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Information Systems as a Startegic Advantage: Competitive Forces Model

Michael Porter developed a model that helps managers isolate particular forces that are potential threats and thus affect how much profits organizations competing in the same industry can expect to make:

The level of rivalry among organizations in an industry: Competition among rival firms drives profits to zero and it takes many familiar forms, including price discounting, new product introductions, advertising campaigns, and service improvements.

High rivalry limits the profitability of an industry and therefore, firms strive for a competitive advantage over their rivals in different ways. Successful organizations have established new business alliances with customers and suppliers, and use of intranets, extranets, and the internet to build a global electronic commerce website to offer their customers worldwide products.

E-commerce website, use of video conferencing and email services are employed in sharing information and capturing data about sales orders and purchases.

These features of information system facilitate an efficient processing of sales orders and purchases enabling a real time updating of inventory and other data bases.

To improve efficiency of E-commerce operations and gain a competitive edge firm can invest invest in upgrading its computer based system to increase their efficiency. 

The potential for entry into an industry: It is not only incumbent rivals that pose a threat to firms in an industry; the possibility that new firms may enter the industry also affects competition.

Industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market. Increased investment in information technology and upgrading of computer based system raises the start-up costs which deters rivals from entering the market. This is so due to expensive start-up costs that may be involved.

The upgraded systems and new relationships established through use of E-commerce website, use of video conferencing and email services makes suppliers and customers’ dependent on the firm, a strategy to prevent potential entrants from entering the market.

The power of Suppliers: A producing industry requires raw materials - labor, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products.

Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits.

Successful organizations invest in the use of internet through E-commerce website, use of video conferencing and email services to connect with its suppliers and share information and capture data about sales orders and purchases.

These facilities an efficient processing of order data and enabling real time updating of inventory and other data bases. These strategies are utilized to lock in their suppliers.

The power of customers: The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, under such market conditions, the buyer sets the price.

To weaken the power of the customers, firm can adopt forward integration by taking over own distribution channels. Use of internet (E-commerce website), video conferencing and email services can be applied to advance this strategy by offering their customers with worldwide products and locking them in this new relationship.

At firm’s custody is a strategic information base about their customer which can be utilized to fragment the buyers leaving them with no particular influence on product or price.

The threat of substitute products: In Porter's model, substitute products refer to related products in other industries and their respective price changes, the new technologies available and the changing product structure.

A close substitute product constrains the ability of firms in an industry to raise prices. In essence, the competition engendered by a threat of substitute comes from products outside the industry.

To counter these threats, firm can increase its investment in information technology by upgrading its computer based system which make its customers dependent on their worldwide, innovative and high quality products making them reluctant to spend the efforts in time, money, inconvenience, etc to switch systems to a competitors. 

But it's widely known that even Michael Porter couldn't salvage his company using this model!

Last modified on Sunday, 03 January 2016 20:07
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