Today billions in advertising dollars flee old media and are pouring into digital efforts, and this shift is reshaping industries and redefining skills needed to reach today’s consumers. Firms are harnessing social media for new product ideas and for millions in sales. Many of the world’s most successful technology firms—organizations that have had tremendous impact on consumers and businesses across industries—were created by young people. Today, tech knowledge can be a key differentiator for the job seeker. It’s the worker without tech skills that needs to be concerned. The aspiring investment banker who doesn’t understand the role of technology in firms and industries can’t possibly provide an accurate guess at how much a company is worth. Lecture 2 Chapter 2-4 Strategy and technology, case of Zara and Netflix Sustainable competitive advantage: financial performance that consistently outperforms their industry peers.
According to Porter, the reason so many firms suffer aggressive, margin-eroding competition is because they’ve defined themselves according to operational effectiveness rather than strategic positioning. Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is “sameness.” The fast follower problem exists when savvy rivals watch a pioneer’s efforts, learn from their successes and missteps, then enter the market quickly with a comparable or superior product at a lower cost. Operational effectiveness is critical. Firms must invest in techniques to improve quality, lower cost, and design efficient customer experiences. But for the most part, these efforts can be matched. Because of this, operational effectiveness is usually not sufficient enough to yield sustainable dominance over the competition.
In contrast to operational effectiveness, strategic positioning refers to performing different activities from those of rivals, or the same activities in a different way. Technology itself is often very easy to replicate, and those assuming advantage lies in technology alone may find themselves in a profit-eroding arms race with rivals able to match their moves step by step. But while technology can be copied, technology can also play a critical role in creating and strengthening strategic differences—advantages that rivals will struggle to match. Higher inventory turns mean the firm is selling product faster, so it collects money quicker than its rivals do. Resource based view of competitive advantage can help: if a firm is to maintain sustainable competitive advantage, it must control a set of exploitable resources that have four critical characteristics. These resources must be (1) valuable, (2) rare, (3) imperfectly imitable (tough to imitate), and (4) non-substitutable.
Dense wave division multiplexing (DWDM) enabled existing fiber to carry more transmissions than ever before. The end result—these new assets weren’t rare and each day they seemed to be less valuable. Firms that craft an imitation-resistant value chain have developed a way of doing business that others will struggle to replicate, and in nearly every successful effort of this kind, technology plays a key enabling role. Sources of switching costs: learning costs, information and data, financial commitment, contractual commitments, search costs, loyalty programs. In order to win customers from an established incumbent, a late-entering rival must offer a product or service that not only exceeds the value offered by the incumbent but also exceeds the incumbent’s value and any customer switching costs.
Commodities are products or services that are nearly identically offered from multiple vendors. Consumers buying commodities are highly price-focused since they have so many similar choices. In order to break the commodity trap, many firms leverage technology to differentiate their goods and services. Data is not only a switching cost, it also plays a critical role in differentiation. Network effects (sometimes called network externalities or Metcalfe’s Law) exist when a product or service becomes more valuable as more people use it. Switching costs also play a role in determining the strength of network effects. Tech user investments often go far beyond simply the cost of acquiring a technology. Nothing lasts forever, and shifting technologies and market conditions can render once strong assets as obsolete.
It doesn’t matter if it’s easy for new firms to enter a market if these newcomers can’t create and leverage the assets needed to challenge incumbents. Beware of those who say, “IT doesn’t matter” or refer to the “myth” of the first mover. This thinking is overly simplistic. It’s not a time or technology lead that provides sustainable competitive advantage; it’s what a firm does with its time and technology lead. If a firm can use a time and technology lead to create valuable assets that others cannot match, it may be able to sustain its advantage.
But if the work done in this time and technology lead can be easily matched, then no advantage can be achieved, and a firm may be threatened by new entrants. Industry competition and attractiveness can be described by considering the following five forces: (1) the intensity of rivalry among existing competitors, (2) the potential for new entrants to challenge incumbents, (3) the threat posed by substitute products or services, (4) the power of buyers, and (5) the power of suppliers.