1803ICT Information Systems Foundations
1803ICT Information Systems Foundations
Module 5
IS, Competitive Advantage and Value
By the end of thisModule you will:
To describe the major stakeholders for organization’s external economic environments
Describe how IS supports competitive strategy through industry structure, competitive strategy, value chain and business processes
Explain Porter’s 5 forces, Porter’s value model and explain how it applies to organizations
Distinguish among value chain, supply and customer chains
What is the essence of businessorganizations and what they do? What are some key ideas about business?What is your understanding of an organization? – this knowledge is important to truly contextualise the idea of information systems.
What is the core goal of organizations? How do they seek to meet it?
As we think about these questions watch the following video…
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
1803ICT Information Systems Foundations
Module 5
IS, Competitive Advantage and Value
By the end of thisModule you will:
To describe the major stakeholders for organization’s external economic environments
Describe how IS supports competitive strategy through industry structure, competitive strategy, value chain and business processes
Explain Porter’s 5 forces, Porter’s value model and explain how it applies to organizations
Distinguish among value chain, supply and customer chains
0:39-1.46
Discuss the ad from the perspective of organizations… What is the main message in this ad about organizations (i.e. businesses)
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
The video is an ad and demonstrates competition among business organizations. Survival of business organizations centers around the idea of competiveness.
What do we mean by competitiveness?It’s about presenting oneself as somewhat better than another – it’s the ability to provide value to a customer beyond what another business of a similar nature can provide.
Being competitive is the mainstay of business organisations.
What does competiveness have to do with information systems?
Remember in the earlier modules how we defined organizations and what we said about the role of information and information systems?
The key argument for the role of information systems in helping maintain competiveness in organisations goes like this
Organizations are value creating entities within a larger value creation network
Value is created through various activities in the organization in human activity systems as part of business processes– the ability to provide ‘better value’ to customersthan another organization is the core of competiveness
Value creating activities require decision making at strategic, tactical and operational levels
And decision making requires knowledge distilled from information and data - In an effective information system there is effective communication and flow of information and data enabling the activity systems to work together very effectively, creating optimal value within the organization.
Hence, information systems are able to influence the competitive capabilities of organisations.
An understanding of competitive advantage and value is important to information systems design, and to better understanding how information systems contribute to the competitive requirements of organisations.This is what this module is about.
The objectives of the module are therefore as follows:
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1803ICT Information Systems Foundations
Module 5
IS, Competitive Advantage and Value
By the end of thisModule you will:
To describe the major stakeholders for organization’s external economic environments
Describe how IS supports competitive strategy through industry structure, competitive strategy, value chain and business processes
Explain Porter’s 5 forces, Porter’s value model and explain how it applies to organizations
Distinguish among value chain, supply and customer chains
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Before we progress further with discussion of how information systems support competitive advantage of organisations, it is necessary to return to the concept of what an organization is. To help us do this,…
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What does this have to do with organisations?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
How is a rainforest like an organization?
It is a system
There’s different parts that do different things and they all work together for the survival of the whole rainforest
What happens in one part influences another part
It is an open system – it is influenced by things outside of the rainforest itself – the external climate, what’s happening in the land and ocean and waterways around it etc.
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Organizations as open systems
The forces of the surroundings bear down on organizations and shape their activity and are a filter to the outputs– this is the essence of competiveness and value
https://en.wikipedia.org/wiki/Open_system_(systems_theory)
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Nowhere is the influence of external forces on organization more obvious than in stock marketsLook what happened to most stock markets around the time of the pandemic (this is the ASX)
The influence of the outside factors is very obvious.
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An organisation is a value-creating system that operates in a wider value network.
Competition is a result of forces in the external environment within which the organisation operates
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
7
Organizations as open systems
An organisation is a system that builds and uses information systems to cope with environmental (business) forces.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
With the conceptualization of organisations as open systems that are subject to external forces, we can think of information systems as helping information systems to cppe with environmental forces that surround the organization.
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The external environment is anything outside the organisation with which the organization interacts. For most organisations, there are four inter-dependent systems in their environment. What might these four systems be?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
There are four main systems in the environment surrounding the organization. What are they?
Physical environment
Economic environment such things as interest rates, consumer confidence, taxes and inflation if for example interests rates are low a company might take out low rate loans to improve the business while they can
Political environment includes laws and governing agency that restrict what can and can’t be done – there are regulations about the food industry and being international there are likely issues around moving money etc, and what they can and can’t do
Social environment includes the values, practices and beliefs of groups of people. For example, macDonald’s in the face of increasing focus on health consciousness has brought in salds and healthy alternatives.
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The external environment is made up of a network of activities and relationships in each of these systems between the organisation and other agencies
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
There are four main systems in the environment surrounding the organization. What are they?
Economic environment such things as interest rates, consumer confidence, taxes and inflation if for example interests rates are low a company might take out low rate loans to improve the business while they can
Political environment includes laws and governing agency that restrict what can and can’t be done – there are regulations about the food industry and being international there are likely issues around moving money etc, and what they can and can’t do
Social environment includes the values, practices and beliefs of groups of people. For example, macDonald’s in the face of increasing focus on health consciousness has brought in salds and healthy alternatives.
Physical environment location, climate etc
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The external environment is made up of a network of activities and relationships in each of these systems between the organisation and other agencies
Focus for this Module
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
The external factor of most interest is the economic environment.
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Economic environment of McDonald’s
Who are the main groups of stakeholders within McDonald’s economic environment?
https://mcdonalds.com.au
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Stakeholders of McDonald’s (An analysis of McDonald’s stakeholders)– to analyse the economic environment of an organization we must necessarily begin by identifying the stakeholders – after all these are the people and companies that are part of the wider value creating network and that will affect and be affected by the value creating activities of the the organisation.As an example consider mcdonalds.
By: Jo David | Tags:
Stakeholders of McDonald’s (An analysis of McDonald’s stakeholders)
This is a detailed analysis of the stakeholders of McDonald’s. It aims to examine the main stakeholders of McDonald’s and how it engages with them. McDonald’s is one of the largest quick service restaurants in the world. Its operations are spread across 118 countries and territories. It serves more than 69 million people every day worldwide (McDonald’s, 2019).
Main stakeholders of McDonald’s
McDonald’s regards its customers, suppliers, and employees as its main stakeholders (McDonald’s, 2019). These stakeholders have impact on the operations of the restaurant and can be affected by it as well.
Customers are the external stakeholders of McDonald’s. Surely, the company’s existence depends on every single customer it serves. Iserving over 69 million worldwide every day (McDonald’s, 2019). McDonald’s
works with a number of suppliers to procure both food and non-food items to run its operations. For instance, Lopez Foods provides McDonald’s with USDA-inspected beef in the USA. Likewise, Kenny Longaker, Frank Martinez, and Keystone Foods supply a wide variety of items to keep the restaurant’s operations going. It is worth mentioning that McDonald’s has a policy of maintaining trusted relationships with the suppliers. This trusted relationship is vital as delay or poor quality of raw materials may affect McDonald’s badly.
McDonald’s is one of the largest employers in the world. It employs approximately 120,000 people in the UK. As of the end of 2018, it employs 210,000 people worldwide which is 25,000 less compared to the number of employees in 2017 (Lock, 2019). However, it is worth mentioning the total number of employees is far higher when franchise employees are added together. Employees are at the forefront of McDonald’s operations and customer satisfaction is heavily dependent on their friendly and professional service.
Other stakeholders of McDonald’s
In addition to its customers, suppliers, and employees, McDonald’s also engages with some other stakeholders. For example, it engages with experts from different sectors, local communities, non-governmental organisation and so on. Relationship with these stakeholders help it in many different ways. For instance, World Wildlife Fund (WWF) experts led an independent analysis of the supply chain of McDonald’s in 2010 to help it identify the raw materials that represented the biggest sustainable sourcing opportunities for it to prioritise (McDonald’s, 2019).
McDonald’s has over the years become a member of a number of non-government organisations e.g. Alliance for a Healthier Generation, WWF’s Bioplastic Feedstock Alliance, and Global Food Safety Initiative to contribute to the global efforts to deal with social and environmental issues. It established a Global Community Leadership Board in 2013 to improve community relations worldwide through disaster relief and charity donation.
McDonalds faces a number of competitors that challenge it every day in its global markets. Burger King, KFC, Subway, Pizza Hut, Starbucks, Domino’s, Dunkin’ Donuts, and Wendy’s are some of those competitors. However, it is worth noting that McDonald’s is No.1 fast food brand in the world in terms of brand value (Lock, 2019).
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An organisation’s economic environment is defined by activities and relationships between the
organisation and a number of
economic actors or external
stakeholders, including:
Competitors
Partners
Suppliers
Customers
Regulators
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
13
Economic environment stakeholders:
Competitors are other organisations in the same fundamental area of business that compete for customers.
Partners are other organisations that cooperate with a particular organisation in the provision of goods and services to the same customers.
Suppliers are those organisations providing resources to the organisation.
Customers are those individuals, groups or organisations purchasing products or services from the organisation.
Regulators are those groups or organisations which set policy for appropriate economic activity. Effectively, regulators attempt to constrain behaviour in economic systems within defined bounds.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
14
How are Organisation’s Competitive Strategy and its Information Systems related?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
In pursuing our understanding of the role of information systems to support an organizations competitive advantage, we have come to understand thatcompeition is the result oforganizations being open systems (ie. They are affected by factors in the external environment). The economic environment is of particular interest. We have also established that any analysis of the economic environment should begin with identifying stakeholders and we now know what those main groups of stake holders are.
On the basis of this understanding, let us know look more carefully at how an organization’s competitive strategy and it’s information systems are related.
The relationship is best summarized through this diagram.
We will go through in more detail each of industry structure, competitive advantage and value chains. Business processes we touched on in the earlier modules when discussing organisations as networks of activity systems undertaking business processes.
Before an organization can devise a strategy to successfully compete in the marketplace, the industry (e.g. food industry, vehicle manufacting, home care serveices etc) within which the organization is positioned must be analysed. This is referred to as an analysis of industry structure and it is most effectively undertaken using porters five competitive forces.
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Industry Structure:
Porter’s Five Competitive Forces
that Determine Industry Structure.
1
4
5
2
3
https://www.youtube.com/watch?v=vuWAghwPzJQ
Watch the video. What are the 5 forces?
Give examples of each of them.
For interest, a longer video with Michael Porter discussing his ideas
https://www.youtube.com/watch?v=ws1MEol8oXg
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
16
he five industry or market forces in Porter’s model
These forces should be thought of as pressures or drivers. The model does not include forces which would affect all companies in the industry uniformly, such as new government regulations. The effect on a company or organisation is determined by the interaction of the forces rather than by the forces individually (Turban, Volonino and Wood, 2013).
Threat of entry of new competitors
This is determined by how difficult or expensive it is to enter an industry. New competitors are attracted to industries in which the costs of setting up a business are not prohibitive and profit margins are large. These new entrants will then attempt to undercut established businesses, forcing down profit margins across the industry. The threat is particulary strong when companies from other industries diversify, using their ‘existing capabilities and cash flow’ to enter another sector (Porter, 2008). Industries which depend upon complex ISs have some protection from this threat.
The bargaining power of suppliers
If the company or its brand are powerful and if the customer or buyer (a retailer or a large organisation) purchases products in large quantities from the company, the company is in a strong position to bargain and secure a higher profit margin through higher prices or better terms.
The bargaining power of customers and buyers
The reverse of 2. In industries dominated by government or a few large companies (such as department stores), these customers will be able to leverage their position against the supplier, securing lower prices and more advantageous terms and thereby lowering profit margins.
The threat of substitute technologies and services
A new technology or product is developed which can be substituted directly for the existing product, forcing companies to lower their prices to remain competitive (examples from the textbook: Kindle replacing Nook, email replacing fax).
The competitive rivalry among the existing firms in the industry
When there is intense competition in the industry, companies are forced to lower their profit margins by investing in advertising and promotions, research and development and other attempts to gain a competitive edge. Porter places this force at the centre of the model because it is influenced by or results from the other forces (new competitors entering the industry, suppliers or buyers attempting to leverage a strong bargaining position and the emergence of substitute products and services).
As Porter observes in an interview with Harvard Business Review, managers have a tendency to understand competition too narrowly. The holistic view taken by the model is based on the insight that companies are in a fight for profits with entities other than their direct rivals, including suppliers, customers and buyers (Porter, 2011; Porter, 2008). For the enterprise architect, focusing on the underlying structures of an industry through the application of the model can prevent a company from being swept up too readily by the latest technological trend or fad (Porter, 2011). http://thinkspace.csu.edu.au/kdaly/2014/03/20/porters-competitive-forces-model-applied-to-the-context-of-a-university/
1
4
5
2
3
The best-known framework for analysing competitiveness is Michael Porter’s competitive forces model (Porter, 1985).
Industry Structure:
Porter’s Five Competitive Forces
that Determine Industry Structure.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
17
These forces should be thought of as pressures or drivers. The model does not include forces which would affect all companies in the industry uniformly, such as new government regulations. The effect on a company or organisation is determined by the interaction of the forces rather than by the forces individually (Turban, Volonino and Wood, 2013).
Threat of entry of new competitors
This is determined by how difficult or expensive it is to enter an industry. New competitors are attracted to industries in which the costs of setting up a business are not prohibitive and profit margins are large. These new entrants will then attempt to undercut established businesses, forcing down profit margins across the industry. The threat is particulary strong when companies from other industries diversify, using their ‘existing capabilities and cash flow’ to enter another sector (Porter, 2008). Industries which depend upon complex ISs have some protection from this threat.
The bargaining power of suppliers
If the company or its brand are powerful and if the customer or buyer (a retailer or a large organisation) purchases products in large quantities from the company, the company is in a strong position to bargain and secure a higher profit margin through higher prices or better terms.
The bargaining power of customers and buyers
The reverse of 2. In industries dominated by government or a few large companies (such as department stores), these customers will be able to leverage their position against the supplier, securing lower prices and more advantageous terms and thereby lowering profit margins.
The threat of substitute technologies and services
A new technology or product is developed which can be substituted directly for the existing product, forcing companies to lower their prices to remain competitive (examples from the textbook: Kindle replacing Nook, email replacing fax).
The competitive rivalry among the existing firms in the industry
When there is intense competition in the industry, companies are forced to lower their profit margins by investing in advertising and promotions, research and development and other attempts to gain a competitive edge. Porter places this force at the centre of the model because it is influenced by or results from the other forces (new competitors entering the industry, suppliers or buyers attempting to leverage a strong bargaining position and the emergence of substitute products and services).
As Porter observes in an interview with Harvard Business Review, managers have a tendency to understand competition too narrowly. The holistic view taken by the model is based on the insight that companies are in a fight for profits with entities other than their direct rivals, including suppliers, customers and buyers (Porter, 2011; Porter, 2008). For the enterprise architect, focusing on the underlying structures of an industry through the application of the model can prevent a company from being swept up too readily by the latest technological trend or fad (Porter, 2011). http://thinkspace.csu.edu.au/kdaly/2014/03/20/porters-competitive-forces-model-applied-to-the-context-of-a-university
Industry structure:
porter’s model
Briefly analyze coca cola in terms of Porter’s five forces model.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Have a go at conducting a simple 5 forces analysis for coca cola – to help you let’s breiefly review each force and note the kinds of questions which should be asked to facilitate the analysis of each of the forces. Note that you will be required to undertake a similar analysis in your major case assessment.
http://www.investopedia.com/articles/markets/120915/analyzing-porters-5-forces-cocacola.asp
Threat of substitute products
This refers to the possibility that customers will find a different (read: quicker and easier) way of doing what your company does. You may have originally conceived products or services that help customers, but as technology changes over time, so do the desires and problems of customers
Always examine how your customer’s lives have changed as your company has grown. For example, you may sell a piece of software that automates a process or synchronizes activity into one platform. As user behaviour changes, you can find opportunities to update your product, or even grow a new service offering
How easy is it to find an alternative to your products or services?
What aspects of your products/services can your customers do manually?
How do cheaper substitutes measure up against your company for ROI?
Bargaining power of buyers
Ask yourself how much power do your buyers have over you. If you’re selling a product, their power is likely contained to order amounts or customization needs. However, if you’re offering a service, customers are more open to negotiation.
Consider:
How powerful are your buyers?
How many are there? What different kinds of buyers do you interact with?
Can the buyers get costs down?
Do they have the power to dictate terms?
How many buyers control your sales? How large are the orders you receive?(the more customers you have the more power you have to retain them)
Could your buyers switch suppliers—and how much would it cost for them to switch?
How important is your product/service to your buyers (i.e. what is the ROI of your product/service)
threat of new entrants
The threat of new entry is based on how secure your company is from being surrounded by competitors.New entrants will threaten your profits because they can drive down your costs (as well as steal your customers)
What’s the threat of new businesses starting in this sector?
How easy is it to start up in this business?
What are the rules and regulations?
What finance would a start-up need?
Are there barriers to entry which give you greater power?
Bargaining power of suppliers
How many suppliers are in the market?
Are there many options (which can lower prices) or just a few (which can raise them)?
How easy is it to switch, what’s the cost?
How would changing suppliers affect your products/services?
Competitive rivalry
hink both on a macro and micro scale about the number of direct competitors you have in your industry and the products/services they offer in comparison to yours.
Markets with few competitors are attractive but can be short-lived. On the other hand, highly-competitive markets with many companies chasing the same work reduce your power and can push you to lower your prices and innovate new products.
What’s the level of competition in your company’s sector?
Who are your large, direct competitors?
What advantages do they leverage over you?
Who are your smaller, independent competitors? What do they do to stay competitive
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See also module_5_Porters five forces example for coca cola.pdf
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Note that conducting a five forces analysis involves three stages
Identifying the relevant stakeholders and state of industry with respect to each of the forces
Classifying forces as high, low or medium intensity (i.e. how strong is the effect of the force – the strength is determined in terms of how strong or how much it increases competition. A strong force is one that will significantly increase competition to the business. A weak force does not contribute very much to competition)
Giving an explanation or supporting argument as to why you classify the force as high, low or medium.
The strongest competitive forces has the potential to severly reduce profits while the weaker forces can be exploited to increase profits.
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Competitive Strategy.
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It is likely you already have an idea of what is meant by competitive strategy.
It is also likely you already know what some strategies might be for organizations to gain competitive advantage.
What do you think is competitive strategy?
How do you think it can be achieved?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
20
Having conducted a porter’s five forces analysis and identified the strongest and weakest competitive forces
It is now time to put in place a competitive strategy.The competitive strategy will aim to protect the business from the strongest forces and help the business make most of opportunities that the weaker forces may offer.
What are some types of competitive strategies?
To answer this question think about what are some of the reasons that you will choose going to one shop over another. What for example will make you buy a pack of cold meats from Aldi instead of the local deli (or vice versa)
– one is cheaper, one is better quality, one has something that is new and other shops don’t have, it’s usually more avialble and quicker, it always has what you want and more.
Cost Leadership. Produce products and/or services at the lowest cost in the industry.
Differentiation. Offer different products, services or product features.
Innovation. Introduce new products and services, add new features to existing products and services or develop new ways to produce them.
Operational Effectiveness. Improve the manner in which internal business processes are executed so that a firm performs similar activities better than its rivals.
Customer-orientation. Concentrate on making customers happy
Competitive Strategy:
How Does Analysis of Industry Structure Determine Competitive Strategy?
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Watch the video
What is meant by competitive advantage?
What generic strategies does Porter give to gain competitive advantage?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
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Competitive Strategy.
Porter identified four competitive strategies:
Cost Leader (most efficient)
Differentiation (most effective)
Cost Focus
Differentiation focus
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
22
According to Michael Porter there are four Generic strategies:
1. Cost Leadership
You target a broad market (large demand) and offer the lowest possible price. There are 2 options within this course. You can opt to keep costs as low as possible; or ensure that you have a larger market share with average prices. In both cases, the point is to keep the company costs as low as possible.
2. Differentiation
You target a broad market (high demand), but your product or service has unique features. With this strategy, you make your product as exclusive as possible, making it more attractive than comparable products offered by the competition. Succeeding using this strategy requires good research & development, innovation and the ability to deliver high quality. Effective marketing is important, so that the market understands the benefits of your unique product. It’s important to be flexible and to be able to adapt quickly in a changing market, or you risk the competition beating you at it. Such an organisation is focused on the outside world and has a creative approach.
3. Cost Focus
You target a niche market (little competition, ‘focused market’) and offer the lowest possible price. In this strategy, you choose to target a clear niche market and through understanding the dynamics of the market and the wishes of the consumers, you can ensure that the costs remain low.
4. Differentiation Focus
You target a niche market (little competition, ‘focused market’) and your product or service has unique features. This strategy often involves strong brand loyalty among consumers. It’s very important to ensure that your product remains unique, in order to stay ahead of possible competition.
In order to choose the right strategy for your organisation, it’s important be aware of the competencies and strengths of your company.
Competitive Strategy :
Porter’s Four Competitive Strategies
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Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
According to Michael Porter there are four Generic strategies:
1. Cost Leadership
You target a broad market (large demand) and offer the lowest possible price. There are 2 options within this course. You can opt to keep costs as low as possible; or ensure that you have a larger market share with average prices. In both cases, the point is to keep the company costs as low as possible.
2. Differentiation
You target a broad market (high demand), but your product or service has unique features. With this strategy, you make your product as exclusive as possible, making it more attractive than comparable products offered by the competition. Succeeding using this strategy requires good research & development, innovation and the ability to deliver high quality. Effective marketing is important, so that the market understands the benefits of your unique product. It’s important to be flexible and to be able to adapt quickly in a changing market, or you risk the competition beating you at it. Such an organisation is focused on the outside world and has a creative approach.
3. Cost Focus
You target a niche market (little competition, ‘focused market’) and offer the lowest possible price. In this strategy, you choose to target a clear niche market and through understanding the dynamics of the market and the wishes of the consumers, you can ensure that the costs remain low.
4. Differentiation Focus
You target a niche market (little competition, ‘focused market’) and your product or service has unique features. This strategy often involves strong brand loyalty among consumers. It’s very important to ensure that your product remains unique, in order to stay ahead of possible competition.
In order to choose the right strategy for your organisation, it’s important be aware of the competencies and strengths of your company.
Aldi caters to the brand substitution market.
Another example is a hotel chain that might cater just for people with no kids etc.
Unique product in small segment e.g. Ben and Jerry icecream.
23
Value Chain:
How Does Competitive Strategy
Determine Value Chain Structure?
A value chain is a network of value-creating activities
Consists of:
Primary activities
Support activities
A value chain is the full range of activities that businesses go through to bring a product or service to their customers.Who would this include?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
24
Once the competitive strategy is determined, it’s time to carry out the plan. We need to put in place activities which will support the strategy. Porter provides another tool to do this. – value chain analysis.
A value chain is all activities that businesses go through to bring a product or service to their customers.
A value chain is a business model that describes the full range of activities needed to create a product or service. For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between—such as procuring raw materials, manufacturing functions, and marketing activities.
The activities can be primary or secondary support activities.
Primary activities are directly concerned with the creation or delivery of a product or service
Secondary activities support the primary activities
Value chains help increase a business’s efficiency so the business can deliver the most value for the least possible cost.
The end goal of a value chain is to create a competitive advantage for a company by increasing productivity while keeping costs reasonable.
The value-chain theory analyzes a firm’s five primary activities and four support activities.
It is also useful to recall here that
Recall that an organization as a value creating system has input and output and creates a transformation.
The way the transformation is achieved is through the various types of activities defined in the value chain.
The Value Chain isPorter’s template for considering an organisation’s key activity systems in terms of value
Organisations are social institutions that produce and deliver value to customers through defined activities
Each link in a chain is a generic model of an organisation in terms of identifying what activities generate value.
Value Chain:
Video explaining the value chain:
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Porter offers a template for considering an organisation’s key activity systems in terms of the concept of value. This is a generic model of an organisation known as the value-chain. In this view organisations are seen as social institutions that produce and deliver value to customers through defined activities.
An organisation’s value chain is therefore a series of interdependent activities that delivers a product or service to a customer. According to Porter, such activities are of two types: primary and secondary activities.
Primary activities constitute the core competencies of the organisation. They create value. Secondary (support) activities are important to the successful operation of primary activities, but don’t make money or generate value directly.
The value model:
primary and support activities
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Primary activities are those business activities that relate to the production and distribution of the firm’s products and services, thus creating value for which customers are willing to pay.
Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and customer service.
Support activities do not add value directly to a firm’s products and services, but support the primary activities.Support activities include accounting, finance, management, human resources management, product and technology development (R&D), and procurement.
According to Porter, such activities are of two types:
Primary activities (make money)
Secondary (support) activities)
Primary activities are those business activities that relate to the production and distribution of the firm’s products and services, thus creating value for which customers are willing to pay.
Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and customer service.
Support activities do not add value directly to a firm’s products and services, but support the primary activities.Support activities include accounting, finance, management, human resources management, product and technology development (R&D), and procurement.
The value model:
primary and support activities
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
“Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. They consist of the following:
Inbound logistics – These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.
Operations – These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.
Outbound logistics – These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.
Marketing and sales – These are the processes you use to persuade clients to purchase from you instead of your competitors. The benefits you offer, and how well you communicate them, are sources of value here.
Service – These are the activities related to maintaining the value of your product or service to your customers, once it’s been purchased.”- Extracted from https://www.mindtools.com/pages/article/newSTR_66.htm
Support Activities
“These activities support the primary functions above. In our diagram, the dotted lines show that each support, or secondary, activity can play a role in each primary activity. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities.
Procurement (purchasing) – This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.
Human resource management – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices.
Technological development – These activities relate to managing and processing information, as well as protecting a company’s knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.
Infrastructure – These are a company’s support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.
Companies use these primary and support activities as “building blocks” to create a valuable product or service.”
27
Value Chain
Primary Activities in Value Chain
Each primary activity clearly adds value to the final product
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
28
Support activities enable the primary activity to take place. For example the acquisition of warehouse might be a support activity for the inbound logistics.Administrative agreements with suppliers also support the inbound logistics.
Primary
The value model (in more detail).
Q. Where does your HAS and new IS fit in this model?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
29
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
The value chain is one of the chains found in business models.
There’s two other chains of interest:
Supply chain
and
customer chain
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Value chain, customer chain and supply chain – what’s the difference?
Value chain:
the activities to help create value
Customer chain:
focused on customer satisfaction
Supply chain:The supply chain includes all functions involved in receiving and filling a customer request.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
The supply chain: to pass on value
The supply chain is the chain of activities that each organisation performs in relation to its suppliers
Direct suppliers are one step removed in the supply chain
Indirect suppliers are two or more steps removed
Sometimes referred to as channel organisations or intermediaries
This model represents how value is created and ‘passed on’ in the chain.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Value, goods and services
Porter’s concept of Industry Structure and his notion of competitive advantage both come down to the idea of value.
Value traditionally comes in two forms: goods and services.
A good is some form of product produced by an organisation and distributed to the customer.
A service is some form of activity performed by an organisation for a customer.
It is possible to distinguish between two types of goods: physical or tangible goods and non-physical or intangible goods.
Similarly services can be classed as either tangible or intangible.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Value (usefulness, monetary worth) is the key flow between organisational actors. Value produced by organisations typically are products or services it provides to its customers. Two forms:
Goods – products produced by an organisation and distributed to customers
Physical or tangible goods
Non-physical or intangible goods
Services – activities performed by an organisation for customers
Also tangible or intangible
Value
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Value traditionally comes in two forms: goods and services. A good is some form of product produced by an organisation and distributed to the customer. A service is some form of activity performed by an organisation for a customer. It is possible to distinguish between two types of goods: physical or tangible goods and non-physical or intangible goods corresponding to the idea of physical and non-physical system flows.Similarly services can be classed as either tangible or intangible.
How Do IS Provide Competitive Advantage?
For your assignment, you need to specify how your new IS provides competitive advantage.
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
36
Porter’s Value Model – summary
This model allows us to identify specific activities where organisations can focus their competitive strategies for greatest impact.
The model identifies 2 kinds of activities of firms
Primary activities
Support or secondary activities
Regarding your assignment:
Q. What HAS does your IS support?
Q. Is your HAS a primary or secondary activity?
Q. Does your HAS and new IS add value?
Q. How does the new IS help them compete?
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
Primary activities are those business activities that relate to the production and distribution of the firm’s products and services, thus creating value for which customers are willing to pay.Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and customer service.
Support activities do not add value directly to a firm’s products and services, but support the primary activities.Support activities include accounting, finance, management, human resources management, product and technology development (R&D), and procurement.
37
Business Process & IS:
How Does Competitive Strategy
Determine Business Processes and the
Structure of Information Systems?
Business processes implement value chains or portions of value chains
Each value chain activity is supported by one or more business processes
An information system may be part of or be used to support a business process
38
Module 5 IS and competitive advantage
5.1 Organizations and information- Introduction
External environment
5.2 Economic environment stakeholders
5.3 Competitive strategy and IS
Industry structure (Porter’s5 forces)
Competitive strategy
Value chain/model
Business Process & IS
Supply & Customer Chains
38
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