Ch 2 - IS & Strategy

Question 0

The ‘threat of new entrants’ is very high to a business when:

Answer 0

1. Start-up costs are low
   (can open up shop with little money, few employees, and no experience)
2. Newcomers can easily enter

Question 1

What are the 5 competitive forces?

That influence industry competition

Answer 1

1. Threat of new entrants
2. Power of buyers
3. Power of suppliers
4. Threat of substitutes
5. Rivalry among existing competitors

Question 2

The ‘threat of new entrants’ can come from an already established company in other industries

Give an example:

Answer 2

Ex:
When Apple launched iTunes.

(CD / DVD companies did not think of Apple as a rival since it just manufactured computers and consumer electronics)

Question 3

The increased value of a product or service that results simply becuse there are more people using it

Answer 3

Network effects

Ex:

• Facebook
• Cell phone carriers (Offering free calling / texting to any phone on their network)

Question 4

Costs that customers incur when they change suppliers

Answer 4

Switching costs

Question 5

Why are switching costs high for information systems bought by an organization?

Answer 5

To switch, organizations would have to:

1. Pay new license fees
2. Change their business processes
3. Migrate their data
4. Train employees on the new system

//This is why companies that use software like Oracle or SAP don’t switch

//This is also why Application Software is highly profitable

Question 6

The ‘power of buyers’ rises when they have leverage over suppliers and can demand deep discounts and special services

-it rises when many suppliers offer similar products and the buyer can switch easily

Examples:

Answer 6

Ex:
-Airline tickets
//Buyers can search for the best price
//which holds down airline profitability

• Buyers can search for anything on the Internet and pay cheapest price possible
• They can rate the transaction / leave reviews

Question 7

The ‘power of suppliers’ rises when there is a lack of competition and they can charge more for products and services

-high switching costs add to supplier power

Example of ‘power of suppliers’:

Answer 7

Ex:
Microsoft
• given the dominance of its Windows OS, pc assemblers around the world risk losing customers if they don’t install it

Walmart
• they can always find a cheaper, alternative
supplier

• the current suppliers have information systems that link their inventories to the company’s supply chain

Question 8

The ‘threat of substitutes’ is posed to a company when buyers can choose alternatives that provide the same item or service (and save money)

Example:

Answer 8

Ex:
• High-quality videoconferencing is a substitute to face-to-face meetings
(can greatly reduce the travel budget)

-Cisco (a computer networking company) is taking the airline market

• Online newspapers took the market from print newspapers

Question 9

How does information technology play a key role in ‘threat of substitutes’

Example:

Answer 9

• Online learning modules that replace face-to-face training classes
• Internet video that threatens cable TV companies

Question 10

‘Rivalry among existing competitors’ is the intensity of competition within an industry

Why is this bad for the industry?

Answer 10

Intense rivalry can [reduce profitability] by:

• price cutting
• other competitive pressures
• Slow growth can cause intensive rivalry, since any competitive strategy from one company will steal market shares from another
• If a company can’t or won’t close and leave the industry, rivalry remains high

Question 11

Disruptive innovations (disruptive technologies) are a new product or service that has the potential to reshape the industry.

Example:

Answer 11

Ex:
Digital camera
•Kodak, Casio, Olympus (1990s)

-wiped out the film industry
(along with all products and services surrounding them)

the Internet itself
•changed aspects of the 5 forces by:

1. Reducing entry barriers for newcomers
2. Empowering buyers with far more
   information about prices / competitors
3. Virtually eliminating switching costs for many products
4. Facilitating a vast global marketplace in which competitors can come from anywhere in the world
   (Online shops now compete with your neighborhood store)

Question 12

What happens in an industry when disruptive innovations threaten the established players

Answer 12

Creative destruction

Question 13

The “poster child of creative destruction”

Answer 13

The music industry

•the record labels once dominated this industry
Controlling pricing, distribution, & marketing

Question 14

Factors that affect how the 5 forces operate:

Answer 14

1. Disruptive technology and innovations
2. Government policies and actions
3. Complementary services and products
   (in the ecosystem)
4. Environmental events and “wildcards”

Question 15

Government policies (and funding priorities) can have dramatic effects on how industries operate and evolve.

Examples

Answer 15

Ex:
•Patents
-reduce threat of new entrants

•Low-cost loans to small businesses
-increase the threat of new entrants

•the “Internet Radio Fairness Act”

-Pandora lobbied Congress to pass
-would reduce the 11 cents it pays in royalties for every song played
-“fairness” comes from competitors revenue paid to royalties:
Sirius XM pays 8% / Pandora pays 55%

Question 16

Complementary Services and Products

•Ecosystem

Many industries are interrelated and events in one can influence the others.

Example:

Answer 16

Ex:
•Desktop publishing software
-made computer and color printer much more useful to small businesses that save money by developing menus, signs, & brochures at home

-companies offering speciality paper also benefited

Question 17

Companies are embedded in a complex ecosystem.

What is an ecosystem?

Answer 17

An economic community that includes the:
1. related industries 
(making complementary products and services)
2. competitors themselves 
3. suppliers 
4. consumers 

(Events in one area ripple through the whole community, affecting all players and 5 forces for the industries involved)

Question 18

Bill gates imagined moving computing away from mainframes and onto the desktop.

-they needed a standard OS so that software developers, peripheral manufacturers, and everyone else could build upon it and enrich the [ecosystem] with complementary products and services

What did they do?

Answer 18

Microsoft OS began its ascent
•90% market share

•Other companies that created applications to run on the OS succeeded as well

Question 19

Complementary Services and Products

How does Salesforce.com lead a whole ecosystem in new directions?

Answer 19

Cloud computing
(An organization’s information systems are not installed on servers in its own data center)

-employees use the Internet to connect to their systems instead

•cloud computing is gaining moments as a disruptive technology that overtakes local data centers, including the desktop PC

Question 20

Environmental Events and “Wildcards”

Hurricanes, snowstorms, pandemics, earthquakes, strikes, and civil unrest can happen without much warning and have major effects on entire industries.

Example:

Answer 20

Ex:
•Hurricane Sandy

• caused major losses for businesses that had to shut down (restaurants, retailers, cable providers)
• some industries benefited once rebuilding began (construction)

Question 21

Environmental Events and “Wildcards”

Rising energy costs, conservation initiatives, and concerns over carbon emissions may also trigger waves of change

Example:

Answer 21

Ex:
•Supply chains that stress just-in-time deliveries may struggle to pay for the extra gas that kind of service requires

•E-commerce companies that rely on many small shipments trucked to people’s homes may have to raise their shipping fees
(losing competitive advantage)

Question 22

The activities a company performs to create value, as it brings in raw resources from suppliers, transforms them in some way, and then markets the products or service to buyers

Answer 22

Value chain model

Question 23

The ‘primary activities’ are activities directly related to the value chain process by which products and services are created, marketed, sold, delivered

What are the 5 primary activities?

Answer 23

1. Bring in [raw resources]
2. [Make] the product or service
3. [Market] the product or service
4. [Deliver] the product or service
5. Provide [customer support]

Question 24

Support activities are performed as part of the value chain model that are not primary

What are the 4 support activities?

Answer 24

1. Administration and management
2. Human resources
3. Technology support
4. Procurement

Question 25

Events in the external part of the chain can also offer strategic opportunities and different risks.

-a company with shitty suppliers might benefit from a switch or form alliances with them to help make them more efficient

Example:

Answer 25

Ex:
Toyota
•encourages its tiny auto parts suppliers to set up shop near its factories so Toyota can provide extensive training and support

•Toyota might decide to become its own supplier and fuck over the old suppliers

Question 26

Online

How do buyers add value to the company’s products or services?

Answer 26

•They can leave blunt and honest reviews
Ex:
Amazon

•Users can go on forums and ask each other questions. (can rate the quality of answers)
Ex:
TurboTax
(It’s easier than pulling out an old IRS manual)

Question 27

What is a benchmark?

Give examples:

Answer 27

A reference point used as a baseline measurement

(Why is spending higher/lower than the benchmark?)

Ex:
Organization’s spending [compared to] industry benchmarks or average expenditures

Ex:
Higher spending on human resources might be apart of a strategic effort to recruit top talent

Question 28

Benchmarks

• Which industries spend the most on IT as a percent of revenue?
• Which industries spend the least?

Answer 28

Most -

1. Software publishing / internet services (7.6%)
2. Banking and finance (6.5%)
3. Education (4.9%)

Least -

1. Energy (1.1%)
2. Retail and wholesale (1.4%)
3. Manufacturing (1.8%)

Question 29

Why do managers use benchmarks?

Answer 29

to see:
1. how they compare to competitors

2. how much every dollar spent is helping to create value

–Each component offers opportunities for either cost savings or improved products or services
–This offers more value to buyers
(Both of which +++ for a company)

Question 30

What are the [3 competitive strategies] in business?

Answer 30

1. Low cost leadership
2. Product differentiation
3. Focused niche

Question 31

What is low cost leadership?

Example:

Answer 31

Offering a similar product at a lower price (vs competitors)

Ex:
Walmart
comes from its IT-supported supply chain, the envy of its competitors

Question 32

What is product differentiation?

Example:

Answer 32

Adding special features (or add-ons) to a product for which customers are willing to pay more

(This strategy tends to reduce threats from substitute products and erects barriers for new entrants)

Ex:
iPod > iPhone