Porter’s Strategic Models: The Five forces and the Value Chain

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Day #2
Porter’s Strategic Models:
The Five forces and the Value Chain
CIS Department
Professor Duane Truex III
The Information Systems Strategy
Triangle
Business Strategy
Organizational
ICT/Information
Design Strategy
Strategy
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HOW CAN INFORMATION
RESOURCES BE USED
STRATEGICALLY?
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Aligning IS/ICT strategy (Infrastructures)
with business strategy
• Using multiple approaches to evaluating the strategic
landscape is helpful in determining strategic
opportunities.
• Here, we look at three such approaches:
– Porter’s five forces model of the competitive
advantage of firms
– Porter’s value chain model of internal
organizational operations
– Wiseman’s theory of strategic thrusts and
strategic option generator
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The Five Forces Model and IS
• The Five Forces Model provides a way to think about
how information resources can create competitive
advantage.
• Using Porter’s Model, General Managers can:
– Identify key sources of competition they face.
– Identify uses of information resources to enhance
their competitive position against competitive threats
– Consider likely changes in competitive threats over
time
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Five Forces Model
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Porter’s competitive forces with potential
strategic use of information

Strategic use
Strategic use
•Cost effectiveness
Potential threat
•Switching costs
•Market access
of new entrants •Access to distribution
•Differentiation of
channels
product or service
•Economics of scale
Bargaining
Bargaining
Industry
power of buyers
power of
competitors
suppliers
Strategic use
Strategic use
Threat of substitutes
•Buyer selection
•Selection of supplier
•Switching costs
•Threat of backward
•Differentiation
integration
Strategic use
•Redefine products and services
•Improve price/performance
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Porter’s Value Chain Model
• Porter’s Value Chain Model looks at increasing
competitive advantage by reorganizing the activities
related to create, support and deliver a firm’s product
or service.
• These activities can be divided into two broad
categories
– Primary activities that relate directly to how value is
created for a product or service.
– Support activities that make the primary activities
possible and that manage the coordinate of different
activities.
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Value Chain of the Firm
Firm Infrastructure
Support
Human Resource Management
Activities
Technology Development
Procurement
Inbound
Operations Outbound Marketing
Service
Logistics
Logistics & Sales
Materials
Mfg. &
Order
Product
Customer
handling
Pricing
service
Primary
assembly
processing
delivery
Shipping
Promotion Repair
Activities
Place
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Gaining competitive value
• The Value Chain model suggest that competition can
come from two sources:
– Lowering the cost to perform an activity and
– Adding value to a product or service so buyers will be
willing to pay more.
• Lowering costs only achieves competitive advantage
if the firm possesses information on the competitor’s
costs
• Adding value is a strategic advantage if a firm
possesses accurate information regarding its
customer such as: which products are valued? Where
can improvements be made?
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The Value System
• The model can be extended by linking many
value chains into a value system.
• Much of the advantage of supply chain
management comes from understanding how
information is used within each value chain of
the system.
• This can lead to the formation of entire new
businesses designed to change the information
component of value-added activities.
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The value system: interconnecting
Relationships between organizations

Supplier’s
Firm’s
value
value
Channel’s
chain
chain
value chains
Buyer’s
value
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chains
The Value System and Strategic
Alliances
• Many industries are experiencing the growth of
strategic alliances that are directly linked to
sharing information resources across existing
value systems.
• An alliance between American Airlines, Marriott
and Budget Rent-A-Car called AMRIS provides
travelers with a single point of contact.
• Thus, electronically pooling information services
of several companies can create competitive
advantage by saving customers time.
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Wiseman’s Strategic Options Generator
• Wiseman asks three questions to refine the
process of identifying strategic opportunities:
– What is the mode of the thrust?
– What is the direction of the thrust?
– What is the strategic target of the thrust?
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Types of Strategic Thrusts
• Differentiation Thrusts: focus resources on unfilled product or
service gaps.
• Cost Thrusts: focus is on reducing costs or increasing
competitor’s costs
• Innovation Thrusts: focus on creating new products or new
ways to sell, create, produce or deliver products.
• Growth Thrusts: focus on increasing size of the market size or
adding more value adding activities in the value chain
• Alliance Thrusts: combine with other groups to create a more
competitive position.
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What is the Mode?
• A firm has two choices for the mode of a a strategic
thrust:
– The firm can act offensively to improve its competitive
advantage -- or
– A firm can act defensively to reduce the opportunities
available to competitors.
• For example, a firm can innovate offensively to gain
product leadership in a market, while others use
innovation defensively to imitate the product leader.
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What is the Direction?
• Two choices for the direction of a a strategic thrust:
– The firm can use the information system to create competitive
advantage -- or
– A firm can provide the system to its chosen strategic target.
• firms have done both: developed systems for internal
use and then offered them to customers or suppliers.
– For example, although FedEx developed its Powership system
internally, it was able to offer it to its best customers, thereby
increasing their switching costs.
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What is the Strategic Target?
Suppliers:
Customers:
Competitors:
Raw materials
Channel
Direct
distributors
Information
Potential
Consumers
Labor
Substitute
Industrial
Capital
Reseller
Insurance
Government
Utilities
International
Transportation
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Functional View of the Firm
Info flows vertically up between line positions and mgmt.
After analysis is flows across to other functions.
Functional view is used when similar activities are being explained,
Coordinated, communicated or executed.
Executive Management
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