Resource: Project Technology Governance Plan Grading Guide
|Management Information Systems: Business Driven MIS|
Business Driven MIS
|Competing in the Information Age The Challenge of Departmental Companies and the MIS Solution||Identifying Competitive Advantages The Five Forces Model—Evaluating Industry Attractiveness The Three Generic Strategies—Choosing a Business Focus Value Chain Analysis—Executing Business Strategies|
|What’s in IT for me? This chapter sets the stage for the textbook. It starts from ground zero by providing a clear description of what information is and how it fits into business operations, strategies, and systems. It provides an overview of how companies operate in competitive environments and why they must continually define and redefine their business strategies to create competitive advantages. Doing so allows them to survive and thrive. Information systems are key business enablers for successful operations in competitive environments. You, as a business student, must understand the tight correlation between business and technology. You must first recognize information’s role in daily business activities and then understand how information supports and helps implement global business strategies and competitive advantages. After reading this chapter, you should have a solid understanding of business driven information systems and their role in managerial decision making and problem solving.|
opening case study
The Internet of Things
Who are your best and worst customers? Who are your best and worst sales representatives? How much inventory do you need to meet demand? How can you increase sales or reduce costs? These are the questions you need to answer to run a successful business, and answering them incorrectly can lead directly to business failure. In the past few years, data collection and analytic technologies have been collecting massive amounts of data that can help answer these critical business questions. The question now becomes whether you have the right technical skills to collect and analyze your data.
Imagine your toothbrush telling you to visit your dentist because it senses a cavity. How would you react if your refrigerator placed an order at your local grocery store because your milk and eggs when about to expire? Over 20 years ago, a few professors at Massachusetts Institute of Technology (MIT) began describing the Internet of Things (IoT), which is a world where interconnected, Internet-enabled devices or “things” can collect and share data without human intervention. Another term for the Internet of Things is machine to machine (M2M), which allows devices to connect directly to other devices. With advanced technologies, devices are connecting in ways not previously thought possible, and researchers predict that more than 50 billion IoT devices will be communicating by 2020. Kevin Ashton, cofounder and executive director of the Auto-ID Center at MIT, first mentioned the Internet of Things in a presentation he made to Procter & Gamble. Here’s Ashton’s explanation of the Internet of Things:
Today computers—and, therefore, the Internet—are almost wholly dependent on human beings for information. Nearly all of the roughly 50 petabytes (a petabyte is 1,024 terabytes) of data available on the Internet were first captured and created by human beings by typing, pressing a record button, taking a digital picture, or scanning a bar code.
The problem is, people have limited time, attention, and accuracy—all of which means they are not very good at capturing data about things in the real world. If we had computers that knew everything there was to know about things—using data they gathered without any help from us—we would be able to track and count everything and greatly reduce waste, loss, and cost. We would know when things needed replacing, repairing, or recalling and whether they were fresh or past their best.
Imagine the power of a sensor sending you information on what a customer is purchasing in real time from a specific location. You could easily approach the customer and offer personal support or even a discount to ensure the sale. IoTs are generating exciting business opportunities, as displayed in Figure 1.1.1
|section 1.1||Business Driven MIS|
1.1Describe the information age and the differences among data, information, business intelligence, and knowledge.
1.2Explain systems thinking and how management information systems enable business communications.
COMPETING IN THE INFORMATION AGE
LO. 1.1: Describe the information age and the differences among data, information, business intelligence, and knowledge.
Did you know that . . .
The movie Avatar took more than four years to create and cost $450 million?
Lady Gaga’s real name is Stefani Joanne Angelina Germanotta?
Customers pay $2.6 million for a 30-second advertising time slot during the Super Bowl?2
A fact is the confirmation or validation of an event or object. In the past, people primarily learned facts from books. Today, by simply pushing a button, people can find out anything, from anywhere, at any time. We live in the information age, when infinite quantities of facts are widely available to anyone who can use a computer. The impact of information technology on the global business environment is equivalent to the printing press’s impact on publishing and electricity’s impact on productivity. College student start-ups were mostly unheard of before the information age. Now, it’s not at all unusual to read about a business student starting a multimillion-dollar company from his or her dorm room. Think of Mark Zuckerberg, who started Facebook from his dorm, or Michael Dell (Dell Computers) and Bill Gates (Microsoft), who both founded their legendary companies as college students.
You may think only students well versed in advanced technology can compete in the information age. This is simply not true. Many business leaders have created exceptional opportunities by coupling the power of the information age with traditional business methods. Here are just a few examples:
Amazon is not a technology company; its original business focus was to sell books, and it now sells nearly everything.
Netflix is not a technology company; its primary business focus is to rent videos.
Zappos is not a technology company; its primary business focus is to sell shoes, bags, clothing, and accessories.
Amazon’s founder, Jeff Bezos, at first saw an opportunity to change the way people purchase books. Using the power of the information age to tailor offerings to each customer and speed the payment process, he in effect opened millions of tiny virtual bookstores, each with a vastly larger selection and far cheaper product than traditional bookstores. The success of his original business model led him to expand Amazon to carry many other types of products. The founders of Netflix and Zappos have done the same thing for videos and shoes. All these entrepreneurs were business professionals, not technology experts. However, they understood enough about the information age to apply it to a particular business, creating innovative companies that now lead entire industries.
The Internet of Things (IoT) is a world where interconnected, Internet-enabled devices or “things” can collect and share data without human intervention. Another term commonly associated with the Internet of Things is machine to machine (M2M), which refers to devices that connect directly to other devices. Students who understand business along with the power associated with the information age and IoT will create their own opportunities and perhaps even new industries. Realizing the value of obtaining real-time data from connected things will allow you to make better-informed decisions, identify new opportunities, and analyze customer patterns to predict new behaviors. Our primary goal in this course is to arm you with the knowledge you need to compete in the information age. The core drivers of the information age are:
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN DISCUSSION
View from a Flat World
Bill Gates, founder of Microsoft, stated that 20 years ago most people would rather have been a B student in New York City than a genius in China because the opportunities available to students in developed countries were limitless. Today, many argue that the opposite is now true due to technological advances making it easier to succeed as a genius in China than a B student in New York. As a group, discuss whether you agree or disagree with Bill Gate’s statement.3
Knowledge (see Figure 1.2)
Data are raw facts that describe the characteristics of an event or object. Before the information age, managers manually collected and analyzed data, a time-consuming and complicated task without which they would have little insight into how to run their business. Lacking data, managers often found themselves making business decisions about how many products to make, how much material to order, or how many employees to hire based on intuition or gut feelings. In the information age, successful managers compile, analyze, and comprehend massive amounts of data daily, which helps them make more successful business decisions.
The Differences among Data, Information, Business Intelligence, and Knowledge
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN MIS
Who Really Won the 2014 Winter Olympics?
If you were watching the 2014 Winter Olympics, I bet you were excited to see your country and its amazing athletes compete. As you were following the Olympics day by day, you were probably checking different websites to see how your country ranked. And depending on the website you visited, you could get a very different answer to this seemingly easy question. On the NBC and ESPN networks, the United States ranked second, and on the official Sochie Olympic website, the United States ranked fourth. The simple question of who won the 2014 Winter Olympics changes significantly, depending on whom you asked.4
In a group, take a look at the following two charts and brainstorm the reasons each internationally recognized source has a different listing for the top five winners. What measurement is each chart using to determine the winner? Who do you believe is the winner? As a manager, what do you need to understand when reading or listening to business forecasts and reports?
Figure 1.3 shows sales data for Tony’s Wholesale Company, a fictitious business that supplies snacks to stores. The data highlight characteristics such as order date, customer, sales representative, product, quantity, and profit. The second line in Figure 1.3, for instance, shows that Roberta Cross sold 90 boxes of Ruffles to Walmart for $1,350, resulting in a profit of $450 (note that Profit = Sales − Costs). These data are useful for understanding individual sales; however, they do not provide us much insight into how Tony’s business is performing as a whole. Tony needs to answer questions that will help him manage his day-to-day operations such as:
Who are my best customers?
Who are my least-profitable customers?
Tony’s Snack Company Data
What is my best-selling product?
What is my slowest-selling product?
Who is my strongest sales representative?
Who is my weakest sales representative?
What Tony needs, in other words, is not data but information.
Information is data converted into a meaningful and useful context. Having the right information at the right moment in time can be worth a fortune. Having the wrong information at the right moment, or the right information at the wrong moment, can be disastrous. The truth about information is that its value is only as good as the people who use it. People using the same information can make different decisions depending on how they interpret or analyze the information. Thus information has value only insofar as the people using it do as well.
Tony can analyze his sales data and turn them into information to answer all the preceding questions and understand how his business is operating. Figures 1.4 and 1.5, for instance, show us that Walmart is Roberta Cross’s best customer and that Ruffles is Tony’s best product measured in terms of total sales. Armed with this information, Tony can identify and then address such issues as weak products and underperforming sales representatives.
A variable is a data characteristic that stands for a value that changes or varies over time. For example, in Tony’s data, price and quantity ordered can vary. Changing variables allows managers to create hypothetical scenarios to study future possibilities. Tony may find it valuable to anticipate how sales or cost increases affect profitability. To estimate how a 20 percent increase in prices might improve profits, Tony simply changes the price variable for all orders, which automatically calculates the amount of new profits. To estimate how a 10 percent increase in costs hurts profits, Tony changes the cost variable for all orders, which automatically calculates the amount of lost profits. Manipulating variables is an important tool for any business.
Business intelligence (BI) is information collected from multiple sources such as suppliers, customers, competitors, partners, and industries that analyzes patterns, trends, and relationships for strategic decision making. BI manipulates multiple variables and in some cases even hundreds of variables, including such items as interest rates, weather conditions, and even gas prices. Tony could use BI to analyze internal data, such as company sales, along with external data about the environment such as competitors, finances, weather, holidays, and even sporting events. Both internal and external variables affect snack sales, and analyzing these variables will help Tony determine ordering levels and sales forecasts. For instance, BI can predict inventory requirements for Tony’s business for the week before the Super Bowl if, say, the home team is playing, average temperature is above 80 degrees, and the stock market is performing well. This is BI at its finest, incorporating all types of internal and external variables to anticipate business performance.
Tony’s Data Sorted by Customer “Walmart” and Sales Representative “Roberta Cross”
A big part of business intelligence is an area called predictive analytics, which extracts information from data and uses it to predict future trends and identify behavioral patterns. Top managers use predictive analytics to define the future of the business, analyzing markets, industries, and economies to determine the strategic direction the company must follow to remain profitable. Tony will set the strategic direction for his firm, which might include introducing new flavors of potato chips or sports drinks as new product lines or schools and hospitals as new market segments.
Knowledge includes the skills, experience, and expertise, coupled with information and intelligence, that create a person’s intellectual resources. Knowledge workers are individuals valued for their ability to interpret and analyze information. Today’s workers are commonly referred to as knowledge workers and they use BI along with personal experience to make decisions based on both information and intuition, a valuable resource for any company.
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN ETHICS AND SECURITY
The Internet of Things Is Wide Open—For Everyone!
IoT is transforming our world into a living information system as we control our intelligent lighting from our smart phone to a daily health check from our smart toilet. Of course, with all great technological advances come unexpected risks, and you have to be prepared to encounter various security issues with IoT. Just imagine if your devices are hacked by someone who now can shut off your water, take control of your car, or unlock the doors of your home from thousands of miles away. We are just beginning to understand the security issues associated with IoT and M2M, and you can be sure that sensitive data leakage from your IoT device is something you will most likely encounter in your life.5 (For more information about IoT, refer to the Opening Case Study.)
In a group, identify a few IoT devices you are using today. These can include fitness trackers that report to your iPhone, sports equipment that provides immediate feedback to an app, or even smart vacuum cleaners. If you are not using any IoT devices today, brainstorm a few you might purchase in the future. How could a criminal or hacker use your IoT to steal your sensitive data? What potential problems or issues could you experience from these types of illegal data thefts? What might be some of the signs that someone had accessed your IoT data illegally? What could you do to protect the data in your device?
Imagine that Tony analyzes his data and finds his weakest sales representative for this period is Craig Schultz. If Tony considered only this information, he might conclude that firing Craig was a good business decision. However, because Tony has knowledge about how the company operates, he knows Craig has been out on medical leave for several weeks; hence, his sales numbers are low. Without this additional knowledge, Tony might have executed a bad business decision, delivered a negative message to the other employees, and sent his best sales representatives out to look for other jobs.
The key point in this scenario is that it is simply impossible to collect all the information about every situation, and yet without that, it can be easy to misunderstand the problem. Using data, information, business intelligence, and knowledge to make decisions and solve problems is the key to finding success in business. These core drivers of the information age are the building blocks of business systems.
Information Gained after Analyzing Tony’s Data
THE CHALLENGE OF DEPARTMENTAL COMPANIES AND THE MIS SOLUTION
LO 1.2: Explain systems thinking and how management information systems enable business communications.
Companies are typically organized by department or functional area such as:
Accounting: Records, measures, and reports monetary transactions.
Finance: Deals with strategic financial issues, including money, banking, credit, investments, and assets.
Human resources: Maintains policies, plans, and procedures for the effective management of employees.
Marketing: Supports sales by planning, pricing, and promoting goods or services.
Operations management: Manages the process of converting or transforming resources into goods or services.
Sales: Performs the function of selling goods or services (see Figure 1.6).
Each department performs its own activities. Sales and marketing focus on moving goods or services into the hands of consumers; they maintain transactional data. Finance and accounting focus on managing the company’s resources and maintain monetary data. Operations management focuses on manufacturing and maintains production data; human resources focuses on hiring and training people and maintains employee data. Although each department has its own focus and data, none can work independently if the company is to operate as a whole. It is easy to see how a business decision one department makes can affect other departments. Marketing needs to analyze production and sales data to come up with product promotions and advertising strategies. Production needs to understand sales forecasts to determine the company’s manufacturing needs. Sales needs to rely on information from operations to understand inventory, place orders, and forecast consumer demand. All departments need to understand the accounting and finance departments’ information for budgeting. For the firm to be successful, all departments must work together as a single unit sharing common information and not operate independently or in a silo (see Figure 1.7).
Departments Working Independently
Departments Working Together
The MIS Solution
You probably recall the old story of three blind men attempting to describe an elephant. The first man, feeling the elephant’s girth, said the elephant seemed very much like a wall. The second, feeling the elephant’s trunk, declared the elephant was like a snake. The third man felt the elephant’s tusks and said the elephant was like a tree or a cane. Companies that operate departmentally are seeing only one part of the elephant, a critical mistake that hinders successful operation.
Successful companies operate cross-functionally, integrating the operations of all departments. Systems are the primary enabler of cross-functional operations. A system is a collection of parts that link to achieve a common purpose. A car is a good example of a system, since removing a part, such as the steering wheel or accelerator, causes the entire system to stop working.
Before jumping into how systems work, it is important to have a solid understanding of the basic production process for goods and services. Goods are material items or products that customers will buy to satisfy a want or need. Clothing, groceries, cell phones, and cars are all examples of goods that people buy to fulfill their needs. Services are tasks people perform that customers will buy to satisfy a want or need. Waiting tables, teaching, and cutting hair are all examples of services that people pay for to fulfill their needs (see Figure 1.8).
Different Types of Goods and Services
Production is the process by which a business processes raw materials or converts them into a finished product for its goods or services. Just think about making a hamburger (see Figure 1.9). First, you must gather all of the inputs or raw materials such as the bun, patty, lettuce, tomato, and ketchup. Second, you process the raw materials, so in this example you would need to cook the patty, wash and chop the lettuce and tomato, and place all of the items in the bun. Finally, you would have your output or finished product—your hamburger! Productivity is the rate at which goods and services are produced based on total output given total inputs. Given our previous example, if a business could produce the same hamburger with less-expensive inputs or more hamburgers with the same inputs, it would see a rise in productivity and possibly an increase in profits. Ensuring the input, process, and output of goods and services work across all of the departments of a company is where systems add tremendous value to overall business productivity.
Input, Process, Output Example
Overview of Systems Thinking
Systems thinking is a way of monitoring the entire system by viewing multiple inputs being processed or transformed to produce outputs while continuously gathering feedback on each part (see Figure 1.10). Feedback is information that returns to its original transmitter (input, transform, or output) and modifies the transmitter’s actions. Feedback helps the system maintain stability. For example, a car’s system continuously monitors the fuel level and turns on a warning light if the gas level is too low. Systems thinking provides an end-to-end view of how operations work together to create a product or service. Business students who understand systems thinking are valuable resources because they can implement solutions that consider the entire process, not just a single component.
Management information systems (MIS) is a business function, like accounting and human resources, which moves information about people, products, and processes across the company to facilitate decision making and problem solving. MIS incorporates systems thinking to help companies operate cross-functionally. For example, to fulfill product orders, an MIS for sales moves a single customer order across all functional areas, including sales, order fulfillment, shipping, billing, and finally customer service. Although different functional areas handle different parts of the sale, thanks to MIS, to the customer the sale is one continuous process. If one part of the company is experiencing problems, however, then, like the car without a steering wheel, the entire system fails. If order fulfillment packages the wrong product, it will not matter that shipping, billing, and customer service did their jobs right, since the customer will not be satisfied when he or she opens the package.
MIS can be an important enabler of business success and innovation. This is not to say that MIS equals business success and innovation, or that MIS represents business success and innovation. MIS is a tool that is most valuable when it leverages the talents of people who know how to use and manage it effectively. To perform the MIS function effectively, almost all companies, particularly large and medium-sized ones, have an internal MIS department, often called information technology (IT), information systems (IS), or management information systems (MIS). For the purpose of this text, we will refer to it as MIS.
MIS Department Roles and Responsibilities
MIS as a department is a relatively new functional area, having been around formally for about 40 years. Job titles, roles, and responsibilities often differ from company to company, but the most common are displayed in Figure 1.11. Although many companies may not have a different individual for each of these positions, they must have top managers who take responsibility for all these areas.
The Roles and Responsibilities of MIS
|section 1.2||Business Strategy|
1.3Explain why competitive advantages are temporary.
1.4Identify the four key areas of a SWOT analysis.
1.5Describe Porter’s Five Forces Model and explain each of the five forces.
1.6Compare Porter’s three generic strategies.
1.7Demonstrate how a company can add value by using Porter’s value chain analysis.
IDENTIFYING COMPETITIVE ADVANTAGES
LO 1.3: Explain why competitive advantages are temporary.
Running a company today is similar to leading an army; the top manager or leader ensures all participants are heading in the right direction and completing their goals and objectives. Companies lacking leadership quickly implode as employees head in different directions attempting to achieve conflicting goals. To combat these challenges, leaders communicate and execute business strategies (from the Greek word stratus for army and agofor leading).
A business strategy is a leadership plan that achieves a specific set of goals or objectives such as increasing sales, decreasing costs, entering new markets, or developing new products or services. A stakeholder is a person or group that has an interest or concern in an organization. Stakeholders drive business strategies, and depending on the stakeholder’s perspective, the business strategy can change. It is not uncommon to find stakeholders’ business strategies have conflicting interests such as investors looking to increase profits by eliminating employee jobs. Figure 1.12 displays the different stakeholders found in an organization and their common business interests.
Good leaders also anticipate unexpected misfortunes, from strikes and economic recessions to natural disasters. Their business strategies build in buffers or slack, allowing the company the ability to ride out any storm and defend against competitive or environmental threats. Of course, updating business strategies is a continuous undertaking as internal and external environments rapidly change. Business strategies that match core company competencies to opportunities result in competitive advantages, a key to success!
A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. Competitive advantages provide the same product or service either at a lower price or with additional value that can fetch premium prices. Unfortunately, competitive advantages are typically temporary because competitors often quickly seek ways to duplicate them. In turn, organizations must develop a strategy based on a new competitive advantage. Ways that companies duplicate competitive advantages include acquiring the new technology, copying the business operations, and hiring away key employees. The introduction of Apple’s iPod and iTunes, a brilliant merger of technology, business, and entertainment, offers an excellent example.
In early 2000, Steve Jobs was fixated on developing video editing software when he suddenly realized that millions of people were using computers to listen to music, a new trend in the industry catapulted by illegal online services such as Napster. Jobs was worried that he was looking in the wrong direction and had missed the opportunity to jump on the online music bandwagon. He moved fast, however, and within four months he had developed the first version of iTunes for the Mac. Jobs’ next challenge was to make a portable iTunes player that could hold thousands of songs and be completely transportable. Within nine months, the iPod was born. With the combination of iTunes and iPod, Apple created a significant competitive advantage in the marketplace. Many firms began following Apple’s lead by creating portable music players to compete with the iPod. In addition, Apple continues to create new and exciting products to gain competitive advantages, such as its iPad, a larger version of the iPod that functions more as a computer than a music player.6
When a company is the first to market with a competitive advantage, it gains a particular benefit, such as Apple did with its iPod. This first-mover advantage occurs when a company can significantly increase its market share by being first with a new competitive advantage. FedEx created a first-mover advantage by developing its customer self-service software, which allows people to request parcel pickups, print mailing slips, and track parcels online. Other parcel delivery companies quickly began creating their own online services. Today, customer self-service on the Internet is a standard feature of the parcel delivery business.
Competitive intelligence is the process of gathering information about the competitive environment, including competitors’ plans, activities, and products, to improve a company’s ability to succeed. It means understanding and learning as much as possible as soon as possible about what is occurring outside the company to remain competitive. Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not send its sales representatives into grocery stores just to stock shelves; they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain competitive intelligence on everything from how well-competing products are selling to the strategic placement of its own products.7 Managers use four common tools to analyze competitive intelligence and develop competitive advantages as displayed in Figure 1.13.
Swot Analysis: Understanding Business Strategies
LO 1.4: Identify the Four Key Areas of a SWOT.
A SWOT analysis evaluates an organization’s strengths, weaknesses, opportunities, and threats to identify significant influences that work for or against business strategies (see Figure 1.14). Strengths and weaknesses originate inside an organization, or internally. Opportunities and threats originate outside an organization, or externally and cannot always be anticipated or controlled.
Business Tools for Analyzing Business Strategies
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN INNOVATION
SWOT Your Students
What is your dream job? Do you have the right skills and abilities to land the job of your dreams? If not, do you have a plan to acquire those sought-after skills and abilities? Do you have a personal career plan or strategy? Just like a business, you can perform a personal SWOT analysis to ensure your career plan will be successful. You want to know your strengths and recognize career opportunities while mitigating your weaknesses and any threats that can potentially derail your career plans. A key area where many people struggle is technology, and without the right technical skills, you might find you are not qualified for your dream job. One of the great benefits of this course is its ability to help you prepare for a career in business by understanding the key role technology plays in the different industries and functional areas. Regardless of your major, you will all use business driven information systems to complete the tasks and assignments associated with your career.
Perform a personal SWOT analysis for your career plan, based on your current skills, talents, and knowledge. Be sure to focus on your personal career goals, including the functional business area in which you want to work and the potential industry you are targeting, such as health care, telecommunications, retail, or travel.
After completing your personal SWOT analysis, take a look at the table of contents in this text and determine whether this course will eliminate any of your weaknesses or create new strengths. Determine whether you can find new opportunities or mitigate threats based on the material we cover over the next several weeks. For example, Chapter 9 covers project management in detail—a key skill for any business professional who must run a team. Learning how to assign and track work status will be a key tool for any new business professional. Where would you place this great skill in your SWOT analysis? Did it help eliminate any of your weaknesses? When you have finished this exercise, compare your SWOT with your peers to see what kind of competition you will encounter when you enter the workforce.
Potential Internal Strengths (Helpful): Identify all key strengths associated with the competitive advantage including cost advantages, new and/or innovative services, special expertise and/or experience, proven market leader, improved marketing campaigns, and so on.
Sample SWOT Analysis
Potential Internal Weaknesses (Harmful): Identify all key areas that require improvement. Weaknesses focus on the absence of certain strengths, including absence of an Internet marketing plan, damaged reputation, problem areas for service, outdated technology, employee issues, and so on.
Potential External Opportunities (Helpful): Identify all significant trends along with how the organization can benefit from each, including new markets, additional customer groups, legal changes, innovative technologies, population changes, competitor issues, and so on.
Potential External Threats (Harmful): Identify all threats or risks detrimental to your organization, including new market entrants, substitute products, employee turnover, differentiating products, shrinking markets, adverse changes in regulations, economic shifts, and so on.
THE FIVE FORCES MODEL—EVALUATING INDUSTRY ATTRACTIVENESS
LO 1.5: Describe Porter’s Five Forces Model and explain each of the five forces.
Michael Porter, a university professor at Harvard Business School, identified the following pressures that can hurt potential sales:
Knowledgeable customers can force down prices by pitting rivals against each other.
Influential suppliers can drive down profits by charging higher prices for supplies.
Competition can steal customers.
New market entrants can steal potential investment capital.
Substitute products can steal customers.
Formally defined, Porter’s Five Forces Model analyzes the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry. Its purpose is to combat these competitive forces by identifying opportunities, competitive advantages, and competitive intelligence. If the forces are strong, they increase competition; if the forces are weak, they decrease competition. This section details each of the forces and its associated MIS business strategy (see Figure 1.15).8
Porter’s Five Forces Model
Buyer power is the ability of buyers to affect the price they must pay for an item. Factors used to assess buyer power include number of customers, their sensitivity to price, size of orders, differences between competitors, and availability of substitute products. If buyer power is high, customers can force a company and its competitors to compete on price, which typically drives prices down.
One way to reduce buyer power is by manipulating switching costs, costs that make customers reluctant to switch to another product or service. Switching costs include financial as well as intangible values. The cost of switching doctors, for instance, includes the powerful intangible components of having to build relationships with the new doctor and nurses as well as transferring all your medical history. With MIS, however, patients can store their medical records on DVDs or thumb drives, allowing easy transferability. The Internet also lets patients review websites for physician referrals, which takes some of the fear out of trying someone new.9
Companies can also reduce buyer power with loyalty programs, which reward customers based on their spending. The airline industry is famous for its frequent-flyer programs, for instance. Because of the rewards travelers receive (free airline tickets, upgrades, or hotel stays), they are more likely to be loyal to or give most of their business to a single company. Keeping track of the activities and accounts of many thousands or millions of customers covered by loyalty programs is not practical without large-scale business systems, however. Loyalty programs are thus a good example of using MIS to reduce buyer power.10
A supply chain consists of all parties involved, directly or indirectly, in obtaining raw materials or a product. In a typical supply chain, a company will be both a supplier (to customers) and a customer (of other suppliers), as illustrated in Figure 1.16. Supplier power is the suppliers’ ability to influence the prices they charge for supplies (including materials, labor, and services). Factors used to appraise supplier power include number of suppliers, size of suppliers, uniqueness of services, and availability of substitute products. If supplier power is high, the supplier can influence the industry by:
Charging higher prices.
Limiting quality or services.
Shifting costs to industry participants.11
Traditional Supply Chain
Typically, when a supplier raises prices, the buyers will pass on the increase to their customers by raising prices on the end product. When supplier power is high, buyers lose revenue because they cannot pass on the raw material price increase to their customers. Some powerful suppliers, such as pharmaceutical companies, can exert a threat over an entire industry when substitutes are limited and the product is critical to the buyers. Patients who need to purchase cancer-fighting drugs have no power over price and must pay whatever the drug company asks because there are few available alternatives.
Using MIS to find alternative products is one way of decreasing supplier power. Cancer patients can now use the Internet to research alternative medications and practices, something that was next to impossible just a few decades ago. Buyers can also use MIS to form groups or collaborate with other buyers, increasing the size of the buyer group and reducing supplier power. For a hypothetical example, the collective group of 30,000 students from a university has far more power over price when purchasing laptops than a single student.12
Threat of Substitute Products or Services
The threat of substitute products or services is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose. For example, travelers have numerous substitutes for airline transportation, including automobiles, trains, and boats. Technology even makes videoconferencing and virtual meetings possible, eliminating the need for some business travel. Ideally, a company would like to be in a market in which there are few substitutes for the products or services it offers.
Polaroid had this unique competitive advantage for many years until it forgot to observe competitive intelligence. Then the firm went bankrupt when people began taking digital pictures with everything from video cameras to cell phones.
A company can reduce the threat of substitutes by offering additional value through wider product distribution. Soft-drink manufacturers distribute their products through vending machines, gas stations, and convenience stores, increasing the availability of soft drinks relative to other beverages. Companies can also offer various add-on services, making the substitute product less of a threat. For example, iPhones include capabilities for games, videos, and music, making a traditional cell phone less of a substitute.13
Threat of New Entrants
The threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to joining a market. An entry barrier is a feature of a product or service that customers have come to expect, and entering competitors must offer the same for survival. For example, a new bank must offer its customers an array of MIS-enabled services, including ATMs, online bill paying, and online account monitoring. These are significant barriers to new firms entering the banking market. At one time, the first bank to offer such services gained a valuable first-mover advantage, but only temporarily, as other banking competitors developed their own MIS services.14
Rivalry among Existing Competitors
Rivalry among existing competitors is high when competition is fierce in a market and low when competitors are more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in almost every industry. The retail grocery industry is intensively competitive. Kroger, Safeway, and Albertsons in the United States compete in many ways, essentially trying to beat or match each other on price. Most supermarket chains have implemented loyalty programs to provide customers special discounts while gathering valuable information about their purchasing habits. In the future, expect to see grocery stores using wireless technologies that track customer movements throughout the store to determine purchasing sequences.
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN GLOBALIZATION
Keeping Sensitive Data Safe When It’s Not in a Safe
In the past few years, data collection rates have skyrocketed, and some estimate we have collected more data in the past four years than since the beginning of time. According to International Data Corporation (IDC), data collection amounts used to double every four years. With the massive growth of smart phones, tablets, and wearable technology devices, it seems as though data is being collected from everything, everywhere, all the time. It is estimated that data collection is doubling every two years, and soon it will double every six months. That is a lot of data! With the explosion of data collection, CTOs, CIOs, and CSOs are facing extremely difficult times as the threats to steal corporate sensitive data also growing exponentially. Hackers and criminals have recently stolen sensitive data from retail giant Target and even the Federal Reserve Bank.
To operate, sensitive data has to flow outside an organization to partners, suppliers, community, government, and shareholders. List 10 types of sensitive data found in a common organization. Review the list of stakeholders; determine which types of sensitive data each has access to and whether you have any concerns about sharing this data. Do you have to worry about employees and sensitive data? How can using one of the four business strategies discussed in this section help you address your data leakage concerns?
Product differentiation occurs when a company develops unique differences in its products or services with the intent to influence demand. Companies can use differentiation to reduce rivalry. For example, although many companies sell books and videos on the Internet, Amazon differentiates itself by using customer profiling. When a customer visits Amazon.com repeatedly, Amazon begins to offer products tailored to that particular customer based on his or her profile. In this way, Amazon has reduced its rivals’ power by offering its customers a differentiated service.
To review, the Five Forces Model helps managers set business strategy by identifying the competitive structure and economic environment of an industry. If the forces are strong, they increase competition; if the forces are weak, they decrease it (see Figure 1.17).15
Analyzing the Airline Industry
Let us bring Porter’s five forces together to look at the competitive forces shaping an industry and highlight business strategies to help it remain competitive. Assume a shipping company is deciding whether to enter the commercial airline industry. If performed correctly, an analysis of the five forces should determine that this is a highly risky business strategy because all five forces are strong. It will thus be difficult to generate a profit.
Strong and Weak Examples of Porter’s Five Forces
Five Forces Model in the Airline Industry
Buyer power: Buyer power is high because customers have many airlines to choose from and typically make purchases based on price, not carrier.
Supplier power: Supplier power is high since there are limited plane and engine manufacturers to choose from, and unionized workforces (suppliers of labor) restrict airline profits.
Threat of substitute products or services: The threat of substitute products is high from many transportation alternatives, including automobiles, trains, and boats, and from transportation substitutes such as videoconferencing and virtual meetings.
Threat of new entrants: The threat of new entrants is high because new airlines are continually entering the market, including sky taxies offering low-cost on-demand air taxi service.
Rivalry among existing competitors: Rivalry in the airline industry is high, and websites such as Travelocity.com force them to compete on price (see Figure 1.18).16
THE THREE GENERIC STRATEGIES—CHOOSING A BUSINESS FOCUS
LO 1.6: Compare Porter’s three generic strategies.
Once top management has determined the relative attractiveness of an industry and decided to enter it, the firm must formulate a strategy for doing so. If our sample company decided to join the airline industry, it could compete as a low-cost, no-frills airline or as a luxury airline providing outstanding service and first-class comfort. Both options offer different ways of achieving competitive advantages in a crowded marketplace. The low-cost operator saves on expenses and passes the savings along to customers in the form of low prices. The luxury airline spends on high-end service and first-class comforts and passes the costs on to the customer in the form of high prices.
Porter’s three generic strategies are generic business strategies that are neither organization nor industry specific and can be applied to any business, product, or service. These three generic business strategies for entering a new market are: (1) broad cost leadership, (2) broad differentiation, and (3) focused strategy. Broad strategies reach a large market segment, whereas focused strategies target a niche or unique market with either cost leadership or differentiation. Trying to be all things to all people is a recipe for disaster because doing so makes projecting a consistent image to the entire marketplace difficult. For this reason, Porter suggests adopting only one of the three generic strategies illustrated in Figure 1.19.17
Figure 1.20 applies the three strategies to real companies, demonstrating the relationships among strategies (cost leadership versus differentiation) and market segmentation (broad versus focused).
Broad market and low cost: Walmart competes by offering a broad range of products at low prices. Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN DEBATE
Is Technology Making Us Dumber or Smarter?
Choose a side and debate the following:
Side A Living in the information age has made us smarter because we have a huge wealth of knowledge at our fingertips whenever or wherever we need it.
Side B Living in the information age has caused people to become lazy and dumber because they are no longer building up their memory banks to solve problems; machines give them the answers they need to solve problems.
Broad market and high cost: Neiman Marcus competes by offering a broad range of differentiated products at high prices. Its business strategy is to offer a variety of specialty and upscale products to affluent consumers.
Narrow market and low cost: Payless competes by offering a specific product, shoes, at low prices. Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which also sells low-cost shoes, by offering a far bigger selection of sizes and styles.
Narrow market and high cost: Tiffany & Co. competes by offering a differentiated product, jewelry, at high prices. Its business strategy allows it to be a high-cost provider of premier designer jewelry to affluent consumers.
Porter’s Three Generic Strategies
Examples of Porter’s Three Generic Strategies
VALUE CHAIN ANALYSIS—EXECUTING BUSINESS STRATEGIES
LO 1.7: Demonstrate how a company can add value by using Porter’s value chain analysis.
Firms make profits by applying a business process to raw inputs to turn them into a product or service that customers find valuable. A business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. Once a firm identifies the industry it wants to enter and the generic strategy it will focus on, it must then choose the business processes required to create its products or services. Of course, the firm will want to ensure the processes add value and create competitive advantages. To identify these competitive advantages, Michael Porter created value chain analysis, which views a firm as a series of business processes, each of which adds value to the product or service.
Value chain analysis is a useful tool for determining how to create the greatest possible value for customers (see Figure 1.21). The goal of value chain analysis is to identify processes in which the firm can add value for the customer and create a competitive advantage for itself, with a cost advantage or product differentiation.
The value chain groups a firm’s activities into two categories, primary value activities, and support value activities. Primary value activities, shown at the bottom of the value chain in Figure 1.21, acquire raw materials and manufacture, deliver, market, sell, and provide aftersales services.
1.Inbound logistics acquires raw materials and resources and distributes to manufacturing as required.
2.Operations transforms raw materials or inputs into goods and services.
3.Outbound logistics distributes goods and services to customers.
4.Marketing and sales promotes, prices, and sells products to customers.
5.Service provides customer support after the sale of goods and services.18
Support value activities, along the top of the value chain in Figure 1.21, include firm infrastructure, human resource management, technology development, and procurement. Not surprisingly, these support the primary value activities.
Firm infrastructure includes the company format or departmental structures, environment, and systems.
Human resource management provides employee training, hiring, and compensation.
Technology development applies MIS to processes to add value.
Procurement purchases inputs such as raw materials, resources, equipment, and supplies.
It is easy to understand how a typical manufacturing firm transforms raw materials such as wood pulp into paper. Adding value in this example might include using high-quality raw materials or offering next-day free shipping on any order. How, though, might a typical service firm transform raw inputs such as time, knowledge, and MIS into valuable customer service knowledge? A hotel might use MIS to track customer reservations and then inform front-desk employees when a loyal customer is checking in so the employee can call the guest by name and offer additional services, gift baskets, or upgraded rooms. Examining the firm as a value chain allows managers to identify the important business processes that add value for customers and then find MIS solutions that support them.
The Value Chain
APPLY YOUR KNOWLEDGE
BUSINESS DRIVEN START-UP
Cool College Start-ups
Not long ago, people would call college kids who started businesses quaint. Now they call them the boss. For almost a decade, Inc. magazine has been watching college start-ups and posting a list of the nation’s top start-ups taking campuses by storm. Helped in part by low-cost technologies and an increased prevalence of entrepreneurship training at the university level, college students—and indeed those even younger—are making solid strides at founding companies. And they’re not just launching local pizza shops and fashion boutiques. They are starting up businesses that could scale into much bigger companies and may already cater to a national audience.19
Research Inc. magazine at www.inc.com and find the year’s current Coolest College Startup listing. Choose one of the businesses and perform a Porter’s Five Forces analysis and a Porter’s Three Generic Strategies analysis. Be sure to highlight each force, including switching costs, product differentiation, and loyalty programs.
When performing a value chain analysis, a firm could survey customers about the extent to which they believe each activity adds value to the product or service. This step generates responses the firm can measure, shown as percentages in Figure 1.22, to describe how each activity adds (or reduces) value. Then the competitive advantage decision for the firm is whether to (1) target high value-adding activities to enhance their value further, (2) target low value-adding activities to increase their value, or (3) perform some combination of the two.
The Value Chain and Porter’s Five Forces Model
Overview of Business Driven Information Systems
MIS adds value to both primary and support value activities. One example of a primary value activity MIS facilitates is the development of a marketing campaign management system that could target marketing campaigns more efficiently, thereby reducing marketing costs. The system would also help the firm pinpoint target market needs better, thereby increasing sales. One example of a support value activity MIS facilitates is the development of a human resources system that could more efficiently reward employees based on performance. The system could also identify employees who are at risk of quitting, allowing managers time to find additional challenges or opportunities that would help retain these employees and thus reduce turnover costs.
Value chain analysis is a highly useful tool that provides hard and fast numbers for evaluating the activities that add value to products and services. Managers can find additional value by analyzing and constructing the value chain in terms of Porter’s Five Forces Model (see Figure 1.22). For example, if the goal is to decrease buyer power, a company can construct its value chain activity of “service after the sale” by offering high levels of customer service. This will increase customers’ switching costs and reduce their power. Analyzing and constructing support value activities can help decrease the threat of new entrants. Analyzing and constructing primary value activities can help decrease the threat of substitute products or services.20
Revising Porter’s three business strategies is critical. Firms must continually adapt to their competitive environments, which can cause business strategy to shift. In the remainder of this text, we discuss how managers can formulate business strategies using MIS to create competitive advantages. Figure 1.23 gives an overview of the remaining chapters, along with the relevant business strategy and associated MIS topics.
LEARNING OUTCOME REVIEW
Learning Outcome 1.1: Describe the information age and the differences among data, information, business intelligence, and knowledge.
We live in the information age, when infinite quantities of facts are widely available to anyone who can use a computer. The core drivers of the information age include data, information, business intelligence, and knowledge. Data are raw facts that describe the characteristics of an event or object. Information is data converted into a meaningful and useful context. Business intelligence (BI) is information collected from multiple sources such as suppliers, customers, competitors, partners, and industries that analyzes patterns, trends, and relationships for strategic decision making. Knowledge includes the skills, experience, and expertise, coupled with information and intelligence, that creates a person’s intellectual resources. As you move from data to knowledge, you include more and more variables for analysis, resulting in better, more precise support for decision making and problem solving.
Learning Outcome 1.2: Explain systems thinking and how management information systems enable business communications.
A system is a collection of parts that link to achieve a common purpose. Systems thinking is a way of monitoring the entire system by viewing multiple inputs being processed or transformed to produce outputs while continuously gathering feedback on each part. Feedback is information that returns to its original transmitter (input, transform, or output) and modifies the transmitter’s actions. Feedback helps the system maintain stability. Management information systems (MIS) is a business function, like accounting and human resources, which moves information about people, products, and processes across the company to facilitate decision making and problem solving. MIS incorporates systems thinking to help companies operate cross-functionally. For example, to fulfill product orders, an MIS for sales moves a single customer order across all functional areas, including sales, order fulfillment, shipping, billing, and finally customer service. Although different functional areas handle different parts of the sale, thanks to MIS, to the customer the sale is one continuous process.
Learning Outcome 1.3: Explain why competitive advantages are temporary.
A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. Competitive advantages provide the same product or service either at a lower price or with additional value that can fetch premium prices. Unfortunately, competitive advantages are typically temporary because competitors often quickly seek ways to duplicate them. In turn, organizations must develop a strategy based on a new competitive advantage. Ways that companies duplicate competitive advantages include acquiring the new technology, copying business processes, and hiring away employees.
Learning Outcome 1.4: Identify the four key areas of a SWOT analysis
A SWOT analysis evaluates an organization’s strengths, weaknesses, opportunities, and threats to identify significant influences that work for or against business strategies. Strengths and weaknesses originate inside an organization or internally. Opportunities and threats originate outside an organization or externally and cannot always be anticipated or controlled.
Learning Outcome 1.5: Describe Porter’s Five Forces Model and explain each of the five forces.
Porter’s Five Forces Model analyzes the competitive forces within the environment in which a company operates, to assess the potential for profitability in an industry.
Buyer power is the ability of buyers to affect the price they must pay for an item.
Supplier power is the suppliers’ ability to influence the prices they charge for supplies (including materials, labor, and services).
Threat of substitute products or services is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose.
Threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market.
Rivalry among existing competitors is high when competition is fierce in a market and low when competition is more complacent.
Learning Outcome 1.6: Compare Porter’s three generic strategies.
Organizations typically follow one of Porter’s three generic strategies when entering a new market: (1) broad cost leadership, (2) broad differentiation, and (3) focused strategy. Broad strategies reach a large market segment. Focused strategies target a niche market. Focused strategies concentrate on either cost leadership or differentiation.
Learning Outcome 1.7: Demonstrate how a company can add value by using Porter’s value chain analysis.
To identify competitive advantages, Michael Porter created value chain analysis, which views a firm as a series of business processes, each of which adds value to the product or service. The goal of value chain analysis is to identify processes in which the firm can add value for the customer and create a competitive advantage for itself, with a cost advantage or product differentiation. The value chain groups a firm’s activities into two categories—primary value activities and support value activities. Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services. Support value activities, along the top of the value chain in the figure, include firm infrastructure, human resource management, technology development, and procurement. Not surprisingly, these support the primary value activities.
OPENING CASE QUESTIONS
1.Knowledge: Explain the Internet of Things and list three IoT devices.
2.Comprehension: Explain why it is important for business managers to understand that data collection rates from IoT devices is increasing exponentially.
3.Application: Demonstrate how data from an IoT device can be transformed into information and business intelligence.
4.Analysis: Analyze the current security issues associated with IoT devices.
5.Synthesis: Propose a plan for how a start-up company can use IoT device data to make better business decisions.
6.Evaluate: Argue for or against the following statement: “The Internet of Things is just a passing fad and will be gone within a decade.”
Business intelligence (BI)
Chief information officer (CIO)
Chief knowledge officer (CKO)
Chief privacy officer (CPO)
Chief security officer (CSO)
Chief technology officer (CTO)
Internet of Things (IoT)
Management information systems (MIS)
Porter’s Five Forces Model
Porter’s three generic strategies
Primary value activities
Rivalry among existing competitors
Support value activities
Threat of new entrants
Threat of substitute products or services
Value chain analysis
1.What is data and why is it important to a business?
2.How can a manager turn data into information?
3.What is the relationship between data, information, business intelligence, and knowledge?
4.Why is it important for a company to operate cross-functionally?
5.Why would a company want to have a CIO, CPO, and CSO?
6.Explain MIS and the role it plays in a company and global business.
7.Do you agree that MIS is essential for businesses operating in the information age? Why or why not?
8.Why is it important for a business major to understand MIS?
9.What type of career are you planning to pursue? How will your specific career use data, information, business intelligence, and knowledge?
10.Explain systems thinking and how it supports business operations.
11.What business strategies would you use if you were developing a competitive advantage for a company?
12.Explain Porter’s Five Forces Model and the role it plays in decision making.
13.How could a company use loyalty programs to influence buyer power? How could a company use switching costs to lock in customers and suppliers?
14.What are Porter’s three generic strategies and why would a company want to follow only one?
15.How can a company use Porter’s value chain analysis to measure customer satisfaction?
CLOSING CASE ONE
The World Is Flat: Thomas Friedman
Christopher Columbus proved in 1492 that the world is round. For centuries, sailors maneuvered the seas, discovering new lands, new people, and new languages as nations began trading goods around the globe. Then Thomas Friedman, a noted columnist for The New York Times, published his book The World Is Flat.
Friedman argues that the world has become flat due to technological advances connecting people in China, India, and the United States as if we were all next-door neighbors. Physicians in India are reading X-rays for U.S. hospitals, and JetBlue Airways ticket agents take plane reservations for the company from the comfort of their Utah homes. Technology has eliminated some of the economic and cultural advantages developed countries enjoy, making the world a level playing field for all participants. Friedman calls this Globalization 3.0.
Globalization 1.0 started when Christopher Columbus discovered the world is round and the world shrank from large to medium. For the next several hundred years, countries dominated by white men controlled business. Globalization 2.0 began around 1800, during the Industrial Revolution, when the world went from medium to small. In this era, international companies dominated by white men controlled business. Globalization 3.0 began in early 2000, removing distance from the business equation, and the world has gone from small to tiny. In this era, people of all colors from the four corners of the world will dominate business. Farmers in remote villages in Nepal carry an iPhone to access the world’s knowledge at, say, Wikipedia or the stock market closing prices at Bloomberg.
Outsourcing, or hiring someone from another country to complete work remotely, will play an enormous role in this era. It has advantages and disadvantages. Outsourcing work to countries where labor is cheap drives down production costs and allows companies to offer lower prices to U.S. consumers. Having an accountant in China complete a U.S. tax return is just as easy as driving to the H&R Block office on the corner and, probably, far cheaper. Calling an 800 number for service can connect consumers to an Indian, Canadian, or Chinese worker on the other end of the line. Of course, outsourcing also eliminates some U.S. manufacturing and labor jobs, causing pockets of unemployment. In fact, the United States has outsourced several million service and manufacturing jobs to offshore, low-cost producers.
Figure 1.24 shows Friedman’s list of forces that flattened the world. They converged around the year 2000 and “created a flat world: a global, web-enabled platform for multiple forms of sharing knowledge and work, irrespective of time, distance, geography, and increasingly, language.” Three powerful new economies began materializing at this time. In India, China, and the former Soviet Union, more than 3 billion new willing and able participants walked onto the business playing field. Business students will be competing for their first jobs not only against other local students but also against students from around the country and around the globe.21
Thomas Friedman’s 10 Forces That Flattened the World
1.Define Globalization 1.0, 2.0, and 3.0 and provide a sample of the type of business data managers collected during each era.
2.Explain Friedman’s flat world and the reasons it is important for all businesses, small or large, to understand.
3.Demonstrate how students competing for jobs in a flat world can create competitive advantages to differentiate themselves in the marketplace.
4.Analyze the current business environment and identify a new flattener not mentioned on Friedman’s list.
5.Propose a plan for how a start-up company can use any of Porter’s strategies to combat competition in a global world.
6.Argue for or against the following statement: “The world is not flat (in Friedman’s sense of the term) because many undeveloped countries are not connected electronically.”
CLOSING CASE TWO
“What makes an application successful?” is a multimillion dollar question. If you can develop and deploy a successful application, you can make millions—every single day. Is it luck that creates that app millions of people download, like Flappy Birds, or is it a genuine business strategy that can be implemented by anyone? With the millions of applications already in the app store and hundreds being added each day, what are the chances you can find that sweet spot to success? If you are lucky enough to create an app that jumps to the top ten list, you can open your doors, sit back, and watch the money flow in.
This is exactly what happened to Candy Crush—the highly successful puzzle game that matches fun with pain. Candy Crush offers a range of 3-D sweets that players must eliminate by matching colored candies to crush them, thus advancing to the next level. Candy Crush brilliantly combines Bejeweled, Candy Land, and Tetris into one game. Each player receives five lives and, once completed, must wait 30 minutes to play again, which can be the longest 30 minutes of your life if you are on level 99. Candy Crush held the coveted position of the number one downloaded app for more than nine months and is one of the highest grossing U.S. applications. The company responsible for the Candy Crush craze is Sweden’s King.com (https://king.com/), and it boasts making between $1 million and $3 million daily on its applications. King.com is the latest among European technology firms entering the international gaming scene similar to Mojang’s Minecraft and Rovio’s Angry Birds. What sets King.com apart is its unbelievable profitability in an industry plagued with failed companies. King. com is truly an icon for others seeking to match its success. Perhaps if you study the secret to King. com’s sweet success, you can be the next star of Apple’s App store.
Here’s the secret to King’s success: freemium. Anyone competing in business today must understand this term. A freemium game is free to download and play and then charges customers for extras. King.com takes advantage of freemium and is making millions as it purposely creates pain points in the game, which users can pay extra for as a way out. For a meager .99 cents, users can purchase a lollipop hammer that thrashes unruly jujubes. Just imagine you have been beaten at level 49 and for just .99 cents, you can regain five lives and continue playing. Or you can buy a lollipop hammer and literally beat your way to the next level.
Many business applications operate using the freemium model, giving customers a functional but limited time to use their applications for free. For example, you can download Microsoft Office for a free trial version and in 90 days purchase the fully functional version for $499. It is important to note that the freemium business strategy does not work with physical products that cost money to produce; the closest you will see in freemium is free shipping. In business, the something-for-nothing feeling resonates with customers. Grocery stores often use the BOGO concept: buy one get one. Instead of simply offering a 50 percent discount on all products purchased, customers tend to buy more when they think they are getting one product for free. The bottom line for the company remains the same regardless if it offers each product at a 50 percent discount or two products for the price of one.22
1.Do you agree or disagree that freemium business strategies can provide a company with a competitive advantage? Be sure to justify your answer.
2.Why are data, information, business intelligence, and knowledge important to King.com? Give an example of each in relation to a customer playing Candy Crush.
3.Analyze King.com’s Candy Crush, using Porter’s Five Forces. If you have one million dollars, would you invest in Candy Crush?
4.According to Porter’s three generic strategies, where does King.com’s Candy Crush reside?
5.Why do freemium business strategies work well for virtual products and typically fail for physical products?
CRITICAL BUSINESS THINKING
1.Focusing on Friedman
Thomas Friedman’s newest book is titled Hot, Flat, and Crowded: Why We Need a Green Revolution—And How It Can Renew America. Research the Internet to find out as much information as you can about this text. Why would a business manager be interested in reading this text? How will this text affect global business? Do you think Hot, Flat, and Crowded will have as great an impact on society as The World Is Flat had on business? Why or why not?23
There is no doubt that Michael Porter is one of the more influential business strategists of the 21st century. Research Michael Porter on the Internet for interviews, additional articles, and new or updated business strategies. Create a summary of your findings to share with your class. How can learning about people such as Thomas Friedman and Michael Porter help prepare you for a career in business? Name three additional business professionals you should follow to help prepare for your career in business.
The video rental industry is fiercely competitive. Customers have their choice of renting a movie by driving to a store (Redbox), ordering through the mail (Netflix), or watching directly from their television (pay-per-view or Netflix). Using Porter’s Five Forces Model (buyer power, supplier power, threat of new entrants, threat of substitute products, and competition), evaluate the attractiveness of entering the movie rental business. Be sure to include product differentiation, switching costs, and loyalty programs in your analysis.
4.Working for the Best
Each year, Fortune magazine creates a list of the top 100 companies to work for. Find the most recent list. What types of data do you think Fortune analyzed to determine the company ranking? What issues could occur if the analysis of the data was inaccurate? What types of information can you gain by analyzing the list? Create five questions a student performing a job search could answer by analyzing this list.
5.Manipulating Data to Find Your Version of the Truth
How can global warming be real when there is so much snow and cold weather? That’s what some people wondered after a couple of massive snowstorms buried Washington, DC Politicians across the capital made jokes and built igloos as they disputed the existence of climate change. Some concluded the planet simply could not be warming with all the snow on the ground. These comments frustrated Joseph Romm, a physicist and climate expert with the Center for American Progress. He spent weeks turning data into information and graphs to educate anyone who would listen about why this reasoning was incorrect. Climate change is all about analyzing data, turning it into information to detect trends. You cannot observe climate change by looking out the window; you have to review decades of weather data with advanced tools to understand the trends.24
Increasingly we see politicians, economists, and newscasters boiling tough issues down to simplistic arguments over what the data mean, each interpreting and spinning the data to support their views and agendas. You need to understand the data and turn them into useful information, or you will not understand when someone is telling the truth and when you are being lied to.
Brainstorm two or three types of data economists use to measure the economy. How do they turn the data into information? What issues do they encounter when attempting to measure the economy? As a manager, what do you need to understand when reading or listening to economic and business reports?
6.Starting Your Own Business
Josh James recently sold his web analytics company, Omniture, to Adobe for $1.8 billion. Yes, James started Omniture from his dorm room! Have you begun to recognize the unbelievable opportunities available to those students who understand the power of MIS, regardless of their major? Answer the following questions.25
a.Why is it so easy today for students to create start-ups while still in college?
b.What would it take for you to start a business from your dorm room?
c.How will this course help you prepare to start your own business?
d.Research the Internet and find three examples of college student start-ups.
e.What’s stopping you from starting your own business today? You are living in the information age and, with the power of MIS, it is easier than ever to jump into the business game with very little capital investment. Why not start your own business today?
7.Information Issues in the Information Age
We live in the information age, when the collection, storage, and use of data are hot topics. One example of inappropriate data handling occurred at a college where the monitoring of restrooms occurred every 15 seconds to observe the use of toilets, mirrors, and sinks. Students, faculty, and staff began complaining that the data collection was an invasion of their privacy and a violation of their rights.
Another example of inappropriate data handling occurred when a professor of accounting at a college lost a flash drive containing information for more than 1,800 students, including Social Security numbers, grades, and names. Social Security numbers were included because the data went back to before 1993, when the college used Social Security numbers to identify students.
What types of student data does your college collect? What could happen if your professor lost a thumb drive with all of your personal information? What types of issues could you encounter if someone stole your personal data? What can your college do to ensure this type of data storage violation does not occur?
Cheryl O’Connell is the owner of a small, high-end retailer of women’s clothing called Excelus. Excelus’s business has been successful for many years, largely because of O’Connell’s ability to anticipate the needs and wants of her loyal customer base and provide her customers with personalized service. O’Connell does not see any value in IT and does not want to invest any capital in something that will not directly affect her bottom line. Develop a proposal describing the potential IT-enabled competitive opportunities or threats O’Connell might be missing by not embracing IT. Be sure to include a Porter’s Five Forces analysis and discuss which one of the three generic strategies O’Connell should pursue.
9.The Competitive Landscape for Students
According to the Economic Policy Institute, over the past decade the United States has lost an estimated 2.4 million factory jobs to China. Factories in South Korea, Taiwan, and China are producing toys, toothpaste, running shoes, computers, appliances, and cars. For a long time, U.S. firms did not recognize these products as competition; they regarded Asia’s high-tech products as second-rate knockoffs and believed Asian countries maintained a factory culture—they could imitate but not innovate.
In hindsight, it is obvious that once these countries did begin designing and creating high-end products, they would have obvious competitive advantages, with high-value research and development coupled with low-cost manufacturing of unbeatable goods and services. Asia is now on the rise in all industries from wind turbines to high-speed bullet trains. According to Bloomberg Businessweek’s ranking of the most innovative companies, 15 of the top 50 are Asian, up from just 5 in 2006. In fact, for the first time, the majority of the top 25 are based outside the United States.
How do you, as a business student, view these statistics? What type of global business climate will you be competing in when you graduate? If you wanted to gather competitive intelligence about the job market, where would you look and what types of data would you want to analyze? What can you do to create personal competitive advantages to differentiate yourself when searching for a job?26
10.10 Best Things You Will Say to Your Grandchildren
Wired magazine recently posted the top 10 things you will say to your grandchildren. For each expression below, try to identify what it is referring to and why it will be considered outdated.27
1.Back in my day, we only needed 140 characters.
2.There used to be so much snow up here, you could strap a board to your feet and slide all the way down.
3.Televised contests gave cash prizes to whoever could store the most data in their head.
4.Well, the screens were bigger, but they only showed the movies at certain times of day.
5.We all had one, but nobody actually used it. Come to think of it, I bet my LinkedIn profile is still out there on the web somewhere.
6.Translation: “English used to be the dominant language. Crazy, huh?”
7.Our bodies were made of meat and supported by little sticks of calcium.
8.You used to keep files right on your computer, and you had to go back to that same computer to access them!
9.Is that the new iPhone 27G? Got multitasking yet?
10.I just can’t get used to this darn vat-grown steak. Texture ain’t right.
BUILD YOUR OWN BUSINESS
You have recently inherited your grandfather’s business, which is conveniently located in your city’s downtown. The business offers many kinds of specialized products and services. It was first opened in 1952 and was a local hot spot for many years. Unfortunately, business has been steadily declining over the past few years. The business runs without any computers and all ordering takes place manually. Your grandfather had a terrific memory and knew all of his customers and suppliers by name, but unfortunately, none of this information is located anywhere in the store. The operational information required to run the business, such as sales trends, vendor information, promotional information, and so on, is all located in your grandfather’s memory. Inventory is tracked in a notepad, along with employee payroll, and marketing coupons. The business does not have a website, uses very little marketing except word of mouth, and essentially still operates the same as it did in 1952.
Throughout this course, you will own and operate your grandfather’s business, and by taking advantage of business practices discussed in this text, you will attempt to increase profits, decrease expenses, and bring the business into the 21st century. For the purpose of this case, please choose the business you wish to operate and create a name for the business. For example, the business could be a coffee shop called The Broadway Café, an extreme sports store called Cutting Edge Sports, or even a movie store called The Silver Screen. Try to pick a business you are genuinely interested in running and that aligns with your overall career goals.
Project Focus: Competitive Advantage
1.Identify the business you will build throughout this course and choose a name for your business.
2.Write an analysis of buyer power and supplier power for your business, using Porter’s Five Forces Model. Be sure to discuss how you could combat the competition with strategies such as switching costs and loyalty programs.
3.Write an analysis of rivalry, entry barriers, and the threat of substitute products for your business, using Porter’s Five Forces Model. Be sure to discuss how you could combat the competition with strategies such as product differentiation.
4.Describe which of Porter’s three generic strategies you would use for your business. Be sure to describe the details of how you will implement this strategy and how it will help you create a competitive advantage in your industry.
APPLY YOUR KNOWLEDGE BUSINESS PROJECTS
PROJECT ICapitalizing on Your Career
Business leaders need to be comfortable with management information systems (MIS) for the following (primary) reasons:
The sheer magnitude of the dollars spent on MIS must be managed to ensure business value.
Research has consistently shown that when top managers are active in supporting MIS, they realize a number of benefits, such as gaining a competitive advantage, streamlining business processes, and even transforming entire industries.
When business leaders are not involved in MIS, systems fail, revenue is lost, and entire companies can even fail because of poorly managed systems.
How do companies get managers involved in MIS? One of the biggest positive factors is managers’ personal experience with MIS and MIS education, including university classes and executive seminars. Once managers understand MIS through experience and education, they are more likely to lead their companies in achieving business success through MIS.
1.Search the Internet for examples of the types of technologies currently used in the field or industry that you plan to pursue. For example, if you are planning a career in accounting or finance, you should become familiar with financial systems such as Oracle Financials. For a career in logistics or distribution, research supply chain management systems. If marketing appeals to you, research customer relationship management systems, blogs, emarketing, and social networking.
2.As a competitive tool, MIS can differentiate products, services, and prices from competitors’ offerings by improving product quality, shortening product development or delivery time, creating new MIS-based products and services, and improving customer service before, during, and after a transaction. Search the Internet for examples of companies in the industry where you plan to work that have achieved a competitive advantage through MIS.
3.Create a brief report of your findings; include an overview of the type of technologies you found and how companies are using them to achieve a competitive advantage.
PROJECT IIAchieving Alignment
Most companies would like to be in the market-leading position of JetBlue, Dell, or Walmart, all of which have used management information systems to secure their respective spots in the marketplace. These companies are relentless about keeping the cost of technology down by combining the best of MIS and business leadership.
The future belongs to those organizations perceptive enough to grasp the significance of MIS and resourceful enough to coordinate their business and management information systems.
1.Use any resource to answer the question, “Why is it challenging for businesses to align MIS and their other operations?” Use the following questions to begin your analysis:
a.How do companies monitor competitive intelligence and create competitive advantages?
b.What are some of the greatest MIS challenges for most firms?
c.What drives MIS decisions?
d. what is the moving force behind MIS decisions for most companies?
PROJECT IIIMarket Dissection
To illustrate the use of the three generic strategies, consider Figure 1.25. The matrix shown demonstrates the relationships among strategies (cost leadership versus differentiation) and market segmentation (broad versus focused).
Porter’s Three Generic Strategies
Hyundai is following a broad cost leadership strategy. It offers low-cost vehicles, in each particular model stratification, that appeal to a large audience.
Audi is pursuing a broad differentiation strategy with its Quattro models available at several price points. Audi’s differentiation is safety, and it prices its models higher than Hyundai’s to reach a large, stratified audience.
Kia has a more focused cost leadership strategy. Kia mainly offers low-cost vehicles in the lower levels of model stratification.
Hummer offers the most focused differentiation strategy of any in the industry (including Mercedes-Benz).
Create a similar graph displaying each strategy for a product of your choice. The strategy must include an example of the product in each of the following markets: (1) cost leadership, broad market; (2) differentiation, broad market; (3) cost leadership, focused market; and (4) differentiation, focused market. Potential products include cereal, dog food, soft drinks, computers, shampoo, snack foods, jeans, sneakers, sandals, mountain bikes, TV shows, and movies.
PROJECT IVFixing the Post Office
Is there anything more frustrating than waiting in line at the post office? Not only are those lines frustrating, but they are also unprofitable. The U.S. Postal Service has faced multibillion-dollar losses every year for the past few years, making for one of the greatest challenges in its history.
What is killing the post office? Perhaps it is Stamps.com, a website that allows you to customize and print your own stamps 24 hours a day. Getting married? Place a photo of the happy couple right on the stamp for the invitations. Starting a business? Place your business logo on your stamps. Stamps.com even keeps track of a custome’s postal spending and can recommend optimal delivery methods. Plus, Stamps.com gives you postage discounts you can’t get at the post office or with a postage meter.
Evaluate the U.S. Postal Service, using Porter’s Five Forces Model. How could the Postal Service create new products and services to help grow its business? What types of competitive advantages can you identify for the Postal Service?
PROJECT VThe iPad—The Greatest Product in History or Just Another Gadget?
Apple sold 300,000 units of its highly anticipated iPad in the first 15 hours it was available for sale. Hundreds of thousands of Apple devotees flocked to stores during Passover and Easter to be the first to obtain the new device, even though it is neither a phone nor a laptop computer and many people are still wondering what it’s for.
The controversy over the usefulness of Apple’s portable tablet began as soon as Apple announced the device was heading to market. At first glance, the iPad is little more than a touch screen the size of a slim book, with a few control buttons along the edges and a home button at the bottom. Shrink it, and it would look like an iPod Touch. What is the value of this device? That’s the question everyone wants to answer.
The iPad’s modest features might represent an entirely new way of consuming media—video, web pages, music, pictures, and even books. Break into groups and review the current value of the iPad for business. Find three examples of the ways businesses are using, or could use, the iPad. Do you consider it the next revolutionary device or just an overpriced music player?
PROJECT VIFlat Competition
“When I was growing up in Minneapolis, my parents always said, ‘Tom, finish your dinner. There are people starving in China and India.’ Today I tell my girls, ‘Finish your homework, because people in China and India are starving for your jobs.’ And in a flat world, they can have them, because there’s no such thing as an American job anymore.” Thomas Friedman.
In his book, The World Is Flat, Thomas Friedman describes the unplanned cascade of technological and social shifts that effectively leveled the economic world, and “accidentally made Beijing, Bangalore, and Bethesda next-door neighbors.” The video of Thomas Friedman’s lecture at MIT discussing the flat world is available at http://mitworld.mit.edu/video/266. If you want to be prepared to compete in a flat world, you must watch this video and answer the following questions:
Do you agree or disagree with Friedman’s assessment that the world is flat?
What are the potential impacts of a flat world for a student performing a job search?
What can students do to prepare themselves for competing in a flat world?28
PROJECT VIIFinding Your College Start-up
Derek Johnson, a student at the University of Houston, was having lunch with his friend who happened to be the communications director for her sorority. During lunch, Derek’s friend was telling him how hard it was to communicate with all of her sisters in the sorority. She had to send out important announcements about meetings, charitable events, and even dues. She had tried everything, including Facebook, email, and message boards, but so far nothing was working. As Derek pondered his friend’s dilemma, he came up with a solution: mass text messaging.
Johnson began researching mass text messaging products and was surprised to find that none existed for the average consumer. Spotting an entrepreneurial opportunity, Derek quickly began working on a product. Within a few months, he launched his website, Tatango, and began offering group text messaging at a reasonable price. Now, a few years later, Tatango offers customers subscription plans starting under $20 a month that allows groups to send text messages to all members at once—whether 10 or 10,000—from any device.29
In a group, brainstorm a list of problems you are currently experiencing. Decide whether any present potential new business opportunities and, if so, analyze the potential, using the tools introduced in this chapter. Be prepared to present your new business to the class.
PROJECT VIIIWhat’s Wrong with This Bathroom?
If you were the CEO of a global financial company that was experiencing a financial crisis, would you invest $1 million to renovate your office? Probably not, and you are possibly wondering whether this is a fabricated story from The Onion. Guess what, this is a true story! John Thain, the former CEO of Merrill Lynch, decided to spend $1.2 million refurbishing his office—well after Merrill Lynch posted huge financial losses. Thain personally signed off on all of the following:
Area rug: $87,784
Mahogany pedestal table: $25,713
19th century credenza: $68,179
Pendant light furniture: $19,751
4 pairs of curtains: $28,091
Pair of guest chairs: $87,784
George IV chair: $18,468
6 wall sconces: $2,741
Parchment waste can: $1,405 (yes, for a trash can!)
Roman shade fabric: $10,967
Roman shades: $7,315
Coffee table: $5,852
Commode on legs: $35,11530
It takes years of education and work experience for people to build the skills necessary to take on the role of CEO. Obviously, a company like Merril Lynch would only hire a highly qualified person for the job. What do you think happened to John Thain? Why would he spend an obscene amount of money redecorating his office when his company was having financial trouble? What happens to a company whose executives are not aligned with company goals? How can you ensure that your company’s executives are not making monumental mistakes, such as million-dollar bathroom renovations?
PROJECT IXI Love TED!
A small nonprofit started in 1984, TED (Technology, Entertainment, and Design) hosts conferences for Ideas Worth Spreading. TED brings people from all over the globe to share award-winning talks covering the most innovative, informative, and exciting speeches ever given in 20 minutes. You can find TED talks by Al Gore, Bill Gates, Steve Jobs, Douglas Adams, Steven Levitt, Seth Godin, Malcolm Gladwell, and so on.31
Visit www.ted.com and peruse the thousands of videos that are available; then answer the following:
Review the TED website and find three talks you would want to watch. Why did you pick these three and will you make time outside of class to watch them?
How can you gain a competitive advantage by watching TED?
How can you find innovative ideas for a start-up by watching TED?
How can you find competitive intelligence by watching TED?
AYK APPLICATION PROJECTS
If you are looking for Excel projects to incorporate into your class, try any of the following after reading this chapter.