Using MIS 2e

Chapter 3

Information Systems for

Competitive Advantage

David Kroenke

© Pearson Prentice Hall 2009 3-1

Study Questions

 Q2 – What five forces determine industry structure?

 Q1 – How does organizational strategy determine information

systems structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-2

 Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry

structure?
 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-3

Q2 – What Five Forces Determine Industry Structure?

 You can use Porter’s Five Forces Model to assess an industry

structure based on these five questions:
 How much bargaining power do customers have?
 How much of a threat do substitution products or services pose?
 How much bargaining power do suppliers have?
 How great is the threat of new competitors entering the marketplace?
 How great is the rivalry among existing firms?

 The intensity of each force determines the characteristics of the

industry, how profitable it is, and how sustainable that profitability
will be.

 An organization develops its competitive strategy based on how it

intends to respond to these forces.

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Q2 – What Five Forces Determine Industry Structure?

Fig 3-2 Porter’s Five Forces Model of Industry Structure

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Q2 – What Five Forces Determine Industry Structure?

Fig 3-3 Examples of Five Forces

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  Q1 – How does organizational strategy
determine information systems structure?
 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-7

Q1 – How does organizational strategy determine information systems
structure?
 An organization’s goals and objectives are determined
by its competitive strategy.
 In turn, an organization’s competitive strategy
determines every information system’s
 Structures
 Features
 Functions

Fig 3-1 Organizational Strategy Determines Information Systems

© Pearson Prentice Hall 2009 3-8

  Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-9

Q3 – What is Competitive Strategy

 A company can choose one of four competitive strategies to help it

respond to the structure of its industry.
 Be the cost leader across its industry – Wal-Mart is the lowest

cost leader in the retail industry.

 Differentiate its products from others across its industry – Apple

Computer competes on how much better its computers are than
PCs.

 Be the cost leader in an industry segment – Southwest Airlines is

the cost leader in certain portions of the airline industry.

 Differentiate its product in an industry segment – Apple’s iPhone

competes by being different than other cell phones.

© Pearson Prentice Hall 2009 3-10

Q3 – What is Competitive Strategy

Fig 3-4 Porter’s Four Competitive Strategies

© Pearson Prentice Hall 2009 3-11

  Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-12

Q4 – What is a Value Chain?

 Each competitive strategy requires a system whose

benefits outweigh the risks and provide value to the
customer.

 Value is defined as the amount of money a customer is willing to

spend on a product, service, or resource.

 The difference between the value that an activity generates and

the cost of the activity is the margin.

 A value chain is a network of value-creating activities and is

divided into primary activities and support activities.

© Pearson Prentice Hall 2009 3-13

Q4 – What is a Value Chain?

Fig 3-5 Porter’s Value Chain Model

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Q4 – What is a Value Chain?

 Primary Activities in the value chain include:

 Inbound logistics activities involve receiving and managing raw
materials.

 Operations activities transform raw materials into final products

or create services.

 Outbound logistic activities deliver finished products to

customers.

 Marketing and Sales activities create marketing strategies and

sell products or services to customers.

 Services activities provide after-sale customer support for

products or services.

© Pearson Prentice Hall 2009 3-15

Q4 – What is a Value Chain?

 Support Activities in the value chain indirectly enhance

production of products and services.

 Firm infrastructure includes general management, finance,

accounting, legal, and government affairs (if necessary).

 Human Resources recruits, compensates, evaluates and trains

employees.

 Technology Development includes research and development for

new processes or techniques.

 Procurement finds suppliers and vendors for raw materials,

creates contracts, and negotiates prices of raw materials.

© Pearson Prentice Hall 2009 3-16

Q4 – What is a Value Chain?

 Each activity in a value chain links to other activities in

the value chain. Linkages are the interactions across the
value activities.

 Understanding a company’s linkages helps it succeed in

designing or redesigning its business process.
 Rather than automating or improving existing functional systems,
Porter contends companies should create new, more efficient
business processes that integrate the activities of the entire value
chain.

© Pearson Prentice Hall 2009 3-17

 Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-18

Q5 – How Do Business Processes Generate Value?

 Each company has many business processes which are

networks of activities that generate value by transforming
inputs into outputs.

 You determine the cost of each business process by

adding the cost of inputs plus the cost of activities used
in the process.

 You determine the margin of each business process by

subtracting the cost of the activity from the value of the
output.

© Pearson Prentice Hall 2009 3-19

Q5 – How Do Business Processes Generate Value?

Fig 3-7 Three Examples of Business Processes

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Q5 – How Do Business Processes Generate Value?

 Each network of activity transforms input resources into

output resources. Bicycle parts are transformed into a
bicycle through a network of activities, both primary and
support.

 A company’s resources, like inventory parts, equipment,

or cash, flow between or among all the activities used to
produce a product.

 Facilities, like buildings or banks, store resources used in

the company’s network of activities.

© Pearson Prentice Hall 2009 3-21

Q5 – How Do Business Processes Generate Value?

 The key to a company’s competitive advantage is to

increase the margin 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.

 The most difficult part of process redesign is associated

with employee resistance.

© Pearson Prentice Hall 2009 3-22

 Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-23

Q6 – How Does Competitive Strategy Determine Business Processes and
Structure of Information Systems?

 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?

 Then it must design its business processes to span

value-generating activities.

 Once those decisions have been made, a business can

structure an information system that supports its
business processes.

© Pearson Prentice Hall 2009 3-24

 Q1 – How does organizational strategy determine information systems
structure?

 Q2 – What five forces determine industry structure?

 Q3 – What is competitive strategy?

 Q4 – What is a value chain?

 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?

© Pearson Prentice Hall 2009 3-25

Q7 – How Do Information Systems Provide Competitive Advantages?

 There are two ways businesses can respond to the

five competitive forces.

 They can gain a competitive advantage via their

products and services.

 They can gain a competitive advantage by developing

superior business processes.

© Pearson Prentice Hall 2009 3-26

Q7 – How Do Information Systems Provide Competitive Advantages?

 A business can gain a competitive advantage via its

products by
 Creating new products and services, or

 Enhancing its existing products or services, or

 Differentiating its products and services from its competitors

 Information systems can help create a competitive advantage by

being part of the product or by providing support to the product.

© Pearson Prentice Hall 2009 3-27

Q7 – How Do Information Systems Provide Competitive Advantages?

 A company can gain a competitive advantage by using business

processes to

 Lock in customers via high switching costs, making it too expensive for
the customer to switch to a competitor.

 Lock in suppliers via easy-to-use connections, discouraging them from

changing to another business.

 Create entry barriers for new competitors, thereby raising the costs to
enter the market.

 Establish alliances with other organizations and set standards, reducing

purchase costs and providing benefits for everyone.

 Reduce costs which in turn reduces prices and increases profitability.

© Pearson Prentice Hall 2009 3-28