CH 03

Chapter 3
Information Systems for

Competitive Advantage
Jason C. H. Chen, Ph.D.

Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99223
chen@jepson.gonzaga.edu
Dr. Chen, Management Information Systems 1

Chapter Preview
• Recall from Chapter 1 that MIS is the development and use of
information systems that enable organizations to achieve their goals
and objectives. In Chapter 2, you learned how information systems
can help people collaborate.
• This chapter focuses on how information systems support competitive
strategy and how IS can create competitive advantages. As you will
learn in your organizational behavior classes, a body of knowledge
exists to help organizations analyze their industry, select a
competitive strategy, and develop business processes.
• In the first part of this chapter, we will survey that knowledge and
show how to use it, via several steps, to structure information
systems.
• Then, in the last section, we will discuss how companies use
information systems to gain a competitive advantage.
Dr. Chen, Management Information Systems
2
BUSINESS VALUE & FOCUS –
IS Perspective
IS/E-BUSINESS
•SCM Customer Value
•CRM Demands Products
centric
•BPR
•ERP
What they need/want?

Who are the customers?
How many they need/want?
Where are the customers?
When they need/want?
Their purchasing habits
How to reach them?
Business Models & Strategies

3
What is Business Model?
• A business model is a set of planned activities
(sometimes referred to as business processes)
designed to result in a profit in a marketplace.
• The business model is at the center of the
business plan.
• An e-commerce business model aims to use and
leverage the unique qualities of the Internet and
the www.
Why New Models?
– Profitability (making money)
N
Source: E-Commerce: business, technology, society, Laudon and Traver, A/W 4
Study Questions
Q1 How does organizational strategy determine

information systems structure?
Q2 What five forces determine industry structure?
Q3 How does analysis of industry structure determine competitive
strategy?
Q4 How does competitive strategy determine value chain structure?
Q5 How do business processes generate value?
Q6 How does competitive strategy determine business processes and
the structure of information systems?
Q7 How do information systems provide competitive advantages?
Q8 2020?

5
• An organization’s goals and objectives are
determined by its competitive strategy.
• In turn, an organization’s competitive strategy
determines every information system’s
– Structures
– Features
– Functions
Fig 3-1 Organizational Strategy Determines Information Systems

6
Organizational Strategy Determines Information Systems
Fig 3-1 Organizational Strategy Determines Information Systems

7
Study Questions
Q1 How does organizational strategy determine information systems
structure?
strategy?
Q8 2020?

8
What is the
“Competitive Advantage”?
• A competitive advantage is a benefit derived from
something a company does or has that its
customers want and its competitors cannot (or
choose not to) match.

9
Striving for Competitive Advantage
• Firm level: Industry & Competitive Analysis
– Competitive Forces Model
– Competitive Strategy
• Business level
– Value-Chain Analysis

10
Five Forces Model
• Five competitive forces determine industry profitability:
bargaining power of customers, threat of substitutions,
bargaining power of suppliers, threat of new entrants, and rivalry
among existing firms (video).
• Intensity of each force determines characteristics of the industry,

how profitable it is, and how sustainable that profitability will be.
• Assessing an industry structure based on five questions:
1. How much bargaining power do customers have?
2. How much of a threat do substitution products or services pose?
3. How much bargaining power do suppliers have?
4. How great is the threat of new competitors entering the marketplace?
5. How great is the rivalry among existing firms?

11
Porter’s Five Forces Model and
Value Chain
• According to Porter, there are five competitive
forces in any industry, and the attractiveness of the
industry depends on the strength of each force.
• Under the perspective of market structure, Porter’s
competitive forces model has been broadly
adopted as the underpinning for investigating the
effect of information technology on the
relationships between suppliers, customers, and
other potential threats.

12
PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
Threats SUBSTITUTE
PRODUCTS
ENTRANTS & SERVICES
•Switching cost
•Access to •Redefine products
distribution channels and services
•Economies of scale •Improve
INDUSTRY price/performance
THE FIRM COMPETITORS
•Cost-effectiveness
•Selection of suppler •Market access •Buyer selection
•Threat of backward •Differentiation of •Switching costs
integration product or service •Differentiation
SUPPLIERS CUSTOMERS
Bargaining power
N
Dr. Chen, Management Information
Dr. Chen, The Systems
Trends of the Information Systems Technology 13
Fig 3-2 Porter’s Five Forces Model of Industry Structure
14
Fig 3-2: Porters Five Forces Model of Industry Structure

15
Q/A - Enhancing your Analytic Skill
Linda is in the computer repair businesses. Mark and
Jill, 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
b. bargaining power of suppliers
c. threat of new entrants
d. threat of substitution
e. rivalry among existing firms
f. … and the answer is:

16
Fig 3-3 Examples of Five Forces

17
Fig 3-4: Five Forces at FlexTime

18
Study Questions
structure?
Q3 How does analysis of industry structure determine
competitive strategy?
Q8 2020?

19
Porter’s Competitive Strategy Model
• Firms engage in one of four competitive strategies: (video)
1. Be the cost leader across a wide industry – Wal-Mart is the lowest

cost leader in the retail industry.
2. Differentiate its products across a wide industry – Apple Computer
competes on how much better its computers are than PCs.
3. Be the cost leader in a focused industry segment – Southwest
Airlines is the cost leader in certain portions of the airline industry.
4. Differentiate its product in a focused industry segment – Apple’s
iPhone competes by being different than other cell phones.

20
Fig 3-4: Porter’s Four Competitive Strategies
To be effective, organization goals, objectives, culture, and activities must be

consistent with organization strategy.

21
FlexTime Strategy
• Focus, differentiated
 Focus downtown
 Urban, city workers
 Sophisticated environment
 Adults only
 Provide superior product, intense, to-the-max workouts
that leave clients “pumped and excited”

22
In-Class-Group Work
Discussion Question
• Using the five competitive forces model as
described in this chapter to describe how (and
what) IT might be used to provide a winning
position for:
• A global airline
– Use UA as an example (Group work together)

23
PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
Threats SUBSTITUTE
PRODUCTS
ENTRANTS & SERVICES
Internal Forces: Other forces should

1.customer focus be considered in the
2.communication INDUSTRY e-Age:
3.core competencies THE FIRM COMPETITORS 1. Digitalization
4.complexity 2. Globalization
5.Quality 3. Deregulation
•Cost-effectiveness
•Market access
•Differentiation of
product or service
SUPPLIERS CUSTOMERS
Bargaining power
24 N
Dr. Chen, Management Information
Dr. Chen, The Systems
Trends of the Information Systems Technology TM -24
Business Strategies
and its Competitive Advantage
Uniqueness
Lower Cost
Perceived by
Position
Customer
Industry Cost Differentiation

wide Leadership
Innovation
Competitive Scope
(Broad
Alliance
Growth
Target)
Particular
Segment
only Cost Focus Differentiation
(Narrow Focus
Target)
Industrial economy Knowledge-based

economy
Competitive Mechanism
Dr. Chen,
Dr. Chen,
The Trends
Management
of the Information
Information
Systems
Systems
Technology
25
TM -25
PART II

26
Study Questions
structure?
strategy?
Q4 How does competitive strategy determine value chain
structure?
Q6 How does competitive strategy determine business processes and the
structure of information systems?
Q8 2020?

27
Value Chain
• Competitive strategy implemented by creating value
 Value—amount of money a customer is willing to pay for a
resource, product, or service
 Margin—difference between value an activity generates and
cost of activity
 Value chain—a network of value-creating activities
• Primary activities
• Support activities
Rather than automating or improving existing functional
systems, Porter contends companies should create new,
more efficient business processes that integrate the
activities of the entire value chain. 28
Business Level: The Value Chain
Co
mp
et
iti
ve
(Value)
e
tag
n
va
Ad
Porter’s Value Chain Model
N
29
Primary Activities in the Value Chain
• Inbound logistics—receiving, handling raw materials and
other inputs
 Value in parts, time required to contact vendors, maintaining
relationships with vendors, ordering parts, receiving shipment, and
so forth
• Operations—transform or assemble materials into finished
products
• Outbound logistics—deliver finished products to customers
• Marketing and sales—create marketing strategies and sell
products or services to customers
• Services—after-sale customer support

30
Support Activities in the Value Chain
• Contribute indirectly to production, sale, and service
of product
 Procurement—finding vendors, setting up contractual
arrangements, and negotiating prices
 Technology development—research and development,
developing new techniques, methods, and procedures
 Human resources—recruiting, compensation, evaluation,
and training of full-time and part-time employees
 Firm infrastructure—general management, finance,
accounting, legal, and government affairs

31
Fig 3-6: Bicycle Maker’s Value Chain

32
Fig 3-7: Summary of Value Chain Primary Activities

33
Value Chain Linkages
• Linkages are the interactions across the value activities.
 Ex: Manufacturing systems use linkages to reduce inventory
costs, sales forecasts to plan production; production plan to
determine raw materials needs; material needs to schedule
purchases. End result is just-in-time inventory, which reduces
inventory sizes and costs.
• Business process design
 Organizations should not automate or improve existing
functional systems. Rather, they should create new, more
efficient business processes that integrate activities of all
departments involved in a value chain.

34
Study Questions
structure?
strategy?
Q8 2020?

35
How Do Business Processes Generate Value?
• Business process—network of activities that generate

value by transforming inputs into outputs.
• Cost of a business process is cost of inputs plus the cost
of activities.
• Margin of the business process equals the value of the
outputs minus the cost.
• Activity transforms input resources into output
resources.
• Resources flow between or among activities.
• Facilities store resources; some facilities, such as
inventories, store physical items.
36
How Do Business Processes Generate Value?
• Each company has many business processes which

are networks of activities that generate value by
transforming inputs into outputs.
• You determine the cost of each business process by
adding the cost of inputs plus the cost of activities
used in the process.
• You determine the margin of each business process
by subtracting the cost of the activity from the value
of the output.

3-37
An Alternate Process for Bicycle Manufacturer
Fig 3-8 Three Examples of Business Processes

38
Compare Three Business Processes For Bicycle
Manufacturer
• Notice that activities get data resources from databases and put data
into databases
• Business processes vary in cost and effectiveness. In fact, the
streamlining of business processes to increase margin (add value,
reduce costs, or both) is key to competitive advantage.
• Example of using a linkage across business processes to improve
process margin:
 Querying both databases allows purchasing department to make decisions on
raw materials quantities and customer demand.
 By using this data, purchasing can reduce size of raw materials inventory,
reducing production costs and thus adding margin to the value chain.

39
Which process(es) was improved/redesigned?
Value
Fig 3-9 Improved Materials Ordering Process

3-40
Business Process Summary
• Key to a company’s competitive advantage is to increase
the margin of its products by adding value, reducing costs,
or both.
• Business process redesign helps a business streamline its

activities in order to increase its margins.
• Most difficult part of process redesign is associated with

employee resistance.

41
Study Questions
structure?
strategy?
Q6 How does competitive strategy determine business
processes and the structure of information systems?
Q8 2020?

42
Fig 3-10: Operations Value Chains
for Bicycle Rental Companies

43
High-Service Business Bike Rental
Fig 3-11 Business Process & Information System for Bike Rental
44
Bottom Line
• Each business must first analyze its industry and

choose a competitive strategy. Will it be a low-cost
provider or differentiate its products from
competitors?
• Given that strategy, they design business processes
that span value-generating activities.
• Those processes determine scope and requirements
of each organization’s information systems.

45
Study Questions
structure?
strategy?
Q6 How does competitive strategy determine business processes and the
structure of information systems?
Q7 How do information systems provide
competitive advantages?
Q8 2020?

46
Competitive Techniques
Figure 3-12: Principles of Competitive Advantage

47
Figure 3-12: Principles of Competitive
Advantage
• Product Implementation
– 1. Create a new product or service
– 2. Enhance products or services
– 3. Differentiate products or services
• System Implementation
– 4. Lock in customers and buyers
– 5. Lock in suppliers
– 6. Raise barriers to market entry
– 7. Establish alliance
– 8. Reduce costs

48
Sustainable Competitive Advantages
• Can we sustain an organization’s competitive
advantage? Yes/No.
– Yes. How
– No. Why?
• However, firms may create/improve their competitive
advantages only if they:
– have capacity to learn (an learning organization )
• Two types of people lead a company to succeed
– Those know how to innovate the enterprise
– Those know how to execute their strategy onto the enterprise

49
• There are two ways businesses can respond to the
five competitive forces.
– They can gain a competitive advantage via their products and
services.
– They can gain a competitive advantage by developing
superior business processes with Information Systems.
Products/
Services

N 50
Two Ways to Respond to the Five
Competitive Forces
(video)
1. Competitive advantage via products or services:
 Creating new products or services,
 Enhancing existing products or services,
 Differentiating their products and services from those of their
competitors.
• Information systems can help create a competitive advantage by being

part of the product or by providing support to the product or service.

51
Fig 3-13: Information Systems Create Competitive
Advantages as Product or Support

52
Gaining Competitive Advantage by Using
Business Processes
 Lock in customers via high switching costs—make it too expensive
for customer to switch to a competitor.
 Lock in suppliers—be easy to connect to and work with
 Create entry barriers—make it difficult and expensive for new

competition to enter the market.
 Establish alliances with other organizations—establish standards,
promote product awareness and needs, develop market size, reduce
purchasing costs, and provide other benefits
 Reduce costs—enables reducing prices and/or to increasing
profitability. Increased profitability means more cash to fund further
infrastructure development and greater competitive advantage.

53
How Does an Actual Company Use IS to Create
Competitive Advantages?
• ABC, Inc, an actual company, created a competitive

advantage in shipping industry by:
 Superior customer service
 Making it easy for customers to business with by
minimizing data entry:
• Drop-down lists, automatic fill-ins, contact lists for
customers
• Minimizing data-entry errors
• Following slide shows some of the Web pages of
ABC’s information system.

54
Fig 3-14: ABC, Inc Web Page to Select recipient from customer records
55
Fig 3-15: ABC, Inc Web Page to Select Contact from Customer Records
56
Fig 3-16: : ABC, Inc Web Page to Specify Email Notification
57
Fig 3-17: Preparation of Shipping Labels
58
How Does This System Create a
Competitive Advantage?
• ABC’s information system helps the company create a
competitive advantage:
 Enhances its existing services—making it easy for the customer to
use its system, and reducing errors.
 Differentiates its service from its competitors who don’t have a
similar service to provide to customers.
 Provides new services for customers that competitors don’t provide.
 Locks in customers into its system based on the benefits they receive
from it.
 Raises barriers to market entry
 Reduces costs

59
Study Questions
structure?
strategy?
Q8 2020?

60
What Does Flextime Look Like in
2020?
• Assume FlexTime keeps pace with emerging research
on optimal workout schedules (
http://www.angelfire.com/wa3/loserschallenge/cardio.html,
http://www.sportsci.org/jour/0101/cf.htm)
• Optimist view
 Could develop information systems that track client workouts and their
intensity and relate that data into net cardiovascular benefits.
 Could correlate workout data with dietary data and client weight loss or
gain.
 Maybe provide data to medical insurers and help its active clients to obtain
reductions in medical insurance premiums.
 FlexTime could, but should it? Is it worthwhile for FlexTime to develop
such systems?

61
Pessimistic View
• Suppose economic downturn proves too much for FlexTime
and it is forced to reconfigure into a shadow of its former self
 No longer a single business entity. Maybe it becomes a federation of
trainers, workout spaces, dieticians, and recreational sports leagues.
 Federation uses free data storage, data communication, and
emerging collaboration tools and systems to appear as a virtual
organization to clients, but is composed of independently owned and
operated small business entities.
 Who knows?

62
Essential Value Propositions for a
Successful Company
• Business Model
• Core Competency
• Execution
– Set corporate goals and get executive sponsorship for
the initiative
63
Enhanced Model of “Built To Last”:
Continuity and Change in Visionary Companies
 Strategic Competitive Advantages and creating
values
Preserve
•Core Values
•Core Purpose
Change
•Culture &
Operating Practices
•Specific Goals
and Strategies
•Processes
•Safety
•Quality Care
•Efficiency
•Effectiveness
•Innovation
Management IT
(tangible, strategic mechanism)
Dr. Chen, Management Information Systems 64

• END OF CHAPTER 3

65

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Chapter 3

Information Systems for

Jason C. H. Chen, Ph.D.

Dr. Chen, Management Information Systems 1

What they need/want?

Business Models & Strategies

Q1 How does organizational strategy determine

Dr. Chen, Management Information Systems

Fig 3-1 Organizational Strategy Determines Information Systems

Fig 3-1 Organizational Strategy Determines Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

• Intensity of each force determines characteristics of the industry,

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

1. Be the cost leader across a wide industry – Wal-Mart is the lowest

Dr. Chen, Management Information Systems

To be effective, organization goals, objectives, culture, and activities must be

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Internal Forces: Other forces should

Industry Cost Differentiation

Industrial economy Knowledge-based

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

• Business process—network of activities that generate

• Each company has many business processes which

Dr. Chen, Management Information Systems

Fig 3-8 Three Examples of Business Processes

Dr. Chen, Management Information Systems

Fig 3-9 Improved Materials Ordering Process

• Business process redesign helps a business streamline its

• Most difficult part of process redesign is associated with

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

• Each business must first analyze its industry and

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Figure 3-12: Principles of Competitive Advantage

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

• Information systems can help create a competitive advantage by being

Dr. Chen, Management Information Systems

Dr. Chen, Management Information Systems

 Create entry barriers—make it difficult and expensive for new

Dr. Chen, Management Information Systems