What does it mean collect all orders in candy crush

ection 1.1

Business Driven MIS

LEARNING OUTCOMES

1.1Describe the information age and the differences among data, information, business intelligence, and knowledge.

1.2Explain systems thinking and how management information systems enable business communications.

COMPETING IN THE INFORMATION AGE

LO. 1.1: Describe the information age and the differences among data, information, business intelligence, and knowledge.

Did you know that . . .

The movie Avatar took more than four years to create and cost $450 million?

Lady Gaga’s real name is Stefani Joanne Angelina Germanotta?

Customers pay $2.6 million for a 30-second advertising time slot during the Super Bowl? 2

A fact is the confirmation or validation of an event or object. In the past, people primarily learned facts from books. Today, by simply pushing a button, people can find out anything, from anywhere, at any time. We live in the information age , when infinite quantities of facts are widely available to anyone who can use a computer. The impact of information technology on the global business environment is equivalent to the printing press’s impact on publishing and electricity’s impact on productivity. College student start-ups were mostly unheard of before the information age. Now, it’s not at all unusual to read about a business student starting a multimillion-dollar company from his or her dorm room. Think of Mark Zuckerberg, who started Facebook from his dorm, or Michael Dell (Dell Computers) and Bill Gates (Microsoft), who both founded their legendary companies as college students.

You may think only students well versed in advanced technology can compete in the information age. This is simply not true. Many business leaders have created exceptional opportunities by coupling the power of the information age with traditional business methods. Here are just a few examples:

Amazon is not a technology company; its original business focus was to sell books, and it now sells nearly everything.

Netflix is not a technology company; its primary business focus is to rent videos.

Zappos is not a technology company; its primary business focus is to sell shoes, bags, clothing, and accessories.

Amazon’s founder, Jeff Bezos, at first saw an opportunity to change the way people purchase books. Using the power of the information age to tailor offerings to each customer and speed the payment process, he in effect opened millions of tiny virtual bookstores, each with a vastly larger selection and far cheaper product than traditional bookstores. The success of his original business model led him to expand Amazon to carry many other types of products. The founders of Netflix and Zappos have done the same thing for videos and shoes. All these entrepreneurs were business professionals, not technology experts. However, they understood enough about the information age to apply it to a particular business, creating innovative companies that now lead entire industries.

The Internet of Things (IoT) is a world where interconnected, Internet-enabled devices or “things” can collect and share data without human intervention. Another term commonly associated with the Internet of Things is machine to machine (M2M) , which refers to devices that connect directly to other devices. Students who understand business along with the power associated with the information age and IoT will create their own opportunities and perhaps even new industries. Realizing the value of obtaining real-time data from connected things will allow you to make better-informed decisions, identify new opportunities, and analyze customer patterns to predict new behaviors. Our primary goal in this course is to arm you with the knowledge you need to compete in the information age. The core drivers of the information age are:

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN DISCUSSION

View from a Flat World

Bill Gates, founder of Microsoft, stated that 20 years ago most people would rather have been a B student in New York City than a genius in China because the opportunities available to students in developed countries were limitless. Today, many argue that the opposite is now true due to technological advances making it easier to succeed as a genius in China than a B student in New York. As a group, discuss whether you agree or disagree with Bill Gate’s statement. 3

Data

Information

Business intelligence

Knowledge (see Figure 1.2 )

Data

Data are raw facts that describe the characteristics of an event or object. Before the information age, managers manually collected and analyzed data, a time-consuming and complicated task without which they would have little insight into how to run their business. Lacking data, managers often found themselves making business decisions about how many products to make, how much material to order, or how many employees to hire based on intuition or gut feelings. In the information age, successful managers compile, analyze, and comprehend massive amounts of data daily, which helps them make more successful business decisions.

FIGURE 1.2

The Differences among Data, Information, Business Intelligence, and Knowledge

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN MIS

Who Really Won the 2014 Winter Olympics?

If you were watching the 2014 Winter Olympics, I bet you were excited to see your country and its amazing athletes compete. As you were following the Olympics day by day, you were probably checking different websites to see how your country ranked. And depending on the website you visited, you could get a very different answer to this seemingly easy question. On the NBC and ESPN networks, the United States ranked second, and on the official Sochie Olympic website, the United States ranked fourth. The simple question of who won the 2014 Winter Olympics changes significantly, depending on whom you asked. 4

In a group, take a look at the following two charts and brainstorm the reasons each internationally recognized source has a different listing for the top five winners. What measurement is each chart using to determine the winner? Who do you believe is the winner? As a manager, what do you need to understand when reading or listening to business forecasts and reports?

Figure 1.3 shows sales data for Tony’s Wholesale Company, a fictitious business that supplies snacks to stores. The data highlight characteristics such as order date, customer, sales representative, product, quantity, and profit. The second line in Figure 1.3 , for instance, shows that Roberta Cross sold 90 boxes of Ruffles to Walmart for $1,350, resulting in a profit of $450 (note that Profit = Sales − Costs). These data are useful for understanding individual sales; however, they do not provide us much insight into how Tony’s business is performing as a whole. Tony needs to answer questions that will help him manage his day-to-day operations such as:

Who are my best customers?

Who are my least-profitable customers?

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FIGURE 1.3

Tony’s Snack Company Data

What is my best-selling product?

What is my slowest-selling product?

Who is my strongest sales representative?

Who is my weakest sales representative?

What Tony needs, in other words, is not data but information.

Information

Information is data converted into a meaningful and useful context. Having the right information at the right moment in time can be worth a fortune. Having the wrong information at the right moment, or the right information at the wrong moment, can be disastrous. The truth about information is that its value is only as good as the people who use it. People using the same information can make different decisions depending on how they interpret or analyze the information. Thus information has value only insofar as the people using it do as well.

Tony can analyze his sales data and turn them into information to answer all the preceding questions and understand how his business is operating. Figures 1.4 and 1.5 , for instance, show us that Walmart is Roberta Cross’s best customer and that Ruffles is Tony’s best product measured in terms of total sales. Armed with this information, Tony can identify and then address such issues as weak products and underperforming sales representatives.

A variable is a data characteristic that stands for a value that changes or varies over time. For example, in Tony’s data, price and quantity ordered can vary. Changing variables allows managers to create hypothetical scenarios to study future possibilities. Tony may find it valuable to anticipate how sales or cost increases affect profitability. To estimate how a 20 percent increase in prices might improve profits, Tony simply changes the price variable for all orders, which automatically calculates the amount of new profits. To estimate how a 10 percent increase in costs hurts profits, Tony changes the cost variable for all orders, which automatically calculates the amount of lost profits. Manipulating variables is an important tool for any business.

Business Intelligence

Business intelligence (BI) is information collected from multiple sources such as suppliers, customers, competitors, partners, and industries that analyzes patterns, trends, and relationships for strategic decision making. BI manipulates multiple variables and in some cases even hundreds of variables, including such items as interest rates, weather conditions, and even gas prices. Tony could use BI to analyze internal data, such as company sales, along with external data about the environment such as competitors, finances, weather, holidays, and even sporting events. Both internal and external variables affect snack sales, and analyzing these variables will help Tony determine ordering levels and sales forecasts. For instance, BI can predict inventory requirements for Tony’s business for the week before the Super Bowl if, say, the home team is playing, average temperature is above 80 degrees, and the stock market is performing well. This is BI at its finest, incorporating all types of internal and external variables to anticipate business performance.

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FIGURE 1.4

Tony’s Data Sorted by Customer “Walmart” and Sales Representative “Roberta Cross”

A big part of business intelligence is an area called predictive analytics , which extracts information from data and uses it to predict future trends and identify behavioral patterns. Top managers use predictive analytics to define the future of the business, analyzing markets, industries, and economies to determine the strategic direction the company must follow to remain profitable. Tony will set the strategic direction for his firm, which might include introducing new flavors of potato chips or sports drinks as new product lines or schools and hospitals as new market segments.

Knowledge

Knowledge includes the skills, experience, and expertise, coupled with information and intelligence, that create a person’s intellectual resources. Knowledge workers are individuals valued for their ability to interpret and analyze information. Today’s workers are commonly referred to as knowledge workers and they use BI along with personal experience to make decisions based on both information and intuition, a valuable resource for any company.

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN ETHICS AND SECURITY

The Internet of Things Is Wide Open—For Everyone!

IoT is transforming our world into a living information system as we control our intelligent lighting from our smart phone to a daily health check from our smart toilet. Of course, with all great technological advances come unexpected risks, and you have to be prepared to encounter various security issues with IoT. Just imagine if your devices are hacked by someone who now can shut off your water, take control of your car, or unlock the doors of your home from thousands of miles away. We are just beginning to understand the security issues associated with IoT and M2M, and you can be sure that sensitive data leakage from your IoT device is something you will most likely encounter in your life. 5 (For more information about IoT, refer to the Opening Case Study.)

In a group, identify a few IoT devices you are using today. These can include fitness trackers that report to your iPhone, sports equipment that provides immediate feedback to an app, or even smart vacuum cleaners. If you are not using any IoT devices today, brainstorm a few you might purchase in the future. How could a criminal or hacker use your IoT to steal your sensitive data? What potential problems or issues could you experience from these types of illegal data thefts? What might be some of the signs that someone had accessed your IoT data illegally? What could you do to protect the data in your device?

Imagine that Tony analyzes his data and finds his weakest sales representative for this period is Craig Schultz. If Tony considered only this information, he might conclude that firing Craig was a good business decision. However, because Tony has knowledge about how the company operates, he knows Craig has been out on medical leave for several weeks; hence, his sales numbers are low. Without this additional knowledge, Tony might have executed a bad business decision, delivered a negative message to the other employees, and sent his best sales representatives out to look for other jobs.

The key point in this scenario is that it is simply impossible to collect all the information about every situation, and yet without that, it can be easy to misunderstand the problem. Using data, information, business intelligence, and knowledge to make decisions and solve problems is the key to finding success in business. These core drivers of the information age are the building blocks of business systems.

FIGURE 1.5

Information Gained after Analyzing Tony’s Data

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THE CHALLENGE OF DEPARTMENTAL COMPANIES AND THE MIS SOLUTION

LO 1.2: Explain systems thinking and how management information systems enable business communications.

Companies are typically organized by department or functional area such as:

Accounting: Records, measures, and reports monetary transactions.

Finance: Deals with strategic financial issues, including money, banking, credit, investments, and assets.

Human resources: Maintains policies, plans, and procedures for the effective management of employees.

Marketing: Supports sales by planning, pricing, and promoting goods or services.

Operations management: Manages the process of converting or transforming resources into goods or services.

Sales: Performs the function of selling goods or services (see Figure 1.6 ).

Each department performs its own activities. Sales and marketing focus on moving goods or services into the hands of consumers; they maintain transactional data. Finance and accounting focus on managing the company’s resources and maintain monetary data. Operations management focuses on manufacturing and maintains production data; human resources focuses on hiring and training people and maintains employee data. Although each department has its own focus and data, none can work independently if the company is to operate as a whole. It is easy to see how a business decision one department makes can affect other departments. Marketing needs to analyze production and sales data to come up with product promotions and advertising strategies. Production needs to understand sales forecasts to determine the company’s manufacturing needs. Sales needs to rely on information from operations to understand inventory, place orders, and forecast consumer demand. All departments need to understand the accounting and finance departments’ information for budgeting. For the firm to be successful, all departments must work together as a single unit sharing common information and not operate independently or in a silo (see Figure 1.7 ).

FIGURE 1.6

Departments Working Independently

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FIGURE 1.7

Departments Working Together

The MIS Solution

You probably recall the old story of three blind men attempting to describe an elephant. The first man, feeling the elephant’s girth, said the elephant seemed very much like a wall. The second, feeling the elephant’s trunk, declared the elephant was like a snake. The third man felt the elephant’s tusks and said the elephant was like a tree or a cane. Companies that operate departmentally are seeing only one part of the elephant, a critical mistake that hinders successful operation.

Successful companies operate cross-functionally, integrating the operations of all departments. Systems are the primary enabler of cross-functional operations. A system is a collection of parts that link to achieve a common purpose. A car is a good example of a system, since removing a part, such as the steering wheel or accelerator, causes the entire system to stop working.

Before jumping into how systems work, it is important to have a solid understanding of the basic production process for goods and services. Goods are material items or products that customers will buy to satisfy a want or need. Clothing, groceries, cell phones, and cars are all examples of goods that people buy to fulfill their needs. Services are tasks people perform that customers will buy to satisfy a want or need. Waiting tables, teaching, and cutting hair are all examples of services that people pay for to fulfill their needs (see Figure 1.8 ).

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FIGURE 1.8

Different Types of Goods and Services

Production is the process by which a business processes raw materials or converts them into a finished product for its goods or services. Just think about making a hamburger (see Figure 1.9 ). First, you must gather all of the inputs or raw materials such as the bun, patty, lettuce, tomato, and ketchup. Second, you process the raw materials, so in this example you would need to cook the patty, wash and chop the lettuce and tomato, and place all of the items in the bun. Finally, you would have your output or finished product—your hamburger! Productivity is the rate at which goods and services are produced based on total output given total inputs. Given our previous example, if a business could produce the same hamburger with less-expensive inputs or more hamburgers with the same inputs, it would see a rise in productivity and possibly an increase in profits. Ensuring the input, process, and output of goods and services work across all of the departments of a company is where systems add tremendous value to overall business productivity.

FIGURE 1.9

Input, Process, Output Example

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FIGURE 1.10

Overview of Systems Thinking

Systems Thinking

Systems thinking is a way of monitoring the entire system by viewing multiple inputs being processed or transformed to produce outputs while continuously gathering feedback on each part (see Figure 1.10 ). Feedback is information that returns to its original transmitter (input, transform, or output) and modifies the transmitter’s actions. Feedback helps the system maintain stability. For example, a car’s system continuously monitors the fuel level and turns on a warning light if the gas level is too low. Systems thinking provides an end-to-end view of how operations work together to create a product or service. Business students who understand systems thinking are valuable resources because they can implement solutions that consider the entire process, not just a single component.

Management information systems (MIS) is a business function, like accounting and human resources, which moves information about people, products, and processes across the company to facilitate decision making and problem solving. MIS incorporates systems thinking to help companies operate cross-functionally. For example, to fulfill product orders, an MIS for sales moves a single customer order across all functional areas, including sales, order fulfillment, shipping, billing, and finally customer service. Although different functional areas handle different parts of the sale, thanks to MIS, to the customer the sale is one continuous process. If one part of the company is experiencing problems, however, then, like the car without a steering wheel, the entire system fails. If order fulfillment packages the wrong product, it will not matter that shipping, billing, and customer service did their jobs right, since the customer will not be satisfied when he or she opens the package.

MIS can be an important enabler of business success and innovation. This is not to say that MIS equals business success and innovation, or that MIS represents business success and innovation. MIS is a tool that is most valuable when it leverages the talents of people who know how to use and manage it effectively. To perform the MIS function effectively, almost all companies, particularly large and medium-sized ones, have an internal MIS department, often called information technology (IT), information systems (IS), or management information systems (MIS). For the purpose of this text, we will refer to it as MIS.

MIS Department Roles and Responsibilities

MIS as a department is a relatively new functional area, having been around formally for about 40 years. Job titles, roles, and responsibilities often differ from company to company, but the most common are displayed in Figure 1.11 . Although many companies may not have a different individual for each of these positions, they must have top managers who take responsibility for all these areas.

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FIGURE 1.11

The Roles and Responsibilities of MIS

section 1.2

Business Strategy

LEARNING OUTCOMES

1.3Explain why competitive advantages are temporary.

1.4Identify the four key areas of a SWOT analysis.

1.5Describe Porter’s Five Forces Model and explain each of the five forces.

1.6Compare Porter’s three generic strategies.

1.7Demonstrate how a company can add value by using Porter’s value chain analysis.

IDENTIFYING COMPETITIVE ADVANTAGES

LO 1.3: Explain why competitive advantages are temporary.

Running a company today is similar to leading an army; the top manager or leader ensures all participants are heading in the right direction and completing their goals and objectives. Companies lacking leadership quickly implode as employees head in different directions attempting to achieve conflicting goals. To combat these challenges, leaders communicate and execute business strategies (from the Greek word stratus for army and ago for leading).

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A business strategy is a leadership plan that achieves a specific set of goals or objectives such as increasing sales, decreasing costs, entering new markets, or developing new products or services. A stakeholder is a person or group that has an interest or concern in an organization. Stakeholders drive business strategies, and depending on the stakeholder’s perspective, the business strategy can change. It is not uncommon to find stakeholders’ business strategies have conflicting interests such as investors looking to increase profits by eliminating employee jobs. Figure 1.12 displays the different stakeholders found in an organization and their common business interests.

Good leaders also anticipate unexpected misfortunes, from strikes and economic recessions to natural disasters. Their business strategies build in buffers or slack, allowing the company the ability to ride out any storm and defend against competitive or environmental threats. Of course, updating business strategies is a continuous undertaking as internal and external environments rapidly change. Business strategies that match core company competencies to opportunities result in competitive advantages, a key to success!

A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. Competitive advantages provide the same product or service either at a lower price or with additional value that can fetch premium prices. Unfortunately, competitive advantages are typically temporary because competitors often quickly seek ways to duplicate them. In turn, organizations must develop a strategy based on a new competitive advantage. Ways that companies duplicate competitive advantages include acquiring the new technology, copying the business operations, and hiring away key employees. The introduction of Apple’s iPod and iTunes, a brilliant merger of technology, business, and entertainment, offers an excellent example.

FIGURE 1.12

Stakeholders’ Interests

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In early 2000, Steve Jobs was fixated on developing video editing software when he suddenly realized that millions of people were using computers to listen to music, a new trend in the industry catapulted by illegal online services such as Napster. Jobs was worried that he was looking in the wrong direction and had missed the opportunity to jump on the online music bandwagon. He moved fast, however, and within four months he had developed the first version of iTunes for the Mac. Jobs’ next challenge was to make a portable iTunes player that could hold thousands of songs and be completely transportable. Within nine months, the iPod was born. With the combination of iTunes and iPod, Apple created a significant competitive advantage in the marketplace. Many firms began following Apple’s lead by creating portable music players to compete with the iPod. In addition, Apple continues to create new and exciting products to gain competitive advantages, such as its iPad, a larger version of the iPod that functions more as a computer than a music player. 6

When a company is the first to market with a competitive advantage, it gains a particular benefit, such as Apple did with its iPod. This first-mover advantage occurs when a company can significantly increase its market share by being first with a new competitive advantage. FedEx created a first-mover advantage by developing its customer self-service software, which allows people to request parcel pickups, print mailing slips, and track parcels online. Other parcel delivery companies quickly began creating their own online services. Today, customer self-service on the Internet is a standard feature of the parcel delivery business.

Competitive intelligence is the process of gathering information about the competitive environment, including competitors’ plans, activities, and products, to improve a company’s ability to succeed. It means understanding and learning as much as possible as soon as possible about what is occurring outside the company to remain competitive. Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not send its sales representatives into grocery stores just to stock shelves; they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain competitive intelligence on everything from how well-competing products are selling to the strategic placement of its own products. 7 Managers use four common tools to analyze competitive intelligence and develop competitive advantages as displayed in Figure 1.13 .

Swot Analysis: Understanding Business Strategies

LO 1.4: Identify the Four Key Areas of a SWOT.

A SWOT analysis evaluates an organization’s strengths, weaknesses, opportunities, and threats to identify significant influences that work for or against business strategies (see Figure 1.14 ). Strengths and weaknesses originate inside an organization, or internally. Opportunities and threats originate outside an organization, or externally and cannot always be anticipated or controlled.

FIGURE 1.13

Business Tools for Analyzing Business Strategies

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN INNOVATION

SWOT Your Students

What is your dream job? Do you have the right skills and abilities to land the job of your dreams? If not, do you have a plan to acquire those sought-after skills and abilities? Do you have a personal career plan or strategy? Just like a business, you can perform a personal SWOT analysis to ensure your career plan will be successful. You want to know your strengths and recognize career opportunities while mitigating your weaknesses and any threats that can potentially derail your career plans. A key area where many people struggle is technology, and without the right technical skills, you might find you are not qualified for your dream job. One of the great benefits of this course is its ability to help you prepare for a career in business by understanding the key role technology plays in the different industries and functional areas. Regardless of your major, you will all use business driven information systems to complete the tasks and assignments associated with your career.

Perform a personal SWOT analysis for your career plan, based on your current skills, talents, and knowledge. Be sure to focus on your personal career goals, including the functional business area in which you want to work and the potential industry you are targeting, such as health care, telecommunications, retail, or travel.

After completing your personal SWOT analysis, take a look at the table of contents in this text and determine whether this course will eliminate any of your weaknesses or create new strengths. Determine whether you can find new opportunities or mitigate threats based on the material we cover over the next several weeks. For example, Chapter 9 covers project management in detail—a key skill for any business professional who must run a team. Learning how to assign and track work status will be a key tool for any new business professional. Where would you place this great skill in your SWOT analysis? Did it help eliminate any of your weaknesses? When you have finished this exercise, compare your SWOT with your peers to see what kind of competition you will encounter when you enter the workforce.

Potential Internal Strengths (Helpful): Identify all key strengths associated with the competitive advantage including cost advantages, new and/or innovative services, special expertise and/or experience, proven market leader, improved marketing campaigns, and so on.

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FIGURE 1.14

Sample SWOT Analysis

Potential Internal Weaknesses (Harmful): Identify all key areas that require improvement. Weaknesses focus on the absence of certain strengths, including absence of an Internet marketing plan, damaged reputation, problem areas for service, outdated technology, employee issues, and so on.

Potential External Opportunities (Helpful): Identify all significant trends along with how the organization can benefit from each, including new markets, additional customer groups, legal changes, innovative technologies, population changes, competitor issues, and so on.

Potential External Threats (Harmful): Identify all threats or risks detrimental to your organization, including new market entrants, substitute products, employee turnover, differentiating products, shrinking markets, adverse changes in regulations, economic shifts, and so on.

THE FIVE FORCES MODEL—EVALUATING INDUSTRY ATTRACTIVENESS

LO 1.5: Describe Porter’s Five Forces Model and explain each of the five forces.

Michael Porter, a university professor at Harvard Business School, identified the following pressures that can hurt potential sales:

Knowledgeable customers can force down prices by pitting rivals against each other.

Influential suppliers can drive down profits by charging higher prices for supplies.

Competition can steal customers.

New market entrants can steal potential investment capital.

Substitute products can steal customers.

Formally defined, Porter’s Five Forces Model analyzes the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry. Its purpose is to combat these competitive forces by identifying opportunities, competitive advantages, and competitive intelligence. If the forces are strong, they increase competition; if the forces are weak, they decrease competition. This section details each of the forces and its associated MIS business strategy (see Figure 1.15 ). 8

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FIGURE 1.15

Porter’s Five Forces Model

Buyer Power

Buyer power is the ability of buyers to affect the price they must pay for an item. Factors used to assess buyer power include number of customers, their sensitivity to price, size of orders, differences between competitors, and availability of substitute products. If buyer power is high, customers can force a company and its competitors to compete on price, which typically drives prices down.

One way to reduce buyer power is by manipulating switching costs , costs that make customers reluctant to switch to another product or service. Switching costs include financial as well as intangible values. The cost of switching doctors, for instance, includes the powerful intangible components of having to build relationships with the new doctor and nurses as well as transferring all your medical history. With MIS, however, patients can store their medical records on DVDs or thumb drives, allowing easy transferability. The Internet also lets patients review websites for physician referrals, which takes some of the fear out of trying someone new. 9

Companies can also reduce buyer power with loyalty programs , which reward customers based on their spending. The airline industry is famous for its frequent-flyer programs, for instance. Because of the rewards travelers receive (free airline tickets, upgrades, or hotel stays), they are more likely to be loyal to or give most of their business to a single company. Keeping track of the activities and accounts of many thousands or millions of customers covered by loyalty programs is not practical without large-scale business systems, however. Loyalty programs are thus a good example of using MIS to reduce buyer power.10

Supplier Power

A supply chain consists of all parties involved, directly or indirectly, in obtaining raw materials or a product. In a typical supply chain, a company will be both a supplier (to customers) and a customer (of other suppliers), as illustrated in Figure 1.16 . Supplier power is the suppliers’ ability to influence the prices they charge for supplies (including materials, labor, and services). Factors used to appraise supplier power include number of suppliers, size of suppliers, uniqueness of services, and availability of substitute products. If supplier power is high, the supplier can influence the industry by:

Charging higher prices.

Limiting quality or services.

Shifting costs to industry participants.11

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FIGURE 1.16

Traditional Supply Chain

Typically, when a supplier raises prices, the buyers will pass on the increase to their customers by raising prices on the end product. When supplier power is high, buyers lose revenue because they cannot pass on the raw material price increase to their customers. Some powerful suppliers, such as pharmaceutical companies, can exert a threat over an entire industry when substitutes are limited and the product is critical to the buyers. Patients who need to purchase cancer-fighting drugs have no power over price and must pay whatever the drug company asks because there are few available alternatives.

Using MIS to find alternative products is one way of decreasing supplier power. Cancer patients can now use the Internet to research alternative medications and practices, something that was next to impossible just a few decades ago. Buyers can also use MIS to form groups or collaborate with other buyers, increasing the size of the buyer group and reducing supplier power. For a hypothetical example, the collective group of 30,000 students from a university has far more power over price when purchasing laptops than a single student.12

Threat of Substitute Products or Services

The threat of substitute products or services is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose. For example, travelers have numerous substitutes for airline transportation, including automobiles, trains, and boats. Technology even makes videoconferencing and virtual meetings possible, eliminating the need for some business travel. Ideally, a company would like to be in a market in which there are few substitutes for the products or services it offers.

Polaroid had this unique competitive advantage for many years until it forgot to observe competitive intelligence. Then the firm went bankrupt when people began taking digital pictures with everything from video cameras to cell phones.

A company can reduce the threat of substitutes by offering additional value through wider product distribution. Soft-drink manufacturers distribute their products through vending machines, gas stations, and convenience stores, increasing the availability of soft drinks relative to other beverages. Companies can also offer various add-on services, making the substitute product less of a threat. For example, iPhones include capabilities for games, videos, and music, making a traditional cell phone less of a substitute.13

Threat of New Entrants

The threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to joining a market. An entry barrier is a feature of a product or service that customers have come to expect, and entering competitors must offer the same for survival. For example, a new bank must offer its customers an array of MIS-enabled services, including ATMs, online bill paying, and online account monitoring. These are significant barriers to new firms entering the banking market. At one time, the first bank to offer such services gained a valuable first-mover advantage, but only temporarily, as other banking competitors developed their own MIS services.14

Rivalry among Existing Competitors

Rivalry among existing competitors is high when competition is fierce in a market and low when competitors are more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in almost every industry. The retail grocery industry is intensively competitive. Kroger, Safeway, and Albertsons in the United States compete in many ways, essentially trying to beat or match each other on price. Most supermarket chains have implemented loyalty programs to provide customers special discounts while gathering valuable information about their purchasing habits. In the future, expect to see grocery stores using wireless technologies that track customer movements throughout the store to determine purchasing sequences.

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN GLOBALIZATION

Keeping Sensitive Data Safe When It’s Not in a Safe

In the past few years, data collection rates have skyrocketed, and some estimate we have collected more data in the past four years than since the beginning of time. According to International Data Corporation (IDC), data collection amounts used to double every four years. With the massive growth of smart phones, tablets, and wearable technology devices, it seems as though data is being collected from everything, everywhere, all the time. It is estimated that data collection is doubling every two years, and soon it will double every six months. That is a lot of data! With the explosion of data collection, CTOs, CIOs, and CSOs are facing extremely difficult times as the threats to steal corporate sensitive data also growing exponentially. Hackers and criminals have recently stolen sensitive data from retail giant Target and even the Federal Reserve Bank.

To operate, sensitive data has to flow outside an organization to partners, suppliers, community, government, and shareholders. List 10 types of sensitive data found in a common organization. Review the list of stakeholders; determine which types of sensitive data each has access to and whether you have any concerns about sharing this data. Do you have to worry about employees and sensitive data? How can using one of the four business strategies discussed in this section help you address your data leakage concerns?

Product differentiation occurs when a company develops unique differences in its products or services with the intent to influence demand. Companies can use differentiation to reduce rivalry. For example, although many companies sell books and videos on the Internet, Amazon differentiates itself by using customer profiling. When a customer visits Amazon.com repeatedly, Amazon begins to offer products tailored to that particular customer based on his or her profile. In this way, Amazon has reduced its rivals’ power by offering its customers a differentiated service.

To review, the Five Forces Model helps managers set business strategy by identifying the competitive structure and economic environment of an industry. If the forces are strong, they increase competition; if the forces are weak, they decrease it (see Figure 1.17 ).15

Analyzing the Airline Industry

Let us bring Porter’s five forces together to look at the competitive forces shaping an industry and highlight business strategies to help it remain competitive. Assume a shipping company is deciding whether to enter the commercial airline industry. If performed correctly, an analysis of the five forces should determine that this is a highly risky business strategy because all five forces are strong. It will thus be difficult to generate a profit.

FIGURE 1.17

Strong and Weak Examples of Porter’s Five Forces

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FIGURE 1.18

Five Forces Model in the Airline Industry

Buyer power: Buyer power is high because customers have many airlines to choose from and typically make purchases based on price, not carrier.

Supplier power: Supplier power is high since there are limited plane and engine manufacturers to choose from, and unionized workforces (suppliers of labor) restrict airline profits.

Threat of substitute products or services: The threat of substitute products is high from many transportation alternatives, including automobiles, trains, and boats, and from transportation substitutes such as videoconferencing and virtual meetings.

Threat of new entrants: The threat of new entrants is high because new airlines are continually entering the market, including sky taxies offering low-cost on-demand air taxi service.

Rivalry among existing competitors: Rivalry in the airline industry is high, and websites such as Travelocity.com force them to compete on price (see Figure 1.18 ).16

THE THREE GENERIC STRATEGIES—CHOOSING A BUSINESS FOCUS

LO 1.6: Compare Porter’s three generic strategies.

Once top management has determined the relative attractiveness of an industry and decided to enter it, the firm must formulate a strategy for doing so. If our sample company decided to join the airline industry, it could compete as a low-cost, no-frills airline or as a luxury airline providing outstanding service and first-class comfort. Both options offer different ways of achieving competitive advantages in a crowded marketplace. The low-cost operator saves on expenses and passes the savings along to customers in the form of low prices. The luxury airline spends on high-end service and first-class comforts and passes the costs on to the customer in the form of high prices.

Porter’s three generic strategies are generic business strategies that are neither organization nor industry specific and can be applied to any business, product, or service. These three generic business strategies for entering a new market are: (1) broad cost leadership, (2) broad differentiation, and (3) focused strategy. Broad strategies reach a large market segment, whereas focused strategies target a niche or unique market with either cost leadership or differentiation. Trying to be all things to all people is a recipe for disaster because doing so makes projecting a consistent image to the entire marketplace difficult. For this reason, Porter suggests adopting only one of the three generic strategies illustrated in Figure 1.19 .17

Figure 1.20 applies the three strategies to real companies, demonstrating the relationships among strategies (cost leadership versus differentiation) and market segmentation (broad versus focused).

Broad market and low cost: Walmart competes by offering a broad range of products at low prices. Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.

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APPLY YOUR KNOWLEDGE

BUSINESS DRIVEN DEBATE

Is Technology Making Us Dumber or Smarter?

Choose a side and debate the following:

Side A Living in the information age has made us smarter because we have a huge wealth of knowledge at our fingertips whenever or wherever we need it.

Side B Living in the information age has caused people to become lazy and dumber because they are no longer building up their memory banks to solve problems; machines give them the answers they need to solve problems.

Broad market and high cost: Neiman Marcus competes by offering a broad range of differentiated products at high prices. Its business strategy is to offer a variety of specialty and upscale products to affluent consumers.

Narrow market and low cost: Payless competes by offering a specific product, shoes, at low prices. Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which also sells low-cost shoes, by offering a far bigger selection of sizes and styles.

Narrow market and high cost: Tiffany & Co. competes by offering a differentiated product, jewelry, at high prices. Its business strategy allows it to be a high-cost provider of premier designer jewelry to affluent consumers.

FIGURE 1.19

Porter’s Three Generic Strategies

FIGURE 1.20

Examples of Porter’s Three Generic Strategies

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VALUE CHAIN ANALYSIS—EXECUTING BUSINESS STRATEGIES

LO 1.7: Demonstrate how a company can add value by using Porter’s value chain analysis.

Firms make profits by applying a business process to raw inputs to turn them into a product or service that customers find valuable. A business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. Once a firm identifies the industry it wants to enter and the generic strategy it will focus on, it must then choose the business processes required to create its products or services. Of course, the firm will want to ensure the processes add value and create competitive advantages. To identify these competitive advantages, Michael Porter created value chain analysis , which views a firm as a series of business processes, each of which adds value to the product or service.

Value chain analysis is a useful tool for determining how to create the greatest possible value for customers (see Figure 1.21 ). The goal of value chain analysis is to identify processes in which the firm can add value for the customer and create a competitive advantage for itself, with a cost advantage or product differentiation.

The value chain groups a firm’s activities into two categories, primary value activities, and support value activities. Primary value activities , shown at the bottom of the value chain in Figure 1.21 , acquire raw materials and manufacture, deliver, market, sell, and provide aftersales services.

1.Inbound logistics acquires raw materials and resources and distributes to manufacturing as required.

2.Operations transforms raw materials or inputs into goods and services.

3.Outbound logistics distributes goods and services to customers.

4.Marketing and sales promotes, prices, and sells products to customers.

5.Service provides customer support after the sale of goods and services. 18

Support value activities , along the top of the value chain in Figure 1.21 , include firm infrastructure, human resource management, technology development, and procurement. Not surprisingly, these support the primary value activities.

Firm infrastructure includes the company format or departmental structures, environment, and systems.

Human resource management provides employee training, hiring, and compensation.

Technology development applies MIS to processes to add value.

Procurement purchases inputs such as raw materials, resources, equipment, and supplies.

It is easy to understand how a typical manufacturing firm transforms raw materials such as wood pulp into paper. Adding value in this example might include using high-quality raw materials or offering next-day free shipping on any order. How, though, might a typical service firm transform raw inputs such as time, knowledge, and MIS into valuable customer service knowledge? A hotel might use MIS to track customer reservations and then inform front-desk employees when a loyal customer is checking in so the employee can call the guest by name and offer additional services, gift baskets, or upgraded rooms. Examining the firm as a value chain allows managers to identify the important business processes that add value for customers and then find MIS solutions that support them.