The Value Chain and the Value Web and How They Help Businesses Identify Opportunities for Strategic Information Systems Applications

Porter’s competitive force model and how it helps companies develop competitive strategies through the use of information systems. 4

Introduction. 4

The 5 forces. 5

New Market Entrants. 5

Substitute Products and Services. 5

Customer. 6

Suppliers. 6

Competitors. 6

How it helps Companies develop competitive strategies using Information systems. 7

The value chain and the value web model and how they help businesses identify opportunities for strategic Information Systems applications. 7

The value chain model 7

How the value chain can be used to identify opportunities in information systems. 9

The Value Web and its relationship with the Value Chain. 9

How Value Webs help businesses identify opportunities in information systems. 9

The internet and how it has changed Competitive forces and Competitive advantage. 10

Information systems and how they help businesses use Core-Competencies, Network-based strategies, and Synergies to achieve competitive advantage. 10

How Information Systems promote Synergies and Core-Competencies. 10

The enhancing of competitive advantage by promoting core competencies and synergies. 11

Network connections and their benefits. 11

Virtual company and the merits of pursuing a virtual company strategy. 12

Disruptive technologies and the creation of strategic opportunities. 12

Table of figures

Figure 1: porters value chain model (Porter and Kramer 2011, p.17) 7

Information Systems for Business Strategy

Porter’s competitive force model and how it helps companies develop competitive strategies through the use of information systems

Introduction

            This model can be described as a tool used by businesses to analyse competition. From the Industrial Organization Economics (IO), the model derives 5 forces that are used to determine a business’s competitive intensity, thus, determine the potential it has in making profits in a particular industry. It works to determine the attractiveness of an industry, for example, an industry that is not attractive is one in which the 5 forces reduce its profitability. It closely associated with its originator Michae E. Porter who first published it in the Harvard Business Review in the year 1979 (Grundy 2006, p.215). According to Michael, the 5 forces can collectively be referred to as a microenvironment as they are composed of forces that are closest to a company, thus, affect the ability it has in offering its goods and services to the customers, hence, make profits. It can be acknowledged that a change in any of the 5 forces requires a company to reassess its marketplace and establish the overall change in the industry. The attractiveness of an industry does not mean that every company in that industry makes the same profit. Because of this, companies have to apply their business models, as well as, core competencies so as to realize their share of the industry’s profits. The model is composed of 3 horizontal and 2 vertical forces of competition. The horizontal forces include; the threat from already established rivals, substitutes, and new entrants. The vertical forces include the customer and supplier bargaining power. The model was developed in reaction to the SWOT analysis. It improves on the market analysis idea because it is built upon a theory referred to as the structure-conduct-analysis found in the IO (Porter 2008, p.32). Its application has helped solve a diverse range of problems that make businesses less profitable. Its other strategy tools include the generic competitive strategies and the value chain.

The 5 forces

New Market Entrants

            It is true to state that profitable industries attract companies. The more new companies enter a market, the more the profits the other companies that were already in the industry reduce. The reduction of these profits holds unless the entry of new companies into the industry is made difficult by incumbents. If this does not happen, there will be a perfect competition that can be described as the abnormal profitability falling below zero. This perfect competition is the level of profitability required to sustain an industry. The factors discussed below influence the degree in which the threat of new entrants may pose in an industry; the presence of barriers, for example, rights and patents (Narayanan and Fahey 2005, p.227). The most attractive industry is one in which the exit barriers are low and the entry barriers are high. The other factors include; the economies of scale, government policies, brand equity, expected retaliation, and the industry’s profitability.

Substitute Products and Services

            Substitute products and services apply a different use of technology to solve the same economic problem. For example, the substitutes of beef include fish and poultry. Using a more relevant example, the substitute of coke is Pepsi. Pepsi uses the very same technology to solve the same economic problem. Substitutes affect each other in terms of price, for instance, increased marketing for Pepsi drinks reduces the demand for Coke, and thus, to fight the high competition, Coke reduces its price resulting into a phenomenon referred to as price wars. The potential factors that affect the threat of substitutes include; switching of costs by buyers, ease of substitution, the propensity of buyers to substitutes, the price performance of substitutes, and the availability of substitutes.

Customer

            Every customer has a bargaining power which is at times referred to as the market of outputs. Through this power, a customer has the ability to apply pressure to a company. This manages to affect the price changes. By implementing measures such as loyalty programs, companies can reduce the buyer power. With the availability of many alternatives, the buyer power is high, however, the buyer power is low if there are a few alternatives.

Suppliers

            Suppliers also have a power and this is referred to as the market of inputs. It can be acknowledged that the suppliers of services, labour, and raw materials can be a form of power against a company if there exist a few substitutes. For example, if Kelvin is manufacturing iron doors and there is only one organization supplying the iron, Kelvin has no alternative but get the iron from the organization. The potential factors that affect the suppliers bargaining power include; the presence of substitute inputs, employee solidarity, competition between suppliers, and the strength of distribution channels.

Competitors

            It is true to state that the level of competitive rivalry is a major determinant of the attractiveness of an industry. By a company making sure that it has solid knowledge of the industry competitors, it makes it possible to achieve profitability. This information allows the company to better position itself in the industry. Positioning can be defined as how the public perceives a product or service offered by a particular company, thus, distinguishes it from the products and services offered by another company.

How it helps Companies develop competitive strategies using Information systems

            Information systems which are an integral part of Information Technology have greatly revolutionized the economy. Through the use of the Information Systems, new and effective methods are being created and applied by businesses with the aim of helping them achieve competitive advantage. These systems and IT, in general, help businesses reduce their operating costs, thus, improve their productivity through the adoption of technology. Managers across the globe now see the need to integrate IT with other business strategies, for example, Potter’s five forces strategy. Through the above-discussed five-force theory, technological capabilities, such as Information Systems can be effectively applied by a company to achieve competitive advantage (Mohapatra 2012, p. 270). However, for this integration to take the course in an effective manner, the managers need to effectively understand both in a holistic manner.

The value chain and the value web model and how they help businesses identify opportunities for strategic Information Systems applications

The value chain model

            A set of activities that a business does in order to deliver quality goods and services to a customer is referred to as a value chain. As a model, it is widely applied in the business environment and was first introduced by Michael Porter in his book referred to as ‘Competitive Advantage’ published in the year 1985 (Cox 1999, p.170). This model is based on the idea of viewing a business as a system that is composed of many other sub-systems each having inputs and outputs. Through inputs and outputs, there is the acquisition and use of resources, for example, labour, money, materials, and land in order to deliver the final product or service to the market (Hansen and Birkinshaw 2007, p.121). Value chains as concept tools for realizing competitive advantage got included into the competitive strategies theories of Porter in the tear 1979. In this model, outbound and inbound logistics, marketing and sales, services, as well as, operations are all classified the primary activities of a business. On the other hand, human resource management, procurement, infrastructure, and technological advancements are classified as support activities (Holweg and Pil 2005, p.56.) 

Figure 1: porters value chain model. An analysis of the primary and the support activities (Porter and Kramer 2011, p.17)

According to Porter, the best level to establish a value chain is at the business unit. This is mainly because products and services pass through a chain of activities within a business in a sequenced order. It is this chain of activities that gives products and services value. For example, purchasing of unprocessed nuts from a cereal store cannot be compared in price to the purchasing of already processed and well-packaged nuts from a supermarket. The chain of activities that have been involved in the processing of the nuts have added a value to them. This value chain of activities forms what Porter describes as the value system. Porter argues that this system is composed of the suppliers who provide a business with the necessary raw materials and distributors who supply the finished products to the market. It is important to note that these 2 chains form a fundamental part of the value system. In order to achieve competitive advantage, it is essential that business understand every single part of the value system. It can be concluded that the value chain defines the generic value-adding activities of a business.

How the value chain can be used to identify opportunities in information systems

               It is important to note that value chain models assist businesses in analysing how they perform their value-adding activities (Normann and Ramirez 1993, p.68). It also helps them look into ways through which they can improve those processes through the use of Information Systems. By combining the value chains with information systems, the value webs are created.

The Value Web and its relationship with the Value Chain.

            This web can be described as a combination of independent businesses through the synchronization of Information Technology.  This collection of businesses aims at effectively coordinating value chains so as to produce services and products collectively (Andrews and Hahn 1998, p.7). Unlike the traditional value chain, these webs help businesses adopt customer driven and less linear operations.

How Value Webs help businesses identify opportunities in information systems.

            According to the definition provided above, it can arrive at that a value web helps independent businesses work together. By working together these businesses get to create standards for exchanging services, as well as goods through the use of information systems. Eventually, all the other businesses are forced to adopt and follow the same standards. Value webs help businesses in analysing the value chains deeply, these firms come up with new ways through which they can use information systems to link up with the distributors, suppliers, customers, as well as, the strategic partners (Bouwman and MacInnes 2006, p.47). The value web, thus, gives businesses the ability to relate their value chains with those of other businesses.

The internet and how it has changed Competitive forces and Competitive advantage

            The internet has over the years formed the basis of new markets, thus, facilitating the growth of businesses. It is true to state that it is through the use of the internet that new industries have developed, as well as, the improvement of the conventional supply chain (Karagiannopoulos, Georgopoulos, and Nikolopoulos 2005, p.70). It has also influenced competitive forces and competitive advantage. Through it, competition between businesses has intensified. The internet also avails detailed information to everyone who can get connected to it, hence, it increased the customers bargaining power.

Information systems and how they help businesses use Core-Competencies, Network-based strategies, and Synergies to achieve competitive advantage.

How Information Systems promote Synergies and Core-Competencies

            Synergies are concepts that hold the performance and the value of 2 or more businesses combined together is greater than the sum of all of the businesses operating individually (Carayannis 1999, p.220). This concept is mainly used when it comes to acquisitions and mergers. It can also be viewed as the potential financial benefit achieved by combing companies together. The concept of core-competencies is derived from the management theory and it argues the foundation to the competitiveness of a business in an industry is the harmonization of resources and skills that make it different from the other businesses (Byrd 2001, p.27). Information systems through the formation of value webs facilitate the formation of synergies. Here, businesses come together through the value web to create a force that can take various forms, for example, standards of operation and these forces other businesses to adopt and abide by those standards. Through information systems and the sharing of information and skills among businesses through the internet, businesses can harness their own core-competencies, as well as, borrow others from their competitors, thus, in a bid to achieve competitive advantage.

The enhancing of competitive advantage by promoting core competencies and synergies

            Synergies are a mere product of a combination of businesses. Competitive advantage is bound to be achieved through these because the combined businesses can now put together their resources to fight off their competitors (Harrison, Hitt, Hoskisson, and Ireland 1991, p.180). Core competencies are a unique set of resources and skills that gives a business strength over its competitors (Oliver 1997, p.700). A good set of core competencies that are well implemented will give a business competitive advantage over the others.

Network connections and their benefits

            It is true to state that network economies are the new emerging trend in the information world. Products and services are created then distributed through the already established network economies. The merits of using network economies is that information can be instantly shared in an inexpensive way (Perry 2012, p.23). In addition to this, expensive bureaucracies and centralized decision making are greatly reduced through the use of network economies.

Virtual company and the merits of pursuing a virtual company strategy

            A virtual company can be referred to as a firm that uses telecommunications and computer technology to expand its capabilities by routinely networking stakeholders located in different parts of the world (Voss 1996, p.14). There are many advantages of adopting the virtual company strategy and they include; increasing the market coverage, linking of complementary core competencies, gaining access to new markets, and the sharing of infrastructure and risks with the established partners (Rayport and Sviokla 1995, p.75).

Disruptive technologies and the creation of strategic opportunities

            A disruptive technology can be described one that displaces an already established technology or a product or service that creates a new industry (Danneels 2004, p.250). Riding the wave can be viewed as a technique through which businesses can continue to state at the top of their industries when new technologies change those industries. The internet and globalization are technologies and social phenomenon that have greatly changed the markets of every industry in the world. If companies invest aggressively in the disruptive technologies, then it is certain that they will retain their current status in the industry.

References

Andrews, P.P. and Hahn, J., 1998. Transforming supply chains into value webs. Strategy & Leadership, 26(3), p.7.

Bouwman, H. and MacInnes, I., 2006, January. Dynamic business model framework for value webs. In System Sciences, 2006. HICSS’06. Proceedings of the 39th Annual Hawaii International Conference on (Vol. 2, pp. 43-53). IEEE.

Byrd, T.A., 2001. Information technology: Core competencies, and sustained competitive advantage. Information Resources Management Journal, 14(2), p.27.

Carayannis, E.G., 1999. Fostering synergies between information technology and managerial and organizational cognition: the role of knowledge management. Technovation, 19(4), pp.219-231.

Cox, A., 1999. Power, value and supply chain management. Supply chain management: An international journal, 4(4), pp.167-175.

Danneels, E., 2004. Disruptive technology reconsidered: A critique and research agenda. Journal of product innovation management, 21(4), pp.246-258.

Grundy, T., 2006. Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15(5), pp.213-229.

Harrison, J.S., Hitt, M.A., Hoskisson, R.E. and Ireland, R.D., 1991. Synergies and post-acquisition performance: Differences versus similarities in resource allocations. Journal of management, 17(1), pp.173-190.

Hansen, M.T. and Birkinshaw, J., 2007. The innovation value chain. Harvard business review, 85(6), p.121.

Holweg, M. and Pil, F.K., 2005. The second century: reconnecting customer and value chain through build-to-order moving beyond mass and lean in the auto industry. MIT Press Books, 1, p.56.

Karagiannopoulos, G.D., Georgopoulos, N. and Nikolopoulos, K., 2005. Fathoming Porter’s five forces model in the internet era. info, 7(6), pp.66-76.

Mohapatra, S., 2012. IT and Porter’s Competitive Forces Model and Strategies. In Information Systems Theory (pp. 265-281). Springer New York.

Narayanan, V.K. and Fahey, L., 2005. The relevance of the institutional underpinnings of Porter’s five forces framework to emerging economies: An epistemological analysis. Journal of Management Studies, 42(1), pp.207-223.

Normann, R. and Ramirez, R., 1993. From value chain to value constellation: Designing interactive strategy. Harvard business review, 71(4), pp.65-77.

Oliver, C., 1997. Sustainable competitive advantage: Combining institutional and resource-based views. Strategic management journal, pp.697-713.

Perry, M., 2012. Small firms and network economies. Routledge, p.23

Porter, M.E., 2008. The five competitive forces that shape strategy. Harvard business review, 86(1), pp.25-40.

Porter, M.E. and Kramer, M.R., 2011. The big idea: Creating shared value, pp. 14-23.

Rayport, J.F. and Sviokla, J.J., 1995. Exploiting the virtual value chain. Harvard business review, 73(6), p.75.

Voss, H., 1996. Virtual organizations: The future is now. Strategy & Leadership, 24(4), pp.12-16.