A Partnership for Performance

Partnership for PerformanceHow to hear this lectureClick on the icon: to hear the narration for each slide.

#1Partnership for Performancefisher.osu.eduFisher logoThe Business ContextDr. Rajiv RamnathDirector, CETIDepartment of Computer Science and Engineering, College of EngineeringThe Ohio State UniversityRamnath.6@osu.eduhttp://www.ceti.cse.ohio-state.edu

Partnership for Performance

#2Partnership for PerformanceAgendaHow does industry structure define business strategy?How does an enterprise pick where to do better?How do we translate strategy into execution?

Discussion: Why are we doing this? What is the connection to Enterprise Software Engineering?

#Understanding Industry Structure and CompetitionPorters 5 Forces Model

College of EngineeringThe Ohio State University

#4Partnership for PerformanceInterplaying Elements of Industry Structure

Note: These Forces are NOT independent

#5Partnership for PerformanceCharacterizing the 5 Forces Buyer PowerAvailability of choices: More if higherBuyer concentration vs. firm concentrationSubstitute productsBuyer volume: More if higherE.g. WalmartProportion of buyer cost - price vs. total purchases, buyer profit: More if HigherMakes buyers cost sensitive. E.g. Chips for the computer industryBuyer switching costs: Less if higherDegree of integration/dependence with sellerProduct differencesImpact of supplied product on quality: Less if higherLess price sensitive if impact is higher. E.g. steel on aircraft manufacturersAvailability of information to the buyer: More if HigherE.g. WalmartAbility to backward integrate: More if higherAnd replace the supplier. E.g. Auto industryPull-through: More if higherDependence on buyer to pull the suppliers product throughBrand identity, ability to influence decision makers: Less if higherE.g. INTEL inside, vs. DELL

#6Partnership for PerformanceCharacterizing the 5 Forces Supplier PowerBuyer switching costs: More if higherDifferentiation of inputsLack of substitute inputs: More if fewerE.g. GasolineFragmentation of buyers: More if higherAvailability of choicesImportance of volume to supplier: Less if higherSupplier cost relative to purchases: Less if higherThreat of forward integration relative to backward integration: More if higher

NOTE: Labor is a supplied good too

#7Partnership for PerformanceCharacterizing the 5 Forces Threat of New EntrantsEconomies of scale: Less if higherPermit lower per-piece marginsEntry deterring priceProprietary capabilities: features, components, technology, experience: Less if HigherCapabilities should not be easily acquiredBrand identity, customer loyalties, product tailoring to customers: Less if higherPerceived or real tailoring to customer needsSwitching costs to customers: Less if higherEspecially with integrated productsCapital requirements: Less if higherRelationships to sources of investmentAccess to distribution: More if higherShelf space in grocery stores, contracts with car dealershipsGovernment regulation: Less if higherCertificationsStandardsExpectation of retaliation: Less if higherMarket history

#8Partnership for PerformanceCharacterizing the 5 Forces Threat of SubstitutesRelative price/performance/perception of substitutes: More if higherIn particular trends with respect to existing productsBuyer propensity to switch: More if higherBuyer need for variety vs. stabilitySwitching costs of customers: Less if higherAbility of firms to collectively position their products against substitutes: Less if higher

#9Partnership for PerformanceCharacterizing the 5 Forces - RivalryNumerous, balanced competitors => Less competitionNo clear market leaderDiversity of competitors and their motivationsNo clear rules of the gameHigh strategic stakes for someSlow industry growthReliance on market share for growthHigh fixed or storage costs => Less competition if moreAlso: Capacity augmented in large incrementsHigh exit barriersEspecially when coupled with low entry barrierse.g. home ownershipLack of product differences

#10So HOW do firms compete?For this we have to study their value chain or the internal operations of the company.Partnership for Performance

#Partnership for PerformanceWhat is the Value Chain?

#12PRIMARY ACTIVITIES + SUPPORT ACTIVITIES = VALUE ACTIVITIESAll activities have Direct, Indirect and Quality Assurance activitiesValue chain can have linkages among activities e.g. pre-inspection reduces final QA stepsPartnership for PerformanceValue chain for a personal computer manufacturerInbound logisticsPurchase componentsPurchase raw materialsProductionR&DEngineering/product designOrder componentsOrder raw materialsManufacture productsOutbound logisticsInventory managementOrder entryOrder fulfillmentSales &marketingCustomerserviceInformation technology infrastructure

#Partnership for PerformanceEach value chain process consists of sub-processes

#Partnership for PerformanceHow Firms CompeteGoal: Create a sustainable, defensible position within the marketGeneric Strategies:CostLeadership is keyDifferentiationSustainable differentiation is keyFocusCost or differentiation in a target segmentTargets competitor sub-optimizationTailor value chain to strategyNOTE: Firms rarely risk damage to the industry structure

#15Partnership for PerformanceCompetitive Advantage is Achieved by Optimizing the Value ChainThe value chain shapes and reflects the industry structure

The value chain shapes the organizational structure optimize bothE.g. Apple: Close interaction between marketing and product design

Each activity in the value chain is a point of differentiation optimize these activitiesExamine and optimize steps Examine, optimize and exploit linkagesLinkages may be across firms as well

Scope affects the value chain optimize the scopeSegment scopeIntegration scopeGeographic scopeIndustry scope

Discussion: How can IT help?

#Partnership for PerformanceReferencesHow Competitive Forces Shape Strategy, Michael Porter (Electronic copy provided)http://www.geocities.com/plarmuseau/mporter3.htm

#Connecting Strategy to ExecutionThe Balanced ScorecardCollege of EngineeringThe Ohio State University

#Partnership for PerformanceGoals of the Balanced ScorecardStrategy has to be:Defined based on the organization and its environment (Porters Model)Translated into operational termsDocumented and communicated in an understandable manner through the organizationExecuted in a unified manner through the organizationExecution must be measured and used to continuously improve the strategy, design, communication and execution, using forward looking metricsItems (2) - (5): Addressed by the Balanced Scorecard

#19Partnership for PerformanceThe Strategic Management ProcessTranslating the VisionThe BalancedScorecardBusinessPlanningFeedback andLearningLinking and Communicating

#20Partnership for PerformanceWhat is the Balanced Scorecard?

#21Partnership for Performance

Question: What area of the Value Chain is being targeted?

#Partnership for PerformanceHow to Apply the Balanced ScorecardAlign activities to a strategic goalE.g. cost reduction vs. customer intimacy vs. new product developmentTie it to the key areas in the value chain. Bring in forward looking measures rather than backward looking financial metricsE.g. number of new leadsInclude intangible assets in the strategyExperience, capabilities in the organizationE.g. Nationwides agentsDiscussion: How is this connected to Porters Model?What role can IT play in achieving this?

#Partnership for PerformanceReferencesUsing the Balanced Scorecard as a Strategic Management System, Kaplan and Norton (Electronic copy)

#Partnership for PerformanceThank you!

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