Active Review 9/9/17, 2(44 PM

Active Review
Use this Active Review to verify that you understand the ideas and concepts that answer the chapters

study questions.

Q3-1 How Does Organizational Strategy Determine Information Systems Structure?

Diagram and explain the relationship among industry structure, competitive strategy, value chains,

business processes, and information systems. Working from the bottom up, explain how the knowledge
youve gained in these first three chapters pertains to that diagram.

Q3-2 What Five Forces Determine Industry Structure?

Describe the original purpose of the five forces model and the different purpose for which it is used in
this chapter. Name two types of forces and describe the strength factors for each. Name three competitive
forces and describe the strength factors for each. Name two bargaining power forces. Summarize the five
forces operating on Falcon Security.

Q3-3 What is Competitive Strategy?

Describe four different strategies, as defined by Porter. For each strategy, offer an example of a company
that uses that strategy. Describe Falcon Securitys competitive strategy and justify it.

Q3-4 How Does Competitive Strategy Determine Value Chain Structure?

Define the terms value, margin, and value chain. Explain why organizations that choose a differentiation
strategy can use value to determine a limit on the amount of extra cost to pay for differentiation. Name
the primary and support activities in the value chain and explain the purpose of each. Explain the concept

of linkages.

Q3-5 How Do Value Chains Determine Business Processes and Information Systems?

What is the relationship between a value chain and a business process? How do business processes relate
to competitive strategy? How do information systems relate to competitive strategy? Justify the comments

in the two rows labeled Supporting business process in Figure 3-8 .

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Q3-6 How Do Information Systems Provide Competitive Advantages?

List and briefly describe eight principles of competitive advantage. Consider your college bookstore, and

list one application of each of the eight principles. Strive to include examples that involve information
systems.

How does the knowledge in this chapter help you?

Explain in your own words how Falcon Securitys competitive strategy is threatened by relying on a few

large industrial accounts. Describe Falcon Securitys planned response and summarize the problems Cam
perceives with that response. Recommend a course of action for Falcon Security. Use Cams idea of

diversifying the type of work the company does to illustrate your answer.

Key Terms and Concepts

Competitive strategy
Five forces model
Linkages
Margin
Primary activities
Support activities

Switching costs
Value

Value chain

To complete the problems with the in your MyLab, go the EOC Discussion Questions .

Using Your Knowledge

3-1. Suppose you decide to start a business that recruits students for summer jobs. You will

match available students with available jobs. You need to learn what positions are available

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and which students are available for filling those positions. In starting your business, you know

you will be competing with local newspapers, Craigslist (www.craigslist.org), and your college.
You will probably have other local competitors as well.

a. Analyze the structure of this industry according to Porters five forces model.
b. Given your analysis in part a, recommend a competitive strategy.

c. Describe the primary value chain activities as they apply to this business.

d. Describe a business process for recruiting students.

e. Describe information systems that could be used to support the business process in

part d.

f. Explain how the process you described in part d and the system you described in part e

reflect your competitive strategy.

3-2. Consider the two different bike rental companies in Q3-4 . Think about the bikes that they

rent. Clearly, the student bikes will be just about anything that can be ridden out of the shop.
The bikes for the business executives, however, must be new, shiny, clean, and in tip-top
shape.

a. Compare and contrast the operations value chains of these two businesses as they
pertain to the management of bicycles.

b. Describe a business process for maintaining bicycles for both businesses.

c. Describe a business process for acquiring bicycles for both businesses.

d. Describe a business process for disposing of bicycles for both businesses.

e. What roles do you see for information systems in your answers to the earlier questions?
The information systems can be those you develop within your company or they can be
those developed by others, such as Craigslist.

3-3. Samantha Green owns and operates Twigs Tree Trimming Service. Samantha graduated
from the forestry program of a nearby university and worked for a large landscape design firm,
performing tree trimming and removal. After several years of experience, she bought her own

truck, stump grinder, and other equipment and opened her own business in St. Louis, Missouri.
Although many of her jobs are one-time operations to remove a tree or stump, others are
recurring, such as trimming a tree or groups of trees every year or every other year. When

business is slow, she calls former clients to remind them of her services and of the need to trim

their trees on a regular basis.

Samantha has never heard of Michael Porter or any of his theories. She operates her business

by the seat of her pants.

a. Explain how an analysis of the five competitive forces could help Samantha.

b. Do you think Samantha has a competitive strategy? What competitive strategy would
seem to make sense for her?

c. How would knowledge of her competitive strategy help her sales and marketing

efforts?

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d. Describe, in general terms, the kind of information system that she needs to support

sales and marketing efforts.

Collaboration Exercise 3

Read Chapter Extensions 1 and 2 if you have not already done so. Meet with your team and

build a collaboration IS that uses tools like Google Docs, SharePoint, or other collaboration
tools. Do not forget the need for procedures and team training. Now, using that IS, answer the

questions below.

Figure 3-15 shows the business process and related information systems for the high-value
bike rental company described in Figure 3-8 . The small cylinders ( ) represent a computer

database, the most common type of repository.

Figure 3-15 Rental Process for High-Value Bike Rental

In terms of Porters value chain model, this process involves both the sales and operations

activities. The bike rental company uses information systems to maintain customer data in the

Customer database and bike inventory data in the Bike Inventory database and to transmit
hotel charge data to the Hotel Billing system.

Each information system consists of all five IS components. Consider, for example, the

information system for processing the Bike Inventory database. With regard to hardware, the

database itself will be stored on a computer, and it will be accessed from other computers or

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computing devices, such as cash registers or handheld scanning devices (possibly used to

check bikes in). Computer programs will provide forms for the system users to query and
update the database. Other computer programs will be used to manage the database. (You

will learn about such programs in Chapter 5 .) Data, the third component of an information
system, will be stored in the database. Each employee will be trained on procedures for using

the system. For example, the sales clerk will learn how to query the database to determine
what bikes are available and how to determine promising up-sell candidates. Finally, the

people component will consist of the clerks in the rental shop as well as any support
personnel for maintaining the inventory system.

Information systems that support the Customer database and those that interface with the

Hotel Billing system will also have the five IS components. (By the way, whenever you consider

the development or use of an information system, it is good practice to think about these five
components.)

As stated in this chapter, business processes must generate more value than their cost. If
they do notif the margin of a business process is negativethen either costs must be
reduced or the value increased. Considering the business process in Figure 3-15 , one
possibility for reducing costs is to eliminate rental personnel. Bicycles could be placed on
racks having locks that customers can open with their hotel room keys; the bike would be
rented until the customer places the bike back on the rack. Another possibility is to increase
the value of the process. The rental agency could decide to rent additional types of equipment
or perhaps to sell clothing or food and beverages.

Using your collaboration IS, work with your team to answer the following questions.

3-4. Explain the relationship between value and cost according to the Porter model.
When does it make sense to add cost to a business process?

3-5. Suppose you are told that the business process in Figure 3-15 has a negative
margin. Explain what that means. Suppose the margin of some business process is

a negative $1 million. If costs are reduced by $1.2 million, will the margin necessarily

be positive? Explain why or why not.

3-6. Consider the alternative of replacing the rental personnel from the business process

in Figure 3-15 .

a. Describe changes that will need to be made to the process documented in

Figure 3-15 . You can download a copy of this Visio diagram from this texts
Web site at www.pearsonhighered.com/kroenke.

b. Would eliminating the rental personnel change the competitive strategy of this
company? Is it possible to be a high-value company with no rental personnel?
Explain why or why not.

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c. Would eliminating the rental personnel necessarily reduce costs? What costs

would increase as a result of this change?

3-7. Consider the alternative of increasing the value delivered by existing rental

personnel. The text suggests possibly renting more kinds of equipment or selling
items of use to guests who are renting bicycles, but consider other options as well.

a. Describe five ways that you think the existing personnel could increase the

value of this business process.

b. For the five alternatives you developed in part a, name and describe criteria

for selecting among them.

c. Using your criteria in part b, evaluate the alternatives you identified in part a

and select the best one. Explain your selection.

d. Redraw Figure 3-15 for the alternative you selected in part c.

Case Study 3

The Amazon of Innovation

On Cyber Monday, December 1, 2014, Amazon.com customers ordered more than 18 toys per
second. And almost 60 percent of Amazons holiday shoppers bought gifts using a mobile
device. This contributed to a 20 percent increase in Amazons total annual sales of $89B.
Amazons last order for the holiday season was placed on December 24 at 10:24 PM and was
delivered at 11:06 PM just in time for Christmas.

You may think of Amazon as simply an online retailer, and that is indeed where the company
has achieved most of its success. To do this, Amazon had to build an enormous supporting

infrastructurejust imagine the information systems and fulfillment facilities needed to ship
36.8 million items on a single day. That infrastructure, however, is needed only during the busy

holiday season. Most of the year, Amazon is left with excess infrastructure capacity. Starting
in 2000, Amazon began to lease some of that capacity to other companies. In the process, it

played a key role in the creation of what are termed cloud services, which you will learn about

in Chapter 6 . For now, just think of cloud services as computer resources somewhere out in
the Internet that are leased on flexible terms.

Today, Amazons business lines can be grouped into three major categories:

Online retailing

Order fulfillment

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Cloud services

Consider each.

Amazon created the business model for online retailing. It began as an online bookstore, but

every year since 1998 it has added new product categories. The company is involved in all
aspects of online retailing. It sells its own inventory. It incentivizes you, via the Associates

program, to sell its inventory as well. Or it will help you sell your inventory within its product
pages or via one of its consignment venues. Online auctions are the major aspect of online

sales in which Amazon does not participate. It tried auctions in 1999, but it could never make

inroads against eBay.6

Today, its hard to remember how much of what we take for granted was pioneered by

Amazon. Customers who bought this, also bought that; online customer reviews; customer
ranking of customer reviews; books lists; Look Inside the Book; automatic free shipping for
certain orders or frequent customers; and Kindle books and devices were all novel concepts
when Amazon introduced them (Figure 3-16 ).

Figure 3-16 Innovation at Amazon

Source: Data from Amazon.com, http://phx.corporateir.net/phoenix.zhtml?c=176060&p=irolcorporate Timeline

(accessed July 2013).

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Amazons retailing business operates on very thin margins. Products are usually sold at a

discount from the stated retail price, and 2-day shipping is free for Amazon Prime members
(who pay an annual fee of $99). How does it do it? For one, Amazon drives its employees

incredibly hard. Former employees claim the hours are long, the pressure is severe, and the
workload is heavy. But what else? It comes down to Moores Law and the innovative use of

nearly free data processing, storage, and communication.

In addition to online retailing, Amazon also sells order fulfillment services. You can ship your
inventory to an Amazon warehouse and access Amazons information systems just as if they

were yours. Using technology known as Web services, your order processing information

systems can directly integrate, over the Web, with Amazons inventory, fulfillment, and
shipping applications. Your customers need not know that Amazon played any role at all. You
can also sell that same inventory using Amazons retail sales applications.

Amazon Web Services (AWS) allow organizations to lease time on computer equipment in very
flexible ways. Amazons Elastic Cloud 2 (EC2) enables organizations to expand and contract
the computer resources they need within minutes. Amazon has a variety of payment plans,
and it is possible to buy computer time for less than a penny an hour. Key to this capability is
the ability for the leasing organizations computer programs to interface with Amazons to
automatically scale up and scale down the resources leased. For example, if a news site
publishes a story that causes a rapid ramp-up of traffic, that news site can, programmatically,
request, configure, and use more computing resources for an hour, a day, a month, whatever.

With its Kindle devices, Amazon has become both a vendor of tablets and, even more
importantly in the long term, a vendor of online music and video. And to induce customers to
buy Kindle apps, in 2013 Amazon introduced its own currency, Amazon Coins. In 2014,
Amazon opened a 3D printing store from which customers can customize their own toys,
jewelry, dog bones, and dozens of other products. It also made a push to provide video
services by introducing Fire TV.7

In 2015, Amazon introduced WorkMail, a potential cloud-based replacement for Microsoft

Exchange. It also introduced Amazon Home Services (local professional services), Amazon
Destinations (travel site), and Amazon Dash (a one-button reordering device).8

Finally, Jeff Bezos announced in 2014 that Amazon was experimenting with package delivery

using drones, a service called Prime Air.9 In March 2015, the U.S. Federal Aviation

Administration gave Amazon permission to start testing its drones in the United States.10 But

drone delivery is something that will happen in the future; consider a business service that

Amazon.com is offering right now.

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Fulfillment by Amazon (FBA)

Fulfillment by Amazon (FBA) is an Amazon service by which other sellers can ship goods to

Amazon warehouses for stocking, order packaging, and shipment. FBA customers pay a fee
for the service as well as for inventory space. Amazon uses its own inventory management

and order fulfillment business processes and information systems to fulfill the FBA customers
orders.

FBA customers can sell their goods on Amazon.com, sell them via their own sales channels, or

both. If the FBA customer sells on Amazon.com, Amazon will provide customer service for

order processing (handling returns, fixing erroneously packed orders, answering customer
order queries, and the like).

The costs for Fulfillment by Amazon depend on the type and size of the goods to be
processed. The FBA fees for standard-size products as of February 2015 are shown in the
table.

If goods are sold via Amazon.com, Amazon uses its own information systems to drive the

order fulfillment process. However, if the goods are sold via an FBA customers sales channel,
then the FBA customer must connect its own information systems with those at Amazon.
Amazon provides a standardized interface by which this is done called Amazon Marketplace

Web Service (MWS). Using Web-standard technology (see Chapter6 ), FBA customers order

and payment data are directly linked to Amazons information systems.

FBA enables companies to outsource order fulfillment to Amazon, thus avoiding the cost of

developing their own processes, facilities, and information systems for this purpose.

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Questions
3-8. Based on the facts presented in this case, what do you think is Amazon.coms

competitive strategy? Justify your answer.

3-9. Jeff Bezos, CEO of Amazon.com, has stated that the best customer support is none.

What does that mean?

3-10. Suppose you work for Amazon or a company that takes innovation as seriously as

Amazon does. What do you suppose is the likely reaction to an employee who says
to his or her boss, But, I dont know how to do that!?

3-11. Using your own words and your own experience, what skills and abilities do you
think you need to have to thrive at an organization like Amazon?

3-12. What should UPS and FedEx be doing in response to Amazon.coms interest in drone
delivery?

3-13. Summarize the advantages and disadvantages for brick-and-mortar retailers to sell
items via Amazon.com. Would you recommend that they do so?
3-14. If a brick-and-mortar retailer were to use FBA, what business processes would it not
need to develop? What costs would it save?
3-15. If a brick-and-mortar retailer were to use FBA, what information systems would it not
need to develop? What costs would it save?
3-16. If a brick-and-mortar retailer were to use FBA, how would it integrate its information
systems with Amazons? (To add depth to your answer, Google the term Amazon
MWS.)

Go to the Assignments section of your MyLab to complete these writing exercises.

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3-17. YourFire, Inc., is a small business owned by Curt and Julie Robards. Based in

Brisbane, Australia, YourFire manufactures and sells a lightweight camping stove

called the YourFire. Curt, who previously worked as an aerospace engineer,

invented and patented a burning nozzle that enables the stove to stay lit in very
high windsup to 90 miles per hour. Julie, an industrial designer by training,

developed an elegant folding design that is small, lightweight, easy to set up, and
very stable. Curt and Julie manufacture the stove in their garage, and they sell it

directly to their customers over the Internet and via phone.

a. Explain how an analysis of the five competitive forces could help YourFire.
b. What does YourFires competitive strategy seem to be?

c. Briefly summarize how the primary value chain activities pertain to

YourFire. How should the company design these value chains to conform
to its competitive strategy?

d. Describe business processes that YourFire needs in order to implement

itsmarketing and sales and also its service value chain activities.

e. Describe, in general terms, information systems to support your answer to

part d.

3-18. A friend of yours from college, who you havent talked to in three years, sends you
an email asking you to meet him for lunch. He says hes got a great idea for a
business and wants to run it by you. At first youre hesitant because your friend,
while obviously intelligent, doesnt always think things though. You agree to meet
for lunch and talk about the idea. At lunch he explains that hes been developing

new flexible screens for his employer that are incredibly tough, waterproof, and
use very little energy. His idea is to use these new flexible screens to create

wearable computing clothing that can connect directly to smartphones and push
ads, promotions, and video. His only problem is that he knows nothing about

business. Hes not sure where to start.

a. Explain how you could use the five forces model to help your friend

understand the potential success of his wearable flex screens.

b. How might understanding the unique forces affecting this industry

determine the competitive advantage for your friends new company?

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Endnotes
1. Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).

2. Michael Porter, Competitive Strategy (New York: Free Press, 1980).

3. Chris Welch, Mercedes Built a Self-Driving Truck That Could Save Thousands of Lives Every Year, The Verge, October 7, 2014, accessed

April 10, 2015, www.theverge.com/2014/10/7/6939809/mercedes-self-driving-truck-could-save-thousands-lives-each-year.

4. Lee Matthews, Amazon Files Patent for 3D Printing Delivery Trucks, Geek.com, February 25, 2015, accessed April 10, 2015,

www.geek.com/news/amazon-files-patent-for-3d-printing-delivery-trucks-1616525.

5. Maxwell Wessel, Making Sense of Ubers $40 Billion Valuation, HBR.org, December 10, 2014, accessed April 10, 2015,

September 9,https://hbr.org/2014/12/making-sense-of-ubers-40-billion-valuation.
2017 2:40 pm
6. For a fascinating glimpse of this story from someone inside the company, see Early Amazon: Auctions at

http://glinden.blogspot.com/2006/04/early-amazon-auctions.html, accessed August 2012.

7. www.amazon.com/b?ie=UTF8&node=8323871011

8. Andy Meek, Amazons Roadmap for 2015: Move Fast, Launch as Much as Possible, BGR Media, April 24, 2015, accessed May 16, 2015,

https://bgr.com/2015/04/24/amazon-earnings-q1-2015-analysis-roadmap.

9. Marcus Wholsen, Jeff Bezos Says Amazon Is Seriously Serious About Drone Deliveries, Wired, accessed May 22, 2014,

www.wired.com/2014/04/amazon-delivery-drones.

10. Bart Jansen, FAA Approves Amazon Drone Research Again, USA Today, accessed April 30, 2015,

www.usatoday.com/story/money/2015/04/09/faa-amazon-drone-approval-prime-air/25534485.

11. Fulfillment by Amazon Fee Changes 2015, Amazon.com, accessed April 30, 2015, www.amazon.com/gp/help/customer/display.html/?

nodeId=201119410.

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