Ch 2

5 forces model

(1) the intensity of rivalry among existing competitors, (2) the threat of new entrants, (3) the threat of substitute goods or services, (4) the bargaining power of buyers, and (5) the bargaining power of suppliers

Why does all firms purchase accounting software ?

Accounting processes are standardized and accounting isn't a source of competitive advantage, so most firms buy rather than build their own accounting software.

scale advantages

Advantages related to a firm's size

A new means of distribution channels

Affiliates that promote produces and get percentage of sales

sustainable competitive advantage

Financial performance that consistently outperforms their industry peers. The goal is easy to state, but hard to achieve.

search costs

Finding and evaluating a new alternative costs time and money.

How can a firm benefit with technology included in their value chain ?

Firms can often buy software to improve things, and tools such as supply chain management (SCM; linking inbound and outbound logistics with operations), customer relationship management (CRM; supporting sales, marketing, and in some cases R&D), and enterprise resource planning software (ERP; software implemented in modules to automate the entire value chain), can have a big impact on more efficiently integrating the activities within the firm, as well as with its suppliers and customers.

scalable

Firms that benefit from scale economies as they grow

The value chain doesn't

Flow in a line from one function to another example, an order taken by the marketing function can trigger an inbound logistics function to get components from a supplier, operations functions (to build a product if it's not available), or outbound logistics functions (to ship a product when it's available). Similarly, information from service support can be fed back to advise research and development (R&D) in the design of future products.

Firms use technology to differentiate their products and services

For example lands end stores customers measurements for custom clothing so switching to a competitor would require consumer to renter their measurements

Technology / research and development

new product and process design

• A strategist must constantly refer to models

that describe events impacting their industry, particularly as new technologies emerge.

• In markets where commodity products are sold

the Internet can increase buyer power by increasing price transparency.

procurement

the buying and reselling of goods that have already been produced (sourcing and purchasing functions )

• The more differentiated and valuable an offering,

the more the internet shifts bargaining power to sellers Highly differentiated sellers that can advertise their products to a wider customer base can demand higher prices

distribution channel

the path by which you deliver the product or service to customers

Primary components of the value chain

1. Inbound logistics 2. Operations 3. Outbound logistics 4. Marketing and sales 5. Support

In order to move a customer away from a rival

A new entrant must not only demonstrate to consumers that an offering provides more value than the incumbent, they have to ensure that their value added exceeds the incumbent's value plus any perceived customer switching costs

Micheal Porter

A professor at the Harvard Business School and father of the value chain and the five forces concepts,Porter is justifiably considered one of the leading strategic thinkers of our time.

imitation-resistant value chain

A way of doing business that competitors struggle to replicate and that frequently involves technology in a key enabling role.

bargaining power with suppliers or buyers example

As Dell grew larger, the firm forced suppliers wanting in on Dell's growing business to make concessions such as locating close to Dell plants. Similarly, for years eBay could raise auction fees because of the firm's market dominance. Auction sellers who left eBay lost pricing power since fewer bidders on smaller, rival services meant lower prices.

sustainable competitive advantage is not

Based on a firm's time lead or technology it's what they do with it

Dell in the beginning

Before Dell followed a direct to consumer model which didn't rely on retail chains to be responsible for the majority of their sales. Dells PCs was cheaper too which allowed them to have price wars with competitors .

contractual agreement

Breaking contracts can lead to compensatory damages and harm an organization's reputation as a reliable partner.

Firms that appear dominant without high switching costs

Can be effected greatly by rivals

switching costs

Costs that exists when consumers incur an expense to move from one product or service to another

Operational effectiveness is

Critical Firms must invest in techniques to improve quality, lower cost, and generate design-efficient customer experiences. But for the most part, these efforts can be matched. Because of this, operational effectiveness is usually not sufficient enough to yield sustainable dominance over the competition

Moving first pays off when the time lead is used to create:

Critical resources that are valuable, rare, tough to imitate, and lack substitutes.

How can data be a strong factor in switching costs for customers

Data is inputted by the customer such as their preferences being saved if that means losing it even if technology is cheaper customer might not want to be inconvenienced

ERP software in the beginning with Dell

Dell stopped deployment of the logistics and manufacturing modules of a packaged ERP implementation when it realized that the software would require the firm to make changes to its unique and highly successful operating model and that many of the firm's unique supply chain advantages would change to the point where the firm was doing the same thing using the same software as its competitors. By contrast, Apple had no problem adopting third-party ERP software because the firm competes on product uniqueness rather than operational differences.

Data is not only a switching cost, it also plays a critical role in differentiation.

Each time a visitor returns to Amazon, the firm uses browsing records, purchase patterns, and product ratings to present a custom home page featuring products that the firm hopes the visitor will like.

Software Implementation in value chain problem

If a firm adopts software that changes a unique process into a generic one, it may have co- opted a key source of competitive advantage particularly if other firms can buy the same stuff. This isn't a problem with something like accounting software.

Why is having a strong brand important for firms?

It's a powerful resource for competitive advantage . Consumers use brands to lower search costs, so having a strong brand is particularly vital for firms hoping to be the first online stop for consumers. Want to buy a book online? Auction a product? Search for information? Which firm would you visit first? Almost certainly Amazon, eBay, or Google. But how do you build a strong brand?

True strategic positioning

Means a firm has created differences that cannot be easily matched by rivals.

When a firm has an imitation-resistant value chain—

One that's tough for rivals to copy while gaining similar benefits—then a firm may have a critical competitive asset.

Dell problems

Rival contract manufactures improved manufacturing and efficiency. Component suppliers located near contract manufacturers, and assembly times fell dramatically. And as the cost of computing fell, the price advantage Dell enjoyed over rivals also shrank in absolute terms. That meant savings from buying a Dell weren't as big as they once were. On top of that, the direct-to-consumer model also suffered when sales of notebook PCs outpaced the more commoditized desktop market. Notebooks can be considered to be more differentiated than desktops, and customers often want to compare products in person—lift them, type on keyboards, and view screens—before making a purchase decision.

Firms should define themselves according to

Strategic positioning not operational effectiveness

loyalty programs

Switching can cause customers to lose out on program benefits. Think frequent purchaser programs that offer "miles" or "points" (all enabled and driven by software).

The virtuous cycle of network effects example

Switching costs also play a role in determining the strength of network effects. Tech user investments often go far beyond simply the cost of acquiring a technology. Users spend time learning a product; they buy add-ons, create files, and enter preferences. Because no one wants to be stranded with an abandoned product and lose this additional investment, users may choose a technically inferior product simply because the product has a larger user base and is perceived as having a greater chance of being offered in the future

learning costs

Switching technologies may require an investment in learning a new interface and commands

SCM (Supply Chain Management)

Systems that can help a firm manage aspects of its value chain, from the flow of raw materials into the firm, through delivery of finished products and services at the point-of-consumption.

Switching costs for tech firms customers

Tech firms often benefit from strong switching costs that cement customers to their firms. Users invest their time learning a product, entering data into a system, creating files, and buying supporting programs or manuals. These investments may make them reluctant to switch to a rival's effort.

Technology should be created in a way

That is hard for rivals to replicate

How does lands end benefit from getting customer measurements

The firm's reorder rates are 40 to 60 percent on custom clothes, and Lands' End also gains valuable information on more accurate sizing—critical because current clothes sizes provided across the U.S. apparel industry comfortably fit only about one-third of the population.

A barrier to entry in technology example

The scale of technology investment required to run a business can also act as a barrier to entry, discouraging new, smaller competitors. Intel's size allows the firm to pioneer cutting-edge manufacturing techniques and invest $7 billion on next-generation plants.

Value Chain is

The set of activities through which a product or service is created and delivered to customers.

Resource-based view of competitive advantage

The strategic thinking approach suggesting that if a firm is to maintain sustainable competitive advantage, it must control an exploitable resource, or set of resources, that have four critical characteristics. These resources must be (1) valuable, (2) rare, (3) imperfectly imitable, and (4) nonsubstitutable.

Servers can be copied however what gives firms like eBay a competitive advantage is

Their network effects, switching costs, data assets, and built solid and well-respected brands.

What is the problem with a firm using software to operate their supply chain ?

These software tools can be purchased by competitors . While valuable, such software may not yield lasting competitive advantage if it can be easily matched by competitors as well.

An analysis of a firm's value chain can reveal

a firm's differences and distinctiveness compared to rivals and operational weaknesses

Bargaining power of buyers

a measure of the influence that customers have on a firm's prices example album sales dropped 45% so they demand cheaper prices and connivence

Bargaining power of suppliers

a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs

economies of scale

a proportionate saving in costs gained by an increased level of production.

outbound logistics

delivering products or services to consumers, distribution centers, retailers, or other partners

By firms using packaged third party SCM, CRM, and ERP software requires

adopting a very specific way of doing things, using software and methods that can be purchased and adopted by others.

Porters five Forces of Competitive Advantage helps with

analyzing [these] forces illuminates an industry's fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future."

Fueled by scale over time, firms that have more customers and have been in business longer can gather more data,

and many can use this data to improve their value chain by offering more accurate demand forecasting or product recommendations.

Commodities

are products or services that are nearly identically offered from multiple vendors. Consumers buying commodities are highly price-focused since they have so many similar choices.

ERP (Enterprise Resource Planning)

business process management software that allows an organization to use a system of integrated applications to manage the business and automate many back office functions related to technology, services and human resources

Human resource management

consists of the activities managers perform to plan for, attract, develop, and retain an effective workforce (recruiting, hiring, training, and development )

Marketing and sales

customer engagement, pricing, promotion, and transaction

How to build a strong brand

customer experience counts. A strong brand proxies quality and inspires trust, so if consumers can't rely on a firm to deliver as promised, they'll go elsewhere. As an upside, tech can play a critical role in rapidly and cost-effectively strengthening a brand. If a firm performs well, consumers can often be enlisted to promote a product or service (so-called viral marketing

EPS

earnings per share

Patents

exclusive rights to make or sell inventions

Secondary components of value chain

firm infrastructure, human resource management, technology/research and development, procurement

firm infrastructure

functions that support the whole firm, including general management, planning, IS, and finance

inbound logistics

getting needed materials and other inputs into the firm from suppliers

financial commitment

investments in new equipment, cost to acquire new software, consulting or expertise, and devaluation of any investment in prior technologies no longer used

CRM (Customer Relationship Management)

involves managing all aspects of a customer's relationship with an organization to increase customer loyalty and retention and an organization's profitability

Sources of Switching Costs

learning costs, information and data, financial commitment, contractual commitments, search costs, loyalty programs

How can managers use a value chain from a strategic perspective ?

managers can use the value chain framework to consider a firm's differences and distinctiveness compared to rivals. If a firm's value chain can't be copied by competitors without engaging in painful trade-offs, or if the firm's value chain helps to create and strengthen other strategic assets over time, it can be a key source for competitive advantage

strategic positioning

performing different activities from those of rivals, or the same activities in a different way

Operational Effectiveness

performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is "sameness."

Information and data

reentering data, converting files or databases, or loss of contributions on incompatible systems

Dell now

sells products through third-party brick-and-mortar retailers. Dell's struggles as computers, customers, and the product mix changed, all underscore the importance of continually assessing a firm's strategic position among changing market conditions. There is no guarantee that today's winning strategy will dominate forever.

support

service, maintenance, and customer support

Value Chain

set of interrelated activities that bring products or services to market.

Operations

turning inputs into products or services

The Network Effect - Metcalfe's Law

when a product or service becomes more valuable as more people use it