Download The Evolution of IS


Firms strive for sustainable competitive advantage, financial
performance that consistently outperforms industry averages

Achieving sustainable competitive advantage is not easy
◦ Rapid emergence of new products and new competitors
◦ New competitors and copycat products cutting costs, prices and
increasing features that may benefit customers but erode profits
industry-wide
2-1

Achieving sustainable competitive advantage is more
difficult when competition involves technology
◦ The fundamental strategic question in the Internet era:
“How can I possibly compete when everyone can copy my
technology and the competition is just a click away?”
2-2

Two concepts defined by Michael Porter can be useful in
achieving sustainable advantage
◦ Value chain
◦ Five forces

According to Porter, firms suffer aggressive, margin-eroding
competition because they define themselves according to
operational effectiveness rather than strategic positioning
2-3

Operational effectiveness: Performing the same
tasks better than rivals perform them

The danger in operational effectiveness is
“sameness”
◦ This risk is acute in firms that rely on technology for
competitiveness




Buy the same stuff as your rivals
Hire students from the same schools
Copy the look and feel of competitor Web sites
Reverse engineer their products
2-4

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 can dominate
Technology can be matched quickly — Rarely a source of competitive
advantage
2-5

Operational effectiveness is critical, but not sufficient enough to yield
sustainable dominance over the competition

Strategic positioning: Performing different activities from those of
rivals, or the same activities in a different way

Technology itself is often very easy to replicate, but it is essential to
creating and enabling novel business approaches that are defensibly
different and can be quite difficult for others to copy
2-6

The New York City–based grocery firm focused on the two
most pressing problems for Big Apple shoppers:
◦ Selection is limited
◦ Prices are high

The solution it provides
◦ Use technology to craft an ultraefficient model that makes an
end-run around stores
2-7

The FreshDirect model crushes costs that plague traditional grocers
◦
◦
◦
◦
◦
◦
Worker shifts are highly efficient
The firm buys and prepares what it sells, leading to less waste
Higher inventory turns
Use of artificial intelligence software
Use of climate controlled cold rooms to save energy
Use of recycled bio-diesel fuel to cut down on delivery costs
2-8

The firm offers suppliers several benefits beyond
traditional grocers, in exchange for more favorable terms
such as:
◦ Offering to carry a greater selection of supplier products by
eliminating “slotting fees”
◦ Co-branding products
◦ Paying in days rather than in weeks
◦ Sharing data to improve supplier sales and operations
2-9

How can you recognize whether your firm’s differences are
special enough to yield sustainable competitive advantage?

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




Valuable
Rare
Imperfectly imitable
Nonsubstitutable
210

Being aware of major sources of competitive advantage can
help managers:
◦ Recognize an organization’s opportunities and vulnerabilities
◦ Brainstorm winning strategies

Often a firm with an effective strategic position can create an
arsenal of assets that:
◦ Reinforce one-another
◦ Create advantages that are difficult for rivals to successfully challenge
211


Imitation-resistant value chains: A way of doing business that
competitors struggle to replicate and that frequently involves
technology in a key enabling role
Value chain: Set of interrelated activities that bring products
or services to market
212

FreshDirect
◦ The elements in FreshDirect’s value chain work together to create and
reinforce competitive advantages that others cannot easily copy
◦ Incumbents would be straddled between two business models, unable
to reap the full advantages of either
 Straddling: When a firm attempts to match the benefits of a successful
position while maintaining its existing position
◦ Late-moving pure-play rivals will struggle, as FreshDirect’s lead time
allows it to develop brand, scale, data, and other advantages that
newcomers lack
213
214




When a firm has an imitation-resistant value chain, it may have a
critical competitive asset
From a strategic perspective, managers can use the value chain
framework to consider a firm’s differences and distinctiveness
compared to rivals
An analysis of a firm’s value chain can reveal operational weaknesses
Technology is of great benefit to improving the speed and quality of
execution
215

Firms can buy software and tools
◦ Supply chain management (SCM)
◦ Customer relationship management (CRM)
◦ Enterprise resource planning software (ERP)

Can be purchased by
competitors too
Potential danger
◦ 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
216

Dell stopped deployment of the logistics and manufacturing modules
of a packaged ERP implementation — It realized that the software
would require the firm to make changes to its unique and highly
successful operating model

Apple adopted third-party ERP software because the firm competes on
product uniqueness rather than operational differences
217

Brand: The symbolic embodiment of all the information
connected with a product or service
◦ A strong brand can be an exceptionally powerful resource for
competitive advantage
◦ Consumers use brands to lower search costs
◦ How do you build a strong brand?
 A strong brand proxies quality and inspires trust
◦ Technology can play a critical role in rapidly and cost-effectively
strengthening a brand
218
◦ Viral marketing: Leveraging consumers to promote a product or service
◦ Branding is difficult, but if done well, even complex tech products can
establish themselves as killer brands
◦ Early customer accolades for a novel service often mean that positive
press will also likely follow
◦ Showing up late may mean paying much more to gain attention
219

Scale
◦ Scale advantages: Advantages related to a firm’s size
◦ Businesses benefit from economies of scale
 Economies of scale: When the cost of an investment can be spread across
increasing units of production or in serving a growing customer base
◦ A growing firm may gain bargaining power with its suppliers or buyers
2-20



Switching costs: Exist when consumers incur an expense
to move from one product or service to another
Sources of switching costs:
◦
◦
◦
◦
◦
◦
Learning costs
Information and data
Financial commitment
Contractual commitments
Search costs
Loyalty programs
Data can be a particularly strong switching cost for firms
leveraging technology
2-21

Differentiation
◦ Commodities are products or services that are nearly
identically offered from multiple vendors
◦ To break the commodity trap, many firms leverage
technology to differentiate their goods and services


Network effects: When the value of a product or
service increases as its number of users expands
Distribution channels: The path through which
products or services get to customers
222



Intellectual property protection can be granted in the form of a patent for
those innovations deemed to be useful, novel, and nonobvious
Firms that receive patents have some degree of protection from copycats that
try to identically mimic their products and methods
Patents are not necessarily a sure-fire path to exploiting an innovation.
223

The barriers to entry for many tech-centric businesses are low

Market entry is not the same as building a sustainable business and
just showing up doesn’t guarantee survival

Timing and technology alone will not yield sustainable competitive
advantage — Both can be enablers for competitive advantage

Moving first pays off when the time lead is used to create critical
resources that are valuable, rare, tough to imitate, and lack
substitutes
224
225

In markets where commodity products are sold, the Internet
can increase buyer power by increasing price transparency

The more differentiated and valuable an offering, the more the
Internet shifts bargaining power to sellers
◦ Price transparency: The degree to which complete information is
available

Information asymmetry: A decision situation where one party
has more or better information than its counterparty
226
Competitive Environment:
Porter’s Forces Model
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalries within
Industry
Threat of
Substitutes
Bargaining
Power of
Customers
Competitive Environment:
Porter’s Forces Model
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalries within
Industry
Threat of
Substitutes
Bargaining
Power of
Customers
Regulatory





Zara: Game-changing clothes giant
Parent company: Inditex Corporation
The blend of technology-enabled strategy unlashed
by Zara seems to break all of the rules in the fashion
industry
The firm shuns advertising and rarely runs sales
In fashion industry nearly every major player
outsources manufacturing to low-cost countries, but
Zara is highly vertically integrated, keeping huge
swaths of its production process in-house
3-29
3-30

To understand and appreciate :
◦ The counterintuitive and successful strategy of Zara
◦ The technology, which has made all of this possible
3-31




Micky Drexler, the iconic CEO, helped turn Gap’s buttondown shirts and khakis into America’s business casual
uniform
Drexler’s team had spot-on tastes throughout the 1990s
When sales declined in the early 2000s, Drexler tried to
revitalize the brand by filling the stores with teenage
apparels
This shift sent Gap’s mainstay customers to retailers that
easily copied the styles that Gap had made classic
3-32




Gap’s same-store sales declined for twenty-nine
months straight, profits vanished
Paul Pressler, the new CEO shut down hundreds of
stores, but it did not help due to bad bets on colors
and styles
The marketing model used by Gap to draw customers
in via big-budget television promotion had collapsed
In January 2007, Pressler resigned
3-33

Conventional wisdom suggests that leveraging cheap
contract manufacturing in developing countries can
keep the cost of goods low
◦ Contract manufacturing: Involves outsourcing production to
third-party firms
 Firms that use contract manufacturers don’t own the plants or
directly employ the workers who produce the requested goods

Firms can lower prices and sell more product or
maintain higher profit margins
3-34

The downside of contract manufacturing
◦ In order to have the low-cost bid, contract firms:
 Skimp on safety
 Ignore environmental concerns
 Employ child labor
 Engage in some ghastly practices
3-35

Firms that fail to adequately ensure their products
are made under acceptable labor conditions risk a
brand-damaging backlash that may:
◦ Turn off customers
◦ Repel new hires
◦ Leave current staff feeling betrayed
3-36


To make sure that the stores carry the kinds of
products customers want, Zara managers ask the
customers
Zara’s store managers are armed with personal
digital assistants (PDAs) that can be used to:
◦ Gather customer input
◦ Chat up with customers to gain feedback on what they’d like
to see more of

Incentives for success—as much as 70 percent of
salaries can come from commissions
3-37

Staff also checks for customer preferences by looking at
unsold items

PDAs are linked to the store’s point-of-sale (POS) system

Point-of-sale (POS) system: A transaction process that
captures customer purchase information, showing how
garments rank by sales

Managers can send updates that combine the hard data
captured at the cash register with insights on what
customers would like to see
3-38


All of this valuable data allows the firm to plan styles
and issue rebuy orders based on feedback rather than
hunches and guesswork
The goal is to improve the frequency and quality of
decisions made by the design and planning teams
3-39

Zara designs follow evidence of customer
demand

Zara design staff consists of young and fresh
designers from design school

Teams are regularly rotated to:
◦ Cross-pollinate experience
◦ Encourage innovation
3-40

The average time for a Zara concept to go from idea
to appearance in store is fifteen days versus their
rivals who receive new styles once or twice a season

The firm is able to be so responsive through:
◦ A competitor-crushing combination of vertical integration
and technology-orchestrated coordination of suppliers
◦ Just-in-time manufacturing
◦ Finely tuned logistics
3-41

Vertical integration: When a single firm owns
several layers in its value chain

Value chain: The set of interdependent activities
that bring a product or service to market

Nearly 60 percent of Zara’s merchandise is
produced in-house, with an eye on leveraging
technology in areas that:
◦ Speed up complex tasks
◦ Lower cycle time
◦ Reduce error
3-42

Inventory optimization models ensure that each
store is stocked with just what it needs

Zara leverages contract manufacturers to
produce staple items with longer shelf lives,
which account for only about one-eighth of dollar
volume
3-43




Ceiling-mounted racks and customized sorting
machines patterned on equipment used by overnight
parcel services and Toyota-designed logistics, whisk
items from factories to staging areas for each store
Clothes are ironed in advance and packed on
hangers, with security and price tags affixed
Trucks serve destinations that can be reached
overnight, while chartered cargo flights serve farther
destinations within forty-eight hours
Zara is also a pioneer in going green
◦ Introduction of biodiesel for the firm’s trucking fleet
3-44

Running out of bestsellers at Zara delivers several
benefits:
◦
◦
◦
◦
Allows the firm to cultivate the exclusivity of its offerings
Encourage customers to buy right away and at full price
Encourages customers to visit often
Reduces the rate of failed product introductions
3-45

Zara’s IT expenditure is less than one-fourth the fashion
industry average

Zara excels by targeting technology investment at the points in
its value chain where it will have the most significant impact

Zara makes sure that every dollar spent on tech has a payoff
3-46

The Prada example offers critical lessons for
managers:
◦ Getting the right mix of the following five components is
critical to executing a flawless information system rollout:





Hardware
Software
Data
Procedures
People
◦ Financial considerations should forecast the return on
investment (ROI) of any effort
◦ Designers need to thoroughly test the system before
deployment
3-47


Zara’s value chain is difficult to copy, but it still has
challenges to face
Limitations of Zara’s Spain-centric, just-in-time
manufacturing model:
◦ If problems occur in northern Spain, Zara has no other fall
back
◦ The firm is potentially more susceptible to financial
vulnerabilities as the Euro has strengthened relative to the
dollar
◦ Rising transportation costs

Zara’s financial performance can also be impacted by
broader economic conditions
3-48

Zara’s value chain is difficult to copy; but it is not
invulnerable, nor is future dominance guaranteed

Zara’s management must
◦ Have an understanding of how information systems can
enable winning strategies
◦ Scan the state of the market and the state of the art in
technology, looking for new opportunities and remaining
aware of impending threats
3-49

When Netflix went public, financial disclosure rules
forced the firm to reveal how profitable it was

Rivals such as Blockbuster and Wal-Mart showed up

Competitors underestimated Netflix because:
◦ It was an Internet pure play without a storefront
◦ It’s overall customer base was microscopic in comparison
4-50

Newcomers mimicked Netflix with cheaper rival
efforts forcing Netflix to cut prices

Netflix survived big competitors, a price war, and
spending on the rise
4-51

It gives us a chance to examine how technology
helps firms craft and reinforce a competitive
advantage
4-52
4-53

Netflix settled on a DVD-by-mail service model
◦ It charges a flat-rate monthly subscription
◦ Customers don’t pay mailing expenses and late fees

Videos arrive in Mylar envelopes containing:
◦ Prepaid postage
◦ Return address

After watching the video, consumers:
◦ Slip the DVD back into the envelope
◦ Drop the disc in the mail
4-54

Users make their video choices in their “request
queue” at Netflix.com

Consumers use the Web site to:
◦ Rate videos
◦ Specify movie preferences
◦ Get video recommendations
◦ Check out DVD details
◦ Share their viewing habits and review
4-55
Tech and Timing: Creating Killer Assets
• Building a great brand online starts with offering
exceptional value
• Advertising builds awareness, but brands are built
through customer experience
• Subscribers expectations from Netflix:
–
–
–
–
–
Huge selection
Ability to find what they want
Timely arrival
Ease of use and convenience
Fair price
Technology drives all of these
capabilities
Technology is at the center of
the firm’s brand building efforts
4-56
Tech and Timing: Creating Killer Assets
• Building a great brand online starts with offering exceptional
value
• Advertising builds awareness, but brands are built through
customer experience
• Subscribers expectations from Netflix:
–
–
–
–
–
Huge selection
Ability to find what they want
Technology drives all of these capabilities
Timely arrival
Technology is at the center of the firm’s brand
Ease of use and convenience
building efforts
Fair price
4-57



Netflix offers its customers a selection of over 100,000
DVD titles
Traditional retailers cannot offer this because of shelf
space constraints
Traditional retailers can determine their breakeven point
by considering:
◦
◦
◦
◦
◦
Number of customers that can reach a location
Store size
Store inventory
Payback from inventory
Cost to own and operate the store
4-58


Internet firms can have just a few highly automated
warehouses
Long tail: A phenomenon whereby firms can make money
by offering a near-limitless selection
4-59
4-60

The long tail works because:
◦ Cost of production and distribution drop
◦ It gives the firm a selection advantage that traditional stores
cannot match
◦ Geographic constraints go away and untapped markets open up
4-61

Netflix has used the long tail to create close ties
with film studios
◦ Studios earn a percentage of the subscription revenue
◦ Netflix gets DVDs at a very low cost
◦ Studios do not spend on additional marketing
4-62



Netflix uses a proprietary recommendation system
called Cinematch
Each time a DVD is returned, Cinematch asks the
customer to rate it
Collaborative filtering: A classification of software
that monitors trends among customers and uses this
data to personalize an individual customer’s
experience
◦ It can be mimicked by competitors
4-63

The data provided by Cinematch is a switching cost

To see how strong switching costs are is to examine Netflix’s
churn rate
◦ Churn rate: The rate at which customers leave a product or service
◦ In mid-2008, churn rates for Netflix’s most active regions were below 3
percent

Netflix’s marketing costs benefit from satisfied customers, as
referrals are a better choice than advertisements

Netflix launched a crowdsourcing effort known as The Netflix
Prize
4-64

Technology lies at the heart of Netflix’s warehouse
operations
◦ Netflix has a network of fifty-eight ultrahigh-tech
distribution centers
◦ Distribution centers are all located close to U.S.P.S. facilities
◦ Trucks collect DVD shipments from these U.S.P.S. hubs and
return the DVDs to the nearest Netflix center
◦ Scanners pick out incoming titles
◦ Netflix presorts outgoing mail before dropping it off at the
U.S.P.S. facilities
◦ All DVDs are hand-inspected for cracks and smudges
◦ Warehouse processes are linked to Cinematch
4-65

Staff members are expected to focus on improving
the firm’s processes

Quality management features are built into systems

Netflix can monitor and record the circumstances
surrounding any failures
4-66

Netflix’s size gives it a huge scale advantage

Scale economies allow firms to:
◦ Lower prices
◦ Spend more on customer acquisition, new features, or other
efforts

Smaller rivals have an uphill fight

Established firms end up straddling markets
4-67

Netflix’s size gives it a huge scale advantage

Scale economies allow firms to:
◦ Lower prices
◦ Spend more on customer acquisition, new features, or other
efforts

Smaller rivals have an uphill fight

Established firms end up straddling markets
4-68

Many media products are created as bits (digital files)

When we buy a CD, DVD, book or newspaper, we’re
buying physical atoms that are a container for the bits
4-69




When Netflix launched its streaming video option, only
17,000 videos were offered
Legal issues involved in securing the digital distribution
rights
Windowing restricts the number of titles available
Wal-Mart uses its bargaining power to encourage studios
to:
◦ Hold content from competing windows
◦ Limit offering titles at competitive pricing during the new
release period
4-70

Netflix initially developed a prototype set top box

It then developed a software platform that allowed
firms to build Netflix access into their devices

Advantages of the atoms to bits model
◦ Netflix will eliminate a huge chunk of its shipping and
handling costs
◦ Bandwidth costs are minimal
4-71

Disadvantages of the atoms to bits model
◦ Wrangling licensing costs is a challenge
◦ The switch to Blu-ray DVDs means that Netflix will be
forced to carry two sets of video inventory
 Standard
 High-definition
4-72