Porter’s five forces model Value chain EDI Data warehousing Data mining Intelligent agents Value added networks

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Using Information
Technology for Competitive
Advantage
Lecture 4
Abdisalam Issa-Salwe
Business Information Systems
MSc Finance and Legal Management
Thames Valley University
Abdisalam Issa-Salwe, Thames Valley University
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Topic list
 Porter’s five forces model
 Value chain
 EDI
 Data warehousing
 Data mining
 Intelligent agents
 Value added networks

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Porter’s five forces model
 All organisations operate in one or
more industries. By the nature of
their participation in an industry,
they are affected by existing or
potential uses of information
technology

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Porter’s five forces model
 Professor Michael Porter of Harvard
University maintained that in every
industry, competition depends on
the collective strength of five basic
forces
 Interacting with these forces are the
generic corporate strategies (see
below).
 IT can be a powerful agent to
change the balance of power in and
between these forces.
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Porter’s five forces model (cont…)
 New entrants can increase overall capacity
in the industry, thereby reducing prices and
incumbents' cost advantages.
 IT can help create or raise barriers to entry
by increasing mandatory investments in
hardware and software, facilitating control
over databases, or locking in customers to
existing distribution channels.
 There are many types of barriers to entry:
switching costs, economies of scale, high
investment in IT, economies of experience,
access to distribution channels, and
government policy

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Porter’s five forces model (cont…)
 Intensity of industry rivalry depends
on factors beyond the control of the
individual firm,
 such as degree of concentration,
diversity, or dependency; rate of industry
growth; or switching costs.
 It is critical to understand the strategies
of one's rivals in detail.
 For instance, Ford's strategy depends on
the strategies of Toyota, Nissan, GM, and
Volkswagen, and vice versa.
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Porter’s five forces model (cont…)
 Threat of substitute products may arise
from products and services in other
industries.
 Examples:
 * the products of stock brokers and insurance
companies now compete against banks for the
investment dollar.
 * the automobile eliminated the horse with buggy,
and the silicon chip eliminated electromechanical
adding machines. The life cycle of products can
be reduced through the use of IT, such as
Computer-Aided Design (CAD). IT has also
provided the basis for creating new information-
intensive products.

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Porter’s five forces model (cont…)
 Bargaining power of buyers
 Buyers drives prices down and the quality of
products up.
 Buyer power depends on the level of
switching costs, the competitive position of
the buyer in the industry (size, volume),
whether the buyer can purchase a
commodity product, or whether the buyer
poses a serious threat of backward
integration (i.e., buying out or merging with
its suppliers).
 Installing computer terminals at the buyers'
site is one way to raise the buyers' cost of
switching to other suppliers.
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Porter’s five forces model (cont…)
 Bargaining power of suppliers
 It is in some ways the antithesis of buyer
power.
 The threat of forward integration (i.e.,
buying out or merging with its customers)
is one determinant of supplier power.
 Influential suppliers drive prices up and
reduce the quality and quantity of
products and services.
 Supplier power also depends on size,
volume, and concentration relative to
other firms in the industry.

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Value Chain Analysis
 The value chain is a systematic approach
to examining the development of
competitive advantage. It was created by
M. E. Porter in his book, Competitive
Advantage (1980). The chain consists of a
series of activities that create and build
value. They culminate in the total value
delivered by an organisation. The 'margin'
depicted in the diagram is the same as
added value. The organisation is split into
'primary activities' and 'support activities

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Value Chain Analysis (cont…)
 The value chain begins with the data
resource.
 Information is developed from the data
resource to support the knowledge
environment of an intelligent learning
organisation.
 Data is the raw material for information
which is the raw material for the
knowledge environment.
 Knowledge is the raw material for
business intelligence that supports
business strategies.
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Value Chain Analysis (cont…)
 Data is the individual raw facts that are
out of context, have no meaning and are
difficult to understand. Facts are
numbers, characters, character strings,
text, images, voice, video and any other
form in which a fact may be presented.
Data in context is facts that have
meaning and can be readily understood.
It is the raw facts in context with meaning
and understanding, but is not yet
information because it has no relevance
or time frame.

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Electronic Data Interchange (EDI)
 EDI was first developed by the
automobile/transportation industry in the
1970s.
 Today, it is widely used in a variety of
industries, including distribution, finance
and accounting, health care,
manufacturing, purchasing, retail, tax
form filing, and shipping.
 Early EDI packages used rather simple
standard forms that forced companies to
convert data to fit the forms.
 Newer EDI systems allow companies to
create custom systems using simple
programming or authoring tools.
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Electronic Data Interchange (EDI) (cont…)
 Electronic Data Interchange is the electronic exchange
of routine business transactions.
 Typical transactions include such documents as
purchase orders, invoices, advance shipping
notification, payments, etc.
 Exchange of electronic data using inter-organisational
information systems
 Set of hardware, software, and standards that
accommodate the EDI process
 EDI defines the electronic exchange of structured
business data, such as purchase orders, invoices, and
shipping notices, typically between one organisation
and another.
 The relationship is usually between a vendor and
customer.

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Electronic Data Interchange (EDI) (cont…)
 It is important to differentiate between EDI
and electronic commerce.
 Electronic commerce encompasses all aspects of
electronic business exchanges, including person-to-
person interaction (collaboration), money transfers,
data sharing and exchange, Web site merchant
systems, and so on.
 EDI as a subset of electronic commerce that
encompasses the exchange of business information
in a standardised electronic form.
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Electronic Data Interchange (EDI) (cont…)
 EDI can reduce costs, workforce
requirements, and errors associated
with retyping orders, invoices, and
other documents.
 With EDI, computer data already
entered by one organisation is
made available to a business
partner.
 EDI is typically handled using store-
and-forward technologies similar to
e-mail.

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Electronic Data Interchange (EDI) (cont…)
 Two approaches in the
implementation of EDI.
 Many large organisations acquire or build
their own proprietary systems, often in
association with their business partners.
 To work with a VAN (value added
network) provider, which provides EDI
transaction services, security, document
interchange assistance, standard message
formats, communication protocols, and
communication parameters for EDI. Most
VANs also provide a network on which to
transmit information.
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Value Added Network (VAN)
 A (VAN) Value Added Network is a
third party who stores the data to
be communicated. It serves as a
middle person, so neither party can
access the other’s private network.
The main key to a VAN is that the
other partner does not touch your
network, as business partners
initiate the sending or retrieving of
the data from the VAN.
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Value Added Network (VAN) (cont…)
 With the data being sent to or
received from the VAN by the
business partners initiating the
communication, business partners
are insuring a safe method of data
transportation.
 The different ways of
communicating to the VAN include
dialup as well as FTP protocols.

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Business Intelligent
 Business intelligence represent a popular
trend in many public and private sector
organisations.
 Ideally, any manager or knowledge
worker should be able to compose
information requests without programmer
assistance and achieve answers at the
speed of thought.
 Follow-up questions should be
immediately asked and answered in order
to maintain continuity of thought on a
particular topic of importance.
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Data warehouse, data marts
 Data warehouses are computer based information
systems that are home for "secondhand" data
that originated from either another application or
from an external system or source.
 Warehouses optimize database query and
reporting tools because of their ability to analyse
data, often from disparate databases and in
interesting ways.
 They are a way for managers and decision
makers to extract information quickly and easily
in order to answer questions about their business.
 In other words, data warehouses are read-only,
integrated databases designed to answer
comparative and "what if" questions.
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Data warehouse, data marts (cont…)
 Data Marts:
 Data in a data warehouse should be
reasonably current, but not necessarily up to
the minute, although developments in the
data warehouse industry have made frequent
and incremental data dumps more feasible.
 Data marts are smaller than data warehouses
and generally contain information from a
single department of a business or
organisation. The current trend in data
warehousing is to develop a data warehouse
with several smaller related data marts for
specific kinds of queries and reports.

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A Data Warehouse Architecture
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Data mining
 Data mining is primarily used today by
companies with a strong consumer focus -
retail, financial, communication, and
marketing organisations.
 It enables these companies to determine
relationships among "internal" factors
such as price, product positioning, or staff
skills, and "external" factors such as
economic indicators, competition, and
customer demographics.

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Data mining
 Data mining, or knowledge discovery, is the
computer-assisted process of digging through and
analysing enormous sets of data and then
extracting the meaning of the data.
 Data mining tools predict behaviors and future
trends, allowing businesses to make proactive,
knowledge-driven decisions.
 Data mining tools can answer business questions
that traditionally were too time consuming to
resolve.
 They scour databases for hidden patterns, finding
predictive information that experts may miss
because it lies outside their expectations.
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Data mining (cont…)
 With data mining, a retailer could
use point-of-sale records of
customer purchases to send
targeted promotions based on an
individual's purchase history.
 By mining demographic data from
comment or warranty cards, the
retailer could develop products and
promotions to appeal to specific
customer segments

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Data mining (cont…)
 Data mining consists of five major
elements:
 Extract, transform, and load transaction
data onto the data warehouse system.
 Store and manage the data in a
multidimensional database system.
 Provide data access to business analysts
and information technology professionals.
 Analyse the data by application software.
 Present the data in a useful format, such
as a graph or table.
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Tutorial Question
Michael Porter described a
concept that has become
known as the "five forces
model". This concept involves
a relationship between
competitors within an
industry, potential
competitors, suppliers,
buyers and alternative
solutions to the problem
being addressed.
Could you critical discus
Porter’s five force
model?