Strategic Information Systems and Porter’s Competitive Forces Model

Caterpillar Fends Off Competition The Problem Caterpillar is a world leader in manufacturing heavy machinery. In 1992, it confronted a difficult situation, That is, Komatsu in Japan, as a major competitor, was offering bulldozers at price 40% lower than Cat’s. Cat(erpillar) was then forced to cut prices. Even so, the situation was still worse, i.e., a poor economy and a lenghthy labor strike worsened the situation.

Caterpillar Fends Off Competition The Problem (continue…) Cat decided to close many plants, laid off workers, and slashed expenses. But even so, that didn’t help because its market share still declined and losses increased. The IT Solution Management decided to bring in an IT to use with the company.

Caterpillar Fends Off Competition The IT Solution (continue…) The IT that was brought in includes: Computer-integrated manufacturing (CIM), in which case, machinery parts are integrated (assembled) by computers. Robots, Computer-aided design (CAD), Computer-aided manufacturing (CAM).

Caterpillar Fends Off Competition What Cat’s IT Provides superb dealer services, quick shipments, on-time deliveries, an effective parts replacement program.

Caterpillar Fends Off Competition The Results This IT solution resulted in: the inventory reductions of 60%. the elimination of nonessential labor. the simplification of production processes. the closing-down of costly plants/warehouses. By 1993, Cat had become stronger than its competitors.

Caterpillar Fends Off Competition The Results …. Cat had more than 30% of the US construction equipment market share. Cat was a winner of Information Week’s 1998, “Excellence in IS” award.

Caterpillar Fends Off Competition What happened to Kamatsu? Komatsu shifted away from the bulldozer market to avoid the head-to-head competition with Cat.

Strategic Information Systems (SISs) are a system that leads a business unit (an organisation/company) to competitive advantage (ข้อได้เปรียบเชิงแข่งขัน). which simply means you are in a better position than others.

Strategic Information Systems (SISs) Why so? Because SISs typically contribute to the strategic goals of an organisation. E.g., Increase the revenue by 5%, Cut labor. SISs can also increase performance and productivity significantly.

An Example of an SIS The IS that Cat built is an SIS because it provides: superb dealer services, quick shipments, on-time deliveries, and an effective parts replacement program All these issues are related to goals, performance and productivity increase.

Strategic Management Strategic management Management that can help an organisation to achieve strategic goals. Elements of strategic management: Long-term planning, Response management (การบริหารเชิงโต้ตอบ), and Innovation

Strategic Management Long-term (long-range) planning An organisation must create a long-term strategic plan (e.g., 3-5 years) from which all necessary activities that support strategic goals will be carried out. Response Management This is the use of any crucial response to repel (fend off) business pressures. e.g., Cat’s IT use to cope with business pressures.

Strategic Management Innovation An organisation introduces something new to the industry. Cat employed strategic management to kick its competitors away, including Komatsu, in which case, management implemented by CAT helped to improve the bad situation that CAT confronted at the time.

Porter’s Competitive Forces Model Porter proposed a competitive forces model in 1985. The model can be used to analyse your business competitiveness. The model has been used to develop competitive strategies for companies to increase their competitiveness. The model points to 5 major forces that could endanger your company’s position in an industry.

Porter’s Model Characteristics Is an industry-related model that shows the position (competitiveness) of your company in its industry, e.g., Chip Manufacturing Industry Intel, Motorolla Can help suggest specific IT/non-IT actions to take. But in many cases, such actions introduced involve the use of IT.

5 Major Forces 1. The threat of entry of new competitors. 2. The bargaining power of suppliers. 3. The bargaining power of customers (buyers). 4. The threat of substitute products/services. 5. The rivalry (competition) among existing firms in the industry. Note that all these forces are still valid nowadays and result in business pressures.

How are You going to Respond with the Forces? The 5 forces have an impact on your business in one way or another. You must have response strategies (response management) to cope with the forces.

How are You going to Respond with the Forces? Porter suggests how to develop a response strategy which is aimed at establishing sustainable advantage against the 5 forces. To develop such a strategy, Porter proposed the following: Cost leadership, Differentiation, Small focus, Additional strategies.

How are You going to Respond with the Forces? Cost leadership Produce products/services at the lowest cost. Differentiation Be unique/different from your competitors. But must still provide high-quality products/services at a competitive price. Small Focus Select a narrow-scope small market and apply either: cost leadership or differentiation or both.

An Example of Small Focus Several chip manufacturers build customised chips for specific industries. Small market => specific industries who want your customised chips. Differentiation => your customised chips. Frequent flyer programs Small market => just frequent travellers. Cost leadership => cheaper airfares.

How are You going to Respond with the Forces? Other strategies Introduce any other strategies that can remain (sustain) your competitive advantage, such as: Any strategy to improve the efficiency of your business operations, Any strategy to improve customer service, etc.

Factors Related to Each Force Such factors are determinants which impact the 5 forces (See the figure in the next page). Determinants for Suppliers E.g., changing operational costs of suppliers and other firms in the industry, Presence of substitute inputs, Supplier concentration.

Factors Related to Each Force Determinants for Substitutes E.g., Relative prices of substitutes, Changing costs of substitutes, Buyer preference. Determinants for Buyers Volume purchases, Buyer concentration, Brand identity. (the distinguishing/unique character of the brand)

Factors Related to Each Force Determinants for Rivalry E.g., Brand identity, Changing costs, Industry growth.

How the Model is Applied Apply the following 4 steps below to analyse your company position and seek ways to defend your company from business pressures. Let us look at a market industry that sells all kinds of products to customers, like Walmart (in US), like Carrefour.

How the Model is Applied Step 1: List all the players for each (5) force (see the figure in the next page). Describe all the players in each block. Step 2: Perform an analysis to relate the pertinent determinants and others that you can think of to each player listed in step 1.

How the Model is Applied <<Example of a substitute>> To electronic shopping (as a substitute for Walmart), you can relate: Product prices by e-shopping competitors, Buyer preference What makes them purchase via e-shopping?

How the Model is Applied Step 3: Devise a competitive/response strategy for Walmart to defend itself against the 5 forces (business pressures) based on: the specific players in step 1 and the determinants in step 2.

Response Strategies <<Example of how to counter electronic shopping>> Buyer preference: A questionaire to find out what makes customers purchase via e-shopping. Product prices: Monitoring e-shopping pricing. Additional other strategies: Imitate the e-shopping by introducing online Walmart, Value (recognise) frequent shoppers particularly, Provide a playground for children, Hand out free samples of products.

How the Model is Applied Step 4: Look for supporting ITs. <<Example of managing frequent shoppers>> Introduce a monitoring information system. Introduce Walmart online e-shopping. Introduce an online processing system with: a good DBMS and good analytical capability to assess the frequent shoppers’ activities.