What Are The Different Market Forces Marketing Essay

3333 words (13 pages) Essay

1st Jan 1970 Marketing Reference this

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Porter identified five factors that act together to determine the nature of competition within an industry.  These are the:

Threat of new entrants to a market

Bargaining power of suppliers

Bargaining power of customers (“buyers”)

Threat of substitute products

Degree of competitive rivalry

Porters Five Forces

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the following characteristics:

Porter Five Forces

Let’s Look At Each One Of The Five Forces In A Little More Detail To Explain How They Work.

1. Threat Of New Entrants To An Industry:

If new entrants move into an industry they will gain market share & rivalry will intensify

The position of existing firms is stronger if there are barriers to entering the market

If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants.  An industry can have one or more barriers.  The following are common examples of successful barriers:

Barrier

Notes

Investment cost

High cost will deter entry

High capital requirements might mean that only large businesses can compete

Economies of scale available to existing firms

Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively

Regulatory and legal restrictions

Each restriction can act as a barrier to entry

E.g. patents provide the patent holder with protection, at least in the short run

Product differentiation (including branding)

Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share

Access to suppliers and distribution channels

A lack of access will make it difficult for newcomers to enter the market

Retaliation by established products

E.g. the threat of price war will act to discourage new entrants

But note that competition law outlaws actions like predatory pricing

What makes an industry easy or difficult to enter ?

Easy to Enter

Difficult to Enter

Common technology

Access to distribution channels

Low capital requirements

No need to have high capacity and output

Absence of strong brands and customer loyalty

Patented or proprietary know-how

Well-established brands

Restricted distribution channels

High capital requirements

Need to achieve economies of scale for acceptable unit costs

2. Bargaining Power Of Suppliers:

If a firm’s suppliers have bargaining power they will:

Exercise that power

Sell their products at a higher price

Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful the customer (buyer), the lower the price that can be achieved by buying from them.

Suppliers find themselves in a powerful position when:

There are only a few large suppliers

The resource they supply is scarce

The cost of switching to an alternative supplier is high 

The product is easy to distinguish and loyal customers are reluctant to switch

The supplier can threaten to integrate vertically

The customer is small and unimportant

There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:

Factor

Note

Uniqueness of the input supplied

If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position

Number and size of firms supplying the resources

A few large suppliers can exert more power over market prices that many smaller suppliers each with a small market share

Competition for the input from other industries

If there is great competition, the supplier will be in a stronger position

Cost of switching to alternative sources

A business may be “locked in” to using inputs from particular suppliers – e.g. if certain components or raw materials are designed into their production processes.  To change the supplier may mean changing a significant part of production

3. Bargaining Power Of Customers:

Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.

A great example in the India currently is the dominant grocery supermarkets which are able exert great power over supply firms.

Several factors determine the bargaining power of customers, including:

Factor

Note

Number of customers

The smaller the number of customers, the greater their power

Their size of their orders

The larger the volume, the greater the bargaining power of customers

Number of firms supplying the product

The smaller the number of alternative suppliers, the less opportunity customers have for shopping around

The threat of integrating backwards

If customers pose a threat of integrating backwards they will enjoy increased power

The cost of switching

Customers that are tied into using a supplier’s products (e.g. key components) are less likely to switch because there would be costs involved

Customers tend to enjoy strong bargaining power when:

There are only a few of them

The customer purchases a significant proportion of output of an industry

They possess a credible backward integration threat – that is they threaten to buy the producing firm or its rivals

They can choose from a wide range of supply firms

They find it easy and inexpensive to switch to alternative suppliers

4. Threat Of Substitute Products:

A substitute product can be regarded as something that meets the same need. Substitute products are produced in a different industry -but crucially satisfy the same customer need.  If there are many credible substitutes to a firm’s product, they will limit the price that can be charged and will reduce industry profits.

As an example, consider the many substitutes that consumers now have to buying a newspaper for their news:

The extent of the threat depends upon

The extent to which the price and performance of the substitute can match the industry’s product

The willingness of customers to switch

Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation.

Degree of competitive rivalry:

If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions),

Investment in innovation & new products

Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Several factors determine the degree of competitive rivalry; the main ones are:

Factor

Note

Number of competitors in the market

Competitive rivalry will be higher in an industry with many current and potential competitors

Market size and growth prospects

Competition is always most intense in stagnating markets

Product differentiation and brand loyalty

The greater the customer loyalty the less intense the competition

The lower the degree of product differentiation the greater the intensity of price competition

The power of buyers and the availability of substitutes

If buyers are strong and/or if close substitutes are available, there will be more intense competitive rivalry

Capacity utilisation

The existence of spare capacity will increase the intensity of competition

The cost structure of the industry

Where fixed costs are a high percentage of costs then profits will be very dependent on volume

As a result there will be intense competition over market shares

Exit barriers

If it is difficult or expensive to exit an industry, firms will remain thus adding to the intensity of competition 

Information System Strategies For Dealing With Competitive Forces:

What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technology and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy.

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Wal-Mart’s continuous inventory replenishment system uses sales data captured at the checkout counter to transmit orders to restock merchandise directly to its suppliers. The system enables Wal-Mart to keep costs low while fine-tuning its merchandise to meet customer demands.

Low-Cost Leadership

Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Wal-Mart. By keeping prices low and shelves well stocked using a legendary inventory replenishment system, Wal-Mart became the leading retail business in the United States. Wal-Mart’s continuous replenishment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale terminals record the bar code of each item passing the checkout counter and send a purchase transaction directly to a central computer at Wal-Mart headquarters. The computer collects the orders from all Wal-Mart stores and transmits them to suppliers. Suppliers can also access Wal-Mart’s sales and inventory data using Web technology.

Because the system replenishes inventory with lightning speed, Wal-Mart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Wal-Mart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep operating costs low, Wal-Mart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)

Wal-Mart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Wal-Mart’s continuous replenishment system provides such an efficient customer response. Dell Computer Corporation’s assemble-to-order system, described in the following discussion, is another example of an efficient customer response system.

Product Differentiation

Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services.

For instance, Google continuously introduces new and unique search services on its Web site, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for 99 cents. Continuing to innovate, Apple recently introduced a portable iPod video player. Manufacturers and retailers are using information systems to create products and services that are customized and personalized to fit the precise specifications of individual customers. Dell Computer Corporation sells directly to customers using assemble-to-order manufacturing. Individuals, businesses, and government agencies can buy computers directly from Dell, customized with the exact features and components they need. They can place their orders directly using a toll-free telephone number or by accessing Dell’s Web site. Once Dell’s production control receives an order, it directs an assembly plant to assemble the computer using components from an on-site warehouse based on the configuration specified by the customer. Lands’ End customers can use its Web site to order jeans, dress pants, chino pants, and shirts custom-tailored to their own specifications. Customers enter their measurements into a form on the Web site, which then transmits each customer’s specifications over a network to a computer that develops an electronic made-to-measure pattern for that customer. The individual patterns are then transmitted electronically to a manufacturing plant, where they are used to drive fabric-cutting equipment. There are almost no extra production costs because the process does not require additional warehousing, production overruns, and inventories, and the cost to the customer is only slightly higher than that of a mass-produced garment. Fourteen percent of Lands’ End shirt and pants sales are now customized. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.

Table 3-2 lists a number of companies that have developed IS-based products and services that other firms have found difficult to copy, or at least took a long time to copy.

IS-ENABLED NEW PRODUCTS AND SERVICES PROVIDING COMPETITIVE ADVANTAGE

Amazon.com:

One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers.

Online music:

Apple iPod and iTunes An integrated handheld player backed up with an online library of two million songs; one billion songs downloaded so far.

Search engine

advertising:

Google Online search engine integrated with online advertising using text ads; two billion searches per month; Google holds several patents on its PageRank method of search response.

Online bill payment:

CheckFree.com Forty million households pay their bills online, as of 2006.

Online person-to-

person payment:

Enables transfer of money between individual bank accounts and between bank accounts and

PayPal.com credit card accounts.

Information systems make it possible for Ping Inc. to offer customers more than one million custom golf club options with different combinations of club heads, grips, shafts, and lie angles. Ping is able to fill many orders within 48 hours.

Focus on Market Niche

Use information systems to enable a specific market focus, and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.

The data come from a range of sources-credit card transactions, demographic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with Web sites. Sophisticated software tools find patterns in these large pools of data and infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis.

Hilton Hotels uses a customer information system called OnQ, which contains detailed data about active guests in every property across the eight hotel brands owned by Hilton. Employees at the front desk tapping into the system instantly search through 180 million records to find out the preferences of customers checking in and their past experiences with Hilton so they can give these guests exactly what they want. OnQ establishes the value of each customer to Hilton, based on personal history and on predictions about the value of that person’s future business with Hilton. OnQ can also identify customers who are clearly not profitable. Profitable customers receive extra privileges and attention, such as the ability to check out late without paying additional fees. After Hilton started using the system, the rate of staying at Hilton Hotels rather than at competing hotels soared from 41 percent to 61 percent (Kontzer, 2004). The Interactive Session on Technology shows how 7-Eleven improved its competitive position by wringing more value out of its customer data. This company’s early growth and strategy had been based on face-to-face relationships with its customers and intimate knowledge of exactly what they wanted to purchase. As the company grew over time, it was no longer able to discern customer preferences through personal face-to-face relationships. A new information system helped it obtain intimate knowledge of its customers once again by gathering and analyzing customer purchase transactions.

7-Eleven stores use a point-of sale system to capture data about customer purchases and analyzes them to learn more about customer preferences and sales trends.

Strengthen Customer and Supplier Intimacy

Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access from suppliers to production schedules, and even permits suppliers to decide how and when to ship suppliers to Chrysler factories. This allows suppliers more lead time in producing goods. On the customer side, Amazon.com keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product), and loyalty to your firm. Table 3-3 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see companies pursuing several of them simultaneously. For example, Dell Computer tries to emphasize low cost as well as the ability to customize its personal computers. The new US Airways, described in the chapter-opening case, is trying to compete with quality of services as well as low cost.

FOUR BASIC COMPETITIVE STRATEGIES

STRATEGY

DESCRIPTION

EXAMPLE

Low-cost leadership

Use information systems to produce products and services at a lower price than competitors while enhancing quality and level of service.

Wal-Mart

Dell Computer

Product differentiation

Use information systems to differentiate products, and enable new services and products.

Google, eBay, Apple, Lands’ End

Focus on market niche

Use information systems to enable a focused strategy on a single market

niche; specialize.

Hilton Hotels

Harrah’s

Customer and supplier

Use information systems to develop strong ties and loyalty with customers intimacy and suppliers.

Chrysler Corporation

Amazon.com

Porter identified five factors that act together to determine the nature of competition within an industry.  These are the:

Threat of new entrants to a market

Bargaining power of suppliers

Bargaining power of customers (“buyers”)

Threat of substitute products

Degree of competitive rivalry

Porters Five Forces

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the following characteristics:

Porter Five Forces

Let’s Look At Each One Of The Five Forces In A Little More Detail To Explain How They Work.

1. Threat Of New Entrants To An Industry:

If new entrants move into an industry they will gain market share & rivalry will intensify

The position of existing firms is stronger if there are barriers to entering the market

If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants.  An industry can have one or more barriers.  The following are common examples of successful barriers:

Barrier

Notes

Investment cost

High cost will deter entry

High capital requirements might mean that only large businesses can compete

Economies of scale available to existing firms

Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively

Regulatory and legal restrictions

Each restriction can act as a barrier to entry

E.g. patents provide the patent holder with protection, at least in the short run

Product differentiation (including branding)

Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share

Access to suppliers and distribution channels

A lack of access will make it difficult for newcomers to enter the market

Retaliation by established products

E.g. the threat of price war will act to discourage new entrants

But note that competition law outlaws actions like predatory pricing

What makes an industry easy or difficult to enter ?

Easy to Enter

Difficult to Enter

Common technology

Access to distribution channels

Low capital requirements

No need to have high capacity and output

Absence of strong brands and customer loyalty

Patented or proprietary know-how

Well-established brands

Restricted distribution channels

High capital requirements

Need to achieve economies of scale for acceptable unit costs

2. Bargaining Power Of Suppliers:

If a firm’s suppliers have bargaining power they will:

Exercise that power

Sell their products at a higher price

Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful the customer (buyer), the lower the price that can be achieved by buying from them.

Suppliers find themselves in a powerful position when:

There are only a few large suppliers

The resource they supply is scarce

The cost of switching to an alternative supplier is high 

The product is easy to distinguish and loyal customers are reluctant to switch

The supplier can threaten to integrate vertically

The customer is small and unimportant

There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:

Factor

Note

Uniqueness of the input supplied

If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position

Number and size of firms supplying the resources

A few large suppliers can exert more power over market prices that many smaller suppliers each with a small market share

Competition for the input from other industries

If there is great competition, the supplier will be in a stronger position

Cost of switching to alternative sources

A business may be “locked in” to using inputs from particular suppliers – e.g. if certain components or raw materials are designed into their production processes.  To change the supplier may mean changing a significant part of production

3. Bargaining Power Of Customers:

Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.

A great example in the India currently is the dominant grocery supermarkets which are able exert great power over supply firms.

Several factors determine the bargaining power of customers, including:

Factor

Note

Number of customers

The smaller the number of customers, the greater their power

Their size of their orders

The larger the volume, the greater the bargaining power of customers

Number of firms supplying the product

The smaller the number of alternative suppliers, the less opportunity customers have for shopping around

The threat of integrating backwards

If customers pose a threat of integrating backwards they will enjoy increased power

The cost of switching

Customers that are tied into using a supplier’s products (e.g. key components) are less likely to switch because there would be costs involved

Customers tend to enjoy strong bargaining power when:

There are only a few of them

The customer purchases a significant proportion of output of an industry

They possess a credible backward integration threat – that is they threaten to buy the producing firm or its rivals

They can choose from a wide range of supply firms

They find it easy and inexpensive to switch to alternative suppliers

4. Threat Of Substitute Products:

A substitute product can be regarded as something that meets the same need. Substitute products are produced in a different industry -but crucially satisfy the same customer need.  If there are many credible substitutes to a firm’s product, they will limit the price that can be charged and will reduce industry profits.

As an example, consider the many substitutes that consumers now have to buying a newspaper for their news:

The extent of the threat depends upon

The extent to which the price and performance of the substitute can match the industry’s product

The willingness of customers to switch

Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation.

Degree of competitive rivalry:

If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions),

Investment in innovation & new products

Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.

Several factors determine the degree of competitive rivalry; the main ones are:

Factor

Note

Number of competitors in the market

Competitive rivalry will be higher in an industry with many current and potential competitors

Market size and growth prospects

Competition is always most intense in stagnating markets

Product differentiation and brand loyalty

The greater the customer loyalty the less intense the competition

The lower the degree of product differentiation the greater the intensity of price competition

The power of buyers and the availability of substitutes

If buyers are strong and/or if close substitutes are available, there will be more intense competitive rivalry

Capacity utilisation

The existence of spare capacity will increase the intensity of competition

The cost structure of the industry

Where fixed costs are a high percentage of costs then profits will be very dependent on volume

As a result there will be intense competition over market shares

Exit barriers

If it is difficult or expensive to exit an industry, firms will remain thus adding to the intensity of competition 

Information System Strategies For Dealing With Competitive Forces:

What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technology and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy.

Wal-Mart’s continuous inventory replenishment system uses sales data captured at the checkout counter to transmit orders to restock merchandise directly to its suppliers. The system enables Wal-Mart to keep costs low while fine-tuning its merchandise to meet customer demands.

Low-Cost Leadership

Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Wal-Mart. By keeping prices low and shelves well stocked using a legendary inventory replenishment system, Wal-Mart became the leading retail business in the United States. Wal-Mart’s continuous replenishment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale terminals record the bar code of each item passing the checkout counter and send a purchase transaction directly to a central computer at Wal-Mart headquarters. The computer collects the orders from all Wal-Mart stores and transmits them to suppliers. Suppliers can also access Wal-Mart’s sales and inventory data using Web technology.

Because the system replenishes inventory with lightning speed, Wal-Mart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Wal-Mart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep operating costs low, Wal-Mart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)

Wal-Mart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Wal-Mart’s continuous replenishment system provides such an efficient customer response. Dell Computer Corporation’s assemble-to-order system, described in the following discussion, is another example of an efficient customer response system.

Product Differentiation

Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services.

For instance, Google continuously introduces new and unique search services on its Web site, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for 99 cents. Continuing to innovate, Apple recently introduced a portable iPod video player. Manufacturers and retailers are using information systems to create products and services that are customized and personalized to fit the precise specifications of individual customers. Dell Computer Corporation sells directly to customers using assemble-to-order manufacturing. Individuals, businesses, and government agencies can buy computers directly from Dell, customized with the exact features and components they need. They can place their orders directly using a toll-free telephone number or by accessing Dell’s Web site. Once Dell’s production control receives an order, it directs an assembly plant to assemble the computer using components from an on-site warehouse based on the configuration specified by the customer. Lands’ End customers can use its Web site to order jeans, dress pants, chino pants, and shirts custom-tailored to their own specifications. Customers enter their measurements into a form on the Web site, which then transmits each customer’s specifications over a network to a computer that develops an electronic made-to-measure pattern for that customer. The individual patterns are then transmitted electronically to a manufacturing plant, where they are used to drive fabric-cutting equipment. There are almost no extra production costs because the process does not require additional warehousing, production overruns, and inventories, and the cost to the customer is only slightly higher than that of a mass-produced garment. Fourteen percent of Lands’ End shirt and pants sales are now customized. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.

Table 3-2 lists a number of companies that have developed IS-based products and services that other firms have found difficult to copy, or at least took a long time to copy.

IS-ENABLED NEW PRODUCTS AND SERVICES PROVIDING COMPETITIVE ADVANTAGE

Amazon.com:

One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers.

Online music:

Apple iPod and iTunes An integrated handheld player backed up with an online library of two million songs; one billion songs downloaded so far.

Search engine

advertising:

Google Online search engine integrated with online advertising using text ads; two billion searches per month; Google holds several patents on its PageRank method of search response.

Online bill payment:

CheckFree.com Forty million households pay their bills online, as of 2006.

Online person-to-

person payment:

Enables transfer of money between individual bank accounts and between bank accounts and

PayPal.com credit card accounts.

Information systems make it possible for Ping Inc. to offer customers more than one million custom golf club options with different combinations of club heads, grips, shafts, and lie angles. Ping is able to fill many orders within 48 hours.

Focus on Market Niche

Use information systems to enable a specific market focus, and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.

The data come from a range of sources-credit card transactions, demographic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with Web sites. Sophisticated software tools find patterns in these large pools of data and infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis.

Hilton Hotels uses a customer information system called OnQ, which contains detailed data about active guests in every property across the eight hotel brands owned by Hilton. Employees at the front desk tapping into the system instantly search through 180 million records to find out the preferences of customers checking in and their past experiences with Hilton so they can give these guests exactly what they want. OnQ establishes the value of each customer to Hilton, based on personal history and on predictions about the value of that person’s future business with Hilton. OnQ can also identify customers who are clearly not profitable. Profitable customers receive extra privileges and attention, such as the ability to check out late without paying additional fees. After Hilton started using the system, the rate of staying at Hilton Hotels rather than at competing hotels soared from 41 percent to 61 percent (Kontzer, 2004). The Interactive Session on Technology shows how 7-Eleven improved its competitive position by wringing more value out of its customer data. This company’s early growth and strategy had been based on face-to-face relationships with its customers and intimate knowledge of exactly what they wanted to purchase. As the company grew over time, it was no longer able to discern customer preferences through personal face-to-face relationships. A new information system helped it obtain intimate knowledge of its customers once again by gathering and analyzing customer purchase transactions.

7-Eleven stores use a point-of sale system to capture data about customer purchases and analyzes them to learn more about customer preferences and sales trends.

Strengthen Customer and Supplier Intimacy

Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access from suppliers to production schedules, and even permits suppliers to decide how and when to ship suppliers to Chrysler factories. This allows suppliers more lead time in producing goods. On the customer side, Amazon.com keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product), and loyalty to your firm. Table 3-3 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see companies pursuing several of them simultaneously. For example, Dell Computer tries to emphasize low cost as well as the ability to customize its personal computers. The new US Airways, described in the chapter-opening case, is trying to compete with quality of services as well as low cost.

FOUR BASIC COMPETITIVE STRATEGIES

STRATEGY

DESCRIPTION

EXAMPLE

Low-cost leadership

Use information systems to produce products and services at a lower price than competitors while enhancing quality and level of service.

Wal-Mart

Dell Computer

Product differentiation

Use information systems to differentiate products, and enable new services and products.

Google, eBay, Apple, Lands’ End

Focus on market niche

Use information systems to enable a focused strategy on a single market

niche; specialize.

Hilton Hotels

Harrah’s

Customer and supplier

Use information systems to develop strong ties and loyalty with customers intimacy and suppliers.

Chrysler Corporation

Amazon.com

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