1803ICT/7601ICT Information Systems Foundations
Table of contents:
Table of Contents
Module 5 IS, competitive advantage (Porter’s 5 forces) and value1
Objectives:1
What we’ve covered so far…2
5.1Introduction – Organizations and information2
5.2 Economic environment stakeholders5
5.3 CompetitiveStrategy and Information Systems.7
Industry structure8
Threat of new entrants11
Example11
Bargaining power of suppliers12
Example12
Bargaining power of buyers12
Example12
Threat of substitute products13
Example13
Rivalry among existing competitors13
Example13
Competitive strategy16
Value chains18
Business Processes22
Value-Chain Report — The Internet Has Changed Everything25
Selected references:30
Module 5 IS, competitive advantage (Porter’s 5 forces) and value
Objectives:
By the end of thisModule you will be able 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 we’ve covered so far…
Thus far in the course,
In modules 1,2,3, we have established an understanding of
•What an information system is
•What an organization is in terms of human activity systems and the role of information systems.
•The complexity of organizations and the need to understand that complexity in order to be able to design and implement an effective information system. We established the value of diagramming and modelling and through an introduction of soft systems methodology, discussed Human Activity System modelling, rich pictures and Business process modelling (at basic level).
•The importance of a system conceptualisation of organizations.
In the previous module 4, we turned attention to the concept of information and
•Made the distinction among data, information, knowledge and wisdom
•Described the different types of knowledge
•Emphasised the importance of knowledge, knowledge management and learning in an organization
In the present module (module 5), attention is directed towards the organization and its interaction with the external environment. The focus is on competition and competitive advantage and value. Throughout the module we encourage you to think about how information systems can help provide competitive advantage and support value creation in the organizational system
5.1Introduction – Organizations and information
Information systems are embedded within organizations. Information systems, from the perspective we are adopting, work and exist within organizations. To fully understand the field of information systems we must first fully understand the concept of the organization.In module1the basic concept of an organization was developed.To summarise these were the key points related to understanding the concept of an organization from module 1:
•Organizations are chains of interacting human activity systems
•Information systems support human activity systems
•Human activity systems are created around business processes
•Business processes are the steps undertaken in order to create value for the business
An organisation is a series of inter-dependent activity systems which in combined action produce value
Value is the key flow between an organisation and actors in its environment
•Businesses deliver value through products or services provided to customers
•Businesses receive value from suppliers or partners
In this module our understanding of organizations, value creation and the role of information systems in all of this is extended.
Before we begin:
What does a rainforest have in common with organizations?
Just like a rainforest, organizations are systems. As you will recall from module 1, systems are composed of interacting components which work together towards a particular outcome. All components (some are sub-systems) of the system have to work well for the whole of the system to healthy and thrive.
Now, think– is a rainforest a closed or an open system?If a rainforest is a closed system then it is entirely self-contained. Nothing that happens outside of the rainforest will impact what is happening inside the rainforest – is this correct?
Clearly not, as we know human settlement, human activity, weather, climate etc outside of the rainforest all affect the rainforest.
Hence, the rainforest is an open system. Organizations also share this attribute with rainforests – organizations are also open systems. What happens in the broader context outside of an organization will impact on what happens within the organization.
An organization can thus be graphically represented as shown below:
Figure 1 Organizations are open systems (https://en.wikipedia.org/wiki/System)
In module 1 we briefly explored how the concept of a system is useful to organizational thinking. When weuse a mental model of an organization as a system, it becomes evident that, like all systems, an organization has inputs, and outputs, has a purpose and creates transformation,and has some kind of regulatory processes
Notably, an organization is open system so while it has a boundary, the boundary is permeable, meaning that happenings outside the bounds of the organization will impact on it.Remember also that organizations are value creating systems in a wider value network.
What are the kinds of things in the external environment impact on the organization and its value creation?
Write some examples below.
Organizations are affected by the externaleconomic, social, physical and political environment.
The focus in this module is the economic environment.
5.2 Economic environment stakeholders
What do you understand by the term ‘stakeholder’?Write your definition below
List who you believe are the stakeholders for Coles supermarkets https://www.coles.com.au/
A stakeholder is someone or organization that has some kind of interest in an organization or is somehow affected or influenced by that organization.Some of Coles stakeholders are mentioned in their sustainability report:
+ additional reading module 5_1 Coles_Sustainability_Report_2019.pdf – the report provides good insight into organzations and their value creating activity. It gives a ‘feel’ for the context of organizations.
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
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.
Note the presence of competitors as stakeholders!Remember stakeholders are those who have some kind of interest in an organization or are somehow influenced/impacted by the organization – this includes competitors.
At this point, you may be thinking – what does all of this about organizations, external environments and stakeholders have to do with information systems and this module. Information systems play an important role in communicating and establishing relationships with stakeholders.Information systems also play a critical role in enabling organizations to become competitive and survive or even thrive against their competitors.Contending with competitive forcesthe greatest challenge for organizations and will determine their profit margins, and subsequently the ability of organization to survive. After all, the primary goal of any organization is survival and that depends on profit.Information systems play an important role in providing a competitive advantage for organizations – remember how earlier we noted that information and knowledge is crucial for an organization – information systems are pivotal to collecting, analysing and communicating information and creating knowledge.
5.3 CompetitiveStrategy and Information Systems.
Detour
The Design and Understanding of Information Systems
(extracted from https://paginas.fe.up.pt/~acbrito/laudon/ch3/chpt3-3main.htm)
To deliver genuine benefits, information systems must be built with a clear understanding of the organization in which they will be used and of exactly how they can contribute to managerial decision making. In our experience, the central organizational factors to consider when planning a new system are the following:
•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
Systems should be built to support individual, group, and organizational decision making. Information systems builders should design systems that have the following characteristics:
•They are flexible and provide many options for handling data and evaluating information.
•They are capable of supporting a variety of styles, skills, and knowledge as well as keeping track of many alternatives and consequences.
•They are sensitive to the organization’s bureaucratic and political requirements.
“Drucker(1994)definedstrategyinbusinessenvironmentasatheoryofhowto achievecompetitiveadvantage.Further,knowingthedegreeofcompetitionandforcesintheindustrycan assistformulatingtheappropriatebusinessstrategyinordertogainsustainablecompetitiveadvantage (AhituvandNeumann,1986;Jay,2001).Somescholars(i.e.PearlsonandSaunders,2009;Barneyand Hesterly, 2010) argued that strategic Information System (IS) and Information Technology (IT) supports an organization’scompetitivebusinessstrategyforimprovingrelationshipswithcustomersandsuppliers, providing product design, and improving productivity. Moreover, IS and IT strategy could be driven by an organization’sbusinessstrategyinordertofillabusinessorientateddemandandoffernewproducts or servicestogainasustainablecompetitiveadvantage(TallonandPinsonneault,2011) “ (PDF) Information Systems for Competitive Advantage: Implementation of an Organisational Strategic Management Process. Available from: https://www.researchgate.net/publication/260082007_Information_Systems_for_Competitive_Advantage_Implementation_of_an_Organisational_Strategic_Management_Process [accessed Mar 17 2020].”
How are an organization’s competitive strategy and its informationSystems related?
The industry structure determines competitive strategy which in turn determines the value chain.Value chains are implemented by appropriate business process. Business processes areimplemented within information systems (recall in module 1 that organizations are chains of inter-connected human activity systems and that human activity systemsundertake business processes).
In the remainder of this module we work through each of the components of the diagram above .
Industry structure
Industry structure is considered from the point of view of competition. The key question about industry structure is what are the main sources of competition in the economic environment of an organization? Shortly we will look at Porter’s five forces but first, it is likely that you are already able to identify the main competitive forces acting on an organization.
If you’re doing this activity in class, discuss with a peer.
Think about what makes you buy a product from one particular store over another. For example, you want to buy a television, why do you end up buying from shop A over shop B?
Make notes below:
The sources of competition which define industry structure are formalized by Porter and his model of the five competitive forces.
Watch the video. What are the five forces? Give examples of each of them.
https://www.youtube.com/watch?v=vuWAghwPzJQ.. If you prefer you may also read
https://www.isc.hbs.edu/strategy/business-strategy/pages/the-five-forces.aspx
(a pdf of the latter URL is porters five forces.pdf)
Porter’s five forces:
Example of five forces analysis for Coca Cola
module_5_Porters five forces example for coca cola.pdf
Porter’s five force analysis in details with examples: (extracted from https://www.business-to-you.com/porters-five-forces/)
The following will be useful to you as work on your assignment. How to conduct a five forces analysis is very clearly illustrated in each of the examples.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 five forces analysis will then give insights into the competitive strategy. The business should design a competitive strategy that will help to protect against the strongest forces and will exploit the weaker forces to the advantage of the business.
Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within a certain industry. It is especially useful when starting a new business or when entering a new industry sector. According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry. The collective strenght of these forces determines the profit potential of an industry and thus its attractiveness. If the five forces are intense (e.g. airline industry), almost no company in the industry earns attractive returns on investments. If the forces are mild however (e.g. softdrink industry), there is room for higher returns. Each force will be elaborated on below with the aid of examples from the airline industry to illustrate the usage.
Threat of new entrants
New entrants in an industry bring new capacity and the desire to gain market share. The seriousness of the threat depends on the barriers to enter a certain industry. The higher these barriers to entry, the smaller the threat for existing players. Examples of barriers to entry are the need for economies of scale, high customer loyalty for existing brands, large capital requirements (e.g. large investments in marketing or R&D), the need for cumulative experience, government policies, and limited access to distribution channels. More barriers can be found in the table below.
Example
The threat of new entrants in the airline industry can be considered as low to medium. It takes quite some upfront investments to start an airline company (e.g. purchasing aircrafts). Moreover, new entrants need licenses, insurances, distribution channels and other qualifications that are not easy to obtain when you are new to the industry (e.g. access to flight routes). Furthermore, it can be expected that existing players have built up a large base of experience over the years to cut costs and increase service levels. A new entrant is likely to not have this kind of expertise, therefore creating a competitive disadvantage right from the start. However, due to the liberalization of market access and the availability of leasing options and external finance from banks, investors, and aircraft manufacturers, new doors are opening for potential entrants. Even though it doesn’t sound very attractive for companies to enter the airline industry, it is NOT impossible. Many low-cost carriers like Southwest Airlines, RyanAir and EasyJet have succesfully entered the industry over the years by introducing innovative cost-cutting business models, thereby shaking up original players like American Airlines, Delta Air Lines and KLM.
Bargaining power of suppliers
This force analyzes how much power and control a company’s supplier (also known as the market of inputs) has over the potential to raise its prices or to reduce the quality of purchased goods or services, which in turn would lower an industry’s profitability potential. The concentration of suppliers and the availability of substitute suppliers are important factors in determining supplier power. The fewer there are, the more power they have. Businesses are in a better position when there are a multitude of suppliers. Sources of supplier power also include the switching costs of companies in the industry, the presence of available substitutes, the strength of their distribution channels and the uniqueness or level of differentiation in the product or service the supplier is delivering.
Example
The bargaining power of suppliers in the airline industry can be considered very high. When looking at the major inputs that airline companies need, we see that they are especially dependent on fuel and aircrafts. These inputs however are very much affected by the external environment over which the airline companies themselves have little control. The price of aviation fuel is subject to the fluctuations in the global market for oil, which can change wildly because of geopolitical and other factors. In terms of aircrafts for example, only two major suppliers exist: Boeing and Airbus. Boeing and Airbus therefore have substantial bargaining power on the prices they charge.
Bargaining power of buyers
The bargaining power of buyers is also described as the market of outputs. This force analyzes to what extent the customers are able to put the company under pressure, which also affects the customer’s sensitivity to price changes. The customers have a lot of power when there aren’t many of them and when the customers have many alternatives to buy from. Moreover, it should be easy for them to switch from one company to another. Buying power is low however when customers purchase products in small amounts, act independently and when the seller’s product is very different from any of its competitors. The internet has allowed customers to become more informed and therefore more empowered. Customers can easily compare prices online, get information about a wide variety of products and get access to offers from other companies instantly. Companies can take measures to reduce buyer power by for example implementing loyalty programs or by differentiating their products and services.
Example
Bargaining power of buyers in the airline industry is high. Customers are able to check prices of different airline companies fast through the many online price comparisons websites such as Skyscanner and Expedia. In addition, there aren’t any switching costs involved in the process. Customers nowadays are likely to fly with different carriers to and from their destination if that would lower the costs. Brand loyalty therefore doesn’t seem to be that high. Some airline companies are trying to change this with frequent flyer programs aimed at rewarding customers that come back to them from time to time
Threat of substitute products
The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives. In order to discover these alternatives one should look beyond similar products that are branded differently by competitors. Instead, every product that serves a similar need for customers should be taken into account. Energy drink like Redbull for instance is usually not considered a competitor of coffee brands such as Nespresso or Starbucks. However, since both coffee and energy drink fulfill a similar need (i.e. staying awake/getting energy), customers might be willing to switch from one to another if they feel that prices increase too much in either coffee or energy drinks. This will ultimately affect an industry’s profitability and should therefore also be taken into account when evaluating the industry’s attractiveness.
Example
In terms of the airline industry, it can be said that the general need of its customers is traveling. It may be clear that there are many alternatives for traveling besides going by airplane. Depending on the urgency and distance, customers could take the train or go by car. Especially in Asia, more and more people make use of highspeed trains such as Bullet Trains and Maglev Trains. Furthermore, the airline industry might get some serious future competition from Elon Musk’s Hyperloop concept in which passengers will be traveling in capsules through a vacuum tube reaching speed limits of 1200 km/h. Taken this altogether, the threat of substitutes in the airline industry can be considered at least medium to high.
Rivalry among existing competitors
This last force of the Porter’s Five Forces examines how intense the current competition is in the marketplace, which is determined by the number of existing competitors and what each competitor is capable of doing. Rivalry is high when there are a lot of competitors that are roughly equal in size and power, when the industry is growing slowly and when consumers can easily switch to a competitors offering for little cost. A good indicator of competitive rivalry is the concentration ratio of an industry. The lower this ration, the more intense rivalry will probably be. When rivalry is high, competitors are likely to actively engage in advertising and price wars, which can hurt a business’s bottom line. In addition, rivalry will be more intense when barriers to exit are high, forcing companies to remain in the industry even though profit margins are declining. These barriers to exit can for example be long-term loan agreements and high fixed costs.
Example
When looking at the airline industry in the United States, we see that the industry is extremely competitive because of a number of reasons which include the entry of low cost carriers, the tight regulation of the industry wherein safety become paramount leading to high fixed costs and high barriers to exit, and the fact that the industry is very stagnant in terms of growth at the moment. The switching costs for customers are also very low and many players in the industry are similar in size (see graph below) leading to extra fierce competition between those firms. Taken altogether, it can be said that rivalry among existing competitors in the airline industry is high.
(Source: United States Department of Transportation, 2016)
By looking at each competitive force individually, you are able to roughly map out the focal industry and its attractiveness
Attempt a Porter’s five forces analysis of the sportswear industry. Before you undertake the analysis read Module 5_3 how to do porters five forces.pdf. to help you better understand how to do it.
Watch the video https://youtu.be/OCnlArFuU-E
As you watch compare your porter’s five forces analysis of the sportswear market with that in the video.
In doing a Porter’s five forces analysis it is important that you are able to justify why you think a particular force is high, low or medium.
Read Module 5_ using info sys for competitive advantage.pdf – consider how information systems can help to provide competitive advantage.
Having understood the industry structure and having identified the main competitive forces, an organization needs to form a competitive strategy.
Competitive strategy
Strategy refers to the long term vision of the company and how it might plan to get there. Strategy is about decision making in relation to such things as the types of products and services the organization should provide, the industry in which it competes, the suppliers and customers of the organization, and the long-term goals of the organization.
Watch the video
What is meant by competitive advantage?
What generic strategies does Porter give to gain competitive advantage?
According to Porter, organizations have four basic options to compete in the market place.
They can adopt an industry wide strategy and either offer the lowest cost across the industry(e.g. Bunnings hardware, K-mart) or offer a better product or service across the industry (it might not be the cheapest but its better so people are willing to pay a bit more e.g. a microsoft surface pro over a generic android tablet.) – differentiation is about building a ‘superiority’ of the product over others
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
(https://www.toolshero.com/strategy/porters-generic-strategies/)
Think of an another example of industry-wide lower cost,and industry widedifferentiation.
The other options are to focus in a narrow industry segment and either offer the cheaper option in that segment (no-brand cola drinks) or differentiation (e.g. Pepsi-co).
Think of an another example of focused lower cost,and focused differentiation.
There’s five general strategies to compete in the market place:
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.
The table below compares the industry forces with the generic strategy
(http://www.quickmba.com/strategy/generic.shtml)
Value chains
Once an organization has conducted a market analysis via Porter’s five forces and has identified the strategy that will be used to be competitive and create value, it is time to begin implementing more concrete activities which will create value and keep the organization competitive. This is done through a value chain analysis. The value-chain analysis, once complete will enable the creation of suitable business processes.
Recall that an organization is a value producing system inside a wider value network, and that value enters the organization from external stakeholders. Through business processes, transformation occurs in order to create an output of value. Value chains are a larger, over-arching concept which includes all activities that helps to create value in an organization. There may be multiple processes that support activities in a value chain.
The value chain categorises the value creation activities of an organization.This enables the organization to better identify the value creating activities and business processes.
Michael porter proposed a generic value chain framework to help organizations categorise their value creation activities.
(https://www.business-to-you.com/value-chain/)
The activities within the value chain interact to support each other
https://www.business-to-you.com/value-chain/)
The activities in the value chains are divided into primary and secondary (or product and service).
Primary activities (white) constitute the core competencies of the organisation. They create value. Secondary (support) activities (pink) are important to the successful operation of primary activities, but don’t make money or generate value directly.
“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.”
Extracted from https://www.mindtools.com/pages/article/newSTR_66.htm
Watch the video
What are the main points raised in the video?
Here is an example of a value chain analysis for Apple – https://notesmatic.com/2017/05/apple-value-chain-analysis/
Attempt a brief value chain analysis for Coles supermarkets.
Smart Draw has templates which can be edited (you’ll need to create a free account)
https://www.smartdraw.com/value-chain-analysis/examples/
Business Processes
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 a value chain or be used to support a business process.
Information systems are also important in other chains found in organizations.
The value chains refer to the output part of the organizational system. Value chains contain activities which create the transformations so that the organization outputs value.
The value chain is all the processes that the organization needs to undertake to add value to the raw materials going into the organization. All the steps required from the delivery of raw materials from the supplier through to manufacture and delivery to the customer is the supply chain.
A third type of chain found in organizations is the customer chain.The customer chain is the demand chain of the organization. Customers can be local orexport customersin the global marketplace. For both types of customers, particularly in the global marketplace, forms of channel organisations or intermediaries (eg distributors and retailers) mediate between an organisation and its customers.
In understanding value creation it is also important to be aware of value networks. Value networks are the systems of organizations, operating units, people etc which all work together to support a value proposition.
Information systems can facilitate the exchange and use of information across value networks.
Mini-Case.
HOTEL LOYALTY PROGRAMS BECOME COMPETITIVE WEAPONS
(extracted from https://paginas.fe.up.pt/~acbrito/laudon/ch3/chpt3-4main.htm)
Hotels have traditionally used customer loyalty programs to provide incentives for repeat customers. Now they are promoting them even more aggressively, especially for business travelers. Why? The answer lies in the data.
Growing awareness of customer relationship management techniques has made hotels realize they can profit even more than in the past by collecting and analyzing detailed data about their guests. According to Robert Mandelbaum, a hotel analyst with PKF Consulting in Atlanta, the hotel chains are “desperate for data. . . . Hotels need information about their guests and especially about business travelers.” Encouraging guests to sign up for customer loyalty programs is “the easiest way to get that information.”
Guests signing up for Wyndham Hotels’ frequent-guest program provide information about their choice of bed, whether they prefer to relax with a soda or a glass of wine after checking in, the airline frequent flyer program to which they belong, as well as their addresses, e-mail addresses, and phone numbers. Those who sign up online are automatically registered for a monthly “Wyndham News ByRequest” e-mail notice of special members-only offers and program updates.
Guests who refuse to sign up for such programs do not receive as much preferential treatment as those who do. For example, those who do not sign up for Wyndham’s ByRequest loyalty program have to pay extra for high-speed Internet access and phone calls. Similarly, Hilton HHonors loyalty program members are allowed to check out late, whereas non-members who check out late have to pay for an additional day.
The hotels use such detailed data to better serve their guests, and they also use it to develop targeted sales and marketing campaigns for enlarging their market share. Until recently, these data collection efforts have been woefully inadequate. According to Robert Burke, of Egroup Communications of Miami, which manages e-mail databases for the lodging industry, the U.S. hotel industry had collected data on only about 10 percent of its business travelers. The databases were incomplete or disorganized so that the hotels really knew very little about their guests.
One exception is the Hilton Hotel chain. It spent $50 million on a customer information system called OnQ, which contains 7.5 million profiles of active guests in every property across the eight hotel brands owned by Hilton, including Hilton, Doubletree, Conrad, Embassy Suites, Hampton Inn, Hilton Garden Inn, Hilton Grand Vacations, and Homewood Suites. In combination with Hilton’s HHonors frequent-guest program, the system can recognize the same customer whether that person is checking into a $79 room at Hampton Inn or a $540 suite at the Hilton Hawaiian Village in Honolulu.
OnQ was largely custom-developed for Hilton. It includes a property management system and a hotel-owner reporting module, as well as Hilton’s customer relationship management applications. All the pieces are integrated with a central reservation system, a sales force automation tool, an older revenue management system, a financial and human resources application from PeopleSoft enterprise software, and Hilton’s e-commerce site. The system is delivered as an information technology service to the 52 hotels directly owned by Hilton and hotels that are operated as Hilton franchises. The franchisees license the software for about three-fourths of a percent of their annual revenue.
“The Name, OnQ (pronounced ‘On Cue’), supports the Hilton Hotels Corporation Customer Really Matters (CRM) strategy and represents information that is available to team members on demand, prompting them to act on guest ‘cues’— preferences and service-recovery alerts—that will delight customers and create a bond of loyalty to the Hilton Family of Hotels,” said Tim Harvey, chief information officer for Hilton Hotels Corporation. “OnQ also represents an integrated suite of tools that ‘cue’ hotel operators to respond decisively to current market conditions and make informed business decisions based on historical trends and competitive data.”
OnQ makes it easier to match customer reservations with records of customer profiles in the Hilton database. Employees at the front desk tapping into the system can instantly search through 180 million records to find out the preferences of customers checking in and their past experiences with Hilton so they can give these guests exactly what they want. Before this system was implemented, only 2 out of every 10 guest reservations could be matched to an existing customer profile. OnQ is matching 4.7 and will eventually be able to match 6 out of 10.
One of the main ways OnQ provides value is by establishing the value of each customer to Hilton, based on personal history and on predictions about the value of that person’s future business with Hilton. OnQ can also identify customers that are clearly not profitable. Extra attention to profitable customers appears to be paying off. The rate of staying at Hilton Hotels instead of the hotels of rivals has soared to 61 percent from 41 percent two years ago. OnQ will be further put to the test as Hilton opens an additional 125 hotels in 2004 and 150 in 2005.
Source: Tony Kontzer, “Data-Driven,” Information Week, August 2, 2004; Hilton Hotels, “Hilton’s Customer-Information System, Called OnQ, Rolling Out Across 8 Hotel Brands; Seeking Guest Loyalty and Competitive Advantage with Proprietary Technology,” August 31, 2004; and Christopher Elliott, “Hotels Get Pushy About Their Loyalty Programs,” New York Times, June 1, 2004.
To Think About: Why are frequent-guest programs so important for the hotel industry? How do they provide value? To what extent can OnQ provide the Hilton chain with a competitive advantage? Explain your answer.
How the internet changed the supply chain: this article provides an interesting perspective on the internet and on how the external environment impact on organizations’ value chains.
Value-Chain Report — The Internet Has Changed Everything
Has your supply-chain strategy responded?
Kevin O’Brien
Dec 21, 2004
It would be impossible to underestimate the growing impact of the Internet and Web-based technologies on supply chains. Forget, for a moment, the potential for reaching new customers and markets. These are certainly real business opportunities. The eye-popping rise of notable B2B and B2C players, such as Amazon.com, eBay, Dell, and Cisco, demonstrates the potential for top-line impact. However, much of the real benefit of the Internet for most companies — particularly those companies whose fortunes are determined by the effectiveness of their procurement, manufacturing, and distribution operations — is much more likely to result from the power of Web-based technologies to significantly compress time and reduce costs throughout the supply chain. Companies not embracing these new tools and actively seeking ways to exploit them in the marketplace will find themselves at a severe competitive disadvantage in a very short time. The connectivity and speed enabled by the Internet and exploited by new technologies has created some significant challenges for supply-chain managers. In an earlier article, we discussed the evolution of supply chains into supply webs in response to these new capabilities (The Supply Chain of the Future Looks More Like a Web, IWvaluechain.com, May 2000).
The need for this evolution is being driven by numerous forces, including:
1. Blurred Geographical Boundaries Geographical proximity of supply-chain participants is becoming less and less important. The ability for nearly instantaneous communications between trading partners eliminates much of the need for relative nearness.
2. More Efficient Markets Customers are becoming increasingly powerful as search engines become more robust and the cost to identify and qualify potential new suppliers continues to fall. Global reach, whether buy-side or sell-side, is available to all.
3. Reconstructed Value Chains Entire supply and demand chains are being reconstructed around Web-enabled technologies in an effort to maximize efficiency and minimize costs. Coordination and collaboration are replacing physical assets as the drivers of value.
4. Customer-Centric Offerings Suppliers are tailoring their offerings to meet the unique preferences of individual customers. The distinction between a product and the services surrounding that product has disappeared.
5. Compressed Cycle Times The connectivity enabled by Web-based technologies radically reduces communications, transactions, and other time-based activities. Cycle times decrease as the entire supply chain moves in parallel.
6. Unbounded Competition The global reach of the Internet creates increased competition as new buyers and suppliers become connected. Visibility of marketplace inefficiencies and lower barriers to entry attract new participants. The competitive pressures being driven by those forces just described is creating a change in the strategic context for supply chains. Focus is shifting from internal process integration to a broader external trading community. Separate products and services are being bundled into offerings tailored to the needs of individual customers. Hierarchical supply chains are giving way to fluid, distributed supply webs. This shift in strategic context drives new approaches in all the underlying processes supporting supply-chain operations. In evaluating your own supply chain, consider the following:
Demand and Supply Planning. This is the process that turns strategy into action. Leading firms are using Web-based technologies to migrate from centralized, intra-enterprise planning to distributed optimization based on the synchronized capabilities of all trading partners. One-to-one buyer-supplier relationships are quickly being replaced by inter-enterprise collaboration enabled by horizontal and vertical marketplaces. Recognizing that agility and responsiveness bring competitive advantage, rather than planning for products, they are planning for capabilities. Defined products and services are giving way to dynamic, customer-configurable offerings, where products and services related to those products are bundled to meet the unique requirements of individual customers. In addition to efficiently balancing demand (orders) with supply (availability and capacity), effective demand and supply planning significantly impacts the bottom line. Optimization of the planning process can drive revenue growth, reduce inventory investment, and lower operating costs.
Procurement. Procurement activities are likely to impact a significant proportion of the total costs and value of the company. Yet many firms continue with traditional, costly purchasing practices. Fortunately, new technologies are rapidly being adopted that enable companies to not only reduce the costs for materials and services they purchase, but also reduce the operating costs associated with the procurement function itself. Leading firms are quickly migrating to e-procurement solutions. In many cases, these can be easily deployed and do not require a significant investment in infrastructure or training. MRO purchases are a particularly susceptible area for improvement, typically yielding 7%-15% cost reductions or more. These technologies also reduce the labor associated with the acquisition process, yielding productivity gains. More complex, but potentially more beneficial, are the B2B marketplaces that are being formed to bring efficiency and collaboration to entire industries. Examples include Covisint (automotive), ExoStar (aerospace), and Envera (specialty chemicals). These exchanges promise to deliver end-to-end collaborative capabilities, from product development to fulfillment.
Logistics. This is the physical movement and storage of products that nearly every manufacturer, distributor, and retailer must manage. And an area where the Internet and Web-based technologies are having a significant impact. Leading firms have replaced production-driven “push” models with customer-centric tailored delivery programs. Web-based technologies enable buyer and supplier to operate more efficiently, as a result of visibility of orders throughout the entire distribution network. Transactional outsourcing for transportation, warehousing, packaging, and related activities is being replaced by network outsourcing, where these individual functions are managed integrally by a third-party provider. For those firms who do choose to manage their own logistics activities, the emergence of robust portals bringing shippers and carriers together yields benefits for both. Warehouses are being transformed from cost centers to value-adding facilities, enabling customized assembly or kitting, packaging, labeling, or other services to be completed in a rapid fashion.
Summary. The Internet and Web-based technologies have irreversibly changed the game. Competitive pressures driven by these changes are creating a new strategic context for supply chains. Focus is shifting from internal integration to connected, collaborative supply webs, which drives top-line growth, operating efficiencies, and reduced working capital investment. Adoption of these new methodologies and participation with trading partners in electronic marketplaces will separate the winners from the losers. Kevin P. O’Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.
Read the following article
Module 5_0 Information systems for supply chain management a systematic literature analysis.pdf
The article provides some interesting insights into informaiton systems and supply chain. Make notes of 5-10 keypoints you understand as important from the article:
Selected references:
Altamony, H., Ra, M., & Obeidat, B. (2012). Information Systems for Competitive Advantage: Implementation of an Organisational Strategic Management Proces.
APIAN. (n.d.). The Business Process Management Guide: Accelerate Your Organization with BPMN. Retrieved from https://www.appian.com/bpm/definition-of-a-business-process/
Baghizadeh, Z., Cecez-Kecmanovic, D., & Schlagwein, D. (2019). Review and critique of the information systems development project failure literature: An argument for exploring information systems development project distress. Journal of Information Technology, online https://doi.org/10.1177/0268396219832010.
Checkland, P., J. Poulter. 2006. Learning for Action: A Short Definitive Account of Soft Systems Methodology and Its Use for Practitioners,Teachers and Students. Wiley, West Sussex, UK.
Hajric, E. (2019, May 30). HR Management & Compliance. Retrieved from What Is Organizational Knowledge, and Where Can I Find It?: https://hrdailyadvisor.blr.com/2019/05/30/what-is-organizational-knowledge-and-where-can-i-find-it/
Hoang, A. D. (2017, September 24). Albus D. Hoang’s blog. Retrieved from http://leanow.org/catwoe-developing-a-robust-problem-definition/
Islam, T. (2018, October 29). Medium. Retrieved from Soft System methodology for transforming the business analysis to Software Development Architecture: https://medium.com/@tariqul.islam.rony/using-soft-system-methodology-for-transforming-the-business-analysis-to-software-development-52482608bda4
OMG. (n.d.). Object Management Group Business Process Model and Notation. Retrieved from http://www.bpmn.org/
Reviews
There are no reviews yet.