IT Strategic Alignment

&
Porter’s 5 Forces

Week 3

1
Today

• The role of IT in business

• Porter’s 5 competitive forces

• Porter’s response strategies

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The role of IT in business
• IT creates applications that provide strategic
advantages to companies

• IT is a competitive weapon
• IT supports strategic change, e.g, re-engineering

• IT networks with business partners

• IT provides cost reduction

• IT provides competitive business intelligence

• IT enables new products
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The role of IT in business

4
Competitive advantage in the web economy

Competitive Competitive Sustainable

Strategy Advantage Strategic
Advantage
Search for a Look for a
Maintain
competitive competitive profitable &
advantage in necessity, which sustainable
an industry, will help your position against
which leads to company keep the forces that
control of the up with the determine
market. competitors. industry
competition

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HOW IT/IS AFFECTS COMPETITION
• It changes industry structure and alters the
rules of competition
– by increasing the power of buyers
– raising barriers to entry and
– influencing the threat of substitution

• It creates competitive advantage by giving

companies new ways to out-perform their
rivals
– lowering costs,
– enhancing differentiation and
– changing competitive scope
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 •
Porter’s 5 Competitive Forces (1985)
• The threat of entry of new competitors.

• The bargaining power of suppliers.

• The bargaining power of customers (buyers).

• The threat of substitute products or services.

• The rivalry among existing firms in the
industry.

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Porter’s Model in Action

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1. The threat of entry of new competitors

• Profitable markets will draw in more competitors

• Many new entrants decrease profitability.
• Unless the entry of new firms can be blocked the
profit rate will fall towards a competitive level
• The existence of barriers to entry, for example:
• patents & rights, etc.
• economies of product differences
• switching costs
• capital requirements
• learning curve advantages

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2. The bargaining power of suppliers
• Suppliers of raw materials, components, and
services (such as expertise) to the firm can
be a source of power over the firm
• Suppliers may refuse to work with the firm, or
e.g. charge excessively high prices for unique
resources
• Supplier switching costs relative to firm
switching costs

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2. The bargaining power of suppliers
• supplier concentration to firm concentration
ratio
• threat of forward integration by suppliers
relative to the threat of backward integration
by firms
• degree of differentiation of inputs
• presence of substitute inputs

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3. The bargaining power of customers
• The ability of customers to put the firm
under pressure - buyer volume
• buyer concentration to firm concentration
ratio
• buyer switching costs relative to firm
switching costs
• ability to backward integration
• availability of existing substitute products
• buyer price sensitivity
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4. The threat of substitute products or
services
• The existence of close substitute products
increases the propensity of customers to switch
to alternatives in response to price increases
• buyer propensity to substitute
• relative price performance of substitutes
• buyer switching costs
• perceived level of product differentiation

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5. The rivalry among existing firms in
the industry
• For most industries, this is the major
determinant of the competitiveness of the
industry.
• sometimes rivals compete aggressively
• sometimes rivals compete in non-price
dimensions such as innovation, marketing,
etc.
• number of competitors
• intermittent industry overcapacity or under
capacity 14
5. The rivalry among existing firms in
the industry
• exit barriers
• informational complexity and asymmetry
• fixed cost allocation per value added
• level of advertising expense
• economies of scale
• sustainable competitive advantage through
improvisation
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Response Strategies (Porter, 1985)

COST
LEADERSHIP DIFFERENTATION FOCUS

Providing Being unique in the Selecting a

products and/or industry niche market
services at the and achieving
lowest cost in the cost leadership
industry. and/or
differentation.

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 Response Strategies
(added by Porter and others)

GROWTH IMPROVE INTERNAL

Increasing market share, EFFICIENCY
acquiring more customers or To improve employee and
selling more products customer satisfaction

ALLIANCES CRM
Working with business Customer-oriented
partners to create synergy & approaches, e.g. the
provide opportunities for customer is king (queen)
growth
INNOVATION
Developing new products & services

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 Porter’s Model in Action (cont.)

Step 1: The players in each force are listed.

Step 2: An analysis is made which relates

Porter’s determining factors.

Step 3: A strategy is devised to defend

against these factors.

Step 4: Support information technologies

are employed.
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• Web-based Strategic Information Systems

• Many of the SISs of the 70s - 90s were based on

privately owned networks, or organizational
information systems (OISs).

• EDI-based systems are of key importance

• SISs are changing the nature of competition

• In some cases, SIS renders traditional business
procedures obsolete.
• E.g, Encyclopedia Britannia

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CASE: Mobile Oil Moves to Web-based System
• Problem:
• Largest marketer of lubricants in the USA
• In 1995, introduced EDI system
• Used to place orders, submit invoices & exchange business
documents
• It was too expensive, too complex to use
• Solution:
• In 1997, moved to web-based extranet-supported B2B
system
• Results:
• Reduced transaction cost from $45/order to $1.25
• Fewer shortages, better customer service
• decline in distributor administration costs

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Examples of EDI/Internet-based SIS
(for individual Companies)

• Electronic Auctions
• Electronic Biddings
• Buyer-Driven Commerce
• Single Company Exchange
• Direct Sales

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Examples of EDI/Internet-based SIS
(for Groups of Companies)
• Industry Consortiums
• Horizontal Consortiums
• Web-based Call Centers
• Web-based Tracking Systems
• Web-based Intelligent Agents
• Web-based Cross Selling
• Accessing knowledge via Intranets
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Growth of Companies Operating in a Global
Environment
• Fully Global or
Multinational
Corporations

• Companies that export or

import
• Companies with low cost
• Companies facing production facilities
competition of low labour abroad
cost and high natural • Small companies that
resources
can now use eC to
buy/sell internationally 23
CASE: Geisinger Implements an Intranet
• Problem:
• As a result of mergers & acquisitions, Geisinger (a
health maintenance organization) had 40 different
IT legacy systems in need of an upgrade &
integration.
• Solution:
• In 1993, Geisinger implemented an innovative
Intranet: with the following features:
• “Tel-a-Nurse”
• Clinical Management System
• Human Resource Management
• Results:
• Geisinger reduced costs and unnecessary medical
work.

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 CASE: Caltex Corporation

• Major multinational company selling gasoline &

petrol products.
• In 2000, created a centralized e-purchasing
corporate exchange (www.caltex.com)

• Suppliers build electronic catalogues with Ariba’s

software.
• Many benefits to buyers and suppliers, particularly in
Asia, Africa & the Middle East.
• System enables Caltex to successfully handle
complex multinational business environments.
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 CASE: Caterpiller Corporation
Problem:
• This world leader in manufacturing of heavy
machines faced strong competition from Japanese
companies.

Solution:
• Computer-aided manufacturing and robots
• Computerized inventory management
• Supply chain web-based management
• Global Intranet & EDI
• Sensory Intelligent Agents attached to products.

Results:
• CAT experienced such a high rate of success that 26
their main competitor was forced to shift its strategy
 SIS Implementation
• Major Issues to be Considered:
• Justification
• Justifying SIS may be difficult due to the
intengible nature of their benefits.
• Risks & Failures
• The magnitude, complexity, continuous changes
in technology and business environment may
result in failures.
• Finding appropriate SIS
• Identifying appropriate SIS is not a simple task.

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 Sustaining SIS & Strategic Advantage

• A Major problem that companies face is how to

sustain their SIS competitive advantage.
• 3 Major approaches =
• Create inward systems which are not visible to
competitors.

• Provide a comprehensive, innovative & expensive

system that is difficult to duplicate.

• Combine SIS with structural changes. This would

include business processes, reengineering &
organizational transformation. 28
 Managerial Issues

• Implementing SIS Can Be Risky

• The investment involved in implementing
Strategic Information Systems (SIS) is high

• Strategic Information Systems Requires

Planning
• Planning for an SIS is a major concern of
organizations

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 Managerial Issues (cont.)
Sustaining Competitive Advantage Is Challenging

• As companies become larger and more sophisticated, they

develop resources to duplicate the systems of their
competitors quickly

Ethical Issues

• Gaining competitive advantage through the use of IT may

involve unethical or even illegal actions

• Companies can use IT to monitor the activities of other

companies and may invade the privacy of individuals working
there

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 References
• Porter M.E. (1985), Competitive Advantage: Creating and
Sustaining Superior Performance, New York Free Press

• Bakos J.Y. and M.W. Treacy (1986), ‘Information Technology and

Corporate Starategy: A research Perspective’, MIS Quarterly (June
1986)

• McFarlan (1984), ‘Information Technology Changes the Way You

Compete’, Harvard Business Review, (May-June 1984)

• Ives B. et al (1993), ‘Global Business Drivers: Aligning IT to Global

Business Strategy’, IBM Systems Journal, Vol 32, No 1

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 Suggested Reading

• Information Technology for Management

• Chapter 1: pp 35-37
• Chapter 13 – Information Systems for Competitive
Advantage pp 517-526
• Look at references and bibliography for this chapter

• Computing Press – read it

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 Next Week – week 4

IT strategy and planning

Porter’s value chain

&
Nolan’s six levels of DP growth

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