Introduction to Business Analysis and Competitive Strategy

1
Introduction to Business Analysis (and
Competitive Strategy)

• Dr. Theodore H. K. Clark
• Associate Professor and Academic Director of
• MSc in Information Systems Management Degree
  Program
• Department of Information Systems Management
• Hong Kong University of Science Technology
• Formerly Visiting Associate Professor of
  Operations Information Management
• (Information Economics and Strategy Group) 1998 -
  2001
• The Wharton School of the University of
  Pennsylvania

2
What is Strategy? Why do it?

• Strategy versus Tactics
• Strategy is when you have time to plan
• Time is a luxury many firms may not have
• Planning helps firms avoid failures or
  inefficiency
• Doing the right things, not just solving the
  urgent crisis
• Goal of Strategy is to Gain Advantage
• Faster growth, higher margins, or both
• Alternative is More Work, Resources, or Luck
• But, a good strategy can beat superior forces

3
What is Competitive Advantage?

• Comparable Advantage - Something you are better
  at than almost everyone else
• Circular slide rule example
• Swedish language example
• Competitive Advantage - A comparable advantage
  that MATTERS in your market
• Circular slide rule skills irrelevant use
  calculator!
• Swedish MIGHT matter in some environments
• Would Cantonese be a competitive advantage?

4
Achieving and Sustaining Competitive Advantage

• Acheiving COMPETITIVE ADVANTAGE easier than
  SUSTAINING the Advantage over time
• Key Challenge is Becoming Hard to Copy
• Economies of scale and network externalities
• Access to key skills, resources, or suppliers
• Customer switching costs and brand preference
• Government policy (patents, antitrust, etc.)
• Fast (not First) Mover Advantage also Matters

5
Porters Five Competitive Forces that Drive
Industry Profitability
Potential new entrants
Industry competitors
Bargaining power of suppliers
Bargaining power of buyers
Threats of substitute products or services
6
Why is Industry Structure Important for Strategy?

• Implications of new investments or changes in
  environment can affect all firms
• Decisions on entry or exit of an industry
• Decisions on investments in new capabilities
• Understanding how technology affects firms
• Useful tool to examine how these forces act
  differently upon different firms in an industry
• Benchmark for understanding expected profits in
  an industry given these forces

7
Three generic strategies
Strategic Advantage
Uniqueness
Low cost position
Overall Cost Leadership
Differentiation
Industry
Strategic Target
Segment Only
Focus
Determining the cost/value tradeoff you wish to
offer consumers is the most critical decision -
Porter
8
Porters Generic Strategy 1 Leadership Based
on Lower Cost

• Become low-cost producer in the industry
• Lowest total cost, not just low variable cost
• Often driven by economies of scale
• Must have parity quality or have lowest cost
  AFTER adjusting for quality differences
• Leveraging scale is common source of advantage in
  many industries
• Information goods may have difficulties with this
  strategy as costs of duplication are low

9
Porters Generic Strategy 2 Differentiation
and Segmentation

• Differentiation means to make your product unique
  and (hopefully) more valuable
• Becoming hard to copy is critically important
• Avoid commodity competition based on price
• Differentiation must be worth more to customers
  than it costs to create
• Horizontal differentiation (segmentation) versus
  vertical differentiation (quality)
• Less competition with horizontal differentiation

10
Porters Generic Strategy 3 Focus or Niche
Target Market

• Can be based on cost, differentiation or both
• By targeting a narrow market segment, you may be
  able to provide targeted products and services to
  that segment that are both low-cost and
  differentiated relative to less targeted firms
• Strategy is by design differentiated based on
  segment, as target market segment needs must be
  unique for focus strategy to work
• May be only option open for new entrants