Analysis Of How Technology

Published Date: 02 Nov 2017

Study: MITS

Module: Strategic Technology Management

Lecturers: Dr. David Mackay

Student: Adebayo Folorunsho (201289126)

Date: 21 April 2013

Word Count: 3,209

Table of Contents

List of Figures

Introduction

"No longer simply a tool to support "back-office" transactions, IT has become a strategic part of most businesses, enabling the redefinition of markets and industries and the strategies and designs of firms competing within them".

Lynda M. Applegate (1995, p.1)

Harvard Business School Press

Technology has changed the rule of competing in the industrial world, especially with the advent of the boom in internet and information Technology (IT) starting from mid-1990s. This has led to firms heavily investing in technology not only to keep them ahead of rivals but also to improve on their competitive advantage. For example, MacAfee and Brynjolfsson (2011) show how market share of 20 firms increased from the mid-1990s due to high IT spending (cf. Figure 1). Also, Gartner (2013) has forecasted that world IT spending will reach $3.7 trillion in 2013 which is a 4.2% increase from 2012. Thus, it becomes pertinent to explore how technology can be managed by aligning it with strategy in order to boost firms' competitive advantage and return on investment (ROI). This paper will treat this issue using two case study firms, namely Walmart and Home Depot (HD), to analyze how they use technology in pursuance of their competitive advantage.

Consequently, section 2 will start by defining the terms underpinning this write up; this would then be followed by section 3 where the first case study would be analyzed and then followed by the second case study in section 4. Furthermore, section 5 will compare and contrast the use of technology by both case studies which would then be followed by discussions on how technology can used to manage competitive advantage and the constraint this can breed. Finally, the conclusion would be drawn from the write up.

Figure : Effect of increase in IT spending from the mid-1990s (McAfee & Brynjolfsson, 2011, p. 149) (McAfee & Brynjolfsson, 2011)

Definition of terms underpinning the discussions

In considering ways of managing "technology" in pursuit of "competitive advantage" using above mentioned firms, which are practicing different "generic strategies", the first point to consider is the definition of terms underpinning this discussion. These terms are technology, competitive advantage and generic strategy.

Technology

Different meaning has been attributed to technology, depending on the field of in interest (cf. Figure 2). This paper, based on the context of discussion, will accept the definition of technology as tools that are used in managing knowledge and people to extend the range of human activity in order to produce a desired goal or value (Gaynor, 1996; Howells, 2005). Also, technology here is wide collections of tools such as Media technology (television, radio), transport technology, IT, internet, industrial mechanical installation etc.

Figure : Various definitions of technology (Howells, 2005, p. 2)

Competitive Advantage and Generic Strategy

Since the technology application would be used to pursue competitive advantage for different generic strategy firm, it is essential to define the term competitive advantage and how it is related to generic strategy. Although there are various definitions of competitive advantage this paper will go along with it as what a company does better in terms of value generated to buyers that exceeds cost of production and gives them higher profit margin than the rival firms in the same industry (Porter, 1985, p. 3; Grant & Jordan, 2012, p. 174). Porter (1985) argues that there are basically two types of competitive advantage firms can possess, which are low cost or differentiation. This notion of sources of competitive advantage married with the scope of activities leads to the idea of generic strategies which are namely cost leadership, differentiation and focus/niche (cf. Figure 3).

Source Competitive Advantage

Differentiation

Low Cost

Competitive Scope

Narrow Target

Broad Target

Figure : The Generic Strategies (Porter, 1985, p. 12)

Case Study One: Walmart

Background

Walmart, established in 1962 at Rogers, Arkansas by Sam Walton, is a retail outlet providing customers with assortment of merchandise (Walmart, 2012). It serves its customer under different options namely discount stores, supercenter and Sam's club each addressing different consumers' needs. The company also operates in more than 10,700 retail unit under 69 different banners in 27 countries (Walmart, 2012). Furthermore, the company, headed by Michael Duke, is staffed with more than two million associates and serves more than 200 million customers. These records led to its AA rating as the largest retail outlet in the world.

Form of Generic Strategy

Walmart pursue low cost competitive advantage. This is because its 1) slogan is "Every day low price" (Walmart, 2013) 2) gives managers freehand to reduce its cost lower than any of the retail rival stores especially when they are closely located. For example, when Walmart is located close to Kmart it lowers it price by 1% and where there are more than one rival (Kmart, Target, Kroger) located 4-6 miles around it, cost cut is 10.4% - 7.6% (Bradley & Ghemawat, 2002). But in the remote areas or when rival's stores have closed, it increases cost by 6% than usual (Bradley & Ghemawat, 2002). Walmart was able to do this through it economy of scale, power over suppliers in price bargain, operational and supply chain management excellence and customers base size which is more than 200 million buyers to increase its turnover (Hayes, et al., 2005; Porter, 2011; Walmart, 2013).

Analysis of how Technology is used to pursue cost leadership

Having known the generic strategy that Walmart is pursuing, this paper will use value chain analysis to breakdown how technology interfaces with each activity in order to save cost. Porter (1985) explains that since value chain is occupied with activities then it is a collection of technologies.

Through its tacit knowledge on retailing, Walmart uses technology throughout its value chain to leverage on technology for the efficiency required to cut cost in cost leadership strategy. Figure 4 shows the value chain analysis of Walmart's technology. It can be seen that technology in the firm's infrastructure segment has effect on all the primary activities (identified with hard line) while others have effect on some segments of the primary activities (identified with broken lines).

Firm Infrastructure

Own dedicated Satellite communication(1983)

Office technology(computers, printers, phone)

Information system Technology (Data Center)

Human Resources

Pipeline (Company-wide Intranet,

Support ActivitiesKnowledge management, company news, policies and procedures )

Technology Resources

Electronic Data Interchange (EDI)

Radio Frequency ID (RFID)/ Bar-coding

Internet service and Cisco Network

Retail Linka Web based software

Information technology

GPS

Procurements

Information System Technology

Inbound Logistics

Outbound Logistics

Operations

Cargo Air, Ship,

Cross docking technology, Train, Truck

Electronic Media, Social Media, website,

ecommerce, Audio and Video Recording technology (i.e. CCTV)

Marketing & SalesPOS

Primary ActivitiesSam's club mobile app, IOS and android app with inbuilt customize search,

Shopycat

Servicestelephone

Area of technological concentration

Figure : Technology value chain analysis of Walmart (Porter, 1985; Walmart, 2013; Manjoo, 2013; Walmart, 2013)

Walmart through innovative use of technology is able to reduce cost and increase speed of activities in the value chain. For example through the data available to the corporate headquarters, it was able to make procurement needed (CISCO, n.d.). At the same time the manufacturers of retail product also know when the products are getting low through the Retail Linka and would have ordered raw material for manufacturing (CISCO, n.d.). This would be followed by tagging it with RFID which automatically transmit readiness of product to Walmart and track its movement. This kind of synchronization allows timing and speed of delivery to be agreed between supplier and Walmart (CISCO, n.d.).

Walmart also uses cross docking technology to move the products from the distribution center to city hub where it is then distributed to different retail store that is short stocked (cf. Figure 5). All these activities connection using technology allow Walmart to save money on inventory, labor and other cost associated with cost management in the value chain (Walmart, n.d.).

Figure : Walmart use of technology in the value chain (Mishra, 2013, p. 20)

Case Study Two: Home Depot

Background

Home Depot (HD), established in 1978 by Bernie Marcus and Arthur Blank, is a retail outlet that sells wide assortment of building materials, home improvement products and lawn/garden products (The Home Depot, 2012). The company, staffed with 340,000 associates, is the world largest home improvement retailer and has 2,256 stores located in United States, Canada and Mexico (The Home Depot, 2013).

Form of Generic Strategy

The company pursues differentiation generic strategy through customer intimacy and service uniqueness. In fact, the main idea behind its setup is Do-It-Yourself (DIY) which allows customers to do home improvement work on their own (The Home Depot, 2013). Currently, they have added two more customer groups which are Do-It-For-Me (DIFM) and professional customers. The DIY scheme offers customer training on how to apply the tools in their home and garden. Customer can also buy or rent these tools (The Home Depot, 2013). Also at the shop floor, HM staff spent whatever time is required by customer to solve their home problem repairs (Treacy & Wiersema, 1993). Different customers are offered different prices at the discretion of the sales people all in pursuance of customer satisfaction and loyalty, but this does not mean that they cheaper than their rivals (Georgia Tech, 2011). In fact, customers that are price sensitive fall outside HM's core market (Treacy & Wiersema, 1993).

Analysis of How Technology is used to pursue Differentiation

Home depot started its journey into the use of technology 2000 to enhance its competitive advantage when the firm discovered that its customer satisfaction level has dropped (Holstein, 2004). This led to a total overhaul of the IT system towards customer service improvement. Figure 6 shows the technology value chain analysis of home depot. The use of technology has improved associate time for customer by 57% and intended to increase it by reaching 60% by the end of 2013 (The Home Depot, 2013).

Firm Infrastructure

Distribution forecasting and replenishment system

Office technology (computers, printers, phone)

Human ResourcesInformation system Technology

Online training

Support ActivitiesFirst Phone

First Phone Junior

Technology Resources

Bar-coding

Internet service

Inventory management system

Fiber optic network cable

Procurements

Information System Technology

Inbound Logistics

Outbound Logistics

Operations

Cargo Air, Ship,

Mechanized Rapid Deployment Center, Truck

Television and radio, Electronic Media, Social Media, website,

ecommerce, electronic kiosk, Audio and Video Recording technology (i.e. CCTV)

wireless POS

Marketing & Salesself-checkout systems

Primary ActivitiesMyinstall on website - for customer to schedule appointment call centers, phones, online installation video, Paypal

ServicesMobile app for IOS and android to order and pay online, Smartphone QR code

Area of technological concentration

Figure : Technology value chain analysis of Home Depot (Porter, 1985; Janowitz, 2012; The Home Depot, 2013)

Use of technology by the two case study firms

The aforementioned analyses show where application of technology is more concentrated in value chain activities. Table 1 summarizes where the application of technology is strong (represented in red) while amber color shows where it is essential but not targeted towards firms' competitive advantage. Also, the table highlighted the firms' technology significance to Marketing, Branding, innovation, collaboration and globalization.

Walmart

Home Deport

Marketing

Uses less of technology here to save cost. Most adverts are through its website, social media

Spend high on advertisement through Television, radio, Billboard.

Branding

Spend less on branding since its low cost value speaks louder to consumers.

Spends high through marketing technology and customer experience enhancement technology (e.g. First-phone)to create customer loyalty

Innovation

Innovate with cutting edge technology to reduce inventory, access to variety of merchandise, efficient operation and process

Innovate mostly to increase time in attendance to customer and customer intimacy technology like data analytics

Collaboration

Use technology heavily to collaborate between staffs and suppliers

Use technology to collaborate with it staff on training and sharing of knowledge

Globalization

Use technology to coordinate all it world branch. It also implement policy

Use technology to support and integrate its activities among stores

Table : Use of technology by the two case study

Discussions

How can technology be used to pursue competitive advantage?

Based on the case study above, one would observe that pursuing competitive advantage by leveraging on technology depends on the form of generic strategy a firm is positioned and its core competencies in terms of the resource base view. For example, in terms of operational efficiency Walmart pursue it with every available technology that can reduce time which in turn reflects on the cost of inventory and management of its supply chain (Hayes, et al., 2005). This reduction in cost is then passed to the final consumer. This informed the decision on the firm owning its own satellite to bridge against any down time and also the use of RFID to monitor the supply chain (Walmart, 2013). This further removes the needs for labor in scanning of barcode (Nolan & McFarlan, 2011). At the same time, the corporate headquarters is able to make an informed strategic decision on operation without wasting money on transportation to the stores for monitoring.

In contrast, a differentiation generic strategy firm like HM, though care about its supply chain, mostly concentrates on using technology on its core strength which is pursuing customer intimacy. Most of its core technology investments were inclined towards customer satisfaction and brand loyalty. One wonders why a retail outlet that is supposed to value operational efficiency, tends towards customer intimacy but this further shows that technology usage for competitive advantage depends on the value discipline being pursued by the firm. Treacy and Wiersema (1993) argue that firms pursue three different value disciplines which are namely customer intimacy, product leadership and operational excellence (cf. Figure 7). However, inclining towards customer intimacy value discipline will improve brand loyalty which in turn lowers customer sensitivity to cost (Porter, 1980).

value discpline.png

Figure : Value discipline (Treacy & Wiersema, 1993; Aron, 2009; The Enterprise Advocate, 2012)

In collaborating technological activities, communication technology is required for the competitive advantage to be harnessed in either generic strategy. For example cost leadership firm like Walmart make sure that the communication between the company and its supplier is almost negligible using its Retail Linka Enterprise Resource Planning which leverage on the power of internet and internet browser (CISCO, n.d.). Also, in order to improve its communication and sharing of knowledge among its associates, Walmart implemented "Pipeline" a technology that allows within and outside store communication among staff (CISCO, n.d.). This reduces the cost of using commercial phones and further save cost for the firm (CISCO, n.d.). The technology also allows information like company news of the day, policies, knowledge and procedures to be disseminated among staff (CISCO, n.d.).

However, in Home Depot, Communication technologies are targeted toward enhancing customer intimacy and brand loyalty. For example, First-phone allows associates to be able to give reliable information to customer as well as checking unavailable product in the nearest store for them (Janowitz, 2012). It also allows checking out and payment of product purchased. Additionally, there is another wireless communication device, First-phone-for-Junior, which is used during busy day to perform all the functions of First-phone but without data analytics and payment; this allows customer goods to be checked with electronic receipt generated and paid to cashier (Janowitz, 2012; The Home Depot, 2013). All in all, this does not only boost the firm customer loyalty but also encourages the customer to patronize more often and spend more with their favoured retailer (IBM, 2005).

Process engineering, using tacit knowledge and no-one-way-solution to a problem, is also another way firm innovate with technology to give them an edge over rival to sustain competitive advantage. For example, Walmart is known for this in terms of constantly checking on better ways to change its process by rearranging its supply chain and in-store technology (Chillingworth, 2009). Once an innovated process idea by one store is seen as excellent, the news or new policy formulation is transmitted to all associates and at the same time enforced through its companywide technology. Disseminating this digitally does not only magnify its competitive impact but also increased its consistency (Chillingworth, 2009; McAfee & Brynjolfsson, 2011). (McAfee & Brynjolfsson, 2011)

In a different way, HM innovates with technology mostly to reduce the time associates need to attend to store task and increase the time used in attending to customers. For example the mechanized Rapid Deployment Center (RDC) is not only tailored towards one-time aggregated deployment of product to stores but also tailored towards transferring sold product directly to customer and free associates from arranging same product to the store warehouse or shelf (The Home Depot, 2013). Also through its website, the firm connects the DIFM customer with professional customers to free their associate to attend to in-store customer and at the same time creates job for their professional customers (The Home Depot, 2013).

In terms of marketing and brand management, using of technology depends on the generic strategy position of a firm. Mostly, firms pursuing cost leadership does not spend much here to save money. They usually do this by word of mouth and other viral channels like their website and social media site (Porter, 1985). On the other way round, differentiation firms, rely mostly on various channels to promote their strategy and give good impression to their customers (Porter, 1985). An example that shows this is the spending of HM in 2002 on advertisement which was 32% higher than Walmart which is far bigger than it (Lovel, 2003).

The other side of technology to competitive advantage

Depending on the kind of generic strategy pursued by firm, expenses on technology by firms is on the high side. A recent research shows that the cost of IT is high and depends on strategy the firm is pursuing (Nolan & McFarlan, 2011). Figure 8 shows the strategic impact grid, firms that fall into the strategic and turnaround mode spend high revenue on IT, although, the turnaround is mostly temporary and it is the mostly costly (Nolan & McFarlan, 2011). Coupled with the shorter life cycle of technological product, this tends to reduce the ROI of firms. An example of this is the reduction from 19.2% in 2011 to 18.6% 2012 of Walmart's ROI due to their investment into the purchase of Kosmix, a Silicon Valley company, that looks after its ecommerce channel (Manjoo, 2013; Walmart, 2013).

Walmart

Home Depot

Figure : The IT strategic impact grid (Nolan & McFarlan, 2011, p. 92)

Customers are becoming more powerful through the knowledge they gain from the internet and at the same time the social media power of viral communication. For example, customer can easily compare price on the internet and change their decision to continue patronizing a low cost firm like Walmart (Rivard, et al., 2004). At the same time consumer dissatisfaction about product or service can be circulated through social media (Holloman, 2012). This informed why most companies now have the office of the Chief Listen Officer who checks for this kind of issues and informs the affected section of the company (Holloman, 2012).

Customer to associates interaction is reducing due to mobile and internet transaction. This is causing concern for firms in all generic strategies position. For example, Walmart store arrangement strategy is that that for every customer that comes into the store to buy an item there is possibility of buying more than what he intended to buy (Manjoo, 2013). This might be among the reasons why Walmart is investing heavily on "@walmartlab" section which led to the development of Shopycat and its new mobile Apps (cf. Table 2) (Manjoo, 2013). Another example is that HM has tried to improve the visual appeal of it website to imitate store like attraction (The Home Depot, 2013). All this change in scenario would reduce body language reading in face to face customer interaction that would have added to more intimacy with customer.

Walmart Ecommerce Product

Function

Shopycat

Social media application that scan Facebook for customer's friends profile to indentify gift idea from their likes and comments; this is then recommended for the customer.

Mobil App

That allows customer to use voice to store their shopping list has they doing their daily activities and the App will store it for them automatically. They can purchase online and can be sent same day.

Table : @Walmart new ecommerce products

Finally, the imitability of technology has also given concerns to how it can be used to manage competitive advantage. For example, when HM was planning to turnaround its IT infrastructure, it benchmarked Walmart to leapfrog (Holstein, 2004). Furthermore, the consequence of technological imitation to strategy makes it risky to competitive advantages and its sustenance, which at the same time make even its importance to either generic strategy to look dwindle (Carr, 2011; Porter, 2011). However, continuous innovation with technology through tacit knowledge and continuous improvement, which makes the relationship of it complex, might be used to tackle it because of the learning curve rivals would have to achieve in order to be able to compete using same technology. An example of this is Walmart logistics which create a fit between its resources and technology used both within the inside-out and outside-in activities (Wade, et al., 2011).

Conclusion

As discussed in the previous sections, managing technology in pursuance of competitive advantage requires firms to be clear with the source and scope of competitive advantage its competency fits with, which mainly is two has described earlier. A cost leadership firm leverages on technology solution that will pursue its low cost competitive advantage by innovating with technology that will reduce the cost in its value chain. However, differentiation firm might pursue its own competitive advantage by investing on technology that will drive its core competency and brand loyalty.

Having invested on technology, firm may also need to address the flip side of it that will affect its competitive advantage or it sustenance. Before spending on Technology, a firm might need to know its strategic position on the strategic impact grid so as to know whether it does not need to spend much on technology or whether it can wait until the cost of technology is less before spending on it. Furthermore, cases like the viral destruction social media can cause to competitive advantage can be manipulated by been at alert and at the same leverage on its opportunity to lure customers into firms' side. This can be done through innovating with the platform although it might not be sustainable. On the technology imitation, complexity of its usage in the support and primary activities of the value chain might be innovated to reduce its effect on competitive advantage.

All in all, technology might be used to pursue competitive advantage when it is aligned towards the strategy of a firm.