Chapter II

BUSINESS DIGITAL ECONOMY

Business Pressure and Organization
Response
Business Pressure
• Business environment is the combination of social,
legal, economic, physical, and political factors that
affect business activities.
• Significant changes of these factors create business
pressures.
• There are three types of business pressures:
• Market Pressures
• Technology pressures
• Societal pressures
Market pressures
• Generated by global economy & strong competition,
changing nature of workforce, and powerful customers.
Global economy and Strong Competition:
 The move of global economy has been facilitated by the
emergence of the global, Web-based platform.
 The most important pressure in global market is the cost
of labor, which varies widely among countries.
 Labor cost are higher in developed countries.
 Developed countries offer benefits of health care to
employees.
 IT has made easier for many labor-intensive industries
who moves their operations to countries with low labor
costs.
The changing nature of the workforce:
 In developed countries workforce is becoming more
diversified.
 Increasing number of women, single parents, minorities,
and disabled persons can work in all types of position.
 IT is easing the integration of these employee into
traditional workforce and also enabling people to work
from home.
Powerful Customers:
• Consumer sophistication and expectations increase
as customers become more knowledgeable about
the availability and quality of products and services.
• They use the internet to find the information about
the product and services, compare prices, and
purchase items at electronic auctions ( a process of
buying and selling goods or services).
• Organization recognize the importance of customers
and increase their efforts to retain them. As a result,
firms try to know the customers to better anticipate
and serve their needs.
Technology Pressures
There are two types of technology pressures:
Technological innovations & Information overload
Technological Innovation and Obsolescence:
• New technologies create support for products,
alternative service options, and quality.
• Today’s state-of-art(highest level of general
development) products may be obsolete (outdated)
tomorrow. for example, how fast thin-screen
televisions and computer monitors replacing the
bulky TVs and monitors of just a short time ago?
• How fast old and standard cell phones are replaced
with the new smart phones?
Information Overload:
 The amount of information available on the
internet doubles approximately every year, and
much of it is free.
 The information and other telecommunications
network provide latest information to manager
which help them to make the decisions effectively
and efficiently.
 Information technologies, such as search engine
and data mining (process used by companies to
turn raw data into useful information) provided the
valuable support in these efforts.
Societal/Political/Legal Pressures
This category includes social responsibility, government
regulation/deregulation, spending for social programs,
spending to protect against terrorism, and ethics.
Social responsibility:
 Social issues affect businesses range from the state of the
physical environment to companies contributions to
educations.
 Some corporations are willing to spend time and or money
on solving social problems. These efforts are known as
organizational social responsibility.
 The digital divide which refers to the gap between those who
have access to information and communication technology
and those who do not, is one of the social problem that
affects the modern business .
• One development that can help close the digital
divide is the installation of internet kiosks (a small
open-fronted hut or cubicle from which
newspapers, refreshments, tickets, etc. are sold) in
public places and cybercafes.
• Cybercafes are public places where Internet
terminals are available, usually for a small fee.
• Computers have popped up in many public location:
karaoke bars, bookstores, CD stores, hotel lobbies
and convenience stores.
Compliance with government regulations and
deregulations:
 Government regulations refers to health, safety,
environmental control, and equal opportunity.
 Business tend to view government regulations as
expensive constraints on their activities and
government deregulations intensifies competition.
 The US government passed many new laws,
including the Sarbanes-Oxley Act, the USA PATRIOT
Act , the Gramm-Leach-Bliley Act, and the Health
Insurance Portability and Accountability Act.
 Organizations must be in compliance with the
regulations of these states.
Protection against Terrorist Attacks:
• Organization have been in increased pressure to
protect themselves against terrorist attacks
• Information technology can help to protect business
by providing security systems and identifying
patterns of behavior associated with terrorist
activities that will help to prevent terrorist attacks,
including cyber attacks against organizations.
Ethical Issues:
• In IT the ethics relates the standard of right and
wrong in information processing practices.
• Ethical issues are very important because if handled
poorly, they can damage an organizations image
and destroy its employees confidence.
• The use of IT raises many ethical issues, ranging
from monitoring e-mail to invading the privacy of
the millions of customers whose date are stored in
private and public databases.
Organizational Response
Organizations are responding to the above pressures
by implementing IT such as strategic systems,
customer focus, make-to-order & mass customization,
and e-business.
Strategic Systems:
Strategic systems provide organizations with
advantages that enable them to increase their share
market share and/or profits, to better negotiate with
suppliers, or to prevent competitors from entering
their markets.
Customer Focus:
Organizational attempts to provide superb customer
service that can make the difference between
attracting and keeping customers on the one side and
loosing them to competitors on the other side.
Various IT tools and business processes have been
designed to keep customers happy.
For example: Dell guides you through the process of
buying a computer by providing information and
choices that help you make an informed buying
decision.
Make-to-order and Mass Customization:
• Make-to-order is a strategy of producing customized
products and services.
• How to manufacture customized goods efficiently at
reasonable cost is the major business problem.
• Solution is to change manufacturing process from
mass production to mass customization.
In mass production, a company produces large
quantity of identical items.
In mass customization, it also produce a large quantity
of items, but it customizes them to fit the desire of
each customers.
E-business and E-commerce:
Doing business electronically is an essential strategy
for companies competing in todays business
environment.
Competitive Advantage and strategic
information system
Competitive Advantage and strategic information
system
• A competitive strategy is a statement that identifies a
business’s strategies to compete its goals, and the plans
and policies that will be required to carry out those goals.
• Because of the competitive strategy, an organization
seeks a competitive advantage (advantage over competitors
gained by offering consumers greater value, either by means of lower
prices or by providing greater benefits and service that justifies higher
prices)in an industry.
• It seeks to perform better than its competitors in cost,
quality, or speed.
• It helps company control a market and generate larger
than average profits.
Competitive Advantage and strategic
information system
• Strategic Information systems(SISs) provide a
competitive advantage by helping an organization
implement its strategic goals and increase its
productivity.
• Strategic information system is a system that helps
an organization gain a competitive advantage , or
reduce a competitive disadvantage
Porter’s Competitive Forces Model
• The best known framework for analyzing
competitiveness is Michael Porter’s competitive
forces model
• Companies use Porter’s model to develop
strategies by demonstrating how IT can make a
company more competitive.
• This model identifies five major forces that could
either endanger or enhance a company’s position.
1. The threat of entry of new competitors:
The threat of new competitor entry is high when it is
easy to enter your market and low when significant
barriers to entry exist.
Entry barrier is a product or service feature that
customer have learned to expect from organization.
This feature must be offered by a competing
organization.
Competitors frequently need to set up website because
web increases the threat by which the competitors will
enter the market reducing the traditional barriers to
enter such as sales force or a physical storefront to sell
goods & services.
2. The bargaining power of suppliers:
Supplier power is high when buyers have few
choices from whom to buy and low when buyers
have many choices.
Organization should have potential suppliers who
are able to negotiate price, quality and delivery
terms.
By the impact of internet, buyers can find
alternative suppliers and compare prices, reducing
the supplier’s bargaining power.
3. The bargaining power of customers(buyers):
Buyer power is high when buyers have many
choices from whom to buy and low when buyers
have few choices.
 For example: in the past students had few places to buy their
textbooks. As a result, students had low buyer power. Today, students
have numerous choices to choose from, and as a result student
buyer power has greatly increased.
Internet can reduce customers’ switching costs,
which are the costs, money and time, of a decision
to buy elsewhere.
4. The threat of substitute products or services:
If there are many substitutes for organization’s
products or services then the threat of substitutes is
high and with few substitutes the threat is low.
New technologies create substitute products rapidly
Example: customers today buy wireless telephones
instead of landline telephones, internet music
services instead of traditional CDs.
5. The rivalry among existing firms in the industry:
The threat from rivalry (competition for the same
objective or for superiority in the same field.) is high
when there is intense competition among many
firms in an industry.
The threat is low when the competition is among
fewer firms and is not as intense.
Porter’s Value Chain Model
• Organization use Porter’s value chain model to
identify specific activities where they can use
competitive strategies for greatest impact.
• According to this model, the activities conducted in
any organization can be divided into two categories:
primary activities and support activities.
Primary activities:
• Primary activities are those business activities that
relate to the production & distribution of the firm’s
products and services, thus creating value for which
customers are willing to pay.
• These activities involve purchasing materials, processing
materials into products, and delivering products to
customers. Typically, there are 5 primary activities.
i. Inbound logistics
ii. Operations (manufacturing and testing)
iii. Outbound logistics(storage and distribution)
iv. Marketing and sales
v. Services
Support activities:
The primary activities are buttressed by support
activities.
Support activities do not add value directly to the
firm’s products or services.
Support activities consists of:
1.The firm’s infrastructure (accounting, finance,
management)
2.Human Resource Management
3.Product and technology department
4.Procurement
Strategies For Competitive Advantage
Cost Leadership Strategy:
• Produce products and services at lower cost in the
industry
• Example: Wal-Mart’s automatic inventory
replenishment system(refers to the process of inventory
moving from reserve storage to primary storage), which enables
Wal-Mart to reduce inventory storage
requirements. As a result, Wal-Mart stores use floor
space to sell products, not to store them, thereby
reducing costs.
Differentiation strategy:
• Offer different products, services, or product
features.
• For example: Southwest Airlines has differentiated
itself as a low cost, short-haul, express airline.
• This strategy has proved to be winning one for
competing in the highly competitive airline industry.
• Also, Dell has differentiated itself in the personal
computer market through its mass customization
strategy.
Innovation Strategy:
• Introduce new products and services, add new
features to existing products and services, or
develop new ways to produce them.
• Example: Introduction of ATM by banks.
• ATM has changed the nature of competition in the
banking industry and has become the competitive
necessity for any bank
Operational effectiveness strategy:
• Improve the manner in which internal business
processes are executed so that a firm performs
similar activities better than its compititors
• This increase quality, productivity and employee
and customer satisfaction.
• Example : investments in IT has given Norfolk
Southern Railway a strategic advantage. (refer case
2.2)
Customer-orientation strategy:
• Concentrate on making customers happy.
• Web based systems are particularly effective in this
area because they can provide a personalized, one-
to-one relationship with each other.