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Chapter 3

BUS 237 Chapter Notes - Chapter 3: Value Chain, Business Process, Bargaining Power

Business Administration
Course Code
BUS 237

of 3
BUS 237 Chapter 3 Notes
Strategy, Information systems, and comparative advantages
Productive paradox
Productive paradox: no evidence of an increase in worker productivity associated with
the increase in investment
o Productivity: how business value are created using IT
Business value: real benefit for organizations by increase in efficient use of resources
or effectively delivering services to customers
Many businesses invest large amount into IT without taking into account the measure of
o But how can you measure productivity?
o There are other intangible benefits derived from IT but we don’t see it
3 ways to measure the value of IT
1. Productivity: same input more output, produce output faster, make better
2. Structure of competition: alter the way corporation compete due to IT
3. Benefits to the end customer: reduction of cost, cheaper and better products
“Technology for technology’s sake”
Organizations must understand the what business value will IT add to their business
instead of blindly following the trend
Value people who understand both technology and business
IS improving productivity
Productivity can be increased through efficiency or effective business processes
Efficiency: business process can be done quicker or with fewer resources (or both)
o Easy to measure; job can be complete using just enough of the right resources
o “Doing things right”
Effectiveness: new improved goods/services that the consumer value
o “Doing the right thing”
Balance between efficiency and effectiveness is important to gain competitive advantage
for the long-term
Business processes and value chains
o Value chain: network of activities that improve effectiveness (consist of many
business processes) adding value in the chain
o Example: there are no value in raw material for each step of the chain but
throughout the business process we add value to the raw material
o Forward integration: moving downstream on the value chain
o Backward integration: moving upstream on the value chain (close to consumers)
o The more value added = more price companies can sell it for
o Difference between revenue and cost of good sold is margin, more margin =
profit increases
o Primary activities: value added directly to the product
Adds value for the consumers
o Support activities: support primary activities
o Do not add any value directly but instead indirectly
Example: pay workers, payroll system
BUS 237 Chapter 3 Notes
o We can develop more efficient and effective IS to improve productivity through
supporting activity systems
Increase in both primary activities and support activities increase margin
IS provide new technology to increase margin and ability to compete
o Example: online shopping, 24/7 customer support service
Organizational strategy and industry structure related
Organization’s strategy reflect its goals and competition, so it’s IS must be aligned
Five forces model: determine industry profitability
o Bargaining power of the consumers consumer are vulnerable to switch brands
The most important force is consumer’s tastes and desires
o Treat of substitutes other brands that are competitors
o Bargaining power of suppliers to get lowest-priced ingredients
But firms don’t compete on price, they compete on marking strategy
o Threat of new entrants better technology and innovations
Competitive strategy: examination of the 5 forces and how organization respond to
them and respond to the structure of the industry
o Lowest cost across industry
o Lowest cost within a particular industry segment
o Providing wide range of better product across industry
o Providing better product within an industry segment
o The organization’s goals and object must match its competitive strategy
Relationship between innovation and IT
Sustaining technologies: sustaining the technology to provide rate of improvement in
consumer value
o Example: vulcanization to help increase the quality of tires
o Create value for organizations by help making process more efficient
o We can now accomplish more than what was impossible before
Disruptive technologies: match up with the mainstream technology by providing new
o Example: changing Walkman to iPods and MP3
o New set of choice for consumers to choose
Both sustaining and disruptive technology help company gain competitive advantages
but may alter the structure of an industry
o Competitors must react to the change in order to survive or they will lose all their
consumers and margin
There are also competitive advantage that was so large that it created a new industry:
microcomputer relies on the Internet and wireless network
Diffusion of innovation: “the process by which an innovation is communicated through
certain channels over time among the members of social system”
o Adoption of technology
1. Knowledge: individuals hears about the innovation but lack information
2. Persuasion: individuals finds out more about it
3. Decision: individuals weigh out the pros and cons of the innovation, buy it
4. Implementation: individuals try to use the innovation and see if they are satisfy
or would prefer a better way
5. Confirmation: if the individuals are happy, they will make use of it
BUS 237 Chapter 3 Notes
IS providing competitive advantage
Competitive advantage via products
o Create a new product or services
o Enhancing products or services
o Differentiating products or services
Competitive advantage via business processes
o Switching costs: locking in consumers by making it difficult and expensive for
them to switch to another product
o Lock in suppliers by making it easy for them to connect with organization so they
will not provide supplies to the competitors
o Creating entry barriers for new entrance competitor in the market
o Form alliances (used for complementary products)
o Reduce costs reduce prices increase profitability increase cash
building better infrastructures increase competitive advantage
Sustaining competitive advantage through information systems
Innovation are quickly replicate by competitors and decrease organization’s competitive
Technology becomes invisible and no longer provide advantages
Disruptive technology developed open opportunities for companies to gain strong
competitive advantage availability of the technology increases cost decreases
invisible technology
For IT this is true, but for IS people may choose to not adapt to the new innovation
Sustained competitive advantage: finding distinctive ways to compete
o Developing integration between IT and the people and procedures
o Those who have a head start gain advantage because it takes time and skills for
the competitors to match up