FIVE Force Model

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Chapter 2. Strategic Use of Information

Resources

John Wiley & Sons, Inc. & Dr. Chen, Dr. Chen, Information Systems Information Systems –– Theory and PracticesTheory and Practices

Jason C. H. Chen, Ph.D.Professor of MIS

School of Business AdministrationGonzaga UniversitySpokane, WA [email protected]

Learning Objectives

• List the identifying factors of the eras of information usage.

• Know what makes an information resource valuable.

• Explain how information resources are used strategically in context of the 5 forces model

John Wiley & Sons, Inc. & Dr. Chen, Dr. Chen, Information Systems Information Systems –– Theory and PracticesTheory and Practices2

strategically in context of the 5-forces model.

• Understand how information resources can be used to alter the value chain.

• Explain the importance of strategic alliances.

• Know the risks of information resources.

Discussion Questions

• Q4

• It has been said that there are no sustainable competitive advantages gained from IT


competitive advantages gained from IT other than the capability of the IT organization itself. Do you agree or disagree? Defend your position.

Discussion Questions - Answer• Those who agree with this statement might argue that

even the capability of the IT organization is not a sustainable advantage because people come and go, they can be bought by another organization as a move to create the capability elsewhere, and their skills and knowledge atrophy over time, when new capabilities

i Wi IT i i h ll d


arise. Witness IT organizations who excelled at managing mainframe applications, who are now struggling to keep up with web-based applications.

• Those who disagree with this statement might argue that the key to sustaining any advantage comes from the way all business resources are organized and used, and ultimately that comes down to how the managers and the people are able to perform.

What is the “Competitive Advantage”?

• A competitive advantage is a benefit derived from something a company does or has that its customers want and its


competitors cannot (or choose not to) match.

Sustainable Competitive Advantages

• However, firms may create/improve their competitive advantages only if they:– have capacity to learn,


– employ revenue management approach.• With the service economy accounting for over 70

percent of GDP in OECD (Organization for Economic Co-operation and Development) countries, service firms are becoming increasingly competitive withrevenue management (RM) and pricing becoming central in their focus for sustaining long term profitability (and competitive advantage).

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What is Business Model?

• A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace


profit in a marketplace.

Source: E-Commerce: business, technology, society, Laudon and Traver, A/WN

• The business model is at the center of the business plan.• An e-commerce business model aims to use and leverage the unique qualities of the Internet and the www.

Why New Models?

• We need some new models– for how we go about exploring IT for

competitive advantage,


p g ,

– for IT infrastructure how we create it and manage it

– for how we acquire, manage and deploy the skills that are needed to run that infrastructure

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– Profitability (making money)

Value propositions1. Business model

2. Core competencies

competition structure/culture

Strategic intent

F MP H T

fulfill

Essentials for a Successful Enterprise

Analysis(Porter, SWOT)

Business landscapeInternal/External

future positioning


inance

Managem

ent P

rocess

H/R

Technology

… Strategy

•Positioning on product/market

•Differentiation/choice of competitive advantage

•Competitive postureIndustry characteristics，

Market growth，Demand characteristics，

Barrier of entry，etc.

IT Role?N

Corporate strategy

Business strategy

Functional strategy

f p g

Positioning

3. Execution

Business Model vs. Revenue Model

• Business model is the architectural configuration of the components of transactions designed to exploit business


g popportunities.

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• Revenue model refers to “the specific ways in which a business model enables revenue generation.”

Business Model Revenue Model

Value Value

It describes the way in It can be realized through a

Business vs. Revenue Model

creation appropriation


It describes the way in which a company enables transactions that create value for all participants, including partners, suppliers and customers.

It can be realized through a combination of

- subscription fees,- advertising fees,- transactional income (e.g.,

fixed transactional fees, referral fees, fixed/variable commissions, etc)

Four Important Entities for a Successful Enterprise

• Capital （资本）

• Technical （技术）

• Human （人才）


• Human （人才）

• Information （信息）

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EVOLUTION OF INFORMATION RESOURCES


RESOURCES

Information Resources• The term information resources is defined as the

available data, technology, people, and processes available to perform business processes and tasks.

• Information resources can be either assets or capabilities.

IT asset is anything tangible or intangible that can be used


– IT asset is anything, tangible or intangible, that can be used by a firm in its processes for creating, producing and/or offering its products (IT infrastructure is an asset).

– IT capability is something that is learned or developed over time in order for the firm to create, produce or offer it products.

Information Resources (cont.)• Over the past decades the use of information resources

has changed.• Organizations have moved from an “efficiency model”

of the 1960’s to a “value creation model” of the 2000’


2000’s.• Companies seek to utilize those technologies that give

them competitive advantage.• Maximizing the effectiveness of the firm’s business

strategy requires the general manager to identify and use information resources.

• Figure 2.1 shows this change.

Primary

Role of IT

EfficiencyAutomate existing paper-based processes

EffectivenessSolve problems and create opportunities

StrategicIncrease individual and group effectiveness

StrategicTransform industry/organization

Value creation

Create collaborative partnerships

Justify IT expenditure

ROI Increasing productivity and decision making

Competitive

position

Competitive

position

Adding

Value

Target of systems

Organization Individual manager/

Group

Business

processes

Business processes ecosystem

Customer,

supplier,

ecosystem

I f ti Application Data driven User driven Business driven Knowledge

1960s 1970s 1980s 1990s 2000+


Information model

Application

specific

Data-driven User-driven Business-driven Knowledge-

driven

Dominant technology

Mainframe-based

Minicomputer-based

Microcomputer “decentralized intelligence”

Client-Server “distribution intelligence”

Internet “ubiquitous intelligence”

Basis of Value Scarcity Scarcity Scarcity Plentitude Plentitude

Underlying economics

Economic of information bundled w/ economics of things



Economic of information separated f/ economics of things

Economic of information separated f/ economics of things

Figure 2.1 Eras of information usage in organizations (Eras Model)w/ (with)f/ (from)

Network Externalities • Definition - The phenomenon whereby a service becomes

more valuable as more people use it, thereby encouraging ever-increasing numbers of adopters.– Network effects

• While the word of mouth method is often more influential


• While the word-of-mouth method is often more influential in the beginning, analysis may play a significant role later in the cycle. In other words, you may adopt a service initially because someone you know uses it; later, you may adopt a service because "everyone" uses.– IT Role?– Network Externality offers a reason for value derived from

plentitude (Era IV & V)

INFORMATION RESOURCES AS STRATEGIC TOOLS


AS STRATEGIC TOOLS

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Advantages of Information Resources –What General Managers want are …

• General managers should consider the following to understand the type of advantage the information resource might create:

– What makes the information resource valuable?– Who appropriates the value created by the information


pp p yresource?

– Is the information resource equally distributed across firms?

– Is the information resource highly mobile?– How quickly does the information resource become

obsolete?– When, where and …What tools are available to help shape their strategic use?What are the risks of using information resource to gain strategic advantage

HOW CAN INFORMATION RESOURCES BE USED


STRATEGICALLY?

The Strategic Landscape

• Managers confront elements that influence the competitive environment.

• Slim tolerance for error requires managers take


multiple view of the strategic landscape, such as:– First view - Porter’s five competitive forces model.

– Second view - Porter’s value chain.

– Third view • focuses on the types of IS resources needed (Resource Based

View).

Striving for Competitive Advantage

• level: Industry & Competitive Analysis– Competitive Forces Model

– Competitive Strategy

D’A i’ H i i M d l (7 S )

Firm


– D’Aveni’s Hypercompetition Model (7-Ss)

• level – Value-Chain Analysis

Business

Porter’s Five Forces Model and Value Chain

• According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force.

• Under the perspective of market structure Porter’s


• Under the perspective of market structure, Porter’s competitive forces model has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats.

PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY

NEW MARKET ENTRANTS

SUBSTITUTE PRODUCTS & SERVICES

ThreatsThreats

•Switching cost •Access to distribution channels•Economies of scale

•Redefine products and services•Improve price/performance


THE FIRM COMPETITORS

SUPPLIERS CUSTOMERSBargaining power

NDr. Chen, The Trends of the Information Systems Technology TM -24

•Selection of suppler•Threat of backward integration

•Buyer selection•Switching costs•Differentiation

•Cost-effectiveness•Market access•Differentiation of product or service

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Figure 2.3 - Five (5) Competitive Forces with Potential Strategic Use of Information Resources (Porter)

John Wiley & Sons, Inc. & Dr. Chen, Dr. Chen, Information Systems Information Systems –– Theory and PracticesTheory and Practices25N

Group Work/Discussion Questions

• Using the five competitive forces model as described in this chapter to describe how (and what) IT might be used to provide a


( ) g pwinning position for:

• A global airline– Use UA as an example (Group work together)

2. Use the five competitive forces model as described in this chapter to describe how information technology might be used to provide a winning position for each of these businesses

• Ans: The five forces are substitutes, supplier, buyer, new entrants, and inter-industry. The question asks the student to pick a force and describe how each of these 5 types of business might use information resources to reduce the


threat of that force. An example of analyzing the substitute force is given below:

• Global airline-it is difficult to think of what might be a substitute threat for a global airline. Perhaps it might be a cruise ship offering "offices at sea". In that case the global airline might use information resources to offer "offices in the air".

PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY

NEW MARKET ENTRANTS

SUBSTITUTE PRODUCTS & SERVICES

ThreatsThreats

Internal Forces:1.customer focus2.communication,

Other forces should be considered in the e-Age:


THE FIRM COMPETITORS

SUPPLIERS CUSTOMERSBargaining power

NDr. Chen, The Trends of the Information Systems Technology TM -28

•Cost-effectiveness•Market access•Differentiation of product or service

.co u cat o ,3.core competencies4.complexity5.Quality

g1. Digitalization2. Globalization3. Deregulation

The Five Forces Model and IS• The Five Forces Model provides a way to think

about how information resources can create competitive advantage.

• Using Porter’s Model, General Managers can:– Identify key sources of competition they

f


face.– Recognize uses of information resources to

enhance their competitive position against competitive threats

– Consider likely changes in competitive threats over time

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Porter’s Value Chain Model

• The value chain model highlights specific activities (i.e. create, deliver, and support a company’s product or service) in the business where competitive strategies can be best applied and where information systems are


pp ymost likely to have a strategic impact.

• Therefore, the value chain model can be employed to identify specific, critical leverage points where a firm can use IT most effectively to enhance its competitive position.

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Figure 2.6 Process View of the Firm: The Value Chain


(Value)

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Two broad categories:Primary activities – relate directly to the value created in a product or service.Support activities – make it possible for the primary activities to exist and remain coordinated

Using Information Resources to Alter the Value Chain

• The Value Chain model suggest that competition can come from two sources:– Lowering the cost to perform an activity and – Adding value to a product or service so buyers

will be willing to pay more.


• Lowering costs only achieves competitive advantage if the firm possesses information on the competitors’ cost structure

• Adding value is a strategic advantage if a firm possesses accurate information regarding its customer such as: which products are valued? Where can improvements be made? When to …

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The Value System (Fig 2.5)

• The value chain model can be extended by linking many value chains into a value system.

• Much of the advantage of supply chain t f d t di


management comes from understanding how information is used within each value chain of the system.

• This can lead to the formation of entire new businesses designed to change the information component of value-added activities.

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The Value System:Interconnecting relationships between organizations


Upstreamvalue

Firmvalue

Downstreamvalue

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Discussion Questions

• Q3- Using the value chain model as described in this chapter to describe how IT might be used to provide a winning position


g p g pfor:

• A global airline

• A Web-based wine retailer

• A bank

3. Using the value chain model, describe how information technology might be used to provide a winning position for each of these businesses:

• Ans: The value chain has primary activities (inbound logistics, operations, outbound logistics, marketing and sales and service) and secondary activities (organization, human resources, technology, and purchasing). The question asks the student to describe how each of these 5 businesses might use information resources to add value to the activities to their company (and possibly to partners in their supply chain) An example of


possibly to partners in their supply chain). An example of analyzing the inbound logistics is:

• Global airline-• the reservation system data can be analyzed by an information

system to see which customers fly particular routes….When the seat occupancy drops on these routes, the customers that frequently fly such routes could be contacted and offered a reduced price on a ticket for flying that route during the next month…. In that way the load factor could be improved (this could also be modified to be a marketing and sales activity)

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3. (cont.)

• Web-based wine retailer – a system could be set up where the wine retailer has a direct connection with wine companies and even growers to reduce costs that can then be passed on to consumers to drive up revenues. Also, predictive analytics could be used to help the retailer predict future demand for various types of wines which


could be communicated to suppliers up stream.• Bank- The telecommunications system may support

Electronic Funds Transfers to ensure the transfer of funds into the bank. This could also make the outbound logistics of the Federal Reserve Bank more efficient.

Customercentric

Demands Products

E-BUSINESS

BUSINESS FOCUS

•SCM•CRMBPR


Who are the customers?Where are the customers?Their purchasing habits

What they need/want?How many they need/want?When they need/want?How to reach them?

•BPR•ERP

CRM and the Value Chain

• Customer Relationship Management (CRM) is a natural extension of applying the value chain model to customers.


• CRM includes management activities performed to obtain, enhance relationships with, and retain customers.

• CRM is a coordinated set of activities.

• CRM can lead to better customer service, which leads to competitive advantage for the business.

WHY CRM?• In this competitive age when product

differentiation is difficult, CRM is one of the most valuable assets a company can acquire.

• The sooner a company embraces CRM the


• The sooner a company embraces CRM the better off it will be and the harder it will be for competitors to steal loyal and devoted customers.

• CRM is more than just “Marketing” (what else?)

CUSTOMER RELATIONSHIP MANAGEMENT’S EXPLOSIVE GROWTH

CRM Business Drivers


New Forces in Today’s Economy• Overcapacity and hypercompetition.

– Overcapacity is 25% pharmaceuticals, 30% chemicals, 35% automobiles

– Leads to falling prices and margins, mergers, and company failures

• Ascendant power of customers.– Customer shortage– Price transparency


– Price transparency

• Ascendant power of distributors over manufacturers.

• Growth of digitalization and the Internet as major sources of efficiency and profitability.

• Proliferation of channels and media.

• Globalization and global interdependence.

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Supply Chain Management• An approach that improves the way a company finds

raw components it needs to make a product or service, manufactures that product or service, and delivers it to customers.

• Technology permits supply chains of customer’s and


• Technology permits supply chains of customer s and supplier’s to be linked.

• Requires collaboration and the IT to support the seamless connection.

• Electronic marketplaces can be used to limit information sharing.

BASICS OF SUPPLY CHAIN

• Organizations must embrace technologies that can effectively manage supply chains


Involvement(integration)

FIVE BASIC SUPPLY CHAINMANAGEMENT COMPONENTS


Plan DeliverSource Make Return

INFORMATION TECHNOLOGY’S ROLE IN THE SUPPLY CHAIN

• IT’s primary role is to create integrations or tight process and information linkages between functions within a firm


The Resource-Based View• The Resource-Based View (RBV) looks at gaining

competitive advantage through the use of information resources.– Determining whether a firm’s strategy has created value.

• T o s bsets of information reso rces ha e been


• Two subsets of information resources have been identified:– Those that enable firms to attain competitive advantage

(rare and valuable resources that are not common place).– Those that enable firms to sustain competitive advantage

over the long-term (resources must be difficult to transfer or relatively immobile).

Porter’s Model/Value Chain

Resource-Based View (RBV)

Competitive Advantage

Argues that aspects of the firm’s industry create

Maintains that CA comes from the

Porter’s Model vs. Resource-Based View


Advantage (CA)

firm s industry create sources of CA.

comes from the information and other resources at the firm

Focus (what adds value to the firm)

Firm’s activities Resources that firm can manage

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4. Use the resource-based view as described in this chapter to describe how information technology might be used to provide and sustain a winning position for each of these businesses: (p.72)

• Ans: The resource based view The Resource-Based View (RBV) looks at gaining competitive advantage through the use of information resources.

• The question asks the student to describe how each of these 5 businesses might use information resources to add value to the activities of their company


the activities of their company. • 1. A global airline• 3. An appliance service firm (provides services to fix and

maintain appliance)• 5. A Web-based wine retailer• 2. A local dry cleaner• 4. A bank

• 1. Global airline– they could utilize their global relationships to market strategically

to customers through a CRM system that would be difficult to imitate because of their global reach. They could utilize IT talent from all parts of the world to create systems that are innovative and strategic in nature (specialized billing system for example).

• 3. Appliance Service Firm– similar to the local dry cleaner, an IS system could be used that

tracks repairs of appliances and determines which appliances seem to have problems with specific components They could


seem to have problems with specific components. They could then use customer service to get feedback on these appliances and help customers to select appliances in the future that are more reliable, thus generating customer loyalty and service.

• 5. Web-based wine retailer– take advantage of its online presence to offer other services like

wine recommendations, possibly creative cooking recipes, and other services that would enhance its services.

STRATEGIC ALLIANCES


Strategic Alliances• An interorganizational relationship that affords one or

more companies in the relationship a strategic advantage.

• IT can help produce the product developed by alliance, share information resources across the partners’ existing value systems or facilitate communication and


existing value systems, or facilitate communication and coordination among the partners.

• E.g., Delta recently formed an alliance with e-Travel Inc to promote Delta’s inline reservation system.

• This helps reduce Delta’s agency fees while offering e-Travel new corporate leads.

• Also, Supply Chain Management (SCM) is another type of IT-facilitated strategic alliance.

Aligning IS strategy with Business Strategy

• Using multiple approaches to evaluating the strategic landscape is helpful in determining strategic opportunities.

• Here, we look at three such approaches:– Porter’s five forces model of the competitive


o te s five fo ces odel o t e co pet t veadvantage of firms

– Porter’s value chain model of internal organizational operations

– and strategic option generator (results in nine possible major options to secure a competitive advantage)

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Wiseman’s theory of strategic thrusts

Wiseman’s theory of strategic thrustsand strategic option generator

1. What is our strategic target?2. What strategic thrust can be

Suppliers Customers Competitors

I. Major options to secure a competitive advantage

II. Option Generator


2. What strategic thrust can be used against the target?

3. What strategic mode can be used?

4. What direction of thrust can be used?

5. What IS skills can we use?

Differen-tiation

Cost

Innovation

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Types of Strategic Alliances

• Supply Chain Management: improves the way a company finds raw components that it needs to make a product or service.– Technology, especially Web-based, allows the supply chain of a

company’s customers and suppliers to be linked through a single network that optimizes costs and opportunities for all companies in the supply chain


the supply chain– Wal-Mart and Proctor & Gamble.

• Virtual Corporations: is a temporary (virtual) network of suppliers, customer and even rivals linked by IT to share skills, cost and access to each others’ markets

• : a new strategy whereby companies cooperate and compete at the same time with companies in their value net– Covisint and General Motors, Ford, and DaimlerChrysler.

Co-opetition

N

RISKS


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Potential RisksThere are many potential risks that a firm faces when attempting to

use IT to outpace their competition.

• Awakening a sleeping giant – a large competitor with deeper pockets may be nudged into implementing IS with even better features

• Demonstrating bad timing – sometimes customers are not ready to use the technology designed to gain strategic advantage

• Implementing IS poorly information systems that fail because


• Implementing IS poorly – information systems that fail because they are poorly implemented

• Failing to deliver what users want – systems that don’t meet the firm’s target market likely to fail

• Web-based alternative removes advantages – consider risk of losing any advantage obtained by an information resource that later becomes available as a service on the web

• Running afoul of the law – Using IS strategically may promote litigation

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Summary of Key Strategy Frameworks

Framework Key IdeaUsefulness in Information SystemsDiscussions

Porter’s genericstrategiesframework

Firms achievecompetitive advantagethrough cost leadership,differentiation, orfocus.

Understanding which strategy is chosenby a firm is critical to choosing IS tocomplement that strategy.


D’Aveni’s hypercompetition model

Speed and aggressive moves and counter-moves by a firmcreatecompetitive advantage.

The 7-S’s give the manager suggestions on what moves and counter moves tomake and IS are critical to achieve the speed needed for these moves.

Brandenberg and Nalebuff’s co-opetition model

Companies cooperateand compete at the same time.

Being cooperative and competitive at the same time requires IS that can manage these two roles.

150

200

250

300

co

mp

eti

tio

ns

(%

)

Relationship between profits and time of market introduction


-10 -5 0 5 100

50

100

150

Time of market introduction relative to competition (months)

Pro

fits

re

lati

ve

to

c

Figure 7.10 (p.227)

Keen’s Six-Stage Competitive Advantage Model

Stimulus for action

First major move


First-mover expansion movesCompetitor catch-up moves

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Commoditization

Customer acceptance

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When to Perform Activities

• First Movers


Advantages

• Build brand recognition

• Control scarce resources

• Establish networks

• Early Economies-of-Scale

Disadvantages

• Newer technology

• Higher development costs

• Reverse engineering by competitors

FOOD FOR THOUGHT: CO-CREATING IT AND


CO CREATING IT AND BUSINESS STRATEGY

Co-Creating IT and Business Strategy

• Is FedEx a package delivery company?• What happens if FedEx’s IS goes down?• What is the core of FedEx?• Information is increasingly a core component of the


g y pproduct or service offered by the firm.

• IT strategy is business strategy – they cannot be created without each other.

• Some company’s main product is information (financial services).

• FedEx can not function without IT even though they are primarily a package delivering company.

Summary• Using IS for strategic advantage requires more than

just knowing the technology.

• Remember that not just the local competition is a factor in success but the 5 competitive forces model


reminds us of other issues.

• Value chain analysis show us how IS add value to the primary activity of a business.

• Know the risks associated with using IS to gain strategic advantage.

Mini Case 2-2: ZIPCAR

• This is an interesting, short case about how a new type of rental car company is able to operate in a completely new business


p p ymodel, as compared to other rental car companies, and embrace Web 2.0 technologies to gain further competitive advantage.

What is Web 2.0?

• "Web 2.0" refers to the second generation of web development and web design. – It is characterized as facilitating communication,

information sharing, interoperability, user-centered designand collaboration on the World Wide Web. It has led to


the development and evolution of web-based communities, hosted services, and web applications.

– Examples include social-networking sites, video-sharing sites, wikis, blogs, mashups and folksonomies.

– Web 2.0 is the business revolution in the computer industry caused by the move to the Internet as a platform, and an attempt to understand the rules for success on that new platform.

Source: http://en.wikipedia.org/wiki/Web_2.0

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Questions

1. Analyze the business model of Zipcar using Porter’s five forces model.

2. Discuss the synergy between the business strategy of Zipcar and information technology


Zipcar and information technology.

3. Are there any network externalities in the workings of Zipcar? If so, do they add value? How?

4. As the CEO of Zipcar, what would you do to sustain a competitive advantage?

5. Is the ZIPCAR case related to “HypercompetitionModel”? What are they (in terms of 7S)?

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1. Analyze the business model of Zipcar using Porter’s five forces model.

• Ans: Zipcar has created a model that would be difficult for other companies to imitate with its technology infrastructure and low over-head. This model would be difficult for traditional car rental companies to model


difficult for traditional car rental companies to model due to their existing infrastructure and model.

• Buyers could utilize other rental companies, but they would lose the convenience offered by the Zipcar model of hourly rental agreements, and convenient locations. Zipcar does not really have to worry about supplier power since it does not rely on proprietary goods.

2. Discuss the synergy between the business strategy of Zipcar and information technology.

• Ans: There is tremendous synergy between Zipcars business and IT strategy. Zipcar is heavily dependent upon an automated process


heavily dependent upon an automated process, and supports social networking of its clients, so that they can freely provide feedback on the company and its products and services.

• IT completely supports what Zipcar is trying to accomplish

3. Are there any network externalities in the workings of Zipcar? If so, do they add value? How?

• Ans: Through their use of social networking they provide value to the customer by providing an open exchange of ideas, and feedback to Zipcar.

4. As the CEO of Zipcar, what would you do to


p , ysustain a competitive advantage?

• Ans: Continue to innovate through the use of IT and by listening to customer feedback on the social network sites. Look for strategic partnerships with suppliers or other potential providers of services that Zipcar could leverage to improve its service or add extra value.

Hypercompetition model

• Is the ZIPCAR case related to “Hypercompetition Model”?

• What are they (in terms of 7S)?


What are they (in terms of 7S)?

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End of Chapter 2


d o C p e

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FIVE Force Model