An Information System Is Commerce Essay


An information system (IS) is any combination of information technology (IT) and peoples activities that support operations, management and decision making. In a very broad sense, the term information system is frequently used to refer to the interaction between people, processes, data and technology. In this sense, the term is used to refer not only to the information and communication technology (ICT) that an organization uses, but also to the way in which people interact with this technology in support of business processes.

Some writers distinguish between information systems, computer systems, and business processes. Information systems typically include an ICT component but are not purely concerned with ICT, focusing instead on the end use of information technology. Information systems are also different from business processes. Information systems help to control the performance of business processes.

As such, information systems inter-relate with data systems on the one hand and activity systems on the other. An information system is a form of communication system in which data represent and are processed as a form of social memory. An information system can also be considered a semi-formal language which supports human decision making and action.

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An Information System consists of five basic resources, namely:

People, which consists of IT specialists (such as a Database Administrator or Network Engineer) and end-users (such as Data Capture Clerks).[7]

Hardware, which consists of all the physical aspects of an information system, ranging from peripherals to computer parts and servers.[7]

Software, which consists of System Software, Application Software and Utility Software.[7]

Data, which consists of all the knowledge and databases in the IS.[7]

Networks, which consists of communication media and network support.[7]

An information system comprises of all the components that collect, manipulate, and disseminate data or information. It usually includes hardware, software, people, communications systems such as telephone lines, and the data itself. The activities involve

includes inputting data, processing of data into information, storage of data and information, and the production of outputs such as management reports.

In short information system Information system consists of five basic resources which are people, hardware, software, data and networks so as to facilitate planning, control, coordination, and decision making in an organization.

According to Porter there are five competitive forces that shape every single industry and market. These five forces consist of, the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services, and the intensity of competition among current rivals within the industry.

Such forces help to carry out an analysis of the organisation's current position ranging from the intensity of competition to the profitability and attractiveness of an industry. We deal with these 5 forces on a daily basis. Figure 1 shows the relationship between the different competitive forces.

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services.

The bargaining power of suppliers is more likely to be high when, the market is dominated by a few large suppliers rather than a fragmented source of supply, as is the case with Microsoft and Intel, which dominate the highly-fragmented PC industry. These suppliers of key components dominate price, terms, and quantities of operating systems and CPUs. The result is a PC industry that is far less profitable than the suppliers of critical components like Microsoft and Intel. There are no substitutes or few substitutes for a component, for example with CPUs.The suppliers customers are fragmented, so their bargaining power is low. There are high costs involved when switching from one supplier to another one, Suppliers may integrate forward so as to obtain higher prices and margins. This threat is especially high when, the buying industry has a higher profitability than the supplying industry. Forward integration provides economies of scale for the supplier. The buying industry can prevent suppliers from developing, such as, the reluctance in accepting new releases of products. The buying industry has low barriers to entry.

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The buying industry often faces a high pressure on margins from their suppliers in such conditions. The relationship to powerful suppliers can potentially reduce strategic options for organizations.

Bargaining Power of Buyers

Equally, the bargaining power of buyers determines how much they can impose pressure on margins and volumes. Customers bargaining power is likely to be high when they are small in number and/or they buy in large volumes. When the product is undifferentiated and can be replaces by substitutes, buyers can switch to an alternative product easily and would not incur high costs. When a buyer purchases in large volumes from a supplier, this accounts for a high amount in the supplier's revenue, giving buyers an upper hand in such transactions. Buyers power also increase when the product does not have strategical importance for them. Porter argues that internet technology provides buyers with easier access to information about products and suppliers, thus strengthening buyers bargaining power.

Threat of New Entrants

Competition in an industry will increase, when it is easier for other companies to enter this industry. New entrants within the industry could change major determinants of the market environment, such as, market shares, prices, customer loyalty, at any time. This will pressurize existing players in this industry to react and to make adjustments.

The threat of new entries will depend on the extent to which there are barriers to entry. These include the following:- Customers brand loyalty ,buyers will incur high switching costs , initially there are high investments and fixed costs , existing businesses have good customer relations, such as, from long-term service contracts ,Protected intellectual property like patents, licenses etc and Legislation and government action in place.

Threat of Substitutes

This arises when there are alternative products with lower prices of better performance parameters serving the same purpose. Products can be substituted wholly or partially.

In such cases potentially this would attract a major proportion of market volume, therefore decreasing the potential sales for existing players. This category also relates to complementary products. The use of Information technology in businesses can bring about substitute products or services and also protect against them.

The former occurs when different manufacturers fulfil exactly the same purpose and partial substitution of products occurs when only partially substitute by each other. There are also substitute sources, where the exactly the same product is sourced by two or more distributors.

The threat of substitutes is also determined by factors which have an impact on the threat of new entrants, such as, brand loyalty of customers, good customer relations, high switching costs which customers will incur the current price for performance of substitute and current trends.

Competitive Rivalry between Existing Players

This force relates to the intensity of competition between existing companies in an industry. High competitive pressure will bring prices and margins down, thus affecting company's profits within the industry.

Competition between existing players is likely to increase when there is a high amount of competitors with equivalent size, power and having similar strategies. If there is little differentiation between competitors and their products, this gives rise to a price competition. Low market growth rates, as growth of a particular company is possible only at the expense of a competitor, for example with airlines, heavy equipment. There are high barriers to exit, for example, expensive and highly specialized equipment.

The 5-Forces model assists businesses to identify weakness, e.g. those areas where it is unprepared or weak. Helps to analyse what competitive challenges are impacting the business, from suppliers, customers, etc. Such analysis helps businesses to create systems to effectively respond to those challenges and constraints. Porter's model is based on the view that a corporate strategy should meet the opportunities and threats which organizations face in its external environment.

The effect of Porter's five forces varies among industries. However, whatever the industry type, the five forces influence profitability as they affect the prices, the costs, and the capital investment essential for survival and competition in industry. This model also helps in making strategic decisions as it is used by managers to determine the industry's competitive structure.

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The Five Forces Model provides a way to think about how information resources can create competitive advantages. Porter's Model, can assist Management in areas such as,(a)to envisage key sources of competition that they could encounter,(b)identify uses of information resources to enhance their competitive position against competitive threats and (c) to consider likely changes in competitive threats in the future. The 5 forces model offers a simple way to understand where the industry is moving to not just within. Over recent years due to the rapid growth in Information Technology [IT], the WEB has changed the nature of competition. Porter [2001] argues that the main impact of the Web is to increase competition, which would more likely decrease an organisation's profit.

Some later economists suggest that government is the sixth force in Porter's model.

The strength of each of those forces is a separate function of the industry structure, which Porter defines as "the underlying economic and technical characteristics of an industry."

It can be argued that some businesses are more prosperous than others because, they have either better resources that others do, or they are able to use commonly available resources more efficiently. This could be due to superior knowledge and information assets. Nevertheless, they excel in revenue growth, profitability, or productivity growth, ultimately increasing their stock market valuations compared to their competitors.

One of the main criticisms of the Five Forces Model is that it is rather static. Given that it describes the current state of an industry, therefore it would appear unsuitable for our dynamic, in an ever changing and uncertain world.

The information revolution and the tales of competitive advantage have shifted management's view regarding the role of Information Systems in businesses. In the past it was considered to be only a part of the operating of a business, whereas, now there is an increasing recognition of the value of information. Information is also seen as a depreciating asset and must be treated as a resource that the organization could or should use in its business. ( Robson, 1997, p. 188)

A company's performance in competitive markets is based on its competitive advantage, above average performance in the long term can be generated by creating a sustainable competitive advantage. Porter's views on competitive advantage can be used to look at how Information Systems affect the organisation's performance by changing the relationships within the five forces that shape its competitive environment.

According to Porter the fundamental basis for above average performance in the long term is a sustainable competitive advantage; without a sustainable competitive advantage, a company can only reap the windfall , that is, make the largest profits it can whilst it is able to do so. He provides two basic types of competitive advantages, cost leadership and product differentiation. These two basic types of competitive advantage, combined with the scope of the activities open to a particular firm.

Organisations can follow four competitive strategies which are enabled by the use of information systems in gaining a competitive advantage in their markets. These can mainly be achieved through the use of information technology and systems which include the following:-

1. Low-cost leadership: This strategy offers lowest operational costs and lowest prices. The organisation aims to become the lowest cost producer in its specific industry rather than one of several firms vying for that position. To be a cost leader it must do more than just moving down the learning curve, it must find and exploit every source of potential cost advantage. Normally, cost leaders sell a basic product or commodity and concentrate in pursuing economies of scale and absolute cost advantages. While the product may be relatively unsophisticated, the company must comply with the industry norms, that is, the product or service offered must be seen as acceptable and comparable to its competitor's. A cost leader must therefore maintain some degree of parity with its competitor's performance in other areas while out performing they based on price.

2. Product differentiation, where an organisation will try to be the best performer in its industry grouping along some dimension or dimensions of the product or service other than cost. This attribute of its product or service must be something that most of its customers see as important, and the company must position itself in a unique position so as to meet those needs. Being placed in such privileged position will be rewarded by a premium for its distinctive product or service. The premium is paid for the company's uniqueness, although the company must also maintain some degree of parity with its competitors cost levels in order that the cost of "uniqueness" does not begin to exceed the premium that the customer is prepared to pay. Unlike cost leadership, several different firms can simultaneously pursue successful differentiation strategies in the same industrial sector - if sufficient scope exists.

Focus on market niche - This strategy does not select the desired attributes for a product or service across the whole of an industry grouping but concentrates in a particular segment or group, within the industry as a whole, which is to be targeted, that is, the company seeks to exploit a niche market. A company whose strategic advantage is based on having a focus strategy will select its niche and, once this is done it will tailor its strategy specifically to serve the needs of that particular client group better than its competitors. The focuser seeks competitive advantage in its own segment, although it need not possess an overall competitive advantage. To be successful the company must exploit the under-performance of its more broadly based competitors in that niche based either on cost or on differentiation.

Strengthen customer and suppliers: This strategy will tighten linkages with suppliers and develop intimacy with customers.

Strengthen customer and supplier intimacies: Use information systems to facilitate direct

access from suppliers to information within the company. Increase switching costs and

loyalty to the company, such as, IBM,

Customers and supplier intimacy strategy, use information systems so as to develop strong ties and loyalty with customers and supplier as they are both vital to organisations.

Improving customer and supplier intimacy is an effective strategy in itself. By making transactions and conditions easier and more user friendly for both customers and suppliers, this will increase the intimacy of the firm vis a vis the customer and supplier. This will offer great incentive to the customer and supplier so as to continue doing business with the firm.

Customer intimacy is a concept from marketing, which describes the ability of a supplier to become accepted and known as the regular partner with its customer.

In the integration of their operations, suppliers become more than just being useful, they strengthen Customer and Supplier Intimacy: apply information systems to tighten long-term relationship and create brand loyalty with customers and suppliers, including increasing switching costs.

Also, there is fierce competition due to imitating strategies and encouraging new competitors to enter the industry. However, the companies gain opportunities for brand building and loyal customer base creating. For example, Thai Airways and Emirates increase switching costs for their customers by initiating the collection of airline miles to increase the size of loyal customers.

Each strategy contains a different approach in creating and sustaining a competitive advantage. Therefore, each company has to make a choice about which strategy it will employ. A company would not normally be able to utilise differentiation and cost leadership strategies simultaneously. For example, it would be hard to be a cost leader while adopting a differentiation strategy as differentiation costs money. Though by only reducing costs may not adversely affect differentiation, a cost leader will eventually reach a stage where pursuing a cost advantage will inevitably mean a sacrifice of scope.

For Porter, technology is one of the principal driving forces of competition as it plays a significant role in bringing structural changes in existing industries as well as in the creation of new industries. Technological change has greatly influenced competitive advantage, as it creates new opportunities for competition and plays a vital part in the existing competitive strategy through its ubiquitous presence in the value chain.

He further argues that Information Technology and Information Systems are particularly important as every activity creates and uses information. He points out that modern information system technology plays a particularly crucial role in scheduling, controlling, optimizing, measuring and otherwise co-ordinating all manner of activities. He also noted that office or administrative technologies, which are often neglected or come under the term of information systems, also play an important role as:

"Change in the way office functions can be performed is one of the most important types of technological trends occurring today for many firms, though few are devoting substantial resources to it." ( Porter, 1985,)

A vast amount of Research has been carried out to find out whether money invested by organisations in Information Technology, has helped organisations in achieving their objectives and goals. This type of research is referred to as "aligning IT with the corporate objectives".

Chan & Huff [1983] argue that organisations achieve IT alignment with their corporate objectives through 3 levels of alignment, (1) Awareness (2) Integration and (3) alignment. http://www.farrell

In a further study Chan [2001] describes the 3 levels of alignment as "strategic alignment viewed as the degree of congruence between Information systems (IS) and strategic orientation or strategy".

Strategic alignment has two major principles. Firstly, IT strategy should concentrate on external competitiveness instead of internal operations. Secondly, IT influences competitive advantages as it changes the direction or strength of one or more of the forces within Porter's model. The competitive dynamics of industries change as new technologies and their application change the power of buyers, suppliers, new entrants, substitute products and existing rivals (Sasidharan et. al., 2006).

It is essential to align IT with the organisation's corporate objectives. Most organisations rely heavily on IT to operate their business. Organisations must use IT to achieve their corporate

objective and especially to build, sustain, and extend competitive advantage [Boar 1994].