Strategic Information Systems - Case Study Example

Strategic Information Systems This paper encompasses an evaluation of EI based upon a case study The evaluation will be based upon the competitive forces and value chain models. The questions that the evaluation will examine include: What is REI's business strategy What role do networking and Internet technology play in this strategy What management, organization, and technology issues does REI face in running its business What role do telecommunications and the Internet play in solving these challenges The evaluation will also investigate how w effectively has REI used information systems and the Internet to meet its business strategy goals and maintain a competitive edge The evaluation aims to answer if REI is capable of climbing higher with Networking and the Internet In spite of rapid and continued progress and advances of electronic commerce, a lot of corporation's conducting-business is still in the investment and brand-building phase and have yet to show a profit. However, as e-businesses shift their focus (Hoffman, D.L. and Novak, T 2000) from building a customer base to increasing revenue growth and profitability, they should re-evaluate their current business strategies, if any, and develop strategies that provide a clear path to profitability. Competitive Forces Model: Potential Entrants: REI have three successful entities that will continue to attract threats of new entrants. Industry competitors: Traditional competitors who also sell the same products Substitutes: substitutes are high because of the high quality of brands that REI would carry. Suppliers: Supplier power is high because REI need these suppliers in order to make their products available to the buyers they are target marketing. Buyers: the power of the buyer is high because they choose when or how much money they spend Value Chain Model: Networking and Internet technology have been successfully implemented at REI to create a very strong value chain. In the mind of the consumer, all three REI entities (seventy stores, two Web stores, and an adventure-theme travel service) can be viewed as one. E-commerce is fundamentally changing the economy and the way business is conducted. E-commerce forces companies to find new ways to expand the markets in which they compete, to attract and retain customers by tailoring products and services to their needs, and to restructure their business processes to deliver products and services more efficiently and effectively. However, despite rapid and sustained development of e-commerce, many companies doing e-business are still in the investment and brand-building phase and have yet to make a profit (Zwass 1998). Many e-businesses (or Internet companies) have focused on the visual attractiveness and ease of use of their Web sites as the primary method of increasing their customer base. However, as e-businesses shift their focus from building a customer base to increasing revenue growth and profitability, they should re-evaluate their current business strategies, if any, and develop strategies that provide a clear path to profitability. This study uses McCarthy's According to McCarthy (1960) and Perreault and McCarthy (1999), a firm develops its marketing strategies by first identifying the target market for its products or services. It then develops a marketing mix-a particular combination of product, price, promotion, and place (i.e., distribution and delivery functions in the supply chain) designed to enhance sales to the target market. A unique mix of these elements in a given industry allows firms to compete more effectively, thus ensuring profitability and sustainability. For example, by coordinating various product offerings and associated price discriminations with sales promotions and effective logistics, a firm can increase its sales and profit. Since the Internet has a significant impact on the makeup of this marketing mix, Internet companies should develop strategies that take the unique nature of online marketing into account. 2.2 Porter's Five Competitive Forces Model According to Porter (1980, 1985) and Porter and Millar (1985), a firm develops its business strategies in order to obtain competitive advantage (i.e., increase profits) over its competitors. It does this by responding to five primary forces: (1) the threat of new entrants, (2) rivalry among existing firms within an industry, (3) the threat of substitute products/services, (4) the bargaining power of suppliers, and (5) the bargaining power of buyers. A company assesses these five competitive forces in a given industry, then tries to develop the market at those points where the forces are weak (Porter 1979). For example, if the company is a low-cost producer, it may choose powerful buyers and sell them only products not vulnerable from substitutes. The company positions itself so as to be least vulnerable to competitive forces while exploiting its unique advantage (cost leadership). A company can also achieve competitive advantage by altering the competitive forces. For example, firms establish barriers to deter new entrants from coming into an industry by cultivating unique or capital-intensive resources that new firms cannot easily duplicate. Firms also increase bargaining power over their customers and suppliers by increasing their customers' switching costs and decreasing their own costs for switching suppliers. The five competitive forces model provides a solid base for developing business strategies that generate strategic opportunities. Since the Internet dramatically affects these competitive forces, Internet companies should take these forces into account when formulating their strategies. In his recent study, Porter (2001) reemphasized the importance of analyzing the five competitive forces in developing strategies for competitive advantage: "Although some have argued that today's rapid pace of technological change makes industry analysis less valuable, the opposite is true. Analyzing the forces illuminates an industry's fundamental attractiveness, exposes the underlying drivers of average industry profitability, and provides insight into how profitability will evolve in the future. The five competitive forces still determine profitability even if suppliers, channels, substitutes, or competitors change (p. 66)." 3. Impact of the Internet on Marketing Mix and Competitive Forces The Internet can dramatically lower entry barriers for new competitors. Companies can enter into e-commerce easily because they do not need sales forces and huge capital investments as they do in offline markets. As the number of people with Internet access increases, the competition for online business in many industries will also increase. According to the Department of Commerce's 'Digital Economy 2000' report1, in 2000 the number people with Internet access reached an estimated 304 million worldwide, an increase of almost 78 percent over 1999 (Betts 2000). The Internet also brings many more companies into competition with one another by expanding geographic markets (Porter 2001). The Internet changes the basis of competition by radically altering product/service offerings and the cost structure of firms (e.g., cost reductions in production, distribution, and transaction). The Internet also changes the balance of power in relationships with buyers and suppliers by increasing or decreasing the switching costs of these buyers and suppliers. By reducing customers' search costs, the Internet makes price comparison easy for customers, and thus increases price competition (Bakos 1998). The price competition resulting from lowered customer search costs increases rivalry among existing competitors, reduces switching costs of customers, and thereby shifts bargaining power to customers. On the other hand, IT reduces menu cost-the cost of administering multiple prices for a number of different products or services-and, in part, facilitates price discrimination (Bakos and Brynjolfsson, 1997). The Internet creates new substitution threats by enabling new approaches to meeting customer needs and performing business functions (Porter 2001). World Wide Web (WWW) technology itself has produced new promotion venues. The Internet also facilitates an electronic integration of the supply chain activities, achieving efficient distribution and delivery. It also facilitates partnerships or strategic alliances by networking partners or allies. 4. E-Business Strategies for Competitive Advantage This section considers the impact of the Internet on marketing mix and competitive forces, and suggests strategies for achieving a competitive advantage. 4.1 Product Strategy On the Internet, consumers can easily collect information about products or services without traveling to stores to inspect products and compare prices. In the offline market researching product offerings can be extremely expensive and time consuming. As a result, consumers rely on product suppliers and retailers to aid them in the search, and the suppliers and retailers take advantage of this situation by charging higher prices (Allen and Fjermestad 2000; Viswanathan 2000). Consumers end up paying more and often not getting the product they really wanted. However, this is not the case for e-commerce. In the Internet market, a complete search of product offerings is possible at virtually no cost. Because consumers can easily compare prices and find close substitutes, companies are forced to lower prices. Companies cannot achieve competitive advantage simply by exploiting consumers' search costs, as they did in the physical market. An alternative is for companies to make consumers' product comparison more difficult by differentiating their products from others. One possible competitive strategy is product bundling. Product bundling promotes the benefits of the whole package, thus keeping buyers from comparing individual items. For instance, Gateway started bundling its Internet services and computers in response to plunging computer prices (Sinha 2000). AOL, recently merged with Time Warner, is strengthening its bundling strategy by adding interactive and on-demand television, music on computer, and email on mobile phone to its existing services. By adding more services to a bundle, the company could command a higher price for its bundling service. Moreover, adding services to bundles is financially attractive because it is less expensive to sell an additional service to an existing customer than it is to attract a new customer (Schiesel 2001).2 This product (or service) bundling strategy counteracts the threat of product substitutes and rivalry among existing firms. Another strategy is innovation or the introduction of niche products, which also counteracts the threat of product substitutes, new entrants into the market, and competition among existing firms. By using the direct access to consumers enabled by the Internet, companies can collect information, identify target consumers, and better introduce products or services to meet consumers' needs. Companies can also collect information on new products desired by small segments of the market. By creating products that meet the needs of consumers in these niche markets, companies can command higher prices (Sinha 2000). Another strategy associated with niche products or innovation is customer-centric strategy. Compared to a product-centric strategy, which pushes products to consumers, customer-centric strategy pulls information from consumers to improve and customize products (Viehland 2000). An expansion into related product lines can also be a good strategy. According to Porter (1987), the expansion into related product lines can exploit transfer of skills or sharing of activities such as promotion and distribution, which will lead to competitive advantage. Sharing can lower costs by achieving economies of scale and effectively utilizing company resources such as market information, managerial or technical expertise, and knowledge.3 Like traditional companies, Internet companies can also expand their product line into areas related to their existing product lines. For example, Amazon.com recently started selling personal computers in addition to its existing line of electronic products such as disk drives and memory (Hansell 2001). Amazon.com holds no computer inventory and has computers shipped directly from a computer distributor to its customers. This allows Amazon.com to save inventory-holding costs. However, such expansion cannot bring increased profits to Amazon.com without effective utilization of its existing customer base and information, and managerial or technical knowledge of e-business. .2 Price Strategy The Internet enables consumers to compare prices, products, and services across suppliers. For example, by logging onto price-comparison sites like Pricescan.com and shopping agents like Bottomdollar.com, consumers can readily compare the prices and features of more than 10,000 products available on the Web (Sinha 2000). This leads to increased price competition and lowers the prices of products or services. According to Bakos (1998), lower search costs for price and product offerings in Internet marketplaces promote price competition among sellers. The Internet thus significantly affects competition, and intensive price competition can eliminate sellers' profits. References Amazon.com is Adding a Warehouse," The New York Times, January 8, 1999. Allen, E. and Fjermestad, J. "E-Commerce Strategies: The Manufacturer Retailer Consumer Relationship," Proceedings of the 5th Americas Conference on Information Systems, 2000. Bakos, Y. "The Emerging Role of Electronic Marketplaces on the Internet," Communications of the ACM, 41(8), August 1998, pp. 35-42. Bakos, Y. and Brynjolfsson, E. "Aggregation and Disaggregation of Information Goods: Implications for Bundling,Site Licensing and Micropayment Systems," Proceedings of Internet Publishing and Beyond: The Economics of Digital Information and Intellectual Property, Kennedy School of Government, Harvard University, January 1997. Case Study pgs. 300-301 (due October 11, 2006) Hoffman, D.L. and Novak, T. "How to Acquire Customers on the Web," Harvard Business Review, May-June 2000. McCarthy, E.J., Basic Marketing: A Managerial Approach, Homewood, IL: Richard D. Irwin, 1960. Perreault, Jr. W.D. and McCarthy, E.J. Basic Marketing: A Global-Managerial Approach, (13th ed.). Homewood, IL: Irwin, 1999. Porter, M "How Competitive Forces Shape Strategy," Harvard Business Review, March-April 1979. Porter, M. Competitive Strategy, New York: Free Press, 1980. Porter, M. Competitive Advantage, New York: Free Press, 1985. Porter, M. "From Competitive Advantage to Corporate Strategy," Harvard Business Review, May-June 1987. Porter, M. "What is Strategy" Harvard Business Review, November-December 1996, pp.61-78. Zwass, V. "Structure and Macro-Level Impacts of Electronic Commerce: From Technological Infrastructure to Electronic Marketplaces," In Kenneth Read More