Management Information Systems, 4 th Edition 1 Chapter 2 Strategic Uses of Information Systems

Management Information Systems, 4 th Edition 2 Learning Objectives Explain what business strategy and strategic moves are Illustrate how information systems can give businesses a competitive advantage Identify basic initiatives for gaining a competitive advantage

Management Information Systems, 4 th Edition 3 Learning Objectives (Cont.) Explain what makes an information system a strategic information system (SIS) Identify fundamental requirements for developing strategic information systems Explain circumstances and initiatives that make one SIS succeed and another fail

Management Information Systems, 4 th Edition 4 Strategy and Strategic Moves Strategy –A plan designed to help an organization outperform its competitors A best response counteracting to the competitor’s reactions –As a plan : a guide or course of action toward the goal and into the future –As a pattern: consistency in behavior/decision over time –As a positioning: determining the particular value proposition in a particular market segment –As a perspective: a concept of shaping the business –As a ploy: a specific maneuver intended to outwit an opponent Strategic Information Systems –Information systems that help seize opportunities –Can be developed from scratch, or they can evolve from existing ISs

Management Information Systems, 4 th Edition 5 Strategy and Strategic Moves (Cont.) –Strategic advantage: Using a strategy to maximize strength/seek monopolistic rents –Competitive advantage: The result of the use of a strategic advantage

Management Information Systems, 4 th Edition 6 Achieving a Competitive Advantage Increase profits through increased market share/profit margin Innovation results in advantage –Strategies that no one has tried before, or conducted more efficiently than others did –Example: Dell using the Web to take customer orders quicker than the competitors

Management Information Systems, 4 th Edition 7 Achieving a Competitive Advantage (Cont.) Innovation leadership Product proliferation Co-option

Management Information Systems, 4 th Edition 8 Achieving a Competitive Advantage (Cont.)

Management Information Systems, 4 th Edition 9 Lower costs results in lower price –Economies of scale, and experience curve Bigger Market Share –The spill-over effect of a common reputation/goodwill Implement automation to become more productive –The Web has made this possible for many Initiative #1: Reduce Costs

Management Information Systems, 4 th Edition 10 Patenting, ( rent protection enforced by the public orders, mandated monopoly) High capital of entering industry, high-level sunk cost –Limit pricing/predatory pricing/raising cost for entry deterrence –State Street, Inc. (Pension fund management business) Initiative #2: Raise Barriers to Market Entrants

Management Information Systems, 4 th Edition 11 Analysis of entry/exit barrier Exit barrier Entry barrier low high low e.g., 蚵仔麵線 e.g., 石化, 製藥, 半導體 … etc $₤₡ ¥ e.g., 祖傳祕方 e.g., 黑道

Management Information Systems, 4 th Edition 12 Explicit Switching Costs –Fixed and nonrecurring, penalty costs expiated for breach of contract Implicit Switching Costs –Indirect costs in time and money of adjusting to a new product Initiative #3: Establish High Switching Costs

Management Information Systems, 4 th Edition 13 Lasts only until competition offers an identical or similar product or service for a comparable or lower price First Mover: Creates assets –Brand Name –Better Technology –Delivery Methods –Cannibalization for leadership Critical Mass: body of clients that attracts other clients for crossing the diffusion chasm –Network externalities Initiative #4: Create New Products or Services

Management Information Systems, 4 th Edition 14 Product differentiation Distinctive Brand recognition, re-branding for re-positioning Examples of brand name success –Levi ’ s jeans –Chanel perfumes –Gap clothes Initiative #5: Differentiate Products or Services

Management Information Systems, 4 th Edition 15 Examples –Auto manufacturers enticing customers with a longer warranty –Real estate agents providing useful financing information to potential buyers –Charles Schwab moving stock trading services on-line before Merrill Lynch Initiative #6: Enhance Products or Services Total solutions!

Management Information Systems, 4 th Edition 16 Combined services may attract customers –Lower cost –Convenience –The whole product/the total solution resulted from the aggregation of necessary complements Examples –Travel industry linking related tourist businesses –HP and FedEx collaborated for the convenient ordering process and fast delivery/return service Initiative #7: Establish Alliances

Management Information Systems, 4 th Edition 17 Establishing Alliances (Cont.) Ref. Expedia.com

Management Information Systems, 4 th Edition 18 Bargaining Power — assets specificity Purchase volume — monopsony or monopoly Strengthen perception as a leader — bandwagon effects of promotion (sunk costs as credible commitments) and market share Create a standard for issuing the problem of compatibility Initiative #8: Lock in Suppliers or Buyers

Management Information Systems, 4 th Edition 19 Types of Lock-in and Associated Switching Costs Contractual commitments –Compensatory or liquidated damages Durable purchases –Replacement of equipment; tends to decline as the durable ages Brand-specific training –Learning a new system, both direct costs and lost productivity; tends to rise over time Information and databases –Converting data to new format; tends to rise over time as collection grows

Management Information Systems, 4 th Edition 20 Types of Lock-in and Associated Switching Costs (Cont.) Specialized suppliers –Funding of new supplier; may rise over time if capabilities are hard to find/maintain Search costs –Combined buyer and supplier search costs; includes learning about quality of alternatives Loyalty programs –Any lost benefits from incumbent supplier, plus possible need to rebuild cumulative use

Management Information Systems, 4 th Edition 21 Strategic Information Systems (SIS) An IS that helps achieve long-term competitive advantage SIS embodies two types of ideas: –Potentially-winning business move –How to harness IT to implement that move Two conditions for SIS: –Serve an organizational goal –Work with the managers of the other functional units

Management Information Systems, 4 th Edition 22 Creating an SIS Top management involvement –From initial consideration through development and implementation Must be a part of the overall organizational strategic plan

Management Information Systems, 4 th Edition 23 Steps for Considering a new SIS

Management Information Systems, 4 th Edition 24 Steps to Take in an SIS Idea- Generated Meeting

Management Information Systems, 4 th Edition 25 To implement an SIS and achieve a competitive advantage, organization must rethink entire operation Goal of re-engineering –Remove the process bottleneck, the key dead logs –Achieve efficiency leaps of 100% or higher Re-engineering and Organizational Change

Management Information Systems, 4 th Edition 26 SISs developed as strategic advantages quickly become standard businesses –Banking industry (ATMs and banking by phone/Internet) Continuous search for new ways of utilizing information technology to their advantage –SABRE, American Airlines ’ reservation system enhanced continuously by several functions including web-based travel site, Travelocity. Competitive Advantage as Moving Target

Management Information Systems, 4 th Edition 27 JetBlue: A Success Story Gained competitive advantage where others failed Proper technology and management methods –Reservation system, Electronic ticket, ticketless traveling service, revenue analysis for route management Reducing costs resulting in lower prices Improving service — on-time departures and arrivals

Management Information Systems, 4 th Edition 28 Massive Automation –Automation of services with software Combination reservation system and accounting system Supports customer services and sales tracking JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 29 Massive Automation, continued –Electronic tickets No paper handling or expense Encourages online ticket purchases Avoids travel agents Significant savings in cost JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 30 Massive Automation, continued –Maintenance information system Logs all airplane parts and time cycles Reduces manual tracking costs –Flight planning software Maximize seats occupied on a flight Reduced planning costs JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 31 Massive Automation, continued –Blue Performance In-house software for tracking operational data Updated on a flight by flight basis for maximizing yield Accessible by airline’s 2,800 employees –Managers are able to respond immediately to problems JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 32 Massive Automation, continued –Wireless devices for employees Report and respond to irregular events Quick response Events recorded for future analysis –Training records stored electronically Easy to update Efficient retrieval JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 33 Away from Tradition –Decision to not use the hub and spoke routing method –Paperless Cockpits –Laptops for Pilots –Harnessing IT to maintain a strategic gap JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 34 Enhanced Service –Available on all flights and all class tickets Live TV through contract with DirecTV Leather Seating Excellent on-schedule arrivals and departures Fewest mishandled bags Rapid check-in time Security upgrades JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 35 Impressive Performance –Maintains excellent statistics 7 cent cost per available seat-mile (CASM) lesser than the industrial average 78% of seats are filled higher than the industrial average Late Mover Advantage New Technology vs. legacy systems JetBlue: A Success Story (Cont.)

Management Information Systems, 4 th Edition 36 The Ideas –Wingcast telematics Technology in vehicles to enable Web access –Business to Business: Covisint Joint venture with General Motors and DaimelerChrysler Electronic market for parts suppliers Vendor bidding for proposals from automakers Ford on the Web: A Failure Story

Management Information Systems, 4 th Edition 37 The Ideas (cont.) –Business to Consumer: FordDirect.com Sell vehicles direct to consumers via the Web Bypass dealerships Provide service while saving dealer fees ConsumerConnect –Special unit to build Web site and handle direct sales Ford on the Web: A Failure Story (Cont.)

Management Information Systems, 4 th Edition 38 Hitting the Wall –Wingcast: Failed Buyers not interested (as the failure of WAP) Product eliminated in June 2001 –Covisint: Successful Now includes more automakers, Renault and Nissan Ford on the Web: A Failure Story (Cont.)

Management Information Systems, 4 th Edition 39 Hitting the Wall –FordDirect.com: Failed Not a result of faulty technology Ford failed to consider state laws and dealership relationships Dealership relationship was still needed for purchases not on the Web Ford on the Web: A Failure Story (Cont.)

Management Information Systems, 4 th Edition 40 The Retreat –ConsumerConnect disbanded –FordDirect.com used by dealerships now Sells used cars –Price tag for failure: $1 billion –FordDirect.com today results in 10,000 vehicle per month, and 100,000 sales in 2001 Ford on the Web: A Failure Story (Cont.)

Management Information Systems, 4 th Edition 41 Success and Failure on the Web Being first is not enough for success Business ideas must be sound –An organization must carefully define what buyers want –Establishing a recognizable brand name is important but does not guarantee success; satisfying needs is more important

Management Information Systems, 4 th Edition 42 The Bleeding Edge Business owners must develop new features to keep the system on the leading edge Adopting a new technology involves great risk –No experience from which to learn –No guarantee new technology will work or customers and employees will welcome it –Bet on standard competition –Wait-and-see hesitation

Management Information Systems, 4 th Edition 43 The Bleeding Edge (Cont.) The bleeding edge: failure in an organization ’ s effort to be on the technological leading edge –First-mover dis-advantage? Allow competitors to assume the risk –Risk losing initial rewards –Can quickly adopt and even improve pioneer organization ’ s successful technology Second-mover advantage?

Management Information Systems, 4 th Edition 44 Summary Business strategy and strategic moves can give an organization an advantage Basic initiatives for gaining a competitive advantage Strategic information systems require fundamental elements Circumstances and initiatives that make one SIS succeed and another fail

Management Information Systems, 4 th Edition 45 Homework #1: Amazon vs. eBay Refer to the pp Please specify the differences of business played between theses two dotcom giants. Compare the sources of profit between these two firms. Analyze the sustainability of competitive advantage among two. Articulate the possible challenges for the future expansion respectively.