How Information Systems Can Influence Commerce Essay

In this paper I will focus on how Information Systems can influence each of Porter’s Five Forces of Competitive Position differently .Firstly I will provide a brief description of Information Systems, then I will look at Porter’s 5 forces model and how Information Systems can influence each of those five Forces of Competitive. The five competitive forces arises out of Michael E. Porter’s work “Competitive Strategy: Techniques for Analyzing Industries and Competitors”(1980). This model has now become a tool which is commonly used for analysing a company’s structure and its strategic processes.

An information system (IS) includes information technology (IT) and people’s activities to assist in operational management and decision making. Information technology refers to the relation between people processes, data and technology. This definition, not only apply to the information and communication technology (ICT) used within the organisation, but also to the way in which people interact with this technology to support the business processes.

Some writers distinguish between information systems, computer systems, and business processes. Information systems typically include an ICT component but are not purely concerned with ICT, focusing instead on the end use of information technology. Information systems are also different from business processes. Information systems help to control the performance of business processes.

“As such, information systems inter-relate with data systems on the one hand and activity systems on the other. An information system is a form of communication system in which data represent and are processed as a form of social memory. An information system can also be considered a semi-formal language which supports human decision making and action.

An Information System consists of five basic resources, namely:

People, which consists of IT specialists (such as a Database Administrator or Network Engineer) and end-users (such as Data Capture Clerks).

Hardware, which consists of all the physical aspects of an information system, ranging from peripherals to computer parts and servers.

Software, which consists of System Software, Application Software and Utility Software. Data, which consists of all the knowledge and databases in the IS.

Networks, which consists of communication media and network support.

http://en.wikipedia.org/wiki/Information_system

An information system is made up of all the elements which collect, manipulate, and disseminate data or information. Usually this includes hardware, software, people, communications facilities like telephone lines, and the data itself. This will entail inputting data, processing of data into information, storage of data and information, and delivering outputs ,for example management reports.

http://www.wordiq.com/definition/Information_Systems

In short information system Information system consists of five basic resources which are people, hardware, software, data and networks so as to facilitate planning, control, coordination, and decision making in an organization.

According to Porter there are five competitive forces that shape every single industry and market. These five forces consist of, the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services, and the level of competition among current competitors within the market.

Such forces help to carry out an analysis of the organisation’s current position ranging from the level of competition it faces, its profitability and attractiveness. We deal with these 5 forces on a daily basis. The relationship between the different competitive forces is illustrated below.

http://www.businessteacher.org.uk/wp-content/porters-5-forces-analysis.jpg

http://www.businessteacher.org.uk/wp-content/porters-5-forces-analysis.jpg

Bargaining Power of Suppliers -“The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services”.

http://www.themanager.org/Models/p5f.htm

Suppliers are more likely to be in a good bargaining position when, a few large suppliers rather than a fragmented source of supply have command of the market, for example, companies like Microsoft and Intel, which control the highly-fragmented PC industry. In such instances suppliers of these major components are in a dominant position which can affect price, terms, and quantities of operating systems and CPUs. This will create a PC industry which is far less profitable than the suppliers of vital parts components like Microsoft and Intel, as there are no substitute, or few for a component, for example, CPUs. Such customers are isolated rendering their bargaining power weak. There are high costs involved when switching from one supplier to another.

Suppliers may integrate forward to find higher prices and margins. This threat increases when, buyers profitability increases as compared to than the supply industry. The buying industry can prevent suppliers from developing, such as, the reluctance in accepting new products release. The buying industry has low obstacles for entry and frequently they are subjected to high pressure on suppliers’ margins in such conditions. Being associated with powerful suppliers can initially diminish organisations’ strategic options.

Bargaining Power of Buyers

Equally, the bargaining power of buyers will dictate what level of pressure can be applied to margins and volumes. Customers are in a strong bargaining position when there is less of them or when buying in large volumes. When the product is undifferentiated and can be substituted, buyers can switch to an alternative product easily and would not incur high costs. When a buyer purchases in large volumes from a supplier, this accounts for a high amount in the supplier’s revenue, giving buyers an upper hand in such transactions. Buyers power also increase when the product does not have strategical importance for them. Porter argues that internet technology provides buyers with easier access to information about products and suppliers, thus strengthening buyers bargaining power. Due to the advent of IT potential buyers for products and services has increased , thus eroding their individual power as individual buyers and increasing the power of the sellers. For example, auction sites such as e-Bay encourages competition amongst buyers and therefore increase the price of goods and increases the sellers profits.

Threat of New Entrants

Competition in an industry will increase, when it is easier for other companies to enter this industry. New entrants within the industry may change vital elements of the market environment, such as, market shares, prices, customer loyalty. This will pressurise existing players in this industry to react and to make adjustments.

The threat of new entries will depend on the extent to which there are barriers to entry. Porter distinguishes six major barriers to entry.Barriers to entry include the following :- Customers brand loyalty ,buyers will incur high switching costs , initially there are high investments and fixed costs , existing businesses have good customer relations, such as, from long-term service contracts ,Protected intellectual property like patents, licenses etc and Legislation and government action in place.

Threat of Substitutes

This arises when there are alternative products offered at lower prices serving the same purpose. Products can be substituted wholly or partially. In such cases potentially this would attract a major proportion of market volume, therefore decreasing the potential sales for existing companies. This class is applicable to complementary products as well. The use of Information technology in businesses can bring about substitute products or services and also protect against them.

The former occurs when different manufacturers fulfil exactly the same purpose and partial substitution of products occurs when only partially substitute by each other. There are also substitute sources, where the exactly the same product is sourced by two or more distributors.

The threat of substitutes is also determined by factors which have an impact on the threat of new entrants, such as, brand loyalty of customers, good customer relations, high switching costs which customers will incur, the current price of substitutes and current market trends.

In the field of communication, the economy, functions within a broad range of telecommunications and transportation technologies, therefore encourages substitute products and services which would be threats to businesses in many industries. For example on-line health and medical sites can be substitutes for contacting doctors.

Competitive Rivalry between Existing Players

This force deals with the level of competition in existing companies within the industry. If there is a high competitive pressure this will bring prices and margins down, thus affecting company’s profits within the industry.

Existing businesses are likely to face increased competition when there is a high amount of competitors with equivalent size, power and having similar strategies. If there is little differentiation between competitors and their products, this gives rise to a price competition. Market growth rates will be low, as a particular company’s growth is possible only at the detriment of a competitor, for example with airlines, heavy equipments.There are high barriers to exit, for example, expensive and highly specialized equipment.

The 5-Forces model assists businesses to identify weakness, e.g. those areas where it is unprepared or weak. Helps to analyse what competitive challenges are impacting the business, from suppliers, customers, etc. Such analysis helps businesses to create systems to effectively respond to those challenges and constraints. Porter’s model is based on the view that a corporate strategy should meet the opportunities and threats which organizations face in its external environment.

The effect of Porter’s five forces varies among industries. However, whatever the industry type, the five forces influence profitability as they affect the prices, the costs, and the capital investment which are vital for survival and to compete within the industry. This model also helps when making strategic decisions and used by management to determine the industry’s competitive structure.

The Five Forces Model offers us a perspective as to how information resources can bring about competitive advantages. Porter’s Model, can assist Management in areas such as,(a)to envisage key sources of competition that they could encounter,(b)analyse the uses of information resources so as to improve their competitive position when facing threats from competitors and (c) to consider likely changes in competitive threats in the future. The 5 forces model offers a simple way to understand where the industry is moving to not just within. Over recent years due to the rapid growth in Information Technology, the WEB has changed the nature of competition. Porter [2001] argues that the main impact of the Web is to increase competition, which would more likely decrease an organisation’s profit.

It can be argued that some businesses are more prosperous than others because, they have either better resources that others do, or they can utilise commonly available resources more efficiently. This could be due to superior knowledge and information assets. Compared to their competitors they do better in areas such as, revenue growth, profitability, or productivity growth, thus increasing their stock market valuations.

A company’s performance in competitive markets is based on its competitive advantage, above average performance in the long term can arise by creating a realistic competitive advantage. Porter’s opinion on competitive advantage can be used to look at how Information Systems affect the organisation’s performance by changing the link within the five forces model which forms its competitive environment.

Porter argues that the main element to create an above average performance in the long term is to be able to maintain a competitive advantage. “A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices”. http://www.tutor2u.net/business/strategy/competitive_advantage.htm

Without such advantage, a company can only reap the windfall, that is, make the largest profits it can whilst it is able to do so. He provides two basic types of competitive advantages, cost leadership and product differentiation.

Porter provides four “generic” business strategies that could be used so as to obtain a competitive advantage. The strategies relate to the extent to which the scope of a business’ activities are narrow and broad and the extent to which a business seeks to differentiate its products.

Organisations can follow four competitive strategies which are facilitated by the use of information systems in gaining a competitive advantage in their markets. These can mainly be achieved through the use of information technology and systems which include the following:-

Low-cost leadership: This strategy aim is to offer the lowest operational costs and lowest prices. The organisation aims to become the lowest cost producer in its specific industry. A strategy of cost leadership requires more than just moving down the learning curve, it must find and exploit every source to its potential cost advantage. Normally, cost leaders sell a basic product or commodity and concentrate in pursuing economies of scale and absolute cost advantages. The company must ensure compliance with the industry’s norms, that is, the product or service offered must be seen as acceptable and comparable to its competitor’s. To be the lowest cost producer the company has to ensure that it makes effective use of technology in the production process.

2. Product differentiation, where an organisation’s aim is to differentiate with one of

a small number of market segments. The company must ensure that its competitors do not already have such products to satisfy the needs of those “special customers”. The product or service must be something that most of its customers see as important, and the company must position itself in a unique position so as to meet those needs. Being placed in such privileged position the company will be rewarded and a premium is paid for its uniqueness for the product or service .However the company must try to keep similar costs levels as its competitors so that the cost of “uniqueness” does not exceed the premium that the customer is prepared to pay. Unlike cost leadership, several firms can follow successful differentiation strategies in the same industrial sector, if the need arises.

3. Focus on market niche – This strategy does not select the desired features of a

products or services within an industry but concentrates in a specific segment or group, within the whole of the targeted industry, that is, the company seeks to take advantage of a niche market. A company whose strategic advantage is based on having a focus strategy will select its niche and, once this is done it will draw its strategy to provide essentially for the needs of that particular client group and will try to do better than its competitors. The organisation looks for competitive advantage in its own segment, though it does not need an overall competitive advantage. To be successful the company must exploit the under-performance of its competitors in that niche based either on cost or on differentiation.

4. Strengthen customer and supplier intimacies: Information systems facilitate direct

access from suppliers to information within the company. Increase switching costs and loyalty to the company, such as, IBM, Amazon.com.

Customer and supplier intimacy strategy, use information systems so as, to improve their relationships and loyalty with customers and suppliers as they are both vital to organisations.

Improving customer and supplier intimacy is an effective strategy in itself. By making transactions and conditions easier and more user friendly for both customers and suppliers, this will increase the intimacy of the firm vis a vis the customer and supplier. This will offer great incentive to the customer and supplier so as to carry on with in business with the firm.

Customer intimacy is a marketing term, which describes the ability of a supplier to become accepted and known as the regular partner with its customer. http://dewiindrianaaaa.blogspot.co.uk/2010/11/strengthen-customer-and-supplier.html

In the integration of their operations, suppliers are not only being useful, but they reinforces the Customer and Supplier Intimacy, using information systems to create long-term relationship and create brand loyalty with customers and suppliers, including increasing switching costs.

Also, there is fierce competition due to similar strategies which also encourages new entrants in the industry. However, the companies gain opportunities for brand building and creating loyal customer base. For example, Thai Airways and Emirates increased customers’ switching costs and started the collection of airline miles to increase the size of its loyal customers.

Each strategy contains a different approach in creating and sustaining a competitive advantage. Therefore, each company has to make a choice about which strategy it will employ. However, a company would not normally be able to utilise differentiation and cost leadership strategies simultaneously. For example, it would be hard to be a cost leader while adopting a differentiation strategy as differentiation costs money. Though by only reducing costs may not adversely affect differentiation, a cost leader will eventually reach a stage when following a cost advantage will eventually result in sacrificing an aim.

For Porter, technology is one of the principal driving forces of competition as it plays a significant role in making structural changes to existing industries and also contributes to the creation of new industries. Technological change has had a positive impact on competition, creating new opportunities for competition and plays a vital role in the existing competitive strategy.

He further argues that Information Technology and Information Systems are essential as each task creates and uses information. He points out that modern information system technology plays a particularly crucial role, such as in scheduling, controlling, optimizing, measuring and co-ordinating different activities. He also noted that office or administrative technologies, which are often neglected or come under the term of information systems, also play an important role as:

Due to the advancement of technology, for many organisations there has been a significant changes in how the office functions, however not many are devoting substantial resources to it. ( Porter, 1985,)

A vast amount of Research has been carried out to find out whether money invested by organisations in Information Technology, has helped organisations in achieving their objectives and goals. This type of research is referred to as “aligning IT with the corporate objectives”.

Chan & Huff (1983) argue that organisations achieve IT alignment with their corporate objectives through 3 levels of alignment, (1) Awareness (2) Integration and (3) alignment.

In a latter study Chan (2001) describes the 3 levels of alignment as “strategic alignment viewed as the degree of congruence between Information systems and strategic orientation or strategy”.

Strategic alignment has two major principles. Firstly, IT strategy should concentrate on external competitiveness instead of internal operations. Secondly, IT influences competitive advantages as it changes the direction or strength of one or more of the forces within Porter’s model. New technologies and their use change the competitive dynamics of industries which changes the buyers’ power, suppliers, new entrants, substitute products and existing rivals (Sasidharan et. al., 2006).

IT must be aligned in line with the organisation’s corporate objectives. Most organisations rely heavily on IT to operate their business. Organisations must use IT to achieve their corporate objectives and especially to build, sustain, and extend competitive advantage [Boar 1994].

One of the main criticisms of the Five Forces Model is that it is rather static. Given that it describes the current state of an industry, therefore it would appear unsuitable for our dynamic, in an ever changing and uncertain world.

Some economists argue that government is the sixth force in Porter’s model. The strength of each of those forces serves a separate purpose within the industry structure, which is defined by Porter as “the underlying economic and technical characteristics of an industry.”

The information revolution has had an impact on management’s view regarding the role of Information Systems in businesses. In the past it was considered to be only a part of the operating of a business, whereas, now information is highly valued. Information is also seen as a depreciating asset which is to be considered as a resource that the organization could or should use in its business. ( Robson, 1997)

Worldwide the concept of doing businesses has undergone major changes, brought about by the use of Internet , for example ,businesses can now attract a significant percentage of potential buyers nationally and globally through social networks websites like Facebook. . By creating a digital market the Internet has linked buyers and sellers (Laudon & Laudon, 2005).