Chapter 3
Strategy and
Information Systems
Jason C. H. Chen, Ph.D.
Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@gonzaga.edu
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BUSINESS FOCUS
E-BUSINESS
•SCM
•CRM
•BPR
•ERP
Customer
centric
Who are the customers?
______
_______are
the customers?
Where
habits
Their purchasing ______
Supply Chain Management
Customer Relationship Management
Business Process Reengineering
Enterprise Resource Planning
Dr. Chen, Management Information Systems
Demands
Products/
Services
What they need/want?
How many they need/want?
When they need/want?
How to reach them?
What is Business Model?
• A business model is a set of planned activities
(sometimes referred to as business processes)
designed to result in a profit in a marketplace.
• The business model is at the center of the
business plan.
• An e-commerce business model aims to use and
leverage the unique qualities of the Internet and
the www.
Why New Models?
– Profitability (making money)
Source: E-Commerce: business, technology, society, Laudon and Traver, A/W
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Study Questions
Q1: How does organizational strategy determine information
systems structure?
Q2: What five forces determine industry structure?
Q3: How does analysis of industry structure determine competitive
strategy?
Q4: How does competitive strategy determine value chain
structure?
Q5: How do business processes generate value?
Q6: How does competitive strategy determine business processes
and the structure of information systems?
Q7: How do information systems provide competitive advantages?
Q8: 2025?
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Q1: How Does Organizational Strategy
Determine Information Systems Structure?
• An organization’s goals and objectives are determined
by its competitive strategy.
• Ultimately, an organization’s competitive strategy
determines every information system’s …
Goals/Objectives
Fig 3-1 Organizational Strategy Determines Information Systems
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Structures,
Features,
Functions
Striving for Competitive Advantage
Firm level: Industry & Competitive Analysis
• _______
– Competitive Forces Model
– Competitive Strategy
Business level
• _________
– Value-Chain Analysis
Dr. Chen, Management Information Systems
Relationships between Forces and Strategies
Study Five Competitive Forces
Identify
2/3 most Critical Forces (Why?)
Deal
Improve/
Create
Competitive
Advantage
Choose an appropriate Strategy
(strategies)
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PORTER’S FIVE COMPETITIVE FORCES MODEL
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
THE FIRM
INDUSTRY
COMPETITORS
•Cost-effectiveness
•Market access
•Differentiation of
product or service
•Selection of suppler
•Threat of backward
integration
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
Bargaining power
Dr. Chen, Management
Information
Systems
Dr. Chen, The
Trends of the
Information Systems Technology
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
8 N
Q2: What Five Forces Determine
Industry Structure?
Competitive Forces (Threats)
• Competition from existing rivals.
• Competition from new competitors/entrants.
• Competition from vendors who manufacture
substitutes.
Bargaining Power Forces
• Bargaining power of suppliers.
• Bargaining power of customers.
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Five Forces Model
• Five competitive forces determine industry profitability:
bargaining power of customers, threat of substitutions,
bargaining power of suppliers, threat of new entrants, and
rivalry among existing firms (video).
• Intensity of each force determines characteristics of the
industry, how profitable it is, and how sustainable that
profitability will be.
• Assessing an industry structure based on five questions:
1.
2.
3.
4.
5.
How great is the rivalry among existing firms?
How much of a threat do substitution products or services pose?
How great is the threat of new competitors entering the marketplace?
How much bargaining power do suppliers have?
How much bargaining power do customers have?
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A new drug that has shown promise in curing skin
cancer has been discovered by a famous chemical
laboratory. This is the only known drug effective
for treatment of this disease. The laboratory
obtains a patent for the product and decides to sell
it. This situation is characterized by ________.
A) low threat of substitutions
B) high bargaining power of customers
C) high threat of new entrants
D) low bargaining power of the laboratory
A
Answer: ______
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Porter’s Five Forces Model and
Value Chain
• According to Porter, there are five competitive
forces in any industry, and the attractiveness of the
industry depends on the strength of each force.
• Under the perspective of market structure, Porter’s
competitive forces model has been broadly adopted
as the underpinning for investigating the effect of
information technology on the relationships
between suppliers, customers, and other potential
threats.
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Porter’s Competitive Strategy Model
• Firms engage in one of four competitive strategies: (video)
1. Be the _____
cost leader across a wide industry
 Wal-Mart is the lowest cost leader in the retail industry.
Differentiate its products across a wide industry
2. ___________
 Apple Computer competes on how much better its computers are than
PCs.
3. Be the cost leader in a focused industry segment
 Southwest Airlines is the cost leader in certain portions of the airline
industry.
4. Differentiate its product in a focused industry segment
 Apple’s iPhone competes by being different than other cell phones.
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Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Lower Cost
Position
Industrywide
(Broad
Target)
Particular
Segment only
(Narrow
Target)
Overall Cost
Leadership
Uniqueness
Perceived by
Customer
Differentiation
Focus
N
Competitive Mechanism
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Dr. Chen,
The Trends
Management
of the Information
Information
Systems
Systems
Technology
TM -14
Q3: How Does Analysis of Industry Structure
Determine Competitive Strategy?
Porter's Four
Competitive
Strategies
To be effective, organization goals, objectives, culture, and activities
must be consistent with organization strategy.
Fig 3-5: Porter’s Four Competitive Strategies
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Relationships between Forces and Strategies
Study Five Competitive Forces
•
•
•
•
•
Traditional rivals
New entrants
Substitutes
Suppliers
Customers
Identify
2/3 most Critical Forces (Why?)
Deal
• Cost or/and
• Differentiation
Improve/
Create
Competitive
Advantage
Choose an appropriate Strategy
(strategies)
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An automobile company decides to improve
the quality of its products and bring more
variety into its product line. The company has
decided to adopt ________.
A) focused cost leadership
B) industry-wide differentiation
C) industry-wide cost leadership
D) focused differentiation
Answer: ________
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In-Class-Group Work
Discussion Question
• Using the five competitive forces model as
described in this chapter to describe how
(and what) IT might be used to provide a
winning position for:
• A global airline
– Use UA as an example (Group work together)
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PORTER’S FIVE COMPETITIVE FORCES MODEL
#2
#3
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
THE FIRM
SUPPLIERS
INDUSTRY #1
COMPETITORS
•Cost-effectiveness
•Market access
•Differentiation of
product or service
•Selection of suppler
•Threat of backward
integration
#5
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
Bargaining power
Dr. Chen, Management
Information
Systems
Dr. Chen, The
Trends of the
Information Systems Technology
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
#4
19 N
Use the five competitive forces model as described in this
chapter to describe how information technology might be
used to provide a winning position for each of these
businesses
• Ans: The five forces are substitutes, supplier,
buyer, new entrants, and inter-industry. The
question asks the student to pick a force and
describe how each of these 5 types of business
might use information resources to reduce the
threat of that force. An example of analyzing the
substitute force is given below:
• Global airline-it is difficult to think of what might
be a substitute threat for a global airline. Perhaps it
might be a cruise ship offering "offices at sea". In
that case the global airline might use information
resources to offer "offices in the air".
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PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
ENTRANTS
Internal Forces:
1.customer focus
2.communication
3.core competencies
4.complexity
5.Quality
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
THE FIRM
INDUSTRY
COMPETITORS
Other forces should
be considered in the
e-Age:
1. Digitalization
2. Globalization
3. Deregulation
•Cost-effectiveness
•Market access
•Differentiation of
product or service
SUPPLIERS
Bargaining power
Dr. Chen, Management
Information
Systems
Dr. Chen, The
Trends of the
Information Systems Technology
CUSTOMERS
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TM -21
Business Strategies
and its Competitive Advantage
Lower Cost
Position
Industry
wide
(Broad
Target)
Particular
Segment
only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Cost
Leadership
Differentiation
Cost Focus
Differentiation
Focus
Industrial economy
Knowledge-based
economy
Competitive Mechanism
Dr. Chen,
Dr. Chen,
The Trends
Management
of the Information
Information
Systems
Systems
Technology
TM -22
Q/A - Enhancing your Analytic Skill
Linda is in the computer repair businesses. Mark
and Jill, two recent university graduates are
unemployed, but are thinking of doing computer
repairs at their homes. This is an example of which
of the five forces?
a.
b.
c.
d.
e.
f.
bargaining power of customers
bargaining power of suppliers
threat of new entrants
threat of substitution
rivalry among existing firms
… and the answer is:
–
C
Answer _________
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Value-Chain Analysis
• Value chain analysis (model) views an
organization as a chain, or series, or
processes, each of which adds ______
value to
the product or service for each customers.
• To create a competitive advantage, the
value chain must enable the organization to
provide unique value to its customers by
using primary and/or support activites.
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Q4: How Does Competitive Strategy
Determine Value Chain Structure?
Business Level: The Value Chain
(Value)
Porter’s Value Chain Model
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Primary Activities in the Value Chain
Value in parts, time required to contact vendors, maintaining relationships with
vendors, ordering parts, receiving shipment, and so forth
Fig 3-7: Task Descriptions for Primary Activities of the Value Chain
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Support Activities in the Value Chain
Contribute indirectly to production, sale, and service of product
Support Activity
Description
Technology
_____________
R & D, New Techniques, Methods,
Procedures
Procurement
finding vendors (raw materials),
setting up contractual arrangements,
and negotiating prices
Training, Recruiting, Evaluation
Human
______ Resources
________ (performance), Compensation
Firm Infrastructure
Dr. Chen, Management Information Systems
General Management, Finance,
Accounting, Legal, Government
Affairs
Value Chain
• Competitive strategy implemented by creating value
 Value—amount of money a customer is willing to pay for a
resource, product, or service
 Margin—difference between value an activity generates and
cost of activity
 Value chain—a network of value-creating activities
• Primary activities
• Support activities
Rather than automating or improving existing functional
systems, Porter contends companies should create new,
integrate the
more efficient business processes that __________
activities of the entire value chain.
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Q4: How Does Competitive Strategy Determine
Value Chain Structure? (revised)
Competitive strategy: cost leadership / differentiation/ focused
Linkages
Linkages--interactions across value activities
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Figure 3-6 Bicycle Manufacturer’s Value Chain
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Value Chain Linkages
• Linkages are the interactions across the value
activities.
 Ex: Manufacturing systems use linkages to reduce
inventory costs, sales forecasts to plan production;
production plan to determine raw materials needs;
material needs to schedule purchases. End result is just-intime inventory, which reduces inventory sizes and costs.
• Business process design
 Organizations should not automate or improve existing
functional systems. Rather, they should create new, more
processes that integrate activities of
efficient business __________
all departments involved in a value chain.
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Which of the following value chain
activities involves collecting, storing, and
physically distributing the product to
buyers?
A) inbound logistics
B) operations
C) customer service
D) outbound logistics
D
Answer: ______
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Striving for Competitive Advantage
Firm level: Industry & Competitive Analysis
• _______
– Competitive Forces Model
– Competitive Strategy
Business level
• _________
– Value-Chain Analysis
Dr. Chen, Management Information Systems
Q5: How Do Business Processes Generate Value?
Activities
interact with
databases,
but, query
one DB a time
Fig 3-8: Three Examples of Business Processes
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Purchase-bicycle-parts activity queries both raw materials inventory and finished
goods inventory databases.
Queries both
databases
Objectives?
Objectives: # of purchase parts will be more accurate
Fig 3-9: Improved Material Ordering Process Using Integrated Databases34
Dr. Chen, Management Information Systems
Business Process Summary
• Business process - set of activities that generate
value by transforming inputs into outputs.
• Key to a company’s competitive advantage is to
increase the margin (= value - cost) of its
products by adding value, reducing costs, or both.
• Business process redesign helps a business
streamline its activities in order to increase its
margins.
• Most difficult part of process redesign is
associated with employee resistance.
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Which of the following statements is consistent
with the central idea of business process design?
A) Technology should be used to supplement the
existing value chain.
B) Business processes should focus on improving
individual functional systems.
C) Organizations should create new business
processes rather than improve existing systems.
D) Technology should be used to modify and
improve standard business processes.
Answer: ______
C
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Q6: How Does Competitive Strategy Determine Business
Processes and the Structure of Information Systems?
Fig 3-10: Operations Value Chains for Bicycle Rental Companies
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High-Service Rental Value Chain
IT/Cust.
Service
CRM
IT/HR
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Business Process and Information Systems for
High-Service Bike Rental
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Bottom Line
• Each business must first analyze its industry and
choose a competitive strategy. Will it be a low-cost
provider or differentiate its products from
competitors?
• Given that strategy, they design business processes
that span value-generating activities.
• Those processes determine scope and requirements
of each organization’s information systems.
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So What?
What Strategy Do You Support?
1. Never propose an idea to anyone in your
company that is not consistent with its
competitive strategy.
2. Information systems development must mirror
organization’s strategy.
 What about you, personally?
• If you naturally like to save costs, a cost
leader can be the place for you. Or,
• Differentiate your uniqueness
• Know organization’s competitive strategy.
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Q7: How Do Information Systems Provide
Competitive Advantages?
Dr. Chen, Management Information Systems
Figure 3-12 Principles of Competitive Advantage
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• Product Implementation
– 1. Create a new product or service
– 2. Enhance products or services
– 3. Differentiate products or services
• Process Implementation
–
–
–
–
–
4. Lock in customers and buyers
5. Lock in suppliers
6. Raise barriers to market entry
7. Establish alliance
8. Increases profit margins by reducing
costs and decreasing errors
Figure 3-12 (b): Principles of Competitive Advantage
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Two Ways to Respond to the Five
Competitive Forces
(video)
1. Competitive advantage via products or services:
 Creating new products or services,
 Enhancing existing products or services,
 Differentiating their products and services from
those of their competitors by:

cost
 quality
2. Information systems can help create a competitive
advantage by being part of the product or by providing
support to the product or service.
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Hueblue Software, an application provider to the
gaming industry, decided to increase its portfolio
by developing motion-control-enabled games for
the mobile gaming industry. In this scenario,
which competitive strategy is Hueblue Software
implementing?
A) establishment of alliances
B) product differentiation
C) reduction of cost
D) locking in suppliers
B
Answer: ______
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Gaining Competitive Advantage by Using
Business Processes
1. Lock in customers
 Create high switching costs
2. Lock in suppliers
 Make it easy to connect to and work with your organization
3. Create entry barriers
 Make it difficult and expensive for new competition
4. Create better business processes to establish alliances
 Organizations—establish standards, promote product
awareness and needs, develop market size, reduce purchasing
costs, and provide other benefits
5. Reduce costs
 Enables reducing prices and/or to increasing profitability.
Increased profitability means more cash to fund further
infrastructure development and greater competitive
advantage.
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Q8: 2025?
• Speed of business accelerating
• New businesses based on advances in
self-driving cars, drones, Google glass,
3D printing
• Pace of change and integration of new
technology will be fast and increasing
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Essential Value Propositions for a
Successful Company
Business Model
• ________
– A value-added
– Value, value, value
Core Competency
• _______
– outsourcing
– offshoring
Execution
• __________
– Set corporate goals and get executive sponsorship for
the initiative
Dr. Chen, Management Information Systems
Active Review
Q1: How does organizational strategy determine information
systems structure?
Q2: What five forces determine industry structure?
Q3: How does analysis of industry structure determine competitive
strategy?
Q4: How does competitive strategy determine value chain
structure?
Q5: How do business processes generate value?
Q6: How does competitive strategy determine business processes
and the structure of information systems?
Q7: How do information systems provide competitive advantages?
Q8: 2025?
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END of CHAPTER 3
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