Imagine how difficult and costly it would be if you started a company that tailored to everyone's taste, lifestyle, culture, and wallet. How productive will it be? Will a company even survive? An organizational strategy determines its information systems to have a core competency above others in the market. If a company tried to fulfill every need, it will confuse customers and it will be way too costly to attract, maintain, and retain these relationships. The competitive strategy determines the structure, features, and functions of every information system. An industry structure determines the competitive strategy, the competitive strategy will determine the value chain, from the value chain it will lead to business processes and finally to information systems. Walmart as an example is a low cost structure, its competitive strategy is to provide the lowest prices to its consumers, value chains are more products, less quality, but at affordable prices, the profit margin is high because they sell a lot of products, its business processes have become efficient through a supply chain and other relationships between start to finish, and finally its information systems helps them maintain accurate inventory to meet customer demand.
Michael Porter's Five Forces Model
According to Michael Porter, the five competitive forces correlated to an industry's profit margin are:
- Bargaining Power of Customers
- Bargaining Power of Suppliers
- Threat of Substitutions
- Threat of New Entrants
- Rivalry
As each of these competitive forces increases, the less profitability and sustainability a company will have. These five forces also vary in respect to competitors if they are weak, medium, or stronger than them. In the Walmart example, brick-and-mortar companies and small businesses were driven out of business as more Walmart's began to open in strategic locations and were able to pass affordable prices to their consumers, to fit their competitive strategy "every day low prices". Walmart has low entry barriers of rivalry, since Walmart has a wide variety of products. Essentially a family with a low to moderate income can shop for groceries, clothes, and electronics. It is convenient and affordable to meet the mass market consumers that do not pay attention to high quality products because they know that they are getting a lot for their money. For example, customers can go to a Dollartown or Dollartree but they will not find a variety of products like clothing, sizes, colors, food, electronics, and must have to make multiple stops in order to get all their necessities. Walmart has high bargaining power over its suppliers because it develops a relationship with them to meet sustainability and for each supplier to meet a certain quality standard.
Michael Porter's Four Competitive Strategies
According to Porter, a firm engages in one of four strategies. Either a company will be the lowest cost leader industry-wide, the lowest cost leader focused by industry segment, or a company will adopt a differentiation strategy industry-wide or focused by an industry segment to offer higher quality of products/services. For example, Walmart is the lowest cost leader focused on an industry segment. It does not target the entire retail industry because some customers perceive value as top quality and will pay $500 for jeans, compared to others. Walmart focuses on customers who are price sensitive, represent mass market which make up 69% of the market, and mostly are families living below or at poverty level. Walmart is known for not providing excellent customer service, but Walmart does not invest in increasing their marketing or sales support because Walmart is globally recognized, and if they did added more support and sales representatives then it will have to incur costs that will not benefit the customers.
Competitive Strategy Determines Value Chain Structure
As previously mentioned, Walmart must provide every function at the lowest possible cost. What exactly is value? Value is not just providing the lowest prices possible, it is also adding some type of benefit to the consumer like, Walmart being an all-one-stop shop, groceries, clothing, and buying a video game. The value is also the amount of money that a customer is willing to pay for a resource, product, or service. If someone valued customer service, chances are we all know what between Walmart and Target, most consumers will chose Target.
Lets determine how a competitive strategy determines a value chain. A value chain is a network of value-creating activities, it consists of five primary activities and four support activities. The five primary activities are Inbound Logistics, Operations/Manufacturing, Outbound Logistics, Sales and Marketing, Customer Service. The four support activities are, Procurement (manage supplier relationships), Technology (investigate new designs), Human Resources (hire and support employees), and the Firm Infrastructure (manage company resources).While it is more challenging to determine the exact cost of supporting activities, it is essential to note that they are extremely valuable and do contribute to a company's profit margin and every value creation activity shares a linkage with another activity.
Business Processes Generate Value
First of all a business process is a network of activities that generate value by transforming inputs into output. The cost depends on the cost of inputs plus the cost of the activities, and profit margin is the value of the outputs minus the cost. Each activity in a business process is a function that receives inputs and procedures outputs. A repository is a collection of something, like database being repository of data. Instead of Walmart, lets shift to another company, Tesla. Tesla inbound logistics for their all-electric vehicles will start with selecting a vendor/supplier to then manufacture the raw materials, especially their lithium-ion batteries. Next, the raw materials go to the finish product and when their vehicle is ready, a Model S for example will be shipped to a Tesla retail store to display and create brand image. Business processes generate value as each function is being completed, more efficiently. Depending on the company strategy, their value chart will be determine by the value perceived from customers, customer surplus, customer demand, sales, and capital structure and incurred costs. Tesla right now is able to increase their utility costs because they customize their all-electric Model S to meet different styles, functions, and battery range performance. Model S are geared towards business professionals, car enthusiasts, and people that value high quality and innovative products. Currently their profit margin is low, since they have high demand of customer orders but cannot keep up with demand because they have a lot of orders in transit. Therefore, their cost structure is high. For Tesla to gain positive cash flow and pofit margin, it will have to ensure that value added will exceed the costs of providing the services. Perhaps 10 years from now, Tesla will be the number one company in Forbes 500, since they currently do rate as number one in innovation but clearly Tesla is still in the embryonic/growth stage.
Information Systems Provide Competitive Advantage via Products and Services
Firms can either create new products, enhance existing products/services to have a competitive advantage, and by differentiating their products/services from existing and potential competitors. It is critical for a company's survival to have a core competency that is difficult to copy to gain or maintain its market share. By any of these product implementations, a firm can lock in customers and buyers, lock in suppliers, raise barriers to market entry, establish alliances, and reduce costs. A firm can make it difficult for a customer to switch to another product by establishing switching costs. Amazon is able to use innovative and efficient information systems when I am looking for a product, and even when I am not looking for a product by sending me reminders or things based on my prior searches that I will like. Amazon has my information saved, addresses where I have shipped gifts to, and makes it easier to use. I also have their student Prime membership, so now I am able to qualify for more of Amazon Prime products like their Prime Video. Amazon continues to innovate from using information systems to keep up with trends and the increased of digital devices usage. Amazon differentiates from other E-commerce businesses because they offer their own Prime memberships ,different benefits like shipping options, and is still developing new products/services to keep its company competitive advantage.
In 2026
New models might be an extension of existing ones. As technology continues to advance, so will the process and information systems tools and resources to meet high demand. More likely Tesla and other companies who are entering the autonomous driving vehicle market, will be facing more competition since they will become popular. Imagine being able to shop for groceries, if you have kids being able to pick and drop off them off on time while working remotely. Anything will be possible, and though it will not save consumers money on car maintenance, it will greatly reduce our time invested in traffic jams, or reduce car accidents.
Something else as exciting as autonomous cars, will be growth and demand for augmented reality or virtual reality products. We will be able to travel through a unique way and of course eliminate the cost of traveling, fear of airplanes, and travel anywhere that has infrastructure where these will be used.
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