BITS College

Graduate Programs
IT 615
IT and Business Strategy Alignment

Girum Ketema (PhD) &

Nigussie Mengesha (PhD)
Business Strategy and Its Formulation

Nigussie Mengesha (PhD)

 Learning Goals
 Understand business strategy, value creation, competitive priority, and competitive
advantage.
 Master frameworks used to analyze and formulate business strategies
 Formulate/Craft business strategies
Outline
 What is strategy?
 Why strategy?
 The Five Forces Model
 Value Chain Analysis
 The Three Generic Strategies
What is Strategy?
 A business approach to a set of competitive moves that are designed to generate a
successful outcome.
 A strategy is management’s game plan for
 Strengthening the organization’s competitive position
 Satisfying customers
 Achieving performance targets
What is strategy?
 An integrated set of choices that positions an organization within its environment to
achieve its visions over the long term.
 Positioning along market, product, business network, and boundary.

 Important dimensions:
 External consistency: tap opportunities and mitigate threats posed by the environment.
 Internal consistency: internal activities integration “The whole is greater than the sum of
its parts”.
 Dynamic consistency: pathway to success over the long term.
Strategy within the Hierarchy of Organizational
Objectives
Strategy belongs to a hierarchy of objectives in an organization:
 Mission – the reason the enterprise exists.
 Blockbuster – “bringing entertainment home.”
 Facebook - “[g]ive people the power to build community and bring the world closer together”.
 Ethiopian Road Authority – “Develop and Manage Sustainable Roads through institutional competency and
Optimal Utilization of Resources ”
 Vision – what the organization wants to achieve
 Blockbuster – to open stores as close as physically possible to its customers
 Ethiopian Road Authority – “Global Competence and Great Roads to Prosperous Ethiopia by 2030”
 Strategy – offers the roadmap of actions that lead an organization to achieve its
vision.
 Tactics – the specific action steps the organization takes in pursuit of its strategy.
Strategy within the Hierarchy of Organizational
Objectives
 An organization’s objectives
 Convert the mission into performance targets
 Track performance over time
 SMART – Specific, Measurable, Achievable, Realistic, Time-bound
 Financial – outcomes that relate to improving financial performance
 Increase earnings growth from 10 to 15% per year
 Boost return on equity investment from 15 to 20% in 2021
 Strategic – outcomes that will result in greater competitiveness & stronger long-term market
position
 Increase market share from 18 to 22% in 2021
 Overtake rivals on quality or customer service by 2022
 Attain lower overall costs that rivals by 2023
 Achieve technological superiority by 2024
What is a Strategic Plan?
 A strategic plan maps
 Where the organization is headed
 Short- and long-range performance targets
 Actions of management to achieve desired outcomes

 A strategic plan consists of

 Mission statement
 Strategic and financial performance objectives
 Comprehensive strategy for achieving the objectives
Why Strategy?
 Activitiesthat create, produce, sell, and deliver a product or service are the basic unit
of advantage.
 Greater value to customers and/or comparable value at a lower cost.
 Greater value -> charge high and greater efficiency -> lowers cost

 Operational effectiveness – performing activities better, i.e., faster, or with fewer

inputs and defects – than rivals.
 Eliminate inefficiencies, improve customer satisfaction, and achieve best practice

 Productivity frontier – the maximum value a company can deliver at a given cost,
given the best available technology, skills, and management techniques.
Why Strategy?
High  Competitors can quickly imitate
Productivity Frontier
(state of the best practice ) management techniques, new
Nonprice buyer value delivered

technologies, input improvements,

and superior ways of meeting
customers’ needs.
 Competitive convergence –
companies would become
indistinguishable.

Low
High Low
Relative cost position
Strategic Position
 Attempts to achieve sustainable competitive advantage by preserving what is
distinctive about a company.
 Performing different activities from rivals or performing similar activities in different
ways.
 Competitive Advantage
 An advantage over competitors in some measure (cost, quality, or speed).
 Leads to control of a market and to larger-than-average profits.
 Competitive Strategy
 A long-term plan of action that a company devises towards achieving a competitive
advantage over its competitors.
 The strategy can incorporate actions to withstand the market’s competitive pressures,
attract customers and assist in cementing the company’s market position.
What Does a Strategy Include?
 How to satisfy customers
 How to grow the business
 Organic growth
 Acquisition
 How to respond to changing industry and market conditions
 How to best capitalize on new opportunities
 How to manage each functional piece of business
 How to achieve strategic and financial objectives
Identifying Competitive Advantage
 Environmental scanning
 The acquisition and analysis of events and trends in the environment external to an
organization.
 A way to monitor and interpret social, political, economic, ecological and technological
events to spot trends and conditions that could eventually impact the industry and the
organization.
 Three common tools used in developing competitive advantages:
 Porter’s Five Forces Model
 Porter’s three generic strategies
 Value chains
 SWOT
Porter’s Competitive Forces Model
Force 1: Threat of Entry
 Industry profitability influenced by
 Existing and potential competitors
 prevent influx of firms into an industry
 Barriers to entry
 Economies of scale
 Learning curve effects
 Customer loyalty / brand preferences
 Resource / investment
 Access to distribution
 Regulation
 Patents, proprietary technology
 Barriers to entry can change over time
Force 2: Supplier Power
 Brand reputation
 Product differentiation
 Supplier volume
 Brand identity
 Relationships with customers
 Proprietary products
 Switching costs
 Loyalty programs
Force 3: Buyer Power
 Buyer volume
 Buyer leverage
 Buyer choices
 Price sensitivity
 Product/service importance
 Buyer information
 Product differentiation
Force 4: Threat of Substitutes
 Different products or services customers can use to satisfy the same basic need.

 Alternative price/quality
 New technologies
 Buyer inclination to substitute
 Fashion and trends
 Legislative effects
Force 5: Degree of Rivalry
 Most obvious of forces
 Strategists have historically focused on rivalry

 Industry growth
 Brand identity
 Number and size of firms
 Industry size and trends
 Fixed/variable costs
 Product/service ranges
 Differentiation strategy
Porter’s Competitive Forces Model
High when entry is easy and low when there are
significant barriers to entry.
High when buyers have few choices from
whom to buy and low when buyers have many High when buyers have many choices from
choices. whom to buy and low when buyers have few
choices.

High when there is intense competition among

many firms in an industry. The threat is low when High when there are many alternatives for an
the competition is among fewer firms and is not as organization’s products or services and low
intense. where there are few alternatives.
Value Chain Analysis
 Provides a framework for identifying and developing a distinctive competency.
 Value chain – sequence of activities through which the organization's inputs are
transformed into more valuable outputs.

Administration and Management (legal, accounting, finance management)

Human Resource Management (personnel, recruiting, training, career devt )

FIRM ADDS VALUE

Support Product and Technology Development (process & product design, production)
Activities
Procurement (supplier management funding, subcontracting, specification)
Inbound Marketing
Operations Outbound Service
Logistics & Sales
Manufacturing, Logistics Customer
Warranty;
Quality control, Packaging, maintenance;
Finishing goods, management; order
receiving, Production control, Education and
Oder handling; taking; promotion;
raw materials Quality control, training;
Dispatch; delivery; sales analysis; market
control, maintenance upgrades
Invoicing. research.
supply schedule

Primary Activities
Three Generic Strategies
 The objective of a competitive strategy is to generate a competitive
advantage, increase the loyalty of customers and beat competitors
 A competitive strategy is narrower in scope than a business strategy
 Using a single generic strategy makes efficient use of resources
 The three generic strategies
 Cost leadership
 Differentiation
 Focused
Porter’s Generic Strategies
Cost Advantage
Low Cost Differentiation

Broad Broad
Market Cost
Competitive Leadership

Scope

Focused
Market
Overall Low-Cost Leadership Strategy
 Strive
to be the overall low-cost provider in an industry
 How to achieve overall low-cost leadership
 Scrutinize each cost activity
 Manage each cost lower year after year
 Reengineer cost activities to reduce overall costs
 Cut some cost activities out of the value chain
 Competitive strengths of an overall low-cost strategy
 Organization in a better position to compete offensively on price
 Organization is better able to negotiate with large customers
 Organization is able to use price as a defense against substitutes
 Low cost is a significant barrier to entry
 Organization is more insulated from the power of suppliers
When Does an Overall Low-Cost Strategy Work the
Best
 When price competition is a dominant competitive force
 The product is a “commodity”
 There are few ways to differentiate the product
 Most customers have similar needs/requirements
 Customers incur low switching costs changing sellers
 Customers are large and have significant bargaining power
When Doesn’t an Overall Low-Cost Strategy Work
 When technological breakthroughs open cost reductions for competitors, negating a
low-cost provider’s efficiency advantage
 Competitors find it relatively easy and inexpensive to imitate the leader’s low-cost
methods
 Low-cost leader focuses so much on cost reduction that the organization fails to
respond to
 Changes in customer requirements for quality and service
 New product developments
 Reduced customer sensitivity to price
Porter’s Generic Strategies
Cost Advantage
Low Cost Differentiation

Broad Broad
Market Differentiation
Competitive
Scope

Focused
Market
Broad Differentiation Strategies
 Strivingto build customer loyalty by differentiating an organization’s products from
competitors’ products
 Keys to success include
 Finding ways to differentiate to create value for customers that are not easily copied
 Not spending more to differentiate than the price premium that can be charged
 A successful differential strategy allows an organization to
 Set a premium price
 Increase unit sales
 Build brand loyalty
Broad Differentiation Strategies
 Where to look for differentiation opportunities
 Supply chain
 Research and development
 Production activities
 Marketing, sales and service activities
 Strengths of a Differentiation Strategy
 Customers develop loyalty to the brand
 Brand loyalty acts as an entry barrier
 Organization is better able to fend off threats of substitute products because of brand loyalty
 Reduces bargaining power of large customers since other brands are less attractive
 Seller may be in a better position to resist efforts of suppliers to raise prices
Pitfalls of a Broad Differentiation Strategy
 Trying to differentiate on an unimportant product feature that doesn’t result in
providing more value to the customer
 Over differentiating the product such that the product features exceed the customers’
needs
 Charging a price premium that buyers perceive as too high
 Ignoring need to signal value
 Not identifying what customers consider valuable
Porter’s Generic Strategies
Cost Advantage
Low Cost Differentiation

Broad
Market
Competitive
Scope
Focused
Focused Cost
Market Leadership
Porter’s Generic Strategies
Cost Advantage
Low Cost Differentiation

Broad
Market
Competitive
Scope

Focused
Focused Differentiation
Market
Focus Strategies
 Focus strategy based on low-cost
 Concentrate on a narrow customer segment beating the competition on lower
cost
 Focus strategy based on differentiation
 Offering niche customers a product customized to their needs
 Overall objective of both focus strategies is to do a better job of
serving a niche target market than competitors
 Keys to success
 Choose a niche were customers have a distinctive preference, unique needs or
special requirements
 Develop a unique ability to serve the needs of a niche target market
What Makes a Niche Attractive?
 Large enough to be profitable
 Good growth potential
 Not critical to the success of major competitors
 Organization has the resources to effectively serve the niche
 Organization can defend itself against challengers through a superior
ability to serve the niche
 No competitors are focusing on the niche
Strengths and Risks of Focus Strategies
 Strengths
 Competitors don’t have the motivation to meet specialized needs of the niche
 Organization’s competitive advantage could be seen as a barrier to entry
 Organization’s competitive advantage provides an obstacle for substitutes
 Organization’s ability to meet the needs of customers in the niche can reduce the
bargaining power of large niche buyers
 Risks
 Broad differentiated competitors may find effective ways to enter the niche
 Niche customers’ preferences may move toward the product attributes desired
by a larger market segment
 Profitability may be limited if too many competitors enter the niche
Porter’s Generic Strategies
Cost Advantage
Low Cost Differentiation

Broad
Market
Competitive
Scope Best Cost Provider

Focused
Market
Best-Cost Provider Strategy
 Striving
to give customers more value for the money by combining
an emphasis on low cost with an emphasis on upscale differentiation
 Combines low-cost and differentiation
 The objective is to create superior value by meeting or beating
customer expectation on product attributes and beating their price
expectations
 Keys to success
 Match close competitors on key product attributes and beat them on cost
 Expertise at incorporating upscale product attributes at a lower cost than
competitors
 Contain costs by providing customers a better product
Advantages of Best-Cost Provider Strategy

 Competitive advantage comes from matching close competitors on

key product attributes and beating them on price
 Most successful best-cost providers have skills to simultaneously
manage costs down and product quality up
 Best-cost provider can often beat an overall low-cost strategy and a
broad differentiation strategy where
 Customer diversity makes product differentiation the norm
 Many customers are price and value sensitive
Generic Strategies and Industry Forces
Industry Generic Strategies
Force
Cost Leadership Differentiation Focus

Ability to cut price in Focus developing core

Entry Customer loyalty can discourage
retaliation deters competencies that can act as an
Barriers potential entrants.
potential entrants. entry barrier.
Ability to offer lower Large buyers have less power to Large buyers have less power to
Buyer
price to powerful negotiate because of few close negotiate because of few
Power buyers. alternatives. alternatives.
Suppliers have power because of
Supplier Better insulated from Better able to pass on supplier low volumes, but a differentiation-
Power powerful suppliers. price increases to customers. focused firm is better able to pass on
supplier price increases.

Threat of Can use low price to Customers become attached to Specialized products & core
defend against differentiating attributes, reducing competency protect against
Substitutes substitutes. threat of substitutes. substitutes.
Better able to compete Brand loyalty to keep customers Rivals cannot meet differentiation-
Rivalry on price. from rivals. focused customer needs.
Growth Matrix
Existing New
Product Product

Product
Existing Penetration
Development
Market Strategy
Strategy

Market
New Diversification
Development
Market Strategy
Strategy
Summary
 The idea of strategic thinking originated in the military. The industry adopted strategic
thinking in the 1920s. Academic institutions and consultants joined the effort later.
 Competitive effectiveness is not enough to keep a company profitable for long as (1) best
practices can quickly be copied by rivals, and (2) companies would become
indistinguishable.
 Strategicpositioning attempts to achieve sustainable competitive advantage by performing
different activities from rivals or performing similar activities in different ways.
 Strategy is an integrated set of choices that positions an organization within its environment
to achieve its visions over the long term.
 Sources of competitive pressures are defined by rivalry among competitors, substitute
products, potential entry, bargaining power of suppliers, and bargaining power of buyers.
 Five competitive strategies are overall low-cost leadership, best cost provider, broad
differentiation, focused low-cost, and focused differentiation strategies.
Readings
 Ghemawat, P. (2010). Strategy and the business landscape. 3rd ed. Prentice Hall,
Boston.
 Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard
business review, 86(1), 78.
 Porter, M. E. (1996) "What Is Strategy?" Harvard Business Review 74, no. 6 (​
November–December 1996): 61–78.
 Next week – Delivering Business Value through IT Strategy
 Read
 McKeen, J. D. and Smith, H. A. (2015) IT Strategy: Issues and Practices. 3rd ed. Pearson:
Boston