Week 1: Weekly Questions
Explain IT’s role in business and describe how you measure success
Information technology (IT) plays a crucial role in most modern businesses. The use of IT has a dramatic effect on businesses and is ultimately able to transform any firm into a multinational business through the use of e-commerce. IT plays a support role in businesses and has to support the successful performance of certain business processes. The major role IT plays in businesses is seen throughout the different functions or departments of a firm. For example, IT can be employed by the marketing department to research different characteristics of a particular consumer base, ultimately allowing the firm to travel towards business success. IT is also used by the financial department of a business to pay staff and keep record of expenditures. The necessity of IT in businesses is also confirmed through the thorough use of telecommunication devices in most contemporary businesses. Through the use of the internet, businesses can initiate online conferences with other subsidiaries, departments or completely different businesses. As it is evident that IT plays a major role in businesses, management must use various measures to evaluate its success and to assure it is successfully supporting the smooth-running of various business processes. To ensure IT systems within a firm are allowing the business to create a competitive edge and profitability, senior managers regularly measure the IT systems ability to do so. In most businesses, the return on investment of IT has come under great scrutiny. Therefore, managers use simple measures to evaluate the success of IT. Such measures include questioning whether the IT system is efficient and operating well, contemplating whether or not certain IT processes should be outsourced and examining what risks should be considered in any IT project. Due to the difficult nature of accurately measuring the success of IT within a business, key performance indicators (KPIs) are used. KPIs are fed by the somewhat philosophical notion of metrics which consist of inputs from both IT and other business professionals to personally evaluate the successes of information systems. Whilst analysing a businesses IT systems, managers evaluate their efficiency metrics. That is, whether the IT systems of the firm have proven to be fast, constantly available and always operating in an optimum fashion. The effectiveness metrics of IT systems is also evaluated when measuring the success of a businesses operating systems. Whilst determining the effectiveness of a businesses operating system, managers or chief information officers analyse whether or not the IT of a firm is ensuring the goals and objectives are being met, and also whether there are high standards of customer satisfaction and sales.
List and describe each of the forces in Porter’s Five Forces Model.
There are five forces in Michael Porter’s Force Model which are collectively used to determine the ‘relative attractiveness’ of an industry. The five forces Porter have proposed can assist a business when identifying it’s potential opportunities and threats. Such forces include the analysis of a businesses buyer power, supplier power, the threat of substitute products and services, the threat of new market entrants and the rivalry which exists among existing competitors.
Buyer power refers to the ability of consumers to influence the price of a product, as determined by the price that they are personally willing to spend for a product. When a business has a strong buyer power, it is referred to as a monopsony or a monopoly. This is when there is an array of businesses providing a product and only a limited number of consumers. A common method employed by businesses to reduce its buyer power is the use of loyalty programs such as Gloria Jeans ‘frequent sipper program’. Such programs aim to retain a strong and loyal consumer base and prevent consumers from having excessive buyer power.
Supplier power refers to the authority a supplier has over a certain industry. Such power is high if a supplier is able to ‘charge higher prices, limit quantities available and be able to shift all expenses’[1] to the consumer in the price of the finished product. A buyer-supplier relationship is when a business acts as a buyer and purchases raw materials from other businesses (suppliers) to produce their products. The use of supplier power is evident in the business of Microsoft. For instance, if Microsoft wished to increase the price of their operating systems, the profit of buyers such as Dell and HP would decrease as they would be paying a higher price for their inputs.[2] In order to decrease the supplier power a firm possesses, a business can choose to standardise the inputs it uses so they are easily able to switch between suppliers if the price of their parts increases.
Porter has also suggested that the threat of substitute goods or services should be considered if a business wishes to be successful. Many businesses are threatened by other businesses creating imitations of their products. For example, Apple has encountered many instances whereby other businesses have tried to create look-alike iPhones. The threat of such problem is high when there are various alternatives to a product on the market. However, even though the issue of substitute goods is inevitable, businesses can implement the use of switching costs which are not necessarily monetary that make customer’s feel unwilling to leave the business. For example, the online bookstore, amazon.com retains a record of consumer’s purchases to create tailored offers which hopefully intrigue the customers and persuade them to purchase additional products.[3]
There is also a constant threat of new entrants entering a particular business industry. Such threat is considerably high when new competitors find an easy way to enter a market. However, entry barriers are invisible obstructions which may prevent other organisations from effectively competing with already existent firms. For example, a new supermarket chain may wish to introduce a grocery store which completely operates off self-service. Such service is partly expected from consumers as it these technological processes are used by other leading supermarkets. Therefore, such entry barrier prevents new businesses from being completely innovative.
It is evident that competition and rivalry is evident in most business sectors. Porter believes it is essential to identify such competitive forces to ensure the highest possibility of business success. Rivalry among existing competitors is “high when competition is fierce in a market and low when competition is more complacent”[4]. One of the most competitive sectors in the Australian business market is grocery stores. Coles and Woolworths are constantly competing against one another. To overcome such competition, firms have introduced loyalty programs such as Woolworths ‘Every day reward card’ which aims to retain loyal and committed customers. Porter has also suggested that switching costs can be implemented to reduce rival power. As aforementioned, switching costs are not necessarily monetarily related but try to retain a businesses already existent customer base. For example, through the use of differentiated products and services.
View Youtube Clip "Marketing Diploma- Porter's Five Force Model" for a comprehensive understanding.
http://www.youtube.com/watch?v=57TzFsHqPLo&feature=related
Describe the relationship between business processes and value chains
A business process refers to the activities performed by businesses to complete various tasks which ultimately influences a firm’s value chain. In order to evaluate the efficiency and effectiveness of various business processes, Michael Porter’s value chain analysis can be implemented. A value chain closely analyses the worth and significance of each input (including primary and secondary activities) used in the production of the firms goods or services. To ensure the highest likelihood of business success, firms should closely scrutinise each stage to determine which steps add value to the product and which steps can be reduced in cost. A value chain consists of primary value activities (human resources) and the input of raw materials. Whilst analysing the business processes and their worth on the value chain, management must decide whether it is more worthwhile to add enhance the value of their products by lessening the capital injected into each input. Support values, such as staff reward systems is a business process which is also incorporated into the value chain which must also be analysed to see its effect on the profitability and success of a firm.
Compare Porter’s three generic strategies
Michael Porter produced three generic strategies which include broad cost leadership, broad differentiation and a focused strategy. Once a business chooses to enter a particular market, they must produce strategies which will ultimately enable them to achieve their objectives. The broad cost leadership strategy is an approach which aims to produce low cost goods and services. Businesses using this strategy aim to market their products at an industry average price or slightly under the average price to gain an intense market share in an aim to ultimately increase its revenue. Coles implement this strategy with their ‘Savings’ product line as they offer their products at a slightly lower price compared to other main brands. The broad differentiation strategy is similar to the broad cost leadership strategy in that it aims to reach a large consumer base, although, this strategy aims to distinguish a business or its products from its competitors. Such strategy aims to develop a unique product which ultimately influences consumers to pay a higher premium for the good due to its originality. Through the issuing of a higher price for such differentiated products, businesses are able to recover costs incurred from innovating a product which stands out from its competitors. In order for a business to effectively incorporate the broad differentiation strategy into their business plan, they must be able to keep up to date with the trends of their target market, have highly developed and ‘aware’ staff, effectively be able to convey the strengths of their differentiated product and also hold a positive reputation for originality.[5] Even though the broad differentiation strategy allows a business to distinguish itself from its competitors, they may be at risk of other firms imitating their products and the peril of not being able to keep up to date with the ever-changing tastes of their target market. The focus strategy is quite different to the broad cost leadership and broad differentiation strategies because such approach aims to concentrate on a narrower or niche market segment. The notion of this strategy is that the desires of a certain market can be better served if a business focuses entirely on them.[6] The focus strategy is therefore advantageous to consumers as their needs are being directly targeted. This strategy also proves to be beneficial for businesses because most firms are able to “pass higher costs on to customers since substitute products don’t exist”. [7] Even though such benefits exist, the focus strategy can prove to be hazardous because firms which use other strategies, for example, the broad cost leader approach may be able to imitate or adapt its already existent products to the differentiated products created by innovative businesses. Through the introduction of Porter's three generic strategies, his main objective was to persuade businesses to either be sellers of high quality/high priced items or low quality/low priced items rather then trying to 'sit on the bench' between these two categories.
[1] Business Driven Information Systems (2010), Baltzan et al, page 27
[2] Business Driven Information Systems (2010), Baltzan et al, page 28
[3] Business Driven Information Systems (2010), Baltzan et al, page 28
[4] Business Driven Information Systems (2010), Baltzan et al, page 29
[5] http://www.quickmba.com/strategy/generic.shtml 2007, Internet Centre for Management and Business Administration
[6] http://www.quickmba.com/strategy/generic.shtml 2007, Internet Centre for Management and Business Administration
[7] http://www.quickmba.com/strategy/generic.shtml 2007, Internet Centre for Management and Business Administration
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