10.5 Using information technology competitively  (Page 2/4)

Exhibit

Buyer power can be reduced by using IS in ways that tend to restrict buyers’ choices. A good example is the frequent flyer programs that are offered by most commercial airlines around the world. When they enroll in the program, air travelers are awarded “miles” for every flight they take on, for example, British Airways. Their accumulated miles are maintained by a computer system. Travelers can obtain tickets for free flights once as certain number of miles has been accumulated in their account. What this does is to encourage travelers to always use the same airline so they can qualify for awards more quickly. Frequent flyer programs, of course, have to keep track of a lot of information on the activities of thousands of travelers and would not be possible to manage without computer systems. An airline without a frequent flyer program is at a competitive disadvantage to airlines which have them.

Supplier power is high when a business must rely on just a few suppliers. For example, if there is just one store in a town which stocks office supplies, businesses have nowhere else to buy supplies they need and may be forced to higher than normal prices. On the other hand, if a local business is connected to the Internet, it can choose from many other suppliers and possible find cheaper prices, even when the cost of shipping is considered.

The threat of new entrants can be reduced when IS is used to erect “entry barriers”. Entry barriers are offerings that a business must make available to its customers if it expects to do business in a certain sector simply because most or all of its competitors offer a certain feature to their customers. An example is ATM machines offered by banks. ATM machines would not be possible without the use of computers and communications networks. If you had to choose between a bank that offered ATM machines and one that did not, which one would you choose? Most likely the one with ATM machines. ATM machines are this a barrier to enter the banking sector in a particular locale.

The threat of substitute products can usually be reduced by using IS to bind customers more closely to a business and create what is called “switching costs”. This means that the IS systems offered by a business are so appreciated by the customer that customers are reluctant to switch to a substitute product. For example, there are many free open content software products that equally competitive with the costly brands. Zoho, Google Docs, Thinkfree, are examples. One of the reasons many PC users don’t switch to them is that they would have to learn how to use a new package. Even though the free packages are easy to learn, there is a switching cost involved that binds users to Microsoft Office: The time it would take to learn even a relatively simple package is enough of an obstacle to many users that they conclude that switching is not worth the effort.

The Intensity of Intra-Industry Competition can often be increased by IS-enabled innovations. For example, the global reach of the Internet means that competitors for many products and services can be located anywhere in the world. For example, tax accounting specialists may now find themselves competing with accounting specialists in low-cost countries. This is becoming a common practice as companies conclude that IS makes it possible for many forms of knowledge work to be performed anywhere in the world.