Chapter Two – part 2 Analyzing a Company’s External Environment

Five-Forces Model of Competition

 Porter’s competitive forces model.  The strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry’s environment:  New market entrants  Substitute product  Customers  Suppliers

Five-Forces Model of Competition  Traditional Competitors  All firms share market space with the competitors.  Introducing new product and services.  Attempting to attract customers by developing their brands.  Imposing switching cost on their customer.  E.g. Exit fees.

Five-Forces Model of Competition  New Market Entrants  New companies are always entering the marketplace.  Barriers of entry  E.g. – Pizza business – low barrier of entry  E.g. – Computer chip business – high barrier of entry

Barriers of entry  The existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing companies already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors.

Barriers of entry  Barriers to entry can exist as a result of government intervention (industry regulation, legislative limitations on new firms, special tax benefits to existing firms, etc.), or they can occur naturally within the business world.  Some naturally occurring barriers to entry could be technological patents or patents on business processes, a strong brand identity, strong customer loyalty or high customer switching costs. 

Five-Forces Model of Competition  New companies advantages:  Not locked into old plants and equipment  Often hire younger workers  Less experience but more innovative  Not encumbered by old worn-out brand names  More “hungry” than traditional occupants of an industry.

Five-Forces Model of Competition  New companies weaknesses:  Depends on outside financing for new plants and equipment – expensive.  Less experience workforce.  Have little brand recognition.

Five-Forces Model of Competition  Substitute product and services  In every industry, there are substitutes  Your customer might use it if your price become too high.  The more substitutes products and services in your industry, the less you can control pricing and the lower your profit margins.

Five-Forces Model of Competition  Customers  Ability to attract and retain customers (while denying them to competitors)  Power of customer grows  if they can easily switch to a competitor’s products and services OR  if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is a little product differentiation and all price are known instantly.

Five-Forces Model of Competition  Supplier  Market power of suppliers can have a significant impact on firm profits especially when firm cannot raise prices as fast as suppliers can.  The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality and delivery schedules.  E.g. – laptop manufacturers always have multiple competing suppliers of key components, such as keyboards, hard drives and display screens.

Information Systems Strategies for dealing with competitive forces.  Align the IT with the Business Objectives.  Ensures the technology serves the business.  A more successful a firm can align its IT with its business goals, the more profitable it will be.  Align IT with business.  Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on revenues and profits.

Information Systems Strategies for dealing with competitive forces.  Align the IT with the Business Objectives.  Identify your business strategy and goal.  Break these strategic goals down into concrete activities and processes.  Identify how you will measure progress towards the business goals.  Ask yourself “How can information technology help me achieve progress towards our business goals and how it will improve or business processes and activities?”  Measure actual performance. Let the numbers speak.

Information Systems Strategies for dealing with competitive forces.  4 generic strategies.  Low-cost leadership.  Product differentiation.  Focus on market niche.  Strengthening customer and supplier intimacy.  Each of this strategies is enabled by using information technology and systems.

Information Systems Strategies for dealing with competitive forces.  Low-cost leadership.  Use information systems to achieve the lowest operational costs and the lowest prices.  E.g. Wal-Mart, UK. – inventory replenishment systems.  Lower cost in maintaining large inventories of goods in its own warehouse.

Information Systems Strategies for dealing with competitive forces.  Product Differentiation  Use information system systems to enable new products and services, or greatly change the customer convenience is using your existing product and services.  Apple – iPod, iPad, iPhone  Google – new function – e.g. google map

Information Systems Strategies for dealing with competitive forces.  Product Differentiation  Manufacturers and retailers are starting to use information systems to create products and services that are customized and personalized to fit precise specifications of individual customers.  E.g. DELL – Individuals, businesses and government agencies can buy computers directly from DELL, customized with exact features and components they need.  Lands’ End – custom-tailored dress pants, jeans chino pants and shirt. – almost have no extra cost.

Information Systems Strategies for dealing with competitive forces.  Focus on Market Niche  Use information system to enable a specific market focus and serve this narrow target market better than competitors.  Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques.  Information systems enable companies to analyze customer buying patterns, taste and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.  E.g. Hilton Hotels’ OnQ system analyzes detailed data collected on active guest’s profitability. – give privileges.

Information Systems Strategies for dealing with competitive forces.  Strengthen Customer and supplier Intimacy  Use information system to tighten linkages with suppliers and develop intimacy with customers.  E.g. Amazon – keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers  Strong linkages to customers and suppliers reduce switching costs and loyalty to your firm.

Information Systems Strategies for dealing with competitive forces.  Some companies focus on one of these strategies, but you will often see companies pursuing several of them simultaneously.