Lecture 4(Using Information Technology for Competitive Advantage)
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Lecture 4(Using Information Technology for Competitive Advantage)

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Porter’s five forces model

Porter’s five forces model
Value chain
EDI
Data warehousing
Data mining
Intelligent agents
Value added networks

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Lecture 4(Using Information Technology for Competitive Advantage) Lecture 4(Using Information Technology for Competitive Advantage) Document Transcript

  • 1 1 Using Information Technology for Competitive Advantage Lecture 4 Abdisalam Issa-Salwe Business Information Systems MSc Finance and Legal Management Thames Valley University Abdisalam Issa-Salwe, Thames Valley University 2 Topic list  Porter’s five forces model  Value chain  EDI  Data warehousing  Data mining  Intelligent agents  Value added networks
  • 2 Abdisalam Issa-Salwe, Thames Valley University 3 Abdisalam Issa-Salwe, Thames Valley University 4 Porter’s five forces model  All organisations operate in one or more industries. By the nature of their participation in an industry, they are affected by existing or potential uses of information technology
  • 3 Abdisalam Issa-Salwe, Thames Valley University 5 Porter’s five forces model  Professor Michael Porter of Harvard University maintained that in every industry, competition depends on the collective strength of five basic forces  Interacting with these forces are the generic corporate strategies (see below).  IT can be a powerful agent to change the balance of power in and between these forces. Abdisalam Issa-Salwe, Thames Valley University 6 Porter’s five forces model (cont…)  New entrants can increase overall capacity in the industry, thereby reducing prices and incumbents' cost advantages.  IT can help create or raise barriers to entry by increasing mandatory investments in hardware and software, facilitating control over databases, or locking in customers to existing distribution channels.  There are many types of barriers to entry: switching costs, economies of scale, high investment in IT, economies of experience, access to distribution channels, and government policy
  • 4 Abdisalam Issa-Salwe, Thames Valley University 7 Porter’s five forces model (cont…)  Intensity of industry rivalry depends on factors beyond the control of the individual firm,  such as degree of concentration, diversity, or dependency; rate of industry growth; or switching costs.  It is critical to understand the strategies of one's rivals in detail.  For instance, Ford's strategy depends on the strategies of Toyota, Nissan, GM, and Volkswagen, and vice versa. Abdisalam Issa-Salwe, Thames Valley University 8 Porter’s five forces model (cont…)  Threat of substitute products may arise from products and services in other industries.  Examples:  * the products of stock brokers and insurance companies now compete against banks for the investment dollar.  * the automobile eliminated the horse with buggy, and the silicon chip eliminated electromechanical adding machines. The life cycle of products can be reduced through the use of IT, such as Computer-Aided Design (CAD). IT has also provided the basis for creating new information- intensive products.
  • 5 Abdisalam Issa-Salwe, Thames Valley University 9 Porter’s five forces model (cont…)  Bargaining power of buyers  Buyers drives prices down and the quality of products up.  Buyer power depends on the level of switching costs, the competitive position of the buyer in the industry (size, volume), whether the buyer can purchase a commodity product, or whether the buyer poses a serious threat of backward integration (i.e., buying out or merging with its suppliers).  Installing computer terminals at the buyers' site is one way to raise the buyers' cost of switching to other suppliers. Abdisalam Issa-Salwe, Thames Valley University 10 Porter’s five forces model (cont…)  Bargaining power of suppliers  It is in some ways the antithesis of buyer power.  The threat of forward integration (i.e., buying out or merging with its customers) is one determinant of supplier power.  Influential suppliers drive prices up and reduce the quality and quantity of products and services.  Supplier power also depends on size, volume, and concentration relative to other firms in the industry.
  • 6 Abdisalam Issa-Salwe, Thames Valley University 11 Abdisalam Issa-Salwe, Thames Valley University 12
  • 7 Abdisalam Issa-Salwe, Thames Valley University 13 Abdisalam Issa-Salwe, Thames Valley University 14 Value Chain Analysis  The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities
  • 8 Abdisalam Issa-Salwe, Thames Valley University 15 Value Chain Analysis (cont…)  The value chain begins with the data resource.  Information is developed from the data resource to support the knowledge environment of an intelligent learning organisation.  Data is the raw material for information which is the raw material for the knowledge environment.  Knowledge is the raw material for business intelligence that supports business strategies. Abdisalam Issa-Salwe, Thames Valley University 16 Value Chain Analysis (cont…)  Data is the individual raw facts that are out of context, have no meaning and are difficult to understand. Facts are numbers, characters, character strings, text, images, voice, video and any other form in which a fact may be presented. Data in context is facts that have meaning and can be readily understood. It is the raw facts in context with meaning and understanding, but is not yet information because it has no relevance or time frame.
  • 9 Abdisalam Issa-Salwe, Thames Valley University 17 Electronic Data Interchange (EDI)  EDI was first developed by the automobile/transportation industry in the 1970s.  Today, it is widely used in a variety of industries, including distribution, finance and accounting, health care, manufacturing, purchasing, retail, tax form filing, and shipping.  Early EDI packages used rather simple standard forms that forced companies to convert data to fit the forms.  Newer EDI systems allow companies to create custom systems using simple programming or authoring tools. Abdisalam Issa-Salwe, Thames Valley University 18 Electronic Data Interchange (EDI) (cont…)  Electronic Data Interchange is the electronic exchange of routine business transactions.  Typical transactions include such documents as purchase orders, invoices, advance shipping notification, payments, etc.  Exchange of electronic data using inter-organisational information systems  Set of hardware, software, and standards that accommodate the EDI process  EDI defines the electronic exchange of structured business data, such as purchase orders, invoices, and shipping notices, typically between one organisation and another.  The relationship is usually between a vendor and customer.
  • 10 Abdisalam Issa-Salwe, Thames Valley University 19 Electronic Data Interchange (EDI) (cont…)  It is important to differentiate between EDI and electronic commerce.  Electronic commerce encompasses all aspects of electronic business exchanges, including person-to- person interaction (collaboration), money transfers, data sharing and exchange, Web site merchant systems, and so on.  EDI as a subset of electronic commerce that encompasses the exchange of business information in a standardised electronic form. Abdisalam Issa-Salwe, Thames Valley University 20 Electronic Data Interchange (EDI) (cont…)  EDI can reduce costs, workforce requirements, and errors associated with retyping orders, invoices, and other documents.  With EDI, computer data already entered by one organisation is made available to a business partner.  EDI is typically handled using store- and-forward technologies similar to e-mail.
  • 11 Abdisalam Issa-Salwe, Thames Valley University 21 Electronic Data Interchange (EDI) (cont…)  Two approaches in the implementation of EDI.  Many large organisations acquire or build their own proprietary systems, often in association with their business partners.  To work with a VAN (value added network) provider, which provides EDI transaction services, security, document interchange assistance, standard message formats, communication protocols, and communication parameters for EDI. Most VANs also provide a network on which to transmit information. Abdisalam Issa-Salwe, Thames Valley University 22
  • 12 Abdisalam Issa-Salwe, Thames Valley University 23 Value Added Network (VAN)  A (VAN) Value Added Network is a third party who stores the data to be communicated. It serves as a middle person, so neither party can access the other’s private network. The main key to a VAN is that the other partner does not touch your network, as business partners initiate the sending or retrieving of the data from the VAN. Abdisalam Issa-Salwe, Thames Valley University 24 Value Added Network (VAN) (cont…)  With the data being sent to or received from the VAN by the business partners initiating the communication, business partners are insuring a safe method of data transportation.  The different ways of communicating to the VAN include dialup as well as FTP protocols.
  • 13 Abdisalam Issa-Salwe, Thames Valley University 25 Business Intelligent  Business intelligence represent a popular trend in many public and private sector organisations.  Ideally, any manager or knowledge worker should be able to compose information requests without programmer assistance and achieve answers at the speed of thought.  Follow-up questions should be immediately asked and answered in order to maintain continuity of thought on a particular topic of importance. Abdisalam Issa-Salwe, Thames Valley University 26
  • 14 Abdisalam Issa-Salwe, Thames Valley University 27 Data warehouse, data marts  Data warehouses are computer based information systems that are home for "secondhand" data that originated from either another application or from an external system or source.  Warehouses optimize database query and reporting tools because of their ability to analyse data, often from disparate databases and in interesting ways.  They are a way for managers and decision makers to extract information quickly and easily in order to answer questions about their business.  In other words, data warehouses are read-only, integrated databases designed to answer comparative and "what if" questions. Abdisalam Issa-Salwe, Thames Valley University 28 Data warehouse, data marts (cont…)  Data Marts:  Data in a data warehouse should be reasonably current, but not necessarily up to the minute, although developments in the data warehouse industry have made frequent and incremental data dumps more feasible.  Data marts are smaller than data warehouses and generally contain information from a single department of a business or organisation. The current trend in data warehousing is to develop a data warehouse with several smaller related data marts for specific kinds of queries and reports.
  • 15 Abdisalam Issa-Salwe, Thames Valley University 29 A Data Warehouse Architecture Abdisalam Issa-Salwe, Thames Valley University 30 Data mining  Data mining is primarily used today by companies with a strong consumer focus - retail, financial, communication, and marketing organisations.  It enables these companies to determine relationships among "internal" factors such as price, product positioning, or staff skills, and "external" factors such as economic indicators, competition, and customer demographics.
  • 16 Abdisalam Issa-Salwe, Thames Valley University 31 Data mining  Data mining, or knowledge discovery, is the computer-assisted process of digging through and analysing enormous sets of data and then extracting the meaning of the data.  Data mining tools predict behaviors and future trends, allowing businesses to make proactive, knowledge-driven decisions.  Data mining tools can answer business questions that traditionally were too time consuming to resolve.  They scour databases for hidden patterns, finding predictive information that experts may miss because it lies outside their expectations. Abdisalam Issa-Salwe, Thames Valley University 32 Data mining (cont…)  With data mining, a retailer could use point-of-sale records of customer purchases to send targeted promotions based on an individual's purchase history.  By mining demographic data from comment or warranty cards, the retailer could develop products and promotions to appeal to specific customer segments
  • 17 Abdisalam Issa-Salwe, Thames Valley University 33 Data mining (cont…)  Data mining consists of five major elements:  Extract, transform, and load transaction data onto the data warehouse system.  Store and manage the data in a multidimensional database system.  Provide data access to business analysts and information technology professionals.  Analyse the data by application software.  Present the data in a useful format, such as a graph or table. Abdisalam Issa-Salwe, Thames Valley University 34
  • 18 Abdisalam Issa-Salwe, Thames Valley University 35 Tutorial Question Michael Porter described a concept that has become known as the "five forces model". This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed. Could you critical discus Porter’s five force model?