Competitive Advantage

Using Information Systems to Achieve Competitive Advantage Porter s Competitive Forces Model Traditional competitors New market entrants Substitute products and services Customers Suppliers

Using Information Systems to Achieve Competitive Advantage

Porter s Competitive Forces Model

In Porter s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry s environment: new market entrants, substitute products, customers, and suppliers.

 Traditional competitors: Existing firms that share a firm's market space New market entrants: New companies have certain advantages, such as not being locked into old equipment and high motivation, as well as disadvantages, such as less expertise and little brand recognition. Some industries have lower barriers to entry. Substitute products and services: These are substitutes that your customers might use if your prices become too high. Internet telephone service can substitute for traditional telephone service. The more substitute products and services in your industry, the less you can control pricing and raise your profit margins.

 Customers: The power of customers grows if they can easily switch to a competitor's products and services, or if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is little product differentiation and all prices are known instantly . Suppliers: The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality, and delivery schedules.

HIGH Threat of New Market Entrants No entry barrier

LOW Significant entry barrier Few alternatives

Threat of Substitute product and services Customers power

Many alternatives

Many choices from whom to buy Buyers have few choices Competition is fierce

Few choices

Suppliers power Traditional competitors

Many choices Competition is complacent

Using Information Systems to Achieve Competitive Advantage

Information systems strategies for dealing with competitive forces

Low-cost leadership Product differentiation Focus on market niche Strengthen customer and supplier intimacy

Low-cost leadership: Use information systems to achieve the lowest operational costs and the lowest prices. For example, a supply chain management system can incorporate an efficient customer response system to directly link consumer behavior to distribution and production and supply chains, helping lower inventory and distribution costs. http://rollcall.tv/rollcall_video_view.php?vId=13535053555351535353515349

Product differentiation: Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services. For instance, Land's End uses mass customization, offering individually tailored products or services using the same production resources as mass production, to custom-tailor clothing to individual customer specifications.

Focus on market niche: Use information systems to enable a specific market focus and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Hilton Hotels uses a customer information system with detailed data about active guests to provide tailored services and reward profitable customers with extra privileges and attention.

Strengthen customer and supplier intimacy: Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access from suppliers to production schedules, and even permits suppliers to decide how and when to ship suppliers to Chrysler factories. This allows suppliers more lead time in producing goods. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product) and loyalty to your firm.

Case: Can Detroit Make the Cars Customers Want?

Why is AutoNation having a problem with its inventory? Why is this also a problem for auto manufacturers such as GM, Ford, and Chrysler? How is this problem impacting the business performance of AutoNation and of the auto manufacturers?

Case: Can Detroit Make the Cars Customers Want?

What pieces of data do AutoNation need to determine what cars to stock in each of its dealerships? How can it obtain these data? What is AutoNation s solution to its problem? What obstacles must AutoNation overcome to implement its solution?

Value Chain Model

The value chain model highlights specific activities in the business where competitive strategies can best be applied and where information systems are most likely to have a strategic impact. The value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm's products or services. These activities can be categorized as either primary activities or support activities.

Value Chain Model

Primary activities are most directly related to: the production and distribution of the firm's products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Support activities make the delivery of the primary activities possible and consist of: organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchasing input).

 Business value chain model can be used to identify areas where information systems will improve business processes. Also, business processes can be benchmarked against competitors or others in related industries, and industry best practices can be identified and implemented. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, research organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective.

A firm's value chain is linked to the value chains of its suppliers, distributors, and customers.

Information systems can be used to achieve strategic advantage at the industry level by working with other firms to develop industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and raising entry costs.

Using Information Systems to Achieve Competitive Advantage

The business value chain model Extending the value chain: The value web

Synergies, core competencies, and network-based strategies

Synergies Enhancing core competencies Network-based strategies

Network economics Virtual company strategy Business ecosystems: Keystone and niche firms

Value Web
Internet technology has made it possible to create highly synchronized industry value chains called value webs. A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer-driven and operates in a less linear fashion than the traditional value chain.

The Value Web

The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand.

 In synergies, the output of some units can be used as inputs to other units, or two organizations pool markets and expertise, and these relationships lower costs and generate profits. A core competency is an activity for which a firm is a world-class leader, such as being the world's best miniature parts designer. A core competency relies on knowledge that is gained through experience as well as incorporating new, external knowledge. Any information system that encourages the sharing of knowledge across business units enhances competency.

network-based strategy: Network Economics

the marginal costs of adding another participant or creating another product are negligible, whereas the marginal gain is much larger. the more people offering products on eBay, the more valuable the eBay site is to everyone because more products are listed, and more competition among suppliers lowers prices.

Virtual Company

Using Systems for Competitive Advantage: Management Issues

Sustaining competitive advantage Performing a strategic systems analysis Managing strategic transitions

Central organizational factors to consider when planning a new information system include:
The environment in which the organization must function The structure of the organization: hierarchy, specialization, routines, and business processes The organization s culture and politics The type of organization and its style of leadership The principal interest groups affected by the system and the attitudes of workers who will be using the system The kinds of tasks, decisions, and business processes that the information system is designed to assist

Assess Information Intensity

Potentially high information intensity in the value chain
A large number of suppliers or customers A product requiring large quantity of information to sell A product line with many distinctive product varieties Large number of steps in manufacturing process Long cycle time from initial order to the delivered product

 Potentially high information intensity in the product:

A product that mainly provides information a product whose operation involves substantial information processing A product requiring especially high costs for buyer training

Determine the role of IT in Industry Structure

Managers should predict the likely impact of IT on their industry s structure. How IT might affect each of the five competitive forces? A company should understand how structural change is forcing it to respond and look for ways to lead change in the industry.

Identify and rank the ways in which information technology might create competitive advantage.
Technology is likely to affect every activity in the value chain. Possibility that new linkages among activities are being made possible. By taking a careful look, managers can identify the value activities that are likely to be most affected in terms of cost and differentiation particularly, if they have a significant information-processing component. Activities with important links to other activities inside and outside the company are also critical. Executives must examine such activities for ways in which information technology can create sustainable competitive advantage.

 A company should consider how IT might allow a change in competitive scope.

Can information technology help the company serve new segments? Will the flexibility of IT allow broad-line competitors to invade areas that were once the province of niche competitors? Will IT provide the leverage to expand the business globally? Can managers harness IT to exploit interrelationships with other industries? Or, can the technology help a company create competitive advantage by narrowing its scope?

Investigate how information technology might spawn new businesses What information generated (or potentially generated) in the business could the company sell? What information-processing capacity exists internally to start a new business? Does IT make it feasible to produce new items related to the company s product?

Develop a plan for taking advantage of information technology

The action plan should rank the strategic investments necessary in h/w and s/w. In new product development activities that reflect the increasing information content in products. Organizational changes that reflect the role that the technology plays in linking activities inside and outside the company are likely to be necessary.

 Companies must employ IT with a sophisticated understanding of the requirements for competitive advantage. Organizations need to distribute the responsibility for systems development more widely in the organization. At the same time, general managers must be involved to ensure that cross-functional linkages, more possible to achieve with information technology, are exploited. By using information systems, companies can measure their activities more precisely and help motivate managers to implement strategies successfully.

 Companies that anticipate the power of information technology will be in control of events. Companies that do not respond will be forced to accept changes that others initiate and will find themselves at a competitive disadvantage.