An organization's ability to be profitable and operate competitively in the business environment is primarily affected by five competitive forces. The threat of potential entrants relates to the ease of setting up new businesses in a particular industry. This will increase competition in the industry and therefore may decrease the profitability of incumbents in the industry. Barriers to enter an industry have a significant effect on this threat. The power of suppliers refers to the bargaining power that suppliers hold over the organization. This power is especially high when there is a monopoly by the supplier and the costs of switching to alternative suppliers is high for the organization. An organization's costs may increase thereby affecting profitability. The power of buyers is the negotiating power of customers, for example, in terms of prices and product quality. Besides that, substitutes pose a threat to the organization. Substitutes are alternative products or services that function in a similar way as the organization's product. Substitutes may decrease demand for the organization's product. Competitive rivalry is the competition between existing operators in an industry for market share. This is common when rivals are of the same size.
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An organization can utilize the five forces to develop a competitive information systems strategy by first determining the main forces that affect profitability in its industry. The extent of the effect of each competitive force differs for every industry. Subsequently the organization can strategize to minimize the threat these forces. Finally the organization identifies the information systems they possess and plan to utilize these tools to maximize their potential. This will enable it to gain a competitive advantage.
A typical industry consists of many types of companies which are being influenced by the Five Forces that was introduced by Michael Porter. This framework that was introduced by him was slowly adapted by many companies in the particular industry as it was a strategic move that was being carried out by many business managers to develop an edge over their rival firms. Many managers understood the industry as a whole much better with the model that was introduced by Michael Porter as it helped a particular company to analyze its position in the industry more effectively. A company can know where exactly it stands in an industry besides knowing how to further improve their position by increasing barriers to entry, lowering threats of substitutes, lowering supplier power, lowering buyer power and lowering rivalry of competitors. This has caused companies these days to compete more intensely in trying to gain a significant advantage over their competitors. In this modern era where technology has taken the business environment by storm, a company's information system plays a vital role in information management. As such, companies are forced to develop information systems that provide them with a competitive advantage while still holding on to the core principles of the Five Forces model.
One of the Five Forces that was described by Michael Porter is rivalry among existing competitors. Rivalry takes place in many different ways within a particular industry. It may take many different forms such as price discounting, introduction of new products, advertising campaigns, and improving the services provided. Hence, the higher rivalry, the lower the profitability of an industry as companies may have to incur large amount of expenses to gain a competitive advantage over their rivals. As such, this results in intense competition amongst companies within a given industry. Their intensity of rivalry is greatest if competitors are numerous, industry growth is slow, exit barriers are high and rivals are highly committed to the industry. Hence, to overcome these intense conditions, companies are turning to the usage of sophisticated information systems to rise above their rivals within the industry. As such, companies adopt many types of software or computer programmes to increase operational efficiency and improve the quality of customer service provided. This was achieved by Bennet, a leading Italian hypermarket chain. The company deployed the Microsoft Biz Talk Server 2004 and The Microsoft .NET Framework development environment. This allowed the company to automate its customer's loyalty point management system and at the same time allowing Shell customers to accumulate points at Bennet stores. In addition, the implemented Biz Talk Server 2004 software allows effective system integration which in turn enabled the new loyalty solution to be extended efficiently to additional business partners.
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The second force that was introduced by Michael Porter is the threat of entry. When new companies join a certain industry, they bring new capacity and a desire to gain market share that induces competition in the areas of prices, costs and the rate of investment. According to Stair et al. (2010) states that 'a threat appears when entry and exit costs to an industry are low and the technology needed to start and maintain a business is commonly available'. Hence, the threat of entry sets a limit on the profit potential of an industry. When threat is high, companies currently in the industry have to increase investment as well as develop more effective pricing strategies in order to deter new entrants. For example, in the case of Starbucks, the company solidified its position within the market by investing aggressively in modernizing their stores and menus as their industry has very low barriers of entry. In terms of information systems implementation, a company can invest in maintaining and constantly improving their systems to deter possible entrants from joining the market. A company may develop massive online e-business systems to gain a huge percentage of the market share and as such is able to lower possible entries of companies into the market. This is because customers would be accustomed to purchasing items online as companies would be able to ensure reliability of their service while communicating with the buyers directly to improve their business strategies. For example, in the past, Dell has invested a large amount of capital into the development of their online e-commerce through their website Dell.com.
The next force that has a similar impact to the industry is the bargaining power of buyers. A high buyer power can force down prices, demand better quality or more services which increases the costs for companies, and generally causes companies of the same industries to go against each other at the expense of industry profitability. Therefore, customers are considered powerful when they have negotiating leverage relative to an industry's participants particularly when they are sensitive towards the price. Hence, companies would want to be in an industry which has a low buyer power as they would then be able to control the selling price of their goods and services. Low buyer power can be achieved when the switching costs for buyers are high. This keeps them loyal a single company. To keep buyer power low, companies can choose to implement information systems that will solidify their positions amongst their buyers. FedEx, one of the world's largest providers of shipping services, allows customers to track the progress of their shipments though their online database. The usage of this software increases consumer confidence in the services FedEx provides and as such increases brand loyalty. Smaller shipping companies would not be able to cut into FedEx's market share as the loyalty created from their online systems secures FedEx's position in the market.
The fourth force that influences the industry is the bargaining power of suppliers. High supplier power is the flipside of low buyer power, which means that suppliers can capture more of the profits for themselves by charging higher prices, limiting quality of services, or shifting costs to industry participants. Supplier power can be reduced by implementing what is known as JIT system or 'just in time' system. InvestorWords.com defines just in time as 'a strategy for inventory management in which raw materials and components are delivered from the vendor or supplier immediately before they are needed in the manufacturing process'. By using this approach, a supplier has to enter into an agreement with the buyer to ensure that their systems are integrated. Here is where information systems play an important role. By utilizing an integrated information system, the buyer can notify the supplier if the stock levels within the company are running low. This system then allows the supplier to react quickly and respond to the needs of the buyer almost immediately. Therefore, the buyer can avoid any delays in the production process as well as minimizing the costs that it incurs by storing the inventory. A good example would be Toyota, which is considered the first company to popularize the JIT system. Taichii Ohno and Shigeo Shingo developed this system in Japan during their time at Toyota Motor Company which emphasized the central role of inventory management.
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In conclusion, with the introduction of information systems into the business environment, Porter's Five Forces Model can still be incorporated into the business strategies of companies. It is observed that a direct relationship does exist between a companies' performance and the application of the Five Forces Model while utilizing the information systems to gain a competitive advantage over the other companies in the same industry. As such, managers and business strategists have already begun incorporating the Five Forces Model into the design of more sophisticated system as they realize the importance of this correlation. Therefore, with the rapid growth of software development, it can be expected that information systems would be able to be further utilized by companies and thus, increasing efficiency and effectiveness of a given industry.