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Chapter 3 Information Systems, Organizations, and Strategy 125

instance, it is fairly easy to start a pizza business or just about any small retail
business, but it is much more expensive and difficult to enter the computer
chip business, which has very high capital costs and requires significant exper-
tise and knowledge that is hard to obtain. New companies have several possible
advantages: They are not locked into old plants and equipment, they often hire
younger workers who are less expensive and perhaps more innovative, they
are not encumbered by old worn-out brand names, and they are “more hungry”
(more highly motivated) than traditional occupants of an industry. These
advantages are also their weakness: They depend on outside financing for new
plants and equipment, which can be expensive; they have a less-experienced
workforce; and they have little brand recognition.

Substitute Products and Services
In just about every industry, there are substitutes that your customers might
use if your prices become too high. New technologies create new substitutes all
the time. Even oil has substitutes: Ethanol can substitute for gasoline in cars;
vegetable oil for diesel fuel in trucks; and wind, solar, coal, and hydro power for
industrial electricity generation. Likewise, the Internet telephone service can
substitute for traditional telephone service, and fiber-optic telephone lines to
the home can substitute for cable TV lines. And, of course, an Internet music
service that allows you to download music tracks to an iPod is a substitute for
CD-based music stores. The more substitute products and services in your
industry, the less you can control pricing and the lower your profit margins.

Customers
A profitable company depends in large measure on its ability to attract and
retain customers (while denying them to competitors), and charge high prices.
The power of customers grows if they can easily switch to a competitor’s prod-
ucts and services, or if they can force a business and its competitors to compete
on price alone in a transparent marketplace where there is little product dif-
ferentiation, and all prices are known instantly (such as on the Internet). For
instance, in the used college textbook market on the Internet, students (cus-
tomers) can find multiple suppliers of just about any current college textbook.
In this case, online customers have extraordinary power over used-book firms.

Suppliers
The market power of suppliers can have a significant impact on firm profits,
especially when the firm cannot raise prices as fast as can suppliers. The more
different suppliers a firm has, the greater control it can exercise over suppliers
in terms of price, quality, and delivery schedules. For instance, manufacturers
of laptop PCs almost always have multiple competing suppliers of key compo-
nents, such as keyboards, hard drives, and display screens.

INFORMATION SYSTEM STRATEGIES FOR DEALING

WITH COMPETITIVE FORCES
What is a firm to do when it is faced with all these competitive forces? And how
can the firm use information systems to counteract some of these forces? How
do you prevent substitutes and inhibit new market entrants? There are four
generic strategies, each of which often is enabled by using information technol-
ogy and systems: low-cost leadership, product differentiation, focus on market
niche, and strengthening customer and supplier intimacy.

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