E-commerce Strategic Analysis

Jifeng LuoAntai College of Management, SJTU

luojf@sjtu.edu.cn

Strategic Analysis

What is strategy?

Industry Structure

Dynamic Competitive Advantage

Value Chain and Competitive Model

Strategy and Organization

What is Strategy?

Performance: Profitability is most common

– Total profit vs. Profit rate

– Short term vs. Long term

– Shareholders value

External Context: Industry characteristics plus social, political and regulatory environment

Internal Context: Resources and Organization, Decide your focus

Strategy:

– Understanding of the key relationships among actions, context and performance

– A guide for managers to take actions consistent with this understanding

What is Strategy?Context

External (industry, economy) + Internal

(resources & organization)

Actions Acquire resources, Redesign processes, Organization change

Performance

Market share, profits, brands, innovation,

reputation, employee satisfaction, social

goals

• Tangible resources: facilities, labs, infrastructure and money

• Intangible resources: product designs, brands, relationships

• Human resources: employee skills, managerial competence

Elements of

Strategy

I. Goals: where?

II. Scope: what?

III. Competitive Advantage: how?

IV. Logic: why?

Having a strategy requires a strong focus on profitability (goals), an ability to define a unique value proposition (how and why), and a willingness to make tough trade-offs in choosing what not to do.

Elements of Strategy

• Goals: Dominate market, Technology leader, …

Why important to have goals?

• Scope: Products, Markets, Activities?

What’s NOT included?

• Competitive Advantage: Cost, Differentiation, …

How are you better?

• Logic: Lo cost Lo Price Dominance Scale economy Lo cost

Dot-com’s nemesis

Strategic Analysis

What is strategy?

Industry Structure

Dynamic Competitive Advantage

Value Chain and Competitive Model

Strategy and Organization

What Is an Industry?§ Firms may make multiple lines of products / services

§ We can define an industry in terms of close substitutes.

§ Complementary products belong to different industries if sold separately!

Industry Value Chain

Suppliers Manufacturer Distribution

IndustryCompetitors

Intensityof rivalry

Suppliers Buyers

New entrants

Substitutes

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute

s

Threat of

entrants

Elements of Industry Structure (Porter)

Entry Barriers DeterminantsEconomies of scale

Proprietary product differences

Brand identity

Switching costs

Capital requirements

Access to distribution

Proprietary learning curve

Access to necessary inputs

Government policy

Absolute cost advantages

Expected retaliation

Rivalry DeterminantsIndustry growth

Intermittent overcapacity

Product differences

Brand identity

Switching costs

Concentration and balance

Informational complexity

Diversity of competitors

Corporate stakes

Exit barriers

Game

Relative price performance of

substitutes

Determinants of Substitution

ThreatSwitching costs

Buyer propensity to

substitute

Determinants of Substitution Threat

Determinants of Buyer Power

Bargaining Leverage Price Sensitivity

Buyer concentration versus firm concentration

Price/Total purchases

Buyer volume Product differences

Buyer switching costs relative to firm switching costs

Brand identity

Buyer information Impact on quality/Performance

Ability to backward integrate Buyer profits

Substitute products Decision-makers’ incentives

Differentiation of inputs

Switching costs of suppliers and firms in the industry

Presence of substitute inputs

Supplier concentration

Importance of volume to supplier

Cost relative to total purchases in the industry

Impact of inputs on cost or differentiation

Threat of forward integration relative to threat of backward integration by firms in the industry

Determinants of Suppliers Power

Limitations of the Five Forces Model

Manufacturing rather than service focus

Some support functions (IT) are integral part of primary activities

Adversarial relations, no cooperation

Complementors, outsourcers, partners?

Industry Structure: Before Wal-Mart

Intra-Industry Rivalry

Rivals: Kmart, Sears, Specialty Stores

BargainingPower of Buyers

Bargaining Power

of Suppliers

Threat of Substitutes

Threat of Entrants

• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.

• Mail Order• Buying Clubs

• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers

• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores

• Telemarketing• Door-to-door Sales

Industry Structure: After Wal-Mart

Intra-Industry Rivalry

Rivals: Kmart, Target, Sears,Toys R Us, Specialty Stores

BargainingPower of

Buyers

Bargaining Power

of Suppliers

Threat of Substitutes

Threat of Entrants

• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.

• Mail Order• Home Shopping Network• Electronic Shopping

• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers

• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores

• Telemarketing• Buying Clubs• Door-to-door Sales

Competitive Rivalry from

Existing Firms

Technology

Regulatory Environment

Changing Social Values

Substitutes

SuppliersBuyers

New EntrantsEconomic

Changes

Demographic Changes

External Forces Affecting Competition

How does the Internet alter industry structure?

Buyer Power

Supplier Power

Threat of New Entrants

Threat of Substitutes

Rivalry

Intensified Competitive Dynamics Due to IT

Intensified Competitive Dynamics Due to IT

McAfee and Brynjolfsson 2008

Intensified Competitive Dynamics Due to IT

IT-Enabled Processes

IT are accelerating competition, • Not because more products are becoming digital

• But because more processes are

• A company’s unique business processes can now be propagated with much higher fidelity across the organization by embedding it in enterprise information technology

• IT helps the process changes stick• It also allowed for quick and easy propagation of the new

process in all sites

Strategic Analysis

What is strategy?

Industry Structure

Dynamic Competitive Advantage

Value Chain and Competitive Model

Strategy and Organization

Competitive Advantage

– Is there a universal key to competitive advantage?

– Positional advantage (e.g., dominant industry position)

– Capability based advantage (e.g., superior quality)

– Capabilities and position may interact

Positional Advantage

– Brand name (Coke, Mercedes)

– Customer relationships (Nordstrom)

– Government protection (Developing economies)

– Distribution channel (P&G can get shelf space)

– Geographic incumbency (Wal-Mart in small towns)

– Installed base (Windows)

– Infomediaries (AOL, Yahoo!)

Capability Based Advantage

§ Firms differ in capabilities. (Thru organizational learning)

– Manufacturing capability (Miniaturize consumer electronics)

– Time to market (Japanese auto-makers)

– Organizational capability (Resources, processes, values)

§ Distinct capabilities (Are you better than rivals?)

Is my advantage from position or capability?

• Does it matter?

• May affect defense

– How did AT&T defend its monopolistic position until 1984?

– How would Sony defend its manufacturing capability?

• Capabilities may lead to a position that deepens capabilities

• What is Boeing’s advantage for?

– Position in a duopoly market? Or,

– Capability to manage large-scale projects?

Sustainable Advantage?

Sustainable advantage resists competition

Position:

1. Defend your position (Windows in O/S market)

2. Will position change hands? (IBM compatible to Wintel)

Capability:

1. Improve continuously (through learning)

2. Better if it’s hard to understand and imitate (complexity of structures, routines, culture make it hard to codify and capture)

Competitive Advantage is Dynamic!

Exploiters: Deepen present competitive advantage (e.g., reduce costs, improve product performance),

And,

Explorers: Develop new form of competitive advantage (e.g., develop new products and markets)!

– Pure explorers develop new competitive advantage

– Pure exploiters reinforce current advantage

– Many combine these two approaches!

Explorers versus Exploiters

Exploiters Explorers

Less organizational slack Some slack for innovation

Tightly coupled (Risk?) Loosely coupled

Centralized Decentralized

Learning in its domain Learning outside domain

Fit for stable conditions Fit for changing conditions

Application ProblemApple Computer Inc. announced in May 2001 that it was expanding into the retail business, confirming that it had planned to open its first store on May 19, 2001. A computer industry analyst predicted that the company might open as many as 10 stores as part of a strategy to extend the Apple brand. By May 2002, Apple had actually opened 30 stores across 16 states in the U.S.

The retail strategy in general indicates that Apple is undaunted by the recent retrenchment of Gateway Computer, a predominantly mail-order company that has scaled back its retail plans. At the same time, Apple, which traditionally has relied on third-party retailers, has fared well going directly to consumers on its Internet store. Lynn Fox, an Apple spokeswoman, said Internet-based sales represented over 25 percent of the company's revenue in recent quarters.

In the case of Gateway, the company announced plans last month to close 38 under performing stores and to take a charge of $75 million, leaving it with about 300 stores. The company is also removing its sales stands from 1,000 OfficeMax stores.

In general, Apple has been hit by the downturn in the personal computer market. At the time Apple entered the off-line retailing arena, it announced second-quarter earnings that slightly exceeded expectations, but in the first quarter, the company reported its first loss since Steven P. Jobs, the company's co-founder and current chief executive, returned to Apple three years ago.

1.  Is Apple’s decision to open retail stores represent a strategic shift? Why or why not?

2. Does this move create / enhance Apple’s competitive advantage? Positional or capability-driven or both?

3.  What potential risks does this move entail for Apple?

4. Would you characterize this move as exploratory or exploitative? What would be the critical success factors?

Strategic Analysis

What is strategy?

Industry Structure

Dynamic Competitive Advantage

Value Chain and Competitive Model

Strategy and Organization

The Value Chain

- How do we create value for customers?

- Primary activities directly create value

- Support activities help create value

- Value added = output value – input value

Supportactivities

Primaryactivities

Corporate infrastructure

Human resource management

Technology development

Procurement

Inboundlogistics

Operations Outboundlogistics

Marketingand sales

Service

Margin

Info

rmat

ion

Information

Five Primary Activities

Primary Activity Description Internet Application

Inbound logistics Receive, store, and distribute.

Operations Transform inputs into products.

Outbound logistics Store & distribute products.

Marketing and sales Ad., promotion and sales force.

Service After-sale customer service

Four Support Activities

Support Activities Description Internet Application

Corporate infrastructure

General management, accounting, finance

Human resource management

Hiring, training, & development.

Technology development

Improving product / process

Procurement Function or purchasing input.

The Value Chain for New Social Media

Supportactivities

Primaryactivities

Corporate infrastructure

Human resource management

Technology development

Operations: IT infrastructure

Procurement Marketingand sales

Service

Margin

Info

rmat

ion

Information

- Procurement: attract new users, let users (both new and loyal) generate contents, so

to lure more users

- Operations: create/maintain a platform that can let users to do what they want to do

Value Analysis Questions

Clarifying Value Chain Statements- Can we improve our supply chain and or

distribution system to increase inventory turns? - Can we realize significant margins by

consolidating parts of the value chain to my customers?

Creating New Values- Can we improve customer service?- Can we use our ability to attract customers to

increase revenue thru cross-sales or up-sales?

Seller Seller

Original Intermediary

Original Intermediary

Buyer Buyer

Channel Facilitator:

autobytel.com

Channel Facilitator vs. Channel Competitor

Channel Competitor: Southwest

Strategic Analysis

What is strategy?

Industry Structure

Dynamic Competitive Advantage

Value Chain and Competitive Model

Strategy and Organization

Organization Design

Problems

Incentive Problem

Coordination Problem

1. Incentive Problem: Induce people with divergent private goals to work toward the same goal

Information asymmetry, moral hazard, and monitoring costs

2. Coordination Problem: What are the work flows? Who makes what decisions? How is information shared?

Do we promote specialization or team-based environment?

Architecture

Organization Design

Routines Culture

Organization is a necessary condition of advantage (Organization design is dictated by the strategy; no BEST design)

Organizational elements must be consistent with one another, and align with strategy and industry environment.

Industry environment

Strategy

Elements of Architecture1. Organizational structure deals primarily with coordination

– Divide people into sub-units and define linkages between them

– Functional versus Divisional structure

– Flat versus Tall hierarchy

– Horizontal linkages (personal network, liaisons, task-forces)

2. Compensation and rewards deal with incentive problems

– Indicators related to profitability

– Benchmarking to “net out” external effects

– Multiple indicators may help. Why?

– Cost of monitoring limits number of indicators

Functional Versus Divisional Structure

CEO

Sr. Mgr. Sr. Mgr.

Legal Finance Marketing R&D Mfg.HR

CEO

Div 1 Div 2

Mfg.Mfg. HRHRFin. Fin.

• Single industry firm: Specialization; Career development.

• Multiple product lines or countries: Coordination within division.

Other Structures

Matrix: Dual or triple authority structure. An employee may report

to a country head and a business sector head. In Shell, a

manager would report to Managing Director of Shell France and

Head of Shell Refining sector.

– Typically one command structure dominates.

– Leads to much complexity!

Project: Fixed functional departments plus temporary project

teams in construction, oil exploration, …

Routines & Culture

Routines: Establish common expectations and a protocol for cooperation between parties in the performance of a process (coordination gains)

– What decision making rules (e.g., majority, consensus, seniority) exist?

– What routines exist for resource allocation, information sharing, coordination within and between subunits?

Culture: Commonly held values and beliefs

– How strong? Does it support cooperation?

– Does it improve goal congruence and thus reduce need for financial incentives?

STRATEGY:

Competitive Advantage

Coordination Issues

Incentive Issues

Culture Routines

Architecture

Strategic Alignment

Refine / Deepen: Exploiter

Discover new ways: Explorer

Organization must support strategy!

Strategy & Organization: Southwest Airline

Strategy and Performance

– Selected point-to-point short-haul markets with business traffic

– Deliver customer value thru reliable, low price customer service

– Low cost structure thru high aircraft utilization, no-frill service

– Highly profitable

Coordination

– HQ need information about customer needs and operational problems

– HQ and flight teams need cost info

– Passengers use boarding routines

– Curb-side check in info to flight team

Incentive

– Flight team focus on costs and customer needs

– Conflicts between costs and customer needs need balance

Culture Routines

– Customer focus – Managerial probing

– Teamwork / fun – Direct customer contact

Structure Compensation

– Teams – Team performance measures

– Flat hierarchy – Team performance pay

Southwest Airline

Organization

– Same TEAM for same ROUTES meet same CUSTOMERS

– Recruiting and corporate policies promote fun

– Flat organization with trust in senior management

– SW teams responsible and paid for flight performance

– Competitors copy team idea, but reduce discretion– Hub and spoke system requires complex problem solving at central level