1 1. Strategy and Strategic Information Systems Strategy –A plan designed to help an organization outperform its competitors. Strategic Information Systems –Information systems that changes goals, operations, products, services, or environmental relationships to help the firm gain a competitive advantage –Can be developed from scratch, or they can evolve from existing ISs. Chapter 2 Strategic Uses of Information Systems

2 2. Achieving a Competitive Advantage for a For-Profit Company Strategies for this type of company involve increasing profits –Reduce costs –Increase revenue through a larger market share –Do both The essence of strategy is innovation, so competitive advantage often occurs when an organization initiates a strategy that no one has tried before. –Dell’s use of the Web to take customer orders –Citibank’s use of ATMs –Airlines use of computerized reservation systems

3 Eight Ways to Achieve a Competitive Advantage Figure 2.2 Many strategic moves can work together to achieve a competitive advantage

4 Achieving a Competitive Advantage Initiative #1: Reduce Costs –Lower Costs enable you to lower your prices –Competitors may not be able to follow your lead; thus you gain market share –Examples: Dell’s ability to continually lower cost of PCs On-line services (FAQ, package tracking)

5 Achieving a Competitive Advantage Initiative #2: Raise Barriers to Entrants –Patenting Microsoft's programs Lotus’s Patented features of Apple’s IPod; sell music from big labels on Apple’s web site Priceline.com’s reverse auction Amazon.com’s one-click shopping –High expense of entering industry State Street, Inc. (Pension fund management business); money required to build systems keeps competitors out of this market; rents its software to others

6 Achieving a Competitive Advantage Initiative #3: Establish High Switching Costs –Explicit switching costs are fixed and nonrecurring Penalties for canceling cell phone provider Use of proprietary products (operating systems;tape formats;DVD formats) –Implicit Switching Costs Indirect costs in time and money of adjusting to a new product Changing application software (MS Office to Sun’s StarOffice)

7 Achieving a Competitive Advantage Initiative #4: Create New Products and Services –This advantage lasts only until other organizations in the industry start offering an identical or similar product or service for a comparable or lower price. –Examples FedEx’s package tracking eBay –Fleeting advantage (Netscape and Internet Explorer) –First mover success; critical mass

8 Achieving a Competitive Advantage Initiative #5: Differentiate Products and Services –Persuade customers that your product is better than your competitors Brand recognition such as Levi’s, Chanel, or Calvin Klein –Use of the Internet Answering questions online Purchasing advice online Personalize the Web page (Amazon.com) Easy to use Web site –IBM’s transformation to a consulting company

9 Achieving a Competitive Advantage Initiative #6: Enhance Products and Services (similar to #5) –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

10 Achieving a Competitive Advantage Initiative #7: Establish Alliances –Combined service may attract customers Lower cost Convenience –Examples Travel industry HP and FedEx Affiliate programs Amazon’s relationship with Target and other retailers

11 Achieving a Competitive Advantage Initiative #8: Lock in Suppliers or Buyers (similar to #3) –Lock in suppliers Bargaining power of buyer is determined by purchase volume Wal-Mart –Lock in buyers Create impression of product superiority High switching costs Create a standard (software industry) –Microsoft –Adobe (gave away the reader but sells the writer); Macromedia

12 3. Creation of a Strategic Information System Top management involvement –From initial consideration through development and implementation Must be a part of the overall organizational strategic plan

13 Reengineering and Organizational Change Reengineering is the process of eliminating one set of operations and building another from the ground up to achieve hundreds of percentage points in improvement rates Implementation of an SIS often results in organizational change (sometimes unplanned) Planned organizational change is often referred to as “reengineering” –Actively seek ways to employ IT to gain large leaps in efficiencies –Different from continuous improvement –Often associated with large job losses. –Reengineering projects have high failure rates

14 4. 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 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 (Microsoft) –Home Depot’s use of a data warehouse

15 Success and Failure on the Web Just being first on the Web is not enough to be successful; business ideas must be sound. –eBay versus Amazon.com Success criteria –New product/service at a competitive price –Master the retail fulfillment challenge –Create barriers to entrants (difficult to do) –Create high-switching costs (difficult to do) –Create strategic alliances (many companies have been successful at this)

16 Selected Ideas About Strategic Use of Information Systems Competitive advantage is difficult to sustain In some industries, companies must continually contemplate new ways of utilizing IS/IT for competitive advantage Many strategic systems have been unplanned and often come from transaction processing systems You cannot depend on your IS/IT department as your sole source of ideas for strategic use of IS/IT Strategic systems often become standard business procedures (e.g., ATMs, bank by phone) Personal competitive advantage