BSAD 281:66 Technology Management - Chapter 3 Notes

Section 3.1: Learning Objectives

• Define operational effectiveness and understand the limitations of technology-based competition leveraging this principle.
• Define strategic positioning and the importance of grounding competitive advantage in this concept.
• Understand the resource-based view of competitive advantage.
• List the four characteristics of a resource that might yield a sustainable competitive advantage.

The Danger of Relying on Technology

• Firms strive for sustainable competitive advantage.
  • Sustainable competitive advantage: Financial performance that consistently outperforms industry averages.
  • Difficult to achieve due to the rapid emergence of new products and new competitors.
• In order to achieve comparative advantage, competitors:
  • Cut costs
  • Cut prices
  • Increase features
• Michael Porter’s concepts are useful for firms attempting to achieve comparative advantage:
  • Value chain
  • Five forces
• Porter states that firms defining themselves according to operational effectiveness suffer aggressive, margin-eroding competition.
  • Operational effectiveness: Performing the same tasks better than rivals.
  • The danger lies in similarity and failure to innovate.
  • When offerings are roughly the same, they are more commodity than differentiated.
  • Commodity: A basic good that can be interchanged with nearly identical offerings by others.
• Fast follower problem exists when competitors:
  • Watch a pioneer’s efforts.
  • Learn from their successes and missteps.
  • Enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate.
  • Since tech can be copied so quickly, followers can indeed be fast.
  • At one time, over 175 mattress firms operate in a crowded space, and almost none of them manufacture their own products.
• Competition between Facebook and Snapchat also shows the dangers of the fast follower problem:
  • Snapchat pioneered many of the photo and video sharing features such as “Stories,” and augmented-reality “selfie filters,” but Facebook properties routinely mimic Snap features, implementing some in as little as four months.
  • Snapchat’s growth tumbled 82 percent after Instagram Stories launched, and the firm posted a 2.2 billion loss in its first quarter as a public company.
• Why did TiVo fail as a consumer electronics firm?
  • Its technology was largely based on components available to rivals:
    • Off-the-shelf processors
    • Commodity hard drives
    • Open source Linux operating system
    • Rivals could enter the market with a fraction of the development time required had they needed to develop similar products from scratch.
  • Its biggest competition was from cable TV providers.
    • These firms had a distribution channel and existing customer base that TiVo lacked.
• Operational effectiveness is critical but usually not sufficient to yield sustainable dominance over the competition.
  • Strategic positioning: Performing different activities than rivals, or the same activities in a different way.
  • While technology can be copied, it can also play a critical role in creating and strengthening strategic differences—advantages that rivals will struggle to match.
• 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.
  • Four critical characteristics:
    • Valuable
    • Rare
    • Imperfectly imitable
    • Nonsubstitutable
  • Resource-based thinking helps to avoid entering markets simply because growth is spotted.
• Most of what travels over the Internet is transferred over long-haul fiber-optic cables.
  • Telecom firms began digging up the ground and laying webs of fiberglass to meet growing demand.
  • Problems resulted as rivals were doing the exact same thing.
  • A technology called dense wave division multiplexing (DWDM) enabled existing fiber to carry more transmissions than ever before.
  • The end result—the new assets weren’t rare, and each day they seemed to be less valuable.
• Nortel versus Beer: The Beer Wins
  • Nortel, one of the dominant firms providing telecom equipment during the early Internet build-out, saw its value run up tremendously.
    • At Nortel’s height, the firm’s share price was worth 124.50, with an overall market cap above 380 billion.
    • Nortel’s share price at bankruptcy was just 0.39.
    • If faced with the option to either spend 1,000 in Nortel stock at its hype peak versus 1,000 on beer, you'd have more money from drinking all the beer and returning the empties than you would from your investment in Nortel.

Section 3.2: Learning Objectives

• Understand that technology is often critical to enabling competitive advantage, and provide examples of firms that have used technology to organize for sustained competitive advantage.
• Understand the value chain concept and be able to examine and compare how various firms organize to bring products and services to market.
• Recognize the role technology can play in crafting an imitation-resistant value chain, as well as when technology choice may render potentially strategic assets less effective.
• Define the following concepts: brand, scale, data and switching cost assets, differentiation, network effects, and distribution channels.
• Understand and provide examples of how technology can be used to create or strengthen the resources mentioned above.

Powerful Resources

• Being aware of major sources of competitive advantage can help managers:
  • Recognize an organization’s opportunities and vulnerabilities.
  • Brainstorm winning strategies.
• Firms with an effective strategic position can create assets that reinforce one another.
  • This creates advantages that are difficult for rivals to successfully challenge.

Imitation-Resistant Value Chains

• Imitation-resistant value chain: A way of doing business that competitors struggle to replicate and that involves technology in a key enabling role.
• Value chain: Set of activities through which a product or service is created and delivered to customers.
• For example, elements in Zara’s value chain work together to create and reinforce competitive advantages that others cannot easily copy.
  • Incumbents trying to copy the firm would be straddled across two business models, unable to reap the full advantages of either.
  • Late-moving pure-play rivals will struggle, as Zara’s lead time allows the firm to develop brand, scale, data, and other advantages that newcomers lack.

Key Framework: The Value Chain

• Five primary components of the value chain
  • Inbound logistics
  • Operations
  • Outbound logistics
  • Marketing and sales
  • Support
• Secondary components of the value chain
  • Firm infrastructure
  • Human resource management
  • Technology/research and development
  • Procurement
• Firms may have a critical competitive asset when they have an imitation-resistant value chain.
• Value chain framework can be used to consider a firm’s differences and distinctiveness compared to rivals.
• A firm’s value chain can be a key source for competitive advantage if:
  • It can’t be copied by competitors without engaging in painful trade-offs.
  • It helps to create and strengthen other strategic assets over time.
• Analysis of a firm’s value chain can reveal operational weaknesses and technology is of great benefit to improving the speed and quality of execution.
• Firms can buy software and tools:
  • Supply chain management (SCM)
  • Customer relationship management (CRM)
  • Enterprise resource planning software (ERP)
• Potential danger: Adopting software that changes a unique process into a generic one.
• For years, Dell’s super-efficient, vertically integrated manufacturing and direct-to-consumer sales combined to help the firm earn seven times more profit.
• But then Dell’s killer model began to lose steam.
  • Nearly two decades of observing Dell had allowed contract manufacturers to improve manufacturing efficiency.
  • Component suppliers chose to locate near contract manufacturers, and assembly times fell dramatically.
  • The cost of computing fell, and the price advantage Dell enjoyed also shrank.
  • Direct-to-consumer model also suffered when sales of notebook PCs outpaced the more commoditized desktop market.
  • Dell’s struggles all underscore the importance of continually assessing a firm’s strategic position among changing market conditions.

Brand

• 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 decide which company’s products are better, thus forming brand loyalty.
• Technology helps in rapidly and cost-effectively strengthening a brand.
  • Viral marketing: Leveraging consumers to promote a product or service.

Scale

• Scale advantages: Advantages related to size.
• Businesses benefit from economies of scale: When costs can be spread across increasing units of production or in serving multiple customers.
• Organizations are scalable if they benefit from scale economies as they develop.
• Developing firms may gain bargaining power with their suppliers or buyers.
• The scale of technology investment required to run a business can also act as a barrier to entry, discouraging new, smaller competitors.

Switching Costs and Data

• Switching costs: Costs incurred by consumers when switching from one product to another.
• Firms that seem dominant but that do not have high switching costs can be rapidly outshined by strong rivals.
• Data can be a strong switching cost for firms leveraging technology.
  • Firms that have more customers can gather more data to improve their value chain by offering more accurate:
    • Demand forecasting
    • Product recommendations
  • In commodity industries, data is increasingly the only substantive differentiator.

Sources of Switching Costs

• Learning costs
• Information and data
• Financial commitment
• Contractual commitments
• Search costs
• Loyalty programs

Differentiation

• Commodities are products or services that are nearly identically offered from multiple vendors (e.g., gold, wheat).
• Consumers who buy commodities focus highly on price since they have so many similar choices.
• Technology is used by firms to differentiate their goods and services.
• Data plays a critical role in differentiation.
  • Amazon uses browsing records, purchase patterns, and product ratings to present a custom home page featuring products they hope the visitor will like.
  • Apple mobile and computer operating systems only run on Apple hardware —this allows the firm to tightly integrate the experience across Apple products.

Network Effects

• Network effects: When the value of a product or service increases as its number of users expands.
  • Also known as network externalities or Metcalfe’s Law.
  • The following firms are dominant due to this concept:
    • Facebook – most dominant social network worldwide.
    • Microsoft Windows – has a 90 percent market share in operating systems.
    • eBay – has an 80 percent share of online auctions.
  • Switching costs play a role in determining the strength of network effects.
  • Strong asset for firms that can control and leverage a leading standard.
• OpenTable has built the world’s largest online restaurant reservation system:
  • It can get you a reservation at over 60,000 restaurants worldwide.
  • The system delivers high value by exposing inventory and lowering search costs.
  • Customers are attracted to the service that has the most restaurants, and restaurants to the service with the most customers (two-sided market).
  • Effectively creates a new distribution channel for introducing additional value-added services:
    • Loyalty programs
    • Payments to lower customer wait times and free up more table inventory

Distribution Channels

• Distribution channels: The path through which products or services get to customers—can be critical to a firm’s success.
• Apple Stores show firm-crafted retail distribution channels at their most effective.
  • Apple’s key competitive strengths lies in the firm’s differentiation versus rival products.
  • Apple also leveraged its iTunes platform as a distribution channel to launch the Apple Music subscription service.
  • Apple has an additional distribution advantage that Spotify doesn’t—bundling: Selling products available separately as a single package.
• Technology opens up opportunities to leverage products provided by others to create new distribution channels.
  • Many firms offer APIs, essentially programming hooks that allow other firms to tap into their services.
  • Through networked technology, users can be recruited to create new distribution channels.
    • Affiliates: Third parties that promote a product or service in exchange for a cut of any sales.

What about Patents?

• Protection can be granted in the form of a patent for those innovations deemed to be useful, novel, and nonobvious.
• Patents provide firms a degree of protection from copycats.
  • Cut off paths to exploit an innovation.
  • Considered to be unfairly stacked against startups.
  • Non-practicing entities: Commonly known as patent trolls, these firms make money by acquiring and asserting patents, rather than bringing products and services to market.

Section 3.3: Learning Objectives

• Understand the relationship between timing, technology, and the creation of resources for competitive advantage.
• Argue effectively when faced with broad generalizations about the importance (or lack of importance) of technology and timing to competitive advantage.
• Recognize the difference between low barriers to entry and the prospects for the sustainability of new entrant’s efforts.

Barriers To Entry, Technology, and Timing

• Barriers to entry for many tech-centric businesses are low.
• Market entry does not necessarily result in building a sustainable business.
• Platitudes like “follow, don’t lead” can put firms dangerously at risk, and statements about low entry barriers ignore the difficulty many firms will have in matching the competitive advantages of successful tech pioneers.
  • Private: Firms that take another company private hope to improve results so that the company can be sold to another firm or they can reissue shares on public markets.
• Timing and technology alone will not yield sustainable competitive advantage.
  • Both can be enablers for competitive advantage.
  • Put simply, it’s not the time lead or the technology; it’s what a firm does with its time lead and technology.
  • Moving first pays off when the time lead is used to create critical resources that are valuable, rare, tough to imitate, and lack substitutes.
  • Build resources like brand, scale, network effects, switching costs, or other key assets.
• Gmail is the dominant e-mail provider today, but it took Google eight years to finally top early leaders Yahoo! Mail and Hotmail.
• Google’s ability to succeed after being late to the search and mobile party isn’t a sign of the power of the late mover.
  • It’s a story about the failure of incumbents to monitor their competitive landscape, recognize new rivals, and react to challenging offerings.
  • Firms that quickly get to market with the “right” model can dominate, but it’s equally critical for leading firms to pay close attention to competition and innovate in ways that customers value.

Section 3.4: Learning Objectives

• Diagram the five forces of competitive advantage.
• Apply the framework to an industry, assessing the competitive landscape and the role of technology in influencing the relative power of buyers, suppliers, competitors, and alternatives.

Key Framework: The Five Forces of Industry Competitive Advantage

• Strategic frameworks:
  • Help managers describe the competitive environment a firm is facing.
  • Used as brainstorming tools to generate new ideas for responding to industry competition.
• One of the most popular frameworks for examining a firm’s competitive environment is Porter’s five forces, also known as the Industry and Competitive Analysis.
  • As Porter puts it, “analyzing [these] forces illuminates an industry’s fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future.”
• GenAI is the technology used to generate answers in services like ChatGPT and it has affected the programmer Q&A site Stack Overflow.
  • Saw a 50 percent drop off in the months following the introduction of ChatGPT.
  • Less than a year after ChatGPT’s introduction, Stack Overflow’s parent had laid off nearly 30 percent of its workforce.
  • ChatGPT is actually a very good (though not perfect) programmer and knows a lot of programming languages.
  • Programmers found they were likely to get better and quicker advice with ChatGPT than by searching through Stack Overflow’s many posts.
  • It’s early days for GenAI, but massive disruption could follow as the technology presents a series of superior substitute offerings in a wide variety of industries.
• The Internet can increase buyer power by increasing price transparency in markets where commodity products are sold.
  • The more differentiated and valuable an offering, the more the Internet shifts bargaining power to sellers.
  • Price transparency: Degree to which complete information is available.
  • Information asymmetry: Decision situation where one party has more or better information than its counterparty.