TBS906 Major Assignment 26th October 2010
Appendix
1. Introduction
2. Objective of the report
3. Michael Porter’s five force model
4. Six strategic principles
5. Dell Corporation & the five force model
6. Way forward
7. Conclusion
8. Bibliography
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TBS906 Major Assignment 26th October 2010
Introduction:
Strategic use of information systems simply means making efficient use of
information systems in order to achieve organisation effectiveness. This report
basically looks at Michael Porter’s competitive forces model and how an
organisation has used this model to achieve business effectiveness. The five
forces model was written by Michael .E. Porter in the year 1980 in the book
“Competitive Strategy”. The primary reason for Potter’s strategic model was to
help companies analyse the profitability of their business, the intensity of direct
or likely competitors and the industry desirability. Porter believes that every
industry is made up of five different forces that influence the way buyers and
sellers operate in the market. Hence a manager should use this model in order
to understand and analyse his industry better and thus gives him an edge over
his competitors.
Porter’s five force competitive model is by far one of the most widely used
strategic business models and has proven useful to many organisations on
various occasions. This is because the model helps companies analyse the forces
outside the industry that influence the nature of competition within it and the
factors inside the industry that influence the way a company deals with its
competitors.
Objective of the report:
The aims and objectives of this report are stated as follows:
To understand and analyse the “Strategic Use of Information Systems”
using Michael Porter’s competitive forces model.
To define the model and illustrate how it has helped organisations gain
competitive advantage over their competitors.
To study in detail one particular organisation that has effectively used this
model to achieve profitability and business efficiency thus setting it apart
from its rivalries.
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TBS906 Major Assignment 26th October 2010
What is Michael Porter’s five force model?
Figure 1: Porter’s Five force model, Source – Emerald Insight Journals
The above figure shows Michael Porter’s business model. In this model Porter
basically explains that every industry is influenced by 5 different forces.
Threat of new entrants
Bargaining power of buyers
Bargaining power of suppliers
Substitute products or services
Intensity of rivalry among competitors
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TBS906 Major Assignment 26th October 2010
1. Threat of new entrants:
The first force basically talks about having the threat of new competitors in your
market place. The internet has made it easier for more and more rival
companies to enter into marketplaces thus eliminated barriers for industry. This
is due to the opportunity of reaching the customer directly. Because companies
can reach their buyers or other clients directly over the web, they do not have to
incur additional cost of sales team or marketing setups. Additional the internet
also helps companies sells their products to customers directly online without
having to bother about being located in a strategic place.
2. Bargaining power of buyers:
The internet revolution had increased buyers needs and wants tremendously.
With the use of the internet, buyers are able to access a variety of products at a
time giving them better bargaining capacity and thus making it more difficult for
firms to sustain their brand in the industry.
3. Bargaining power of suppliers:
The internet and use of information technology gives suppliers a higher
bargaining power as suppliers can reach their customers directly. The web also
gives suppliers better access to new users and customers thus widening their
end user pool without having to be intervened by competitors. This also means
that companies of different sizes being able to compete at the same level in one
market.
4. Substitute products or services:
Today most large companies face the threat of substitute products and services
by other firms. Information technology has made this possibility increasingly
popular. Customers and suppliers now look for quicker and faster ways to buy
and sell products as well as gain maximum advantage.
5. Intensity of rivalry among existing firms:
The fifth force illustrates how the internet has increased the chances of rivalry
amongst existing firms. As the internet makes it difficult for organisation’s to
manage proprietary data this leads to more rivalries amongst other firms.
Duplication of data is another known factor that happens over the internet and
can increase such rivalries.
Porter states that managers and companies need to analyse these forces in
order to know where does their firm stand in the industry, what are its key
strengths, where can it improve its business systems, what are the likely threats
in the market and how can the firm make strategic use of its IT systems to
achieve business profitability.
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TBS906 Major Assignment 26th October 2010
“Information Technology is changing the way companies operate. It is affecting
the entire process by which companies create their products. Furthermore, it is
reshaping the product itself” (How IT gives you a Competitive Advantage,
Michael Porter and Victor Millar, Pg. 150). Porter mainly highlights that the role
of information technology in business is based on the value chain. This basically
divides the organisation predominantly on its value activities mainly being its
technologic and economic activities it uses to conduct business. How profitable a
company is depends on how well the company uses IT to expand its value
activities such as marketing, distribution, customer services etc. Porter believes
that the only way to achieve profitability is by gaining a competitive advantage
over the average producer. This can be done by making the following strategic
decisions:
Differentiating your products:
One of the best ways to gain customer attraction is to offer products that catch
the customer’s eye and differentiate it from others.
Keeping the cost low:
Providing your customer products at economical cost is what your customer will
be drawn to. This can be achieved also by operating at lower cost thus keeping
your internal costs minimal.
Finding a niche:
Focusing on a specific market or segment line can help firms market their
products and services effectively as they cater to specific customer needs and
are hence able to specialise their products accordingly.
Six Strategic Principles:
Porter also believes that for every company to be successful it needs to follow
six basic principles of strategy:
Companies should start with the ‘right goal’. This means setting long term
goals and return on investment. Only by grounding strategy in sustained
profitability will real economic value be generated (Michael Porter,
Strategy and the Internet, Pg. 71).
A value proposition should be achieved out of the company strategy.
Additionally a company could also offer benefits that its competitors do
not offer.
The company’s strategy needs to be able to reflect a ‘value chain’. This
means a company must conduct its activities differently from its
competitors or alternatively conduct the same activities but in a different
way that will distinguish its process and products.
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TBS906 Major Assignment 26th October 2010
A company should be able to engage in ‘trade-offs’. This simply means
giving up something to gain something else. In order to gain product
uniqueness a company should be able to trade off other product feature
and activities. Trying to meet all customer needs sometimes makes a
company lose out on competitive advantage.
Next Porter describes how all company elements do not ‘fit together’. A
strategy involves making choices throughout the value chain that are
interdependent; all a company’s activities must be mutually rein-forcing
(Michael Porter, Strategy & the Internet, Pg. 71).
Finally the last principle of strategy is ‘continuity of direction’ where Porter
stated that a company should decide and finalise on a value proposition
that it will be associated with through its journey. The company should be
ready to stand by this proposition even if it means letting go of other
opportunities that come its way.
Dell Computer Corporation & the Five Force Model
Dell Corporation is a computer systems firm that was set up in the 1980’s. Dell
provides a variety of computing products and services such as desktops, laptops,
printers, servers etc. Dell is known as one of the largest computer vendors in the
world and has gained huge market share in the industry. Let us look at how Dell
has gained a competitive advantage over its rivals using the five force model.
1. Dell & Rivalry amongst existing firms:
Rivalry amongst competitors is one of Dell’s biggest threat. The challenges that
Dell faces here is the chances of new competition arising within the technology
industry. Dell gains an edge of its competitors like Acer and Compaq by its direct
to customer model. Here Dell provides direct services to its customers at lower
costs. Additionally it keeps itself up to date with the latest technologies and
applications in the market.
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TBS906 Major Assignment 26th October 2010
Dell established the direct to customer model in the late 1990s where at the
time it was the only company that allowed customers to buy its products online.
Its competitor companies like HP, Lenovo, Compaq still worked on the process of
providing their products to a supplier or dealer who would then physically sell
these to customers. Dell products would not be sold in any electronic shops but
was available to customer only online or at a Dell store. Dell additionally
provided its customers with online customer service systems which allowed
customers to directly reach Dell in case of any queries or technically issues. This
gave Dell a competitive advantage over its competitors as it was the first to
move into this style of business and it also provided customers with a
differentiated, low cost service.
2. Dell & Bargaining power of buyers:
The next challenge that Dell faces is that of the buyers bargaining power. The
technology industry today provides buyers with myriad opportunities of products
and services to choose from. Buyers have the opportunity to bargain on prices,
demand for higher quality and thus make it tuff for firms to sustain their
profitability. Dell counters this challenge by providing custom made products to
best suit their budget. With Dell customers can choose to order tailor made
products at the competitive prices. Dell now dominates its industry due to this
concept of providing quality to its customer at lower costs.
3. Dell & Bargaining power of suppliers:
Dell has established brand recognition even amongst its suppliers. Dell has
chosen suppliers that they work with thus assuring Dell that they get the right
quality and on time. Today companies that supply to Dell, play on Dell’s
reputation. Suppliers too want to work with Dell as their inventory levels never
pile up. Being the first company to offer next day delivery and on site product
service Dell has a variety of trusted suppliers. Suppliers of provide customers
with trusted original products to meet their needs as compared to its
competitors’ products that may not be copywrited. Also Dell provides its
customers with a choice of trusted application suppliers like Microsoft and Intel
which are normally standard for other firms.
4. Dell & Threat of substitute products:
Dell continues to believe in a standard based technology giving customers the
opportunity to choose the item of their preference. Dell tries to stay ahead of its
competition by constantly keeping itself up to date with the latest technologies
available and its continuous creation of new products and services. However
they still do face the threat of substitutes from small dealers or computing
companies and large competitors like HP and Compaq. However these firms lose
out to Dell in comparison to prices and software support. Hence Dell manages to
maintain its customer loyalty and reduces chances of people moving across to
other firms. Additionally it comes without saying that Dell out shines its
competitors by providing high quality products at low costs.
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TBS906 Major Assignment 26th October 2010
5. Dell & Threat of new entrants:
This force is not extremely challenging in the computing industry as it is not
easy for entrants to just enter the market. The IT industry is also brand driven
for specific products and services due to piracy and duplication that happens
easily. As a result customers prefer to engage themselves with known brands
that are safe and reliable rather than new companies. The technology industry
mainly has a few major leaders that set the pace of the industry and others
follow. So here Dell continues to face the challenge from direct competitors like
HP, Acer and Compaq rather than worry about new entrants.
The Way forward..
Dell’s Vice president of sales and marketing Michael T announced that as part of
the strategic plan for the future Dell will focus on increasing investment in the
Chinese market and also the introduction of several new products. Consumer
business for Dell in China has also occupied a part of the global consumer
business. Secondly the strategic model that Dell administered in China proved
successful and has been replicated in the rest of the world.
Dell continues to discover new innovations and ideas keeping in line with the
developments of the computer industry.
Continuous review the five forces model in order to analyse any new changes in
its marketplace. It should continue to plan and execute its activities wisely.
Porter spoke about companies that plan for success are most likely to know the
threat they will face. Dell should now look for new ways to use and leverage
information systems to further gain market share and be the first to enter into a
new segment.
Conclusion:
This report has analysed and illustrated how strategic use of information
systems has helped organisations like Dell achieve business profitability.
Dell has come a long way over the years achieving great success on the road
and tackling different challenges. The industry is one where survival of the fittest
is the priority. Constant rivalry with competitors, managing buyer and supplier
expectations, counter threats for substitutes and new entrants is what Dell
continuously prepares for.
Dell has managed to do what other companies are not which is to target only the
customer they want. They basically categorised their customers in to various
categories in order to meet their needs more efficiently. Every customer group
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TBS906 Major Assignment 26th October 2010
was assigned a manager or department and guided him/her through the buying
experience.
Additionally Dell adopted the virtual integration business structure accelerated
its growth in the competitive industry. Due to its highly efficient business model
and well sought out strategies Dell was able to gain market leadership in the
industry. It left no stone unturned and grabbed every opportunity to work more
productively and provide quality products without any compromise. Efficiency in
production is what lowered the company’s cost and thus gave it larger profit
margins.
Dell managed to move ahead of the battle of price by making quality PCs at
more economically prices than that of their competitors. They managed to keep
their costs competitive as they worked on a model that kept their internal costs
low thus showing the virtual integration model effective.
It is very essential for every company to understand the market it is dealing in
and the business dynamics involved with it in order to be able to become a
market leader. Dell has truly used Michael Porter’s five force model and gained
competitive advantage by understanding its industry environment and the
threats it poses, analyses its firm’s strengths against that of its competitors and
strategizing new ways of improving business efficiency.
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TBS906 Major Assignment 26th October 2010
Bibliography
Books:
Information Systems Management in Practice, Eighth edition, Babara M, Ralph
H, Sprague, Jr. Tung B.
UOW E-readings:
Strategy and the Internet
Porter’s strategic models, five force model
Publications:
How information gives you a competitive advantage, Michael Porter & Victor
Miller
Websites:
OP Papers – Porters five force analysis
[Link]
B-Plans – Porter’s five forces
[Link]
Techburg – The strategic use of information systems guide
[Link]
technology-in-business-best-guidebook/
Hub Pages – Dell’s competitive advantage
[Link]
Table product news – June 2010
[Link]
[Link]
Video clips:
You tube – The five forces that shape strategy
[Link]
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TBS906 Major Assignment 26th October 2010
You tube – Michael Porter on competitiveness
[Link]
You tube – Michael Porter on What is strategy
[Link]
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