Chapter 2 Strategic Uses of Information Systems

Learning Objectives When you finish this chapter, you will: Understand business strategy and strategic moves. Recognize how information systems can give business a competitive advantage. Understand basic initiatives for gaining a competitive advantage.

Learning Objectives Know what makes an information system a strategic information system. Understand the fundamental requirements for developing strategic information systems. Recognize circumstances and initiatives that make one SIS succeed and another fail.

Strategy and Strategic Moves A plan designed to help an organization outperform its competitors. Strategic Information Systems Information systems that help seize opportunities. Can be developed from scratch, or they can evolve from existing ISs.

Achieving a Competitive Advantage Profits increase significantly through increased market share. The essence of strategy is innovation, so competitive advantage often occurs when an organization tries a strategy that no one has tried before. Dell was the first PC manufacturer to use the Web to take customer orders.

Achieving a Competitive Advantage Reduce Costs Raise Barriers to Entry Establish High Switching Costs Create New Products or Services Differentiate Products or Services Enhance Products or Services Establish Alliances Lock In Suppliers or Buyers

Achieving a Competitive Advantage Figure 2.2 Many strategic moves can work together to achieve a competitive advantage

Achieving a Competitive Advantage Initiative #1: Reduce Costs Lower Costs Lower Price Bigger Market Share

Achieving a Competitive Advantage Initiative #2: Raise Barriers to Entrants Patenting High expense of entering industry State Street, Inc. (Pension fund management business)

Achieving a Competitive Advantage Initiative #3: Establish High Switching Costs Explicit Switching Costs Fixed and nonrecurring Implicit Switching Costs Indirect costs in time and money of adjusting to a new product

Achieving a Competitive Advantage Initiative #4: Create New Products and Services Dynamic The advantage lasts only until other organizations in the industry start offering an identical or similar product or service for a comparable or lower price.

Achieving a Competitive Advantage Initiative #5: Differentiate Products and Services Product differentiation – usually achieved through advertising Brand recognition Examples of brand name success Levi’s jeans Chanel perfumes Calvin Klein clothing The Internet as a business tool

Achieving a Competitive Advantage Initiative #6: Enhance Products and Services Instead of differentiating a product or service, add to it in order to enhance its value 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

Achieving a Competitive Advantage Initiative #7: Establish Alliances Combined service may attract customers Lower cost Convenience Examples Travel industry HP and FedEx

Achieving a Competitive Advantage Figure 2.3 Strategic alliances combine services to create synergies

Achieving a Competitive Advantage Initiative #8: Lock in Suppliers or Buyers Bargaining Power Purchase volume Strengthen perception as a leader Create a standard

Strategic Information as a Competitive Weapon Strategic Information Systems (SIS) Any IS that can help an organization achieve a 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 IS must be serving an organizational goal IS unit must be working with the managers of the other functional units

Strategic Information as a Competitive Weapon Creating an SIS Top management must be involved from initial consideration through development and implementation. SIS must be a part of the overall organizational strategic plan.

Strategic Information as a Competitive Weapon Figure 2.4 Steps for considering a new SIS

Strategic Information as a Competitive Weapon Re-engineering and Organizational Change To implement an SIS and achieve a competitive advantage, organization must rethink the entire way in which it operates. Goal of re-engineering is to achieve efficiency leaps of 100 percent or even higher.

Strategic Information as a Competitive Weapon Competitive Advantage as Moving Target SISs developed as strategic advantages quickly become standard business. Banking industry (ATMs and banking by phone) Companies must continuously contemplate new ways of utilizing information technology to their advantage. SABRE, American Airlines’ reservation system

Strategic Information as a Competitive Weapon Sources of Strategic Information Systems Existing System New Service New Technology Excess Information Vertical Information

Strategic Information as a Competitive Weapon From Automation to SIS An organization can gain a competitive advantage through automation of a manual process. American Hospital Supply automated manual orders and improved services, resulting in a seventeen percent (17%) compound annual growth rate in sales.

Strategic Information as a Competitive Weapon SIS from a New Service A company may gain competitive advantage by providing a new service using IT. Merrill Lynch was the first to use IT to provide a cash-on-demand service for their investors and captured a lion’s share of the market.

Strategic Information as a Competitive Weapon SIS from New Technology Often, technology involved in an SIS has been around for some time Just waiting to be used strategically Sometimes, new technology sparks major change in the way a firm does business A company that figures out how to use a new technology can gain a competitive advantage.

Strategic Information as a Competitive Weapon SISs from Excess Information An organization can gain an advantage by putting excess information toward a new product or service. A company can look for strategic use of its information What information do we have that another company could use? What information do we have that could be used to start a new business? Can we produce information to assist in creation of new products or services for ourselves to other companies?

Strategic Information as a Competitive Weapon SISs from Vertical Information Organizations use ISs to augment their businesses vertically by offering related services. Realtors offer financing and relocation information in addition to information about houses for sale.

Acumax Plus: An SIS Success Good SIS ideas must be carefully executed if a company is to seize opportunities. McKesson Drugs, Inc., automated its operations and gained a competitive advantage. Enhanced existing services Provided new services Cut costs Created high switching costs for clients

Acumax Plus: An SIS Success Improving Existing Services McKesson devised a new information system to automate order entry and order processing Implementation of a wearable computer and scanner called Acumax to automate collection and fulfillment of orders Business Process Redesign Acumax and its successor, Acumax Plus, contributed to significant cost cutting and increased market share at McKesson Corporation.

Acumax Plus: An SIS Success Providing New Services McKesson delivers about ninety-three percent of its over-the-counter items and ninety-nine percent of prescribed drugs the next day. This creates an almost just-in-time supply cycle. McKesson succeeded in forming an alliance with drugstores, thereby helping drugstores save time

Mortgagepower Plus: An SIS Failure Identifying the Competitive Advantage Citicorp had all the ingredients necessary for successful implementation of new ideas using IT In 1987 a great new idea was conceived: a 15-minute mortgage approval process Equivalent to a 10-minute oil change or one-hour photo processing.

Mortgagepower Plus: An SIS Failure The SIS Plan Citicorp removed the requirement for mortgage insurance Did not compensate by increasing its reserve for potential losses Low-document and non-document loans Checked borrowers’ credit reports and abridged employment histories but not their assets or incomes At worst, the executives believed, the bank could profit by selling a foreclosed house and recoup the loan

Mortgagepower Plus: An SIS Failure How the SIS Failed Failed strategically due to unwise business shortcuts. Failed operationally due to poor technical implementation. Losing Ground Mortgagepower Plus rejected seventy percent of all applicants (twice the bank’s normal rate of thirty-five percent) Citicorp’s management reduced size of mortgage unit and removed its responsibility for originating loans for later sale

Success and Failure on the Web Just being first on the Web is not enough to be successful; 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. To succeed, Web business must offer a new product or service others are willing to pay for.

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 technology will work or customers and employees will welcome it

The Bleeding Edge The bleeding edge: failure in an organization’s effort to be on the technological leading edge. Some organizations let competitors assume the risk associated with being on the leading edge. Risk losing initial rewards. Can quickly adopt and even improve pioneer organization’s successful technology.

Ethical and Societal Issues The Power of Information At what point is a successful strategy considered as a predatory, unfair business practice? Court cases against Microsoft have focused on questions such as these.