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Using Information Systems to Achieve Competitive Advantage

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Types and Functions of Information Systems Used in Business Contents

E. Using Information Systems to Achieve Competitive Advantage

Firms with a competitive advantage over others, typically have access to special resources that others do not or are have special competencies that enable them to use resources more efficiently, or in ways that their competitors find difficult to imitate. Competitive advantage can be turned into higher profits for the company. Porters five forces model can be used to understand the competitive force in an industry and how they affect profitability.

Porter’s Competitive Forces Model

Michael Porter's competitive forces model (Figure 2.4), describes five competitive forces that shape the fate of the firm.

1. Intensity of Rivalry between competitors: Generally the strongest of the five forces.

Rivalry can be focused on such factors as; price, performance features, new product innovation, quality, durability, warranties, after-sale service and brand image.

2. Threat of new market entrants: New companies have certain advantages, such as not being locked into old equipment, as well as disadvantages, such as less expertise and little brand recognition. Barriers to entry can include; economies of scale, capital costs, and access to supplier, distributors, expertise and customer loyalty.

3. Threat of Substitute products and services: These are substitutes that customers might use if prices become too high. For example, Internet telephone services can substitute for traditional telephone services. The more substitute products and services available in an industry, the harder it is to control price and the lower profit margins will be as a result.

4. Bargaining power of Customers: The power of customers 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 where there is little product differentiation and all prices are known instantly (such as on the Internet).

5. Bargaining power of Supplier’s: The more different suppliers that are available to a firm, the greater control the firm can exercise over suppliers in terms of price, quality and delivery schedules. Where there are many suppliers in an industry their power will be low.

Figure 2.4: Porter‘s Competitive Forces Model

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Information System Strategies for dealing with Competitive Forces

Michael Porter developed a number of generic strategies that can be used by companies to deal with competitive forces. A company will normally choose the particular strategy which best suits the particular competitive advantage they want to pursue in the market place. The following section shows how information systems can be used with each of the following strategy options:

1. Low-cost leadership: Information systems can be used to achieve the lowest operational costs and the lowest prices. For example, a supply chain management system can be used to directly link customers to distribution, production and supply chains, helping lower inventory and distribution costs.

2. Product differentiation: Information systems can enable new products and services, or greatly change the customer convenience in using existing products and services. For example; Dell uses mass customisation, offering individually tailored computers using the same production resources as mass production, to customise computers to individual customer needs.

3. Focus on market niche: Use information systems to enable a specific market focus and serve this narrow target market better than competitors. Information systems support this strategy by producing and analysing data for finely tuned sales and marketing techniques.

The Internet’s Impact on Competitive Advantage

The Internet has seriously damaged some industries and has severely threatened more. It has also created entirely new markets and formed the basis for thousands of new businesses.

Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense. Internet technology is based on universal standards, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. Some industries, such as the travel industry and the financial services industry, have been more impacted than others. However, the Internet also creates new opportunities for building brands and establishing very large and loyal customer bases, as is the case for Google, Facebook and eBay.

Table 2.5 summarises some of the potential impacts of the Internet on the five competitive forces identified by Porter.

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Table 2.5: The impact of the internet on the five competitive forces Five forces Impact of the internet

Intensity of Rivalry The internet has had the effect of reducing differences between companies and makes it more difficult for any one company to maintain competitive advantage

Threat of new entrants The internet reduces the barriers to entry making it easier for a new company to enter a market. E-commerce can be used instead of investing in new shops.

Threat of Substitutes The internet has enabled new substitutes to emerge and new ways of meeting customer needs.

Bargaining power of Customers

This is increasing as customers can use the internet to find cheaper product and services.

Bargaining power of Suppliers

Companies can use the internet to source new suppliers thus reducing their power. Suppliers can also benefit from the power of the internet to eliminate intermediaries and in some cases enables them to sell directly to consumers.

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In document INSIDE COVER - BLANK (Page 33-37)