Lecture 3
Digital Business
Strategy
Chapter 3
Career : Reminder
Source : Microsoft
Business wisdom
Customers Don’t care about
technology.
They will care, If business solve
their problems and satisfy their
need.
Case Study- Class Activity
• How Service industries creates value in
Industry 4.0
• The 9 Most Successful Business Models Of
Today
• [Link]
v=DL6myRFdC_g
Learning Objectives
Demonstrate how Porter’s
competitive forces model
helps companies develop
competitive strategies
using digital information
systems.
My Teaching Philosophy
Teamwork &
Preferential attachment
Make friends in class, find like-minded friends and keep in touch with them.
1. Threat of entry of new competitors: Industries that have large profit margins attract entrants into the market to a
greater degree than industries with small margins. The same principle applies to jobs—people are attracted to
higher-paying jobs, provided that they can meet the criteria or acquire the skills for that job. In order to gain
market share, entrants usually need to sell at lower prices as an incentive. Their tactics can force companies
already in the industry to defend their market share by lowering prices—reducing profit margin. Thus, this threat
puts downward pressure on profit margins by driving down prices. This force also refers to the strength of the
barriers to entry into an industry, which is how easy it is to enter an industry. The threat of entry is lower (less
powerful) when existing companies have ITs that are difficult to duplicate or very expensive. Those ITs create
barriers to entry that reduce the threat of entry.
2. Bargaining power of suppliers: Bargaining power is high where the supplier or brand is powerful, such as Apple,
Microsoft, and auto manufacturers. Power is determined by how much a company purchases from a supplier. The
more powerful company has the leverage to demand better prices or terms, which increase its profit margin.
Conversely, suppliers with very little bargaining power tend to have small profit margins.
3. Bargaining power of customers or buyers :This force is the reverse of the bargaining power of suppliers. Examples
are Walmart and government agencies. This force is high when there are few large customers or buyers in a
market.
4. Threat of substituting products or services: Where there is product-for-product substitution, such as Kindle for
Nook, there is downward pressure on prices. As the threat of substitutes increases, the profit margin decreases
because sellers need to keep prices
competitively low.
5. Competitive rivalry among existing firms in the industry: Fierce competition involves expensive advertising and
promotions, intense investments in R&D, or other efforts that cut into profit margins. This force is most likely to be
high when entry barriers are low, the threat of substitute products is high, and suppliers and buyers in the market
attempt to control it. That is why this force is placed in the center of the model.
Using IS to Achieve Competitive Advantage
Why do some firms become
leaders within their
industry?
Barrier of
New Entry In
the Market.
Is it Good ?
What kind of barriers of
this business (Roadside tea
shop) has ?
Threat of New Entrants
What is an industry that has a high entry barrier?
• Energy – the organization has to have the infrastructure to support energy
• Telecommunications – the organization has to invest in a
telecommunications infrastructure prior to offering services
• Banking – the bank must offer its customers an array of IT-enabled
services including ATMs and online account services
What is an industry that has a low entry barrier?
• Restaurants – simply lease a space, obtain a license, and you can sell food
• Catering – simply offer food and deliver
• Movie rental – simply buy the movies, pay the licensing fee, and offer the
movies for rental (although if you want to be like Netflix the entry barrier
is high because you have to have the facilities and systems to mimic their
movie supply chain)
Customers are powerful when they have
more options.
Savvy customers can force down price by
playing between two rivals
In off-season
Powerful
supplier may
constrain profit
if they Charge
higher price
WHY Porter's Five
Forces Model ?
Porter's Five Forces is a framework for
analyzing a company’s
competitive environment.
The number and power of a company’s
competitive rivals,
potential new market entrants,
suppliers,
customers,
and substitute products
influence a company's profitability.
Porter’s five forces with explanation
(Please remember this, because I won’t provide them with
the question)
• Profitable industries that yield high returns will attract new firms. New
entrants eventually will decrease profitability for other firms in the industry.
• A substitute product uses a different technology to try to solve the same
economic need.
• The bargaining power of customers is also described as the market of
outputs: the ability of customers to put the firm under pressure, which also
affects the customer’s sensitivity to price changes.
• The bargaining power of suppliers is also described as the market of inputs.
Suppliers of raw materials, components, labor, and services (such as
expertise) to the firm can be a source of power over the firm when there are
few substitutes.
• For most industries the intensity of competitive rivalry is the major
determinant of the competitiveness of the industry.
How to Analyze Any Industry-c
BARGAINING POWER
A company which can keep costs lower can have a
great advantage over competitors who have higher
costs and therefore the prices of their products and
services will be higher. Example : Iphone.
economy of
scale
a proportionate saving in costs gained
by an increased level of production.
Example : "mergers may lead
to economies of scale"
Performance of substitutes
• Relative price performance of
substitutes is the price of
substitutes for your output
compared to the price you are
charging.
• If the price of substitutes is
lower, the competitive threat
increases as the price
differential increases.
Supplier Power
How an organization can be both a
supplier and a buyer in a supply
chain?
• Example: Dell computers is both a buyer and
supplier in the supply chain.
• Dell is a buyer (customer) of parts, and a
supplier to its customers who buy computers
Threat of Substitute
Products or Services
High when there are many
alternatives to a product or service
and low when there are few
alternatives
• Low for pharmaceutical companies
• High for airline transportations
• Virtual meeting and videoconferencing has
decreased the need for in-person meetings
2-23
Aspiring entrants armed with new capacity and hungry for market share
can ratchet up the investment.
Position your Company where Forces are weakest
An Example: Analyzing the Airline Industry [H]
Perform a Porter’s Five Forces analysis
of each of the following for a company
entering the commercial airline
industry
• Buyer power ( high or low?)
• Supplier power ( high or low?)
• Threat of substitute products/services ( high or
low?)
• Threat of new entrants ( high or low?)
• Rivalry among competitors ( high or low?)
2-26
Using IS to Achieve Competitive
Four generic Advantage
strategies for
dealing with competitive
forces, enabled by using IT
• Low-cost leadership
• Product differentiation
• Focus on market niche
• Strengthen customer and supplier intimacy
Important for THE FIVE FORCES
MODEL explanation
Using IS to Achieve Competitive
Low-cost Advantage
leadership
• produce products and services at a lower
price than competitors while enhancing
quality and level of service
• Examples: Asda, Easyjet
Product differentiation
• Enable new products or services, greatly
change customer convenience and
experience
• Examples: Google, Apple iPhone
Important for THE FIVE FORCES
MODEL explanation
Low-cost leadership firms produces its product with less raw material
waste than its competitors.
Focus
Using IS to Achieve on market Advantage
Competitive niche
• Use information systems to enable a
focused strategy on a single market niche;
specialize
• Example: Hilton Hotels
Strengthen customer and
supplier intimacy
• Use information systems to develop strong
ties and loyalty with customers and
suppliers; increase switching costs
• Example: Tesco, Amazon, Alibaba, DHL,
Important for THE FIVE FORCES
MODEL explanation
Using IS to Achieve Competitive
The Internet’s Advantage
impact on
competitive advantage
• Transformation, destruction, threat to some
industries
E.g. travel agency, printed encyclopedia,
newspaper
• Competitive forces still at work, but rivalry
more intense
• Universal standards allow new rivals, entrants
to market
• New opportunities for building brands and loyal
customer bases
• Interactive Website
Important for THE FIVE FORCES
MODEL explanation
1. Messie goes into a Computer Store to buy a 2TB Portable Hard Drive, only to
find that they are out of all types of “Portable Hard Drive” , but have 1TB USB
Flash Drive, which he buys instead. This would be an example of which of the
five forces?
A. Bargaining power of customers C. Threat of new entrants
B. Bargaining power of suppliers D. Threat of substitution
2. Maradona is in the computer repair businesses. Maradona and Ronaldo, two
recent university graduates are unemployed, but are thinking of doing computer
repairs at their homes. This is an example of which of the five forces?
A. Bargaining power of customers C. Threat of new entrants
B. Bargaining power of suppliers D. Threat of substitution
In the context of Porter's five forces model, the
bargaining power of customers of medicinal
drugs is _________ when pharmaceutical
companies patent their products.
• Increased
• Decreased
3. The intensity of each of the five forces in “Porter’s five forces
model” determines:
A. The bargaining power of the C. How high the barrier to entry
Supplier. will be.
B. How long the company will be D. How satisfied customer I
in business. E. How profitable the industry
is.
4. “Amazon Prime” uses a ________ strategy to provide a
specialized product or service for a narrow target market
better than competitors.
A. Process efficiency C. Market niche
B. Low-cost leadership A. Mass customization
1. According to Porter's five forces model, in which of the
following situations would the suppliers have the highest
bargaining power?
A. a single vendor providing A. a bank liquidating during a
raw materials to many fire sale
department stores B. a large retailer buying
B. a fashion outlet catering goods from many small
to a niche market suppliers
2. According to Porter's five forces model, which of the
following firms would be least affected by the threat of
substitutes?
A. A used car dealership in C. A firm that sells the only
New York drug for a disease
B. A convenience store that A. Corner latte shops in
sells retail products Atlanta
1. According to Michael Porter, supplier power is one of the
forces of five forces to determine industry attractiveness.
Which of the following is needed to decide supplier power
A. Time and cost of entry A. Number of competitors
B. Number of buyers B. Number of suppliers to
choose from
Learning Objectives
Explain how the value chain and value
web models help businesses identify
opportunities for digital business
strategies
Illustrate how digital information systems
help businesses achieve competitive
advantage.
Example of Bad Value Chain
for the Livestock or Dairy
Farmer Provides poor quality
food and unhealthy cattle shed Result
Livestock get sick and
(Doesn’t spend money) remain unhealthy
Step 1 Step 2
Customers Traders don’t
are not offer Good
happy with price for the
the product
Step
cattle
3
Step
6 (sick)
Step
5
Cruel Merchants
provide Poor Farmers are
transports that forced to sell
make livestock sick
and forced to sell below their Step
below their asking asking price 4
price.
VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES
2-44
Value chain for Walmart Example:
[Link]
Class Performance, Quiz- 2 and Case 2
Presentation.
A collection of independent
firms that use information
technology to coordinate
their value chains to
produce a product or service
for a market collectively is
called value web
model
Value web model for beverage company
To achieve competitive advantages
Synergies
synergies.
• If two organizations pool markets and expertise that
result in lower costs and generate profits it is often
referred to as creating synergies.
• Example : JP Morgan Chase's mergers with other
banks that provided JP Morgan with a network of
retail branches in new regions.
