1. business and industrial

eBusiness strategy: how the internet
has impacted competitive strategy
MBA 501
Focus on Assignment 2
• This week we will look at the material needed
to write Section 3c
– Use relevant theory, (citing writers included in
required readings) to explain how the Internet has
impacted the competitive strategies available to a
firm, and analyze how successful (or not) your
particular firm has been in meeting the challenges
posed by its eBusiness activities.
Theory around the impact of the internet on
strategy and competitive advantage (all available
via the course website)
• Porter (2001): Strategy and the Internet
• Tapscott (2001): Rethinking strategy in a networked world (or
why Michael Porter is wrong about the internet”)
• Day et al (2003) Shakeouts in Digital Markets
• Laseter, Kirsch & Goldfarb (2007) Lessons of the last bubble
• Hagel, Seely Brown & Davison (2008) Shaping strategy in a
world of constant disruption
• Zeleny (2010) Strategy as action: from Porter to anti-Porter
The “laws” that influence the impact of
information technology and make it disruptive
• Moore’s Law: “over the history of computing hardware, the
number of transistors on integrated circuits doubles
approximately every two years.”
– So price / performance ratio doubles every 2 years
– digital technology is disruptive because of this force
• Metcalf’s Law: “the value of a telecommunications network is
proportional to the square of the number of connected users
of the system (n2).” aka the “network effect”
• Bandwidth Scaling Law (or Nielsen’s Law) “network
connection speeds (to home users) will increase 50% per year,
or double every 21 months.”
Internet influences
• Ask yourself the question as we look at these
factors…
• Does this apply to my firm? If so….discuss the
concept in your paper
Bargaining power of buyers
• Buyer / customer power is increased – probably the
greatest threat to companies that engage in eBusiness
–
–
–
–
–
More choice
Lower dependency upon existing channels of distribution
More information (and from independent sources)
Greater transparency in terms of price
Trend to “commoditization” or “commodification”
• Firms attempt to counteract this threat by attempting
to “lock in” customers (raise switching costs)
• Although Zelengy suggests that strategy should be first and
foremost customer focused (Amazon claims that this is the
company’s major strength)
Bocij et al. Business Information Systems. Prentice Hall. McNurlin ,
Sprague, & Bui Information Systems Management in Practice. Prentice
Hall.
Lock-in strategy: Raising switching
costs
• Raising switching costs entails lowering the
usefulness or attractiveness of competing
products or services
• There are various ways in which switching
costs might be raised – find some examples of
each?
– Walled gardens
– Contractual obligations
– De facto standard
– The network effect
Threat of substitute products or
services (ie. “Disruption”)
• Significant threat
– New digital products
– Obsolescence of existing products
• Faster introduction of new products or services
• Related to the threat of new business models –
some of which we talked about earlier
• Big bang disruption: Larry Downes (video)
• Question: Can Twitter be regarded as a substitute
for the Globe and Mail?
Barriers to entry
• The internet and digitization increase the threat of new
entrants
• Barriers to entry are reduced, enabling new competitors
– Particular problem for retailers or service providers that have
traditionally relied on a store-front presence or a mobile sales force
– Fixed costs are lower
– No physical distribution network, no manufacturing base needed for
digital products
– Example: financial services eg. INGDIRECT
• Competitive intelligence more important – new entrants must
be carefully watched or market share will be eroded
Bocij et al. Business Information Systems. Prentice Hall. McNurlin ,
Sprague, & Bui Information Systems Management in Practice. Prentice
Hall.
First movers and fast followers
• Internet services easier to initiate – makes it easier for “fast followers”
–
–
–
–
–
–
–
–
–
–
–
AltaVista -> Google
Napster -> iTunes
VisiCalc -> Lotus 123 -> Excel
Word Perfect -> Word
Netscape -> Internet Explorer
Apple Newton -> Palm Pilot -> Blackberry
IBM PC -> Compaq -> Dell
Double Click -> Google Ad Sense
Ofoto -> Flickr
Compuserve -> AOL -> @Home -> Comcast & Verizon
MySpace > Facebook
• Is your firm a first mover or a fast follower?
Bargaining power of suppliers
• Small firms can compete against larger firms
– Level playing field
• Supplier bargaining power is decreased – the
opposite situation from that of purchasers
– B2B purchasers can raise the costs of suppliers by insisting
that they use electronic / internet methods to process
orders eg. WalMart and RFID
• A firm can counteract this by broadening its markets
to find new customers
Bocij et al. Business Information Systems. Prentice Hall. McNurlin ,
Sprague, & Bui Information Systems Management in Practice. Prentice
Hall.
Rivalry among existing firms
• Internet encourages commoditization – makes it
harder to differentiate products or services
• Products are easier to duplicate
• Shorter product lifecycles = more intense rivalry
• Move to global market facilitated by the internet =
increase in the number of competitors in the
“marketspace”
• Shift towards IT-based alliances that change
rivalries
– Value-chain versus value-chain rather than firm versus firm
Bocij et al. Business Information Systems. Prentice Hall. McNurlin ,
Sprague, & Bui Information Systems Management in Practice. Prentice
Hall.
Larry Downes: Three Emerging Forces
• Downes talks about “how 3 shock waves are
overwhelming the “famous Five Forces”
• Digitization
• Globalization
• Deregulation
• “those who use the Five Forces model and who base their thinking on
today's industry structure will never see the change coming in time”
L. Downes. Beyond Porter. Context Magazine. Premier Issue. 1997
STRATEGIC DECISIONS RE EBUSINESS
COMPETITIVE ADVANTAGE
Competitive advantage?
• An organization’s competitive advantage lies
in those characteristics that allow it to
outperform its rivals in the same industry or
market
Afuah and Tucci
– What does “outperform” mean? – Number of
customers / users? Profitability? Sales revenues?
Ability to put a competitor out of business?
Shareholder value? What else could it mean?
Afuah & Tucci (2003) Internet Business Models and
Strategies. McGraw Hill. Bocij et al. (2006) Business
Information Systems 3rd Ed. Prentice Hall.
Incumbents versus new entrants
• Incumbents – bricks and mortar firms
• New entrants – pure play firms
– Those that enter markets that rest on the internet
(completely new markets)
– Those that use the internet to enter existing
markets
Afuah & Tucci (2003) Internet Business
Models and Strategies. McGraw Hill. Bocij
et al. (2006) Business Information Systems
Understanding the impact of digital
markets on incumbents and new
entrant firms
• Breakthrough markets: new products or
services that would not have been possible
without the Internet
– Examples: search engines, consumer portals,
social media sites
• Re-formed markets: new technology doesn’t
change the basic structure and functioning of
the market – just makes it more efficient
Source: Day et al. (2003) Shakeout in digital markets. California Management Review.
Elements of eBusiness strategy: the process
• Stage 1: Situational analysis (where are we
now?)
• Stage 2: Setting strategic objectives (what do
we want to achieve?)
• Stage 3: Defining strategic direction: setting
eBusiness priorities (what do we have to do
to get there?) What DECISIONS have to be
made?
• Stage 4: Implementation
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
Stage 3 of the strategy process: Strategy
definition - DECISIONS
•
•
Driven by the vision and objectives formulated at
Stage 2 of the strategy process
A look at some of the DECISIONS for managers /
entrepreneurs:
1. eBusiness priorities: “getting the right mixture of
bricks and clicks”
2. Business structure? Restructure or not?
3. Business / revenue model
4. Market and product growth strategies
5. Developing capacity and capability
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
DECISION: eBusiness priorities
– Key strategic decision for any business is deciding
whether the Internet will primarily COMPLEMENT
or REPLACE existing channels for doing business
– “Getting the right mixture of bricks and clicks”
– Focus on sell side or buy side?
– Limited involvement – putting a toe in the water?
– Spin-off company or fully switching to eBusiness?
– Same brand or new brand?
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
DECISION: Business / revenue models
• Crucial in terms of potential for innovation and competitive
advantage
– Can Microsoft behave as a startup? New CEO Nadella says that it needs to
behave more like “challengers” than followers
• Flexibility
– Business models are subject to change
• What happened to Blockbuster video? Could they change fast enough?
• Kodak?
• HP acquired EDS in 2008 and Autonomy in 2011 (consulting and
enterprise software) – exited the smartphone and tablet business in 2011
to focus on "strategic priorities of Cloud, solutions and software with an
emphasis on enterprise, commercial and government markets"
• Is change of business model good or bad? What about “wait and
see”?
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
DECISION: market and product growth strategies
• Increase market penetration
– Sell more products into existing markets eg. Google – core
business = advertising
• Develop new markets eg. Blackberry’s shift to consumer
market in 2006 (Pearl) then India and other new markets
in SE Asia in 2012/13 …and now?
• Develop new products (and new markets) eg. Apple
expanded from computers to music players / online music
• Diversify product offerings: eg. eBay and Skype (bought
for $2.6 billion in 2005)
– Acquisition initially not seen as a good move. Eventually spun off
as independent company, then sold to Microsoft in 2011 for $8.5
billion. Skype timeline (Reuters)
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
DECISION: Developing capacity and capability
• Many firms need to develop new capabilities to
implement strategy
– Unfamiliarity with the technology and/or the market
• Leverage something we’ve got (eg. LandsEnd)
• Create the capability inhouse (recruit or train)
• Acquisition of another company
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
Navigating the “capability gap”. Roberts and Berry
model: Acquiring Capabilities
Joint venture
New but
unfamiliar
MARKET
Internet market
capabilities development
New but
familiar
Venture capital
Venture capital
Educational acquisition
Educational acquisition
Internal ventures
Venture capital
Acquisitions
Educational acquisition
Acquisition
Licensing
Internal development (or
acquisition)
Internal technological
capabilities development
Strategic alliances
Acquisitions
Existing
Licensing
Existing
New but familiar
New but unfamiliar
TECHNOLOGY
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
Acquisitions – get something we need
to compete?
• Educational or “learning” acquisitions
– Strategic alliance - Microsoft buys 1.6% share in Facebook for
$240 in 2007
– Acquisition of another company – News Corp (Fox Interactive
Media) / MySpace for $770m in 2005
• Taking out the competition?
• Google/YouTube ($1.6 billion in 2006)
• Facebook / Instagram ($1 billion in 2012)
• Facebook / WhatsApp ($16 billion in 2014)
• New capacity
• Microsoft / Skype ($8.5 billion in 2011)
• eBay / PayPal ($2.2 billion in 2002)
Step 4: STRATEGY IMPLEMENTATION
• Deciding on strategic direction is one thing,
executing is quite another
• Need strong management
– Often acquired from seasoned managers in offline
setting (eg. Meg Whitman came to eBay from
Hasbro, Eric Schmidt came to Google from Novell)
– For traditional firm - need an eBusiness champion
at the top
• Corporate culture and vision very important
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
Pitfalls of strategy implementation
•
•
•
•
•
•
•
•
Timing errors
Lack of creativity
Offering free services
Overambition
Poor situation analysis / poor market research
Setting unrealistic or unclear objectives
Poor strategy definition
Problems with implementation / execution
Afuah & Tucci (2003) Internet Business Models and Strategies. McGraw
Hill. Bocij et al. (2006) Business Information Systems 3rd Ed. Prentice
Hall.
Some industries that are undergoing rapid change
due to Internet forces
•
•
•
•
•
Recorded Music industry
DVD rental industry
Newspaper and magazine publishing
Banking and financial services
Book publishing
FOR DISCUSSION
1.
2.
3.
Select one of these industries
Which forces have impacted this industry and what have those impacts
been?
What competitive strategies have been used to counteract these effects
or to take advantage of them?