Chapter 2 Information Technology’s Strategic Importance

The Current Challenge Walter Wriston, former Chairman of Citicorp, “The essence of an information strategy is to turn the burden of burgeoning business data into a bounty of business opportunity. The business organization has to be rebuilt around the goal of managing information productively. The object of the game is to get information to the person or company that needs and can use it in a timely way.”

Strategic Issues for Senior Executives 1.Obtain or maintain competitive advantage 2.Use the Web to facilitate intra- and inter- organizational linking 3.Enable decentralized operations with effective central coordination 4.Develop flexible and responsive infrastructures for the firm 5.Capitalize on fleeting but critical business information

Time Criticality of Information Modern IT enables the creation of highly decentralized operations that can rapidly respond and exploit high value information that is short lived These decentralized structures must be quickly adaptable to shifting opportunities in a highly competitive environment By enabling these agile operations, IT can be expected to directly contribute to the bottom line

Strategic Information Systems These are information systems whose unique functions or specific applications shape an organization’s competitive strategy and provide it with competitive advantage –These are internal or external systems –These systems provide a firm with competitive advantage –Systems range from transaction processing systems to decision-support systems

IS/IT for Competitive Advantage Competitive Advantage –That value perceived by the customer that makes the customer purchase your product instead of your competitors Interorganizational systems

Visualizing Competitive Forces Michael Porter developed a model to help visualize competition To gain a competitive edge within an existing industry competitors must: –Diminish customer and supplier leverage –Lower the possibility of substitute products entering the marketplace –Discourage new market entrants

Porter’s Model of Industry Competitive Forces Your Firm

Porter’s Model of Industry Competitive Forces Your Firm Threat of New Entrants

Porter’s Model of Industry Competitive Forces Your Firm Threat of New Entrants Bargaining Power of Suppliers

Porter’s Model of Industry Competitive Forces Threat of Substitute Products or Services Your Firm Threat of New Entrants Bargaining Power of Suppliers

Porter’s Model of Industry Competitive Forces Threat of Substitute Products or Services Your Firm Threat of New Entrants Bargaining Power of Customers Bargaining Power of Suppliers

Porter’s Model of Industry Competitive Forces Threat of Substitute Products or Services Your Firm Threat of New Entrants Bargaining Power of Customers Level of Industry Rivalry Bargaining Power of Suppliers

Porter’s Model of Competitive Advantage Strategies Low cost/price efficiency Differentiation Special market niche/Innovation

Strategic Thrusts In 1988, Charles Wiseman extended Porter’s CA strategies Wiseman created a theory based on five thrusts/strategies: –Differentiation –Cost –Innovation –Growth –Alliances

Strategic Roles of Information Systems Improve Operational Efficiency Promote Business Innovation Build Strategic IT Resources ?????????

Strategic Roles for Information Systems Create barriers to entry –Impacts new entrants Lock In customers –Impacts bargaining power of customers Lock in suppliers –Impacts bargaining power of customers Create switching costs

Electronic Data Interchange Supplier –Decreases bargaining power of customers –Makes it difficult for competitors –Makes it more difficult to enter industry Customer –Decreases bargaining power of suppliers –Improves efficiency - lowers cost

Differentiation The firm’s products or services are distinguished from competitors’ products or services, or conversely a rival’s differentiation is reduced –For example, Automated Teller Machines (ATMs) distinguish the services of some financial institutions from others

Cost Advantage is attained either by reducing costs to the firm, to its suppliers, or customers, or by increasing costs incurred by competing firms –For example, advanced order-entry systems or business-to-business e-commerce systems reduce both suppliers’ and customers’ business costs

Innovation Introducing changes to the product or process causes fundamental shifts in the way the industry conducts its business –Web-based trading was introduced by some brokerage firms, and became widely offered by others as the standard level of service expected by customers began to include Web-based access

Growth Advantage is secured by expansion, forward or backward innovation, or by diversification in product or services –The Wall Street Journal and other national newspapers used electronic transmission and remote printing facilities to create a national distribution, thus expanding the potential market

Alliance Firms achieve advantage by establishing agreements, forming joint ventures, or making acquisitions –Many national companies use joint ventures for strategic thrusts. Even rivals join together such as Microsoft and IBM when it serves a mutual purpose

Time – a sixth strategy/thrust Competitive advantage is secured by rapid response to changing market conditions or by supplying a more timely flow of products or services –Electronic design automation tools, CAD/CAM systems, and production logistics systems are thrusts that increase manufacturing’s response to the marketplace

New Economy Paradigms The Internet and the World Wide Web have enabled firms to capture the advantages of all six thrusts quickly The Internet has reshaped the competitive landscape for business and industry The Internet has created a global marketplace with increasing international trade

Strategic Systems in Action Over the past two decades, information systems have been used to create value in business. Two industries, airlines and financial services, created systems that have resulted in significant competitive advantage to their owners. These systems have not been static, and their evolution is impressive given the dramatic changes in technology and the business environment over time.

Airline Reservation Systems In the 1960s, American Airlines created SABRE (Semi-Automated Business Research Environment) Initially invested $350 million to create the system –Provides reservation services for airlines, hotels, and rental cars –Links travel agencies, private or corporate travel systems, and Internet customers

SABRE Evolution AA continued to expand the system and provide outsourcing reservation services to competitors –Integrated back office management for travel agencies –Added a yield-management system to optimize fare structure and load factors –An upgraded yield-management system in 1997 increased corporate profits by $200 million

Competitors United Airlines created “Apollo” in the 1970s to compete with SABRE –Initial cost of $250 million –1987 spun off to UAL subsidiary COVIA Corp –COVIA sold to partners in 1988, valuing the company at $1 billion (renamed Galileo) –Galileo’s IPO in 1997 valued the company at $2.5 billion –In 1999, Galileo earned $218 million on revenues of $1.53 billion

Internet-Based Systems Alaska Air Group created ITMs (Instant Travel Machines) –These machines use a kiosk type interface to create travel reservations in hotels, airports, and business locations –They bring the power of advanced reservations systems to busy travelers in a convenient location –Coupled with paperless ticketing (e-tickets), these technologies are reducing business cost and increasing customer access

Stock Brokerage Systems In 1977, Merrill Lynch introduced the CMA (Cash Management Account) –Combined checking accounts, debit cards, and margin-based brokerage accounts into a single entity –Customers received a consolidated account statement at the end of the month –Cash was automatically swept into a money market account –By 1980, it served 186,000 accounts

CMA Evolution 1981 – CMA available nationwide –500,000 accounts 1982 – International CMA launched 1987 – $150 billion in assets under management –1.3 million accounts –Started ATM access via Visa Premier program

CMA Intellectual Property Merrill was granted US patent in August 1982 –This patent effectively allowed Merrill to stop competition in unified accounts for 7 years During active development of CMA, the Merrill Lynch technology budget was estimated to be approx. $1.5 billion

Internet-Based Competitors The brokerage industry underwent dramatic changes with widespread Internet use –Barriers to entry were removed as local office infrastructure became less important to investors –Charles Schwab, E-Trade, Fidelity, and others embraced Internet transactions to expand and increase market share

Schwab.com Features

Strategic E-Business Systems Internet-based technologies can radically reshape markets resulting in massive realignment of customer and partner relationships –Airlines previously viewed travel agents as their customers. Due to Web portals, they increasingly view individual travelers as customers, now that they have been given direct access to booking and flight information

Where are the Opportunities Most commonly, opportunities present themselves as product or service offerings that differentiate themselves from others through the application of IT Innovative use of technology in the right application –Lowers business costs –Reduces time barriers

Importance of Technology Advanced technology shapes the products and services of the future IT offers opportunities for innovative organizations to increase their value Information is so fundamental to business today, that small advances in information management are magnified as these increases are amplified across business processes

The Time Dimension Time is an irreplaceable asset and source of competitive advantage Information Technology and modern telecommunications systems are well suited to leveraging time as a strategic thrust Just-in-time manufacturing (JIT) is a common example

McDonnell Douglas Corp Implemented a JIT system for coordination of work flow. The resulting system required: –111 new programs –Modifications to 97 other programs –1900 person hours of programming labor –Meetings for project planning and execution

JIT Benefits at McDonnell Douglas

Media Breaks Media breaks occur when information goes from voice to paper, paper to digital or other like transitions –Media breaks require human intervention, incur costs, risk errors, and take time –Unified information systems eliminate media breaks, decreasing cost in time and money

Strategic Value of Networks Offers significant reductions in time and distance barriers Enhances business processes and improve business efficiency Digital business information reduces errors, lowers costs, and improves control Innovative applications of telecom and IT can create new markets and expand customer demand

Networking’s Strategic Value

The Strategist Looks Inward Strategic systems are conceived by first analyzing the firm’s internal functions –85% of all e-business infrastructures are patterned after non “online” legacies Firms commonly have an application portfolio of hundreds to thousands of programs –Deciding which choices to automate requires a keen understanding of the firm’s strategy, competitors, and culture

External Strategic Thrusts How external factors create strategic opportunities A more complicated set of questions –Requires a more global view of the company and its place in the industry (upper management) –Requires a well-grounded understanding of technology and its strengths and limitations

Integrating the Strategic Vision Using a three dimensional model, all three groups of strategic influences can be represented –Strategic Thrusts (Differentiation, Cost, Innovation, Growth, Alliance, and Time) –Competitive Groups (Suppliers, Competitors, and Customers) –Strategic Focus (Internal and External)

Integrated Model of Strategic Influences

Competitive Strategies Competitive Forces Differentiation Cost Innovation Growth Alliance Other Strategies SupplierCustomerCompetitor New Entrant Substitute OD UP TSP

O = Offensive U = Use P = Processing D = Defensive P = Provision S = Storage T = Transmission

Value Chains for E-Business Modern e-business models operate in nearly all the dimensions of the figure –Use internal (example ERP) and external (Web-based B2C and B2B) –Exploit the six strategic thrusts Firms adopting e-business models reconstruct their value chains around powerful new information technology

Other Considerations Strategic information systems have several common characteristics worth noting: –Organization and Environment –Financial Implications –Legal Considerations

Organization and Environment Strategic information systems alter the market environment and create fundamental changes in the field of competition Competitors must adapt to the new landscape or face disadvantage Survivors of this process re-establish an equilibrium

Financial Implications Strategic information systems require continued investments to sustain their advantages First movers capture time at expense of cost and potential failure Even established firms can be beaten when technology appears that is so disruptive, like the Internet, that no advantage exists for the incumbents

Legal Considerations Resort to the courts can be a tool for competitors to blunt the advantages gained by technology Protection of intellectual property by patents can also be a powerful tool to further the advantages of an innovator by denying the competition access to a newly created market

Cautions Most strategic information systems are evolutionary. They are based on pre- existing systems within the firm Successful firms focus on the details of success instead of a grand scheme. Lasting competitive advantage is not found in a few grand strokes The entire firm must be competitive across all areas. IS alone can not deliver a “killer app” that eliminates the competition

Summary Information technology is vital to the continued success of modern firms Senior leadership understands that IT is a potent source of competitive advantage They are prepared to invest in needed applications and hardware, but expect a substantial return on that investment