Chapter 2: Strategy and Technology: Concepts and Frameworks for Achieving Success

Fundamental strategic question in Internet era

"How can I possibly compete when everyone can copy my technology and the competition is just a click away?"

Sustainable Competitive Advantage

Financial performance that consistently outperforms industry averages -New competitors and copy cat products make it difficult to achieve sustainable competitive advantage in race to cut costs, cut prices, and increase features that benefit consumers but erode profits

True or False: Timing and Tech alone will yield sustainable advantage

False - what establishes competitive advantage is if firm strategically uses tech and time lead; Firm has to create differences not easily matched by rivals - Time lead pays off when firm uses time to secure resources that are valuable, tough to imitate, rare, and non substitutable and when builds assets like brand, scale, network effects, switching costs... Profitable tech firms of today used lead to leverage resources and assets that give it competitive advantage

In a study of the factors critical in enabling firms to profit from their innovations, patents were only the__________ most important factor

Fifth (secrecy, lead time, sales skills, manufacturing all ranked higher)

Risk of operational effectiveness

When offerings roughly same, they are more commodity than differentiated meaning that competition focuses on offering lowest prices and pulls down profits for the entire industry

Freshdirect is offered at prices that undercut competition by _________ percent and does it all within margins in range of ___________ which easily dwarf thin 1 percent margin earned by traditional grocers

35; 20-45

Secondary components of Value Chain

1. Firm infrastructure: functions that support whole firm (general management, planning, IS, finance) 2.Human resource management: recruiting, hiring, training, development 3.Technology/Research and Development: new product and process design 4.Procurement: sourcing and purchasing functions

Commodity

A basic good that can be interchanged with nearly identical offerings by others (ie. milk, coal, orange juice, or even Windows PC and android phone). From consumer standpoint, good/product is equivalent in features so the only real determining factor in who to buy it from is price.

Information Asymmetry

A decision situation where one party has more or better information than its counterparty

Dense Wave Division Multiplexing (DWDM)

A technology that increases the transmission capacity (and thus speed) of fiber optic cable. Transmissions using fiber are accompanied by transmitting light inside glass cables. In DWDM, light inside fiber split into different wavelengths similar to how light prism splits into different colors

Imitation Resistant Value Chain

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

Scale Advantages

Advantages related to a firm's size

FreshDirect Rivals

Amazon has been trying to tap into 700 billion market for grocery retail by refining AmazonFresh service and expanding -Amazon offers same day delivery free with Prime -Delivery items cheaper with Amazon Fresh than freshdirect -Amazonfresh can delivery non-grocery items too Other rivals: InstaCart and Google Express (uber style); Blue Apron (meal delivery service)

Private

As in "to go private" or "take a firm private." Buying up a publicly traded firm's shares. Usually done when a firm has suffered financially and when a turn-around strategy will first yield losses that would further erode share price. Firms (often called private equity, buyout, LBO, or leveraged buyout firms) that take another company private hope to improve results so that the company can be sold to another firm or they can reissue shares on public markets. Going private removes stock market punishment of continuous poor quarters and allows execs time to recover

Straddling

Attempts to occupy more than one position, while failing to match the benefits of a more efficient singularly focused rival EX: Traditional grocers can't copy FreshDirect model because that would leave them straddling low margin storefront and high margin delivery unable to gain benefits from either

The scale of tech investment required to run a business can also act as a __________________

Barrier to entry EX: Intel's size allows firm to pioneer innovative manufacturing and invest 7 billion on next-gen plants; Google runs 1.4 million servers -Investments made by Intel and Google would be cost-prohibitive for new comer

The more ________________ an offering, the greater the likelihood that the competition will be based on price (as that becomes the only differentiator)

Commoditized

Non-Practicing Entities (NPEs)

Commonly known as patent trolls, these firms make money by acquiring and asserting patents, rather than bringing products and services to market. -Hold IP not with goal of bringing novel innovations but hoping than can sue/extort settlements from others -EX: Blackberry paid 612 million settlement to little holding company NTP -Rivals are cooperating in patent portfolio acquisition (Apple, EMC, Ericsson, Microsoft, RIM, Sony pooled 4.5 billion in 6,000 patents held by Nortel)

___________ particularly strong switching costs for firms leveraging tech

Data; even if firm cheaper/more features, if customer already has data with one firm, unlikely to switch because they'll lose it

Channel Conflict

Exists when a firm's potential partners see that firm as a threat. This threat could come because it offers competing products or services via alternative channels or because the firm works closely with especially threatening competitors

Fast Follower Problem

Exists when savvy rivals watch a pioneer's efforts, learn from their successes and missteps, then enter the market quickly with a comparable or superior product at a lower cost before the first mover is able to dominate EX: Andrew Mason Groupon founder claims within two years his company brought about 500 imitators; Ben Evans notes that at time of Facebook Whatsapp purchase there were over 50 social apps in Google Play Store with 1 million+ downloads

Although important, because __________ can be so easily matched it is not a source of sustainable competitive advantage

Operational Effectiveness

Strategic Positioning

Performing DIFFERENT tasks than rivals or the same tasks in a DIFFERENT way than rivals

Operational Effectiveness

Performing the SAME tasks better than rivals perform them

Porter's Five Forces

Popular framework for examining firm's competitive environment Also known as Industry and Competitive Analysis. A framework considering the interplay between: 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 5. the bargaining power of suppliers.

Value Chain

Set of interrelated activities through which a product or service is created and delivered to customers

Price Transparency

The degree to which complete information is available

Resource based view of competitive advantage

The idea that if a firm is to maintain sustainable competitive advantage it must control a set of exploitable resources with four characteristics 1. Valueable 2.Rare 3.Imperfectly imitable (hard to copy) 4.Nonsubtituable

Inventory Turns

The number of times inventory is sold or used during a given period. A higher figure means that a firm is selling products more quickly and so it collects money more quickly (also referred to as inventory turnover, stock turns, stock turnover)

Affiliates

Third parties that promote a product or service, typically in exchange for a cut of any sales -In this manner, firms can employ users to create new distribution channels -EX: Websites promote goods sold on Amazon because Amazon gives them a percentage of purchases that come in through links (Amazon has one million of affiliates) -Google receives 30% of ad revenue from ads distributed in third party sites not from search ads

True or False: Patent system unfairly stacked against startups

True - cost of single patent case averages at about 5 million

Example of Economies of Scale: Blue Nile

-In one year, Blue Nile sold as many diamond rings with 115 employers and one website as traditional jewelers would sell with 116 stores -Low operating costs mean Blue Nile can sell at prices physical stores can't match attracting more customers and fueling advantage of economies of scale (only one website and warehouse to maintain) -Web-rooms: consumer storefronts that carry sample diamonds for inspection (these rooms have no inventory, staff for commission, and in store sales placed via Ipad) -20 - 40% below traditional retail prices -Augmented reality "Dreambox" app shows customers how hand will look with diamond -465 retail stores closed in single year during Blue Nile Growth

Why is it so difficult to compete with FreshDirect? (5 years after launch there were 1/3 fewer supermarkets in NYC)

-Traditional grocers would be straddling two markets -Entry costs for competitors would be high -FreshDirect has highly complex and customized software than handles entire operations process and continues to be refined every year -FreshDirect has years of relationships with suppliers and customer data used to further refine and improve operations

Ways in which FreshDirect cuts costs and outcompetes rivals

-Worker shifts highly efficient so labor costs are 60% lower than traditional grocery stores -Less waste (buys and prepares what it sells; 1% waste which is worth 5 percentage points of total revenue in terms of savings) -High inventory turns (perishable inventory turn is 197 at freshdirect compared to 40 at traditional grocer) means collect money faster than rivals and product fresher since have been in stock for less (ex: Freshdirect seafood stock turns each day) -Fast "farm to fork" supply chain allows food to be harvested for optimal freshness so taste superior to rivals (firm even evaluates product taste and shares results with customers) -Extensive AI software (7 miles of fiber optic cable) -Saves on energy (does not need open air refrigerators like traditional grocers) with using climate controlled rooms -Recycled biodiesel fuel cut down delivery costs (customers also feel green about decision to order online as freshdirect trucks produce less emission than traditional delivery trucks) -Buy directly from suppliers and offer supplier benefits (offer to carry greater selection of supplier products, eliminate slotting fees, cobranding products, paying partners in days rather than weeks, sharing data to improve supplier sale and operations)

Primary components of Value Chain

1. Inbound Logistics: getting needed materials and inputs into firm from suppliers 2.Operations: turning inputs into products/services 3.Outbound Logistics: delivering products/services to consumers, distribution centers, retailers, other partners.... 4.Marketing and Sales: Customer engagement, pricing, promotion, and transaction 5.Support: service, maintenance, and customer support

Technology can shock/alter the competitive landscape (Porter's five forces)

1. Intensity of rivalry: With rise of internet, intensity of rivalry increased as music retailers now competing not only in physical locations bust also online on ecommerce channels 2. New entrants: Amazon became dominant new entrant - highly scalable while old music retailers straddling online and offline market so unable to gain efficiency of singularly focused Amazon; Additionally Amazon has superior customer buying experience (sample tracks, limitless selection, data leveraged with collaborative filtering software to make product recommendations) 3. Substitutes: Plastic CDs face competition with substitute of digital music files or subscriptions (although sound quality slightly inferior on digital tracks, convenience of carrying all songs in singular place wins out) -Apple became number one seller of music online or off but streaming rivals like Spotify/Pandora also means Apple has to stay alert -Illegal music sharing is also a substitute for CD purchases -All in all album sales dropped by 45% in less than a decade 4. Bargaining power of buyer: Choice in music industry gives consumers bargaining power and ability to demand cheaper prices/more convenience 5.Bargaining power of suppliers: Ride-sharing services cut out cab middleman for anyone who can use their own car, offer services that deliver enough fares to triple wages, and undercut cab rates by 30% (Uber/Lyft have dominated traditional cab business in this manner)

Sources of Switching Costs

1. Learning costs: switching tech may require investment in learning new interface/commands 2. Information and data: users may have to re enter data, convert filers/database, or lose earlier contributions on incompatible systems 3. Financial commitment:Investment in new equipment, software, or consulting and devaluation of any investment in prior tech no longer used 4. Contractual commitments: Breaking contracts can lead to compensatory damages and harm organization's rep as reliable partner 5. Search costs: Finding and evaluating a new alt costs time and money 6. Loyalty programs: Switching can cause customers to lose program benefits

Dell Case Study

At first Dell successful because of efficient vertically integrated manufacturing (built own PCs instead of outsourcing manufacturing) and direct to consumer sales -Since Dell PCs also cheaper firm could lower prices and still have better margins than rivals For a long time model resistant to imitation -Dell sold direct to consumer but rivals had to share sales with retail chains -Dell rivals unable to move to direct sales because retailers could sense its suppliers were competing with it could easily choose another supplier that sold an identical product (Channel conflict) -After observing Dell, contract manufacturers began to improve manufacturing efficiency (by placing suppliers near contract manufacturers assembly times fell) -When cost of computing fell, Dell lost its price advantage -When notebook PCs picked up pace, Dell direct to consumer model suffered (notebooks are more differentiated and customers want to compare them in person) -These shifts knocked Dell from ranking as world's number one PC manufacturer -Abandoned direct only business and now only sells through retailers now -Firm fallen on such hard times that management has taken firm private to buy up all of publicly traded stock and recover -Key lesson: just because a winning strategy dominates today no guarantee it will dominate forever

Differentiation

Consumers buying commodities highly priced focused since that's the only differentiator; In order to break this trap, firms leverage tech to differentiate goods/services - Data plays critical role in differentiation -Amazon has custom home page featuring products they think customer will like (received highest score on American Customer Satisfaction Index) -Apple mobile and computer operating systems run only on Apple hardware (unlike Microsoft and Google) allowing firm to integrate experience across Apple products - high customer satisfaction rating (secure, easier to use, few privacy issues)

Telecommunication Industry Collapse

Explosion of internet increased demand to transport of web pages, emails, video, etc... Telecom firms began laying webs of fiberglass fiber optic cables to meet growing demand for internet transportation; However these firm did not appreciate that rivals doing same thing DWDM Technology (Dense Wave Division Multiplexing) allowed existing fiber cable to carry more transmission that before Result: new assets were not rare or valuable -For some firms prices they charged on cable collapsed by 90% -Firms/Upstarts struggled -WorldCom became biggest bankruptcy in US history -Firms who sold to telecomm carriers (Sun, Lucent, Nortel...) also collapsed -Industry lost 4 Trillion in 3 years

Scale: Bargaining Power with suppliers or buyers

Growing firm may gain bargaining power with buyers and suppliers -Dominance of Apple in smartphone/tablet market allows them to secure 60% of world's supply of touch screen displays at better pricing than smaller rivals could get them for. -Ebay able to raise auction fees because have market dominance as auction platform; Auction sellers who leave Ebay find that they have fewer bidders and thus lower prices

Internet can either increase bargaining power of buyers or increase bargaining power of suppliers

Internet increase bargaining power of buyers: -Where products are commodities, internet can increase buyer bargaining power by increasing price transparency and counteracting previous information asymmetry (EX: autosales/jewelry) -Customers now have enough information about product to bargain effectively Internet increase bargaining power of suppliers: -Where network effects strong or seller's goods highly differentiated, internet can increase bargaining power of suppliers (firms can reach larger customer base and demand higher prices) -EX: eBay can sell antiques to global audience/have large customer base and bid up the price -Switching costs also weaken buyer bargaining power -EX: Wells Fargo found customers who use online bill pay are 70% less likely to leave bank than those who don't

Viral Marketing

Leveraging consumers to promote a product or service -If firm performs well than consumers can be enlisted to engage in viral marketing -Facebook and Twitter are viral marketing machines -Cost effective way to advertise (people who enjoy your product to spread the word and encourage others to use it too through the internet)

Value Chain Analysis

Managers can use value chain framework to consider firm's differences compared to rivals -If firm has an imitation resistant value chain then firm may have key source of competitive advantage Value chain also reveal operational weaknesses and technology is great way of improving speed/quality of processes -Firms can buy software and tools to improve processes: SCM (supply chain management- linking inbound/outbound logistics with operations), CRM (customer relationship management supports sales, marketing, and sometimes R&D), ERP (enterprise resource planning software - implemented to automate entire value chain) -HOWEVER: software may not provide sustainable competitive advantage if can be easily matched by competitors; if software adopted by firm changes a unique process to generic one then may have lost key source of competitive advantage (Netflix/Amazon are firms that develop their own proprietary software because recognize that uniqueness of certain operations is key to competitive advantage)

Fresh Direct Strategic Positioning

New York City based grocery firm focused on solving issue of high prices and limited selection of city grocery stores - provide fresh produce, massive choice, and savings that traditional grocery stores unable to match Firm storefront is website that offers fresh produce and one click menus and specials; able to pull up and reorder previous orders; mobile app eliminates need for grocery list - can enter items as needed and click deliver when ready Size of warehouse is what allows them to offer 5 times larger selection than supermarkets (low rent Queens facility size of 5 football fields and planning on opening one in Bronx) and cater to more customers (90 zip codes)

According to Porter, the reason firms suffer aggressive competition is because they've defined themselves according to _____________ rather than _________________

Operational effectiveness; Strategic positioning

APIs (Application Programming Interface)

Programming hooks, or guidelines published by firms that tell other programs how to get a service to perform a task such as send or receive data EX: Amazon provides APIs to let developers write their own applications and websites that can send Amazon orders In other words, programming hooks that allow other firms to tap into their services thus creating new distribution channels with which to reach customers EX: By publishing APIs, Uber has added its service to apps/sites by United, OpenTable, TripAdvisor...

As a manager, ability to accurately understand a firm's strategic position/likelihood of sustainability at the intersection of ____________________ is a difficult task

Technology

Switching Costs

The cost a consumer incurs when moving from one product or service to another. It can involve actual money spent (e.g., buying a new product) as well as investments in time, any data loss, and so forth. -Tech firms benefit from strong switching costs that glue customers to their firms -Firms that seem dominant but don't have strong switching costs can be taken down by rivals (EX: Netscape used to control 80% of market share in web browsers but when Microsoft bundled explorer with windows and AOL many customers switched over as the cost of switching was low - customers did not notice difference with new browser) -In order to win customers from rival, the entrant must demonstrate their value exceeds incumbent value plus any customer switching costs

Distribution Channels

The path through which products or services get to customers EX: Apple -Apple stores crafting of firm retail distribution channels are very effective; Apple's key competitive strength is differentiation however convincing customers of unfamiliar product benefits may be difficult; At Best Buy apple products may be displayed along with other products with a simple feature comparison; At Apple Store employees trained on how to present specialized advantages of Apple Products and offer free onsite support; Apple Store has resulted in most successful retail chain in US when it comes to sales by square foot -Apple used Itunes platform as distribution channel to get customers to sign up for Apple Music

Brand

The symbolic embodiment of all the information connected with a product or service -Can be a resource for competitive advantage -Consumers use brand to lower search costs so having strong brand vital for firms who want to be first online stop for consumers -Customer experience critical to building strong brand - must represent quality and inspire trust -Tech can rapidly and cost effectively strengthen a brand (viral marketing) -If show up too late may be too difficult to replace brand of another firm (ie. Google has such a strong brand that Yahoo and Bing can't replace it) -Even complex tech products that most people don't understand can establish strong brand (ie. Intel)

True or False: Although barriers to entry for tech businesses are low (anyone launch a competing website or app overnight), market entry is not the same as building a sustainable business

True

True or False: Strength of sustainable competitive advantage more powerful if elements in value chain work together to create/reinforce competitive advantage in way that makes each resource stronger and way of doing business difficult to match

True

True or False: Patents do not mean that firms have surefire protection

True -Some patents nullified by courts upon later review -Software patents granted but difficult to defend -US Supreme Court ruling recently stated simply taking well known business method and applying tech to process is not patent eligible -Coders at competing firms can write algorithms that are not the same but similar (Yahoo and Microsoft have search algorithms that are just as fast and efficient as Google's PageRank)

Network Effects

When a product or service becomes more valuable as more people use it (Network Externalities or Metcalfe's Law) -With each additional FB user, there is one more person to communicate with -Third party add on products, books, magazines, or even skilled labor are all attracted to networks with largest number of user making these dominant products more valuable/enhanced -Users may even favor a technically inferior product because product has larger user base and larger chance of being continuously used in future (don't want to investment time learning to use a product that might be abandoned) -EX: OpenTable has monopoly on online reservations; Provide service to a two sided market: customers attracted to service with most restaurants and restaurants attracted to service with most customers; Network also creates a new distribution channel that introduces value-added services like loyalty programs to encourage repeat use/payments to lower wait times and free up inventory

True or False: With technology being matched so quickly and the reality of the fast follower problem, technology alone is rarely a source of sustainable competitive advantage

True EX: Snapchat and Facebook -Snapchat pioneer of many photo and video features (stories, location stickers, and augmented reality selfie filters) but Facebook (owning Instagram, Whatsapp, Messenger, and Facebook) copies these features and introduces them in as little as four months after Snapchat -Mantra: "Move Last and Take Things" -Facebook larger than Snapchat so advertisers often look to Facebook; (Snapchat growth decreased 82% after ig stories and firm lost 2.2 billion in first quarter as public company) EX: Flip Video Camera -Cisco bought Pure Digital (parent of flip) for 590 million -Digital video features easy to copy and falling tech costs allowed rivals to include video in their products (Apple introduced video in their products and allowed consumers to have one pocket device capable of doing everything - flip no longer necessary) -Flip lasted two years; Cisco took a half billion dollar loss

True or False: Being dependent on distribution channel provided by other firms challenging if distribution partner cuts you off

True -EX: When Iphone introduced, Google was Apple's map provider until Apple launched own IOS maps; Two years later fewer than 1 in 6 Iphone users had Google Maps on their device even though IOS maps technically inferior -Google spends 3 billion to keep search engine on Apple mobile products for fear of losing out on this distribution channel -Google also has created own distribution channel - Chrome which is the most widely used browser in the world

True or False: Established offline firms have failed to catch up to today's Internet leaders

True -Netflix profits were up sevenfold same year Blockbuster lost more than 1 billion (today Blockbuster bankrupt) -Sotheby dismissed eBay -Barnes and Noble waited to respond to Amazon and now Amazon profits are 3 billion while Barnes and Nobles are 22 million Internet giants of today successful because first to move with profitable model AND establish resources of competitive advantage

True or False: Management theorists, consultants, and practitioners often disagree on how firms should employ tech strategy and many articles contradict each other

True EX: Headlines like "Move First or Die" compete with "First Mover Disadvantage"; Harvard Business Review says "IT Doesn't Matter" while NY Times says tech is the "steroids" of modern business

True or False: Goods and information of value chain don't necessarily flow in line from one function to another

True EX: order taken by marketing function can trigger inbound logistics function to components from supplier, operation function (build product if not available), or outbound logistics function (ship a product when available); Info from service support and be fed back to advise R&D for future products

True or False: Sometimes distribution channels provide firm with such edge that international regulators have stepped in

True - -Microsoft distributed Windows by bundling it with internet and media player; European regulators have forced Microsoft to unbundle these products -Google fined for favoring own products in searches over products of rivals

True or False: Although Google arrived late, because other internet search firms did not see it as a threat, Google was able to build/obtain competitive resources that make it the dominant search engine of today

True - Yahoo failed to pay attention to Google's advance; As Google innovations in tech, interface, and ad remained unmatched over time, the firm was able to build its brand, scale, and ad network (distribution channel) that grew from network effects (two sided market: content providers and advertisers attracting each other) Google's success due to incumbents failing to monitor competition and react -Important to know which rivals to react to -If neglect rivals then they may use time and tech to create strategic resources (EX: Blockbuster, Friendster, even FB has seen rise of Snapchat, Ig, and Whatsapp)

True or False: In order for the resource based view of competitive advantage to work, a firm's resources must have all four characteristics

True - if product not valuable no one cares what you have, if not rare then not unique, if easy to copy or substitute than differences can be undercut

In the US, tech (and even business processes) can be patented for typically a period of __________ years from date of patent application; Patents protect firms from firms that may try to mimic their products and methods

Twenty

Economies of Scale

When costs can be spread across increasing units of production or in serving multiple customers. Businesses that have favorable economies of scale (like many Internet firms) are sometimes referred to as being highly scalable. Businesses benefit from economies of scale when cost of investment can be spread across increasing units of production or serving growing customer base