Chapter 8: Digital Disruption and the Competitive Environment

Industry Analysis

• Porters 5 forces

  • The Threat of New Entrants

  • The Threat of Substitute Products or Services

  • The Bargaining Power of Buyers

  • The Bargaining Power of Suppliers

  • The Rivalry among Existing Competitors

Industry Analysis and the role of IS

• Can IT raise barriers to entry? If a company invests in strong systems, it can make it harder for new competitors to enter (e.g., PlayStation’s platform).

• Can IT reduce supplier power? Online tools and platforms can shift power away from suppliers to buyers (e.g., Alibaba).

• Can IT reduce buyer power? While customers can easily compare options, companies can still use IT to build loyalty and make switching harder (e.g., Orbitz).

• Can IT change industry competition? New systems can disrupt how companies compete and push others to adapt (e.g., Amazon.com).

Value Chain

• Primary Activities: represent the firm’s actions that are directly related to value creation

• Support Activities: represent the firm’s actions that, while not directly related to the transformation process, are nevertheless necessary to enable it

The Value Network

• A company’s value chain is part of a bigger system that includes its suppliers (upstream) and customers (downstream).

• The connection points between these parts are called linkages, and they offer great chances to use IT for strategic gains.

• Important note: The goal of this framework is to help managers find ways to improve how their company creates value.

• Don’t just use the model exactly as it is—adjust it based on your deep understanding of the company and its industry.

Customer Service Life Cycle

• Companies can use information systems to improve customer service and create more value.

• The rise of the internet and smart, connected devices has made this even more powerful.

• Now that many companies can interact directly with customers, there are more chances to offer great service and build strong relationships, especially at the customer-facing end of the business.

4 Phases

• Requirements: customer realizes the need for a specific product or service and begins to focus on its attributes

• Acquisition: the customer orders, pays for, and takes possession of the product or service

• Ownership: the customer has the product or is receiving the service and must deal with issues regarding its efficient and effective use

• Retirement: the customer may begin to think about repurchasing, trading in, or dismissing old products

Virtual Value Chain

• Information isn’t just used to support physical work—it can now be a valuable resource on its own.

• Like physical goods, information goes through steps that increase its value.

• By processing data through these steps, companies can turn it into useful insights, better processes, or even new products and services.

5 Activities

• Gather: the firm collects information from transaction processing systems and any other sources—both internal to the organization (e.g., orders received) and external (e.g., census data).

• Organize: the firm stores the gathered data in a way that makes later retrieval and analysis simple and effective.

• Select:  users identify and extract the needed data from the data repository created in the previous step.

• Synthesiz:   the firm packages the selected information so that the intended consumer can readily use it for the specific purpose to which it is directed (i.e., decision making, sales).

• Distribute:  the firm transfers the packaged information to its intended user or customer.

VVC Three Classes of Strategic Initatives

• Visibility: Companies use digital tools to better understand processes that were once hidden. For example, smart devices and platforms like Khan Academy help track and improve performance by making data more visible.

• Mirroring Capabilities: Some physical activities—like testing or training—can now be done digitally. This saves time and money by using simulations or virtual environments instead of real-world setups (e.g., Second Life).

• New Digital Value: Companies can use data to create new products or services that customers find valuable, like personalized recommendations or targeted offers. This helps increase customer satisfaction and their willingness to pay.

Data Monetization

• Improving:

  • Focuses on internal use of data

  • Aims to enhance operations and support better decision-making

• Wrapping:

  • Customer-facing approach

  • Uses data and analytics to improve or add value to existing products or services

• Selling:

  • Also customer-facing

  • Data or analytics are sold as stand-alone products that generate direct revenue

The Dimension of Decision Making

• Theoretical Repurchase Frequency:

  • Measures how often the average customer could repurchase (not actual performance)

  • Depends on the industry and the firm’s value proposition

  • Reflects potential, not the performance of a specific firm

• Degree of Customizability:

  • Shows how much a product/service can be tailored to customer needs

  • Depends on the complexity of the product/service

  • Examples:

    • Low customizability: Gasoline (standard commodity)

    • High customizability: Resorts and destination spas (personalized experiences)

Value Creation via Digital Platforms and Aggregators

• Digital platforms act as orchestrators of resources, not direct producers of finished goods

• Resources can be tangible (e.g., tools) or intangible (e.g., data, skills), and help create products, services, or processes

• These resources are key to spotting and reacting to market opportunities or threats

• Enabled by technologies like: Cloud computing, Servitization (turning products into services), Software-as-a-Service (SaaS)

The metrics of a servitized business

• Monthly Recurring Revenue (MRR): Predictable revenue a company earns each month from subscriptions

• Annualized Run Rate (ARR): Projects annual revenue based on shorter time periods (e.g., 1 month)

• Annual Recurring Revenue (ARR – Cloud): A cloud-based version of the Annualized Run Rate

• Churn Rate: The percentage of customers who cancel their subscriptions

• Revenue Churn Rate (MRR Churn Rate): Measures how much subscription revenue is lost due to customer cancellations

• MRR Retention Rate: Shows how much monthly revenue is retained despite customer churn

• Customer Retention Rate (CRR): represents the proportion of customers that renew their subscription

• Lifetime Value of Customer (LTV): also referred as Customer Lifetime Value (CLV) this measure represents the cumulative revenue that the average customer will produce for the firm for the duration of the relationship

• Customer Acquisition Cost (CAC): indicates the average upfront cost the company incurred in order to acquire each new customer during a given year

• LTV / CAC ratio: indicates how much revenue the company will receive over the lifetime of a customer given the upfront cost of acquisition

• Months to Recover CAC (CAC / Monthly Revenue): this metric measures the estimated time to profitability; meaning how long before the firm recovers the CAC and starts to have a cumulative positive cash flow

Acquiring the Needed Data: The Third Dimension

• The degree to which data collection can be done easily can vary dramatically by industry and is an important early consideration

• The degree of unobtrusive data capture indicates the extent to which, in the normal course of business, customer data are collected and stored in a readily usable format

• The degree of unobtrusive data capture for a firm is largely given at any point in time. However, technology improvements and innovation may pay off here if you are willing to shoulder the cost of changing people’s habits