Business Technologies 2011 Class 2 Strategy and Technology

Sources American Airlines, American Hospital Supply Corporation and McFarlane's Technology and Strategy Questions – Corporate Information Strategy and Management, by Applegate, Austin and Soule, (8th edition), McGraw Hill 2009 – High Frequency Trading – – Spread betting, High-speed traders set their sights on Asia and Latin America, The Economist, Aug 12th 2010 Digital Platforms and Business Agility – IT Savvy: What Top Executives Must Know to Go from Pain to Gain, by Peter Weill and Jeanne Ross, Harvard Business Press,

Once upon a time …

4 Operations Strategy In the 1950s and 1960s … – IT automated existing routine back-office transactions – The primary goal was to increase efficiency and productivity – Then, IT was applied to front-office activities Since the 1970s … – IT transformed and informed operations – Streamlined and integrated value chain eliminated redundancies, reduced cycle time and achieved greater efficiency At the same time, some companies used IT to change the basis of competition in their industries...

5 The Archetypes American Hospital Supply Corporation Late 1960s A sales manager created a system that enabled hospital purchasing clerks to order across telephone lines using card-readers It was based on the AHSC internal inventory system AHSC helped hospitals to re-desgin processes to fit with the new system AHSC owned the system and information By 1985, AHSC saved $11m per year by the online system and achieved $5m additional revenue per year Late 1950s – 8 operators around a file of cards, each representing a flight looking for a flight, reserving a seat and writing up the ticket took 90 minutes on average IBM suggested to build a reservation system Sabre took over all bookings (up to 83,000 phone calls) Early 1970s - Sabre Terminals given to travel agents

6 However, … Over time, AHS’s and AA’s advantages decreased mainly because regulators required them to un-bias their electronic markets – 1981 flights of NY Air from La-Guardia to Detroit appeared on the bottom of the screen; had to cut from 8 flights a day to a single flight – Sabre withheld Continental’s discount fares on routes American flied The more sustainable advantages came from second order effects – by exploiting the information and respond more quickly and effectively than others – by creating a loyal community of suppliers and customers

How to analyze it systematically?

Porter’s Competitive Forces 1.Can IT change the basis of competition? 2.Can IT build of reduce barriers to entry? 3.Can IT add value to existing products and services or create new ones? 4.Can IT change the nature of relationships and the balance of power among buyers and suppliers? 5.Can IT increase or decrease switching costs? 8 1.The rivalry among competing sellers in the industry 2.The potential entry of new competitors 3.The market attempts of companies in other industries to win customer over to their own substitute products 4.The competitive pressures stemming from supplier-seller collaboration and bargaining 5.The competitive pressures stemming from seller-buyer collaboration and bargaining McFarlan’s Technology Questions

McFarlan’s Technology Questions 1.Ease of use of an ordering system, not only price, availability 2.Extremely costly ordering system 3.Ease of use, accuracy, preciseness of the ordering system 4.Suppliers – Accurate and timely data about end-customers needs and inventory is very valuable When AHSC became dominant, suppliers had to join in 5.Training, skill, habits of using the ordering system 9 1.Can IT change the basis of competition? 2.Can IT build of reduce barriers to entry? 3.Can IT add value to existing products and services or create new ones? 4.Can IT change the nature of relationships and the balance of power among buyers and suppliers? 5.Can IT increase or decrease switching costs? American Hospital Supply Corporation

McFarlan’s Technology Questions 1.Ease of use of a reservation system, not only the size of the commission 2.Extremely costly reservation system 3.Ease of use, accuracy, preciseness of the reservation system 4.Travel agents without the AA reservation system were operationally and strategically disadvantaged 5.Training, skill, habits of using the reservation system 10 1.Can IT change the basis of competition? 2.Can IT build of reduce barriers to entry? 3.Can IT add value to existing products and services or create new ones? 4.Can IT change the nature of relationships and the balance of power among buyers and suppliers? 5.Can IT increase or decrease switching costs?

Is the Operation to Strategy phenomenon still alive?

Equity, bonds, derivatives and currency TRADING Historically, trading was performed manually – by market makers at the trading floors – manual recording procedures Recently, all aspects of trade have been computerized For example, Singapore Exchange is building the fastest system at a cost of $185m Exchanges are now efficient, quick, and precise (operationally) 12

High Frequency Trading “Fully automated trading strategies that seek to benefit from market liquidity imbalances or other short term pricing inefficiencies.” 70% of all US equity trades are high frequency Common Strategies – Pairs trading – Cross-assets Pairs – Statistical arbitrage – Liquidity detection – “Sentimental Trading” Technology – Algorithmic – Co-location 13

McFarlan’s Technology Questions 1.Allowing to recognize minute price inefficiencies is a new basis for competition between exchanges 2.Fast trading systems are very costly to build 3.A lot of money is made by the exchange leading customers (traders) 4.No 5.Non-standard exchanges may 14 1.Can IT change the basis of competition? 2.Can IT build of reduce barriers to entry? 3.Can IT add value to existing products and services or create new ones? 4.Can IT change the nature of relationships and the balance of power among buyers and suppliers? 5.Can IT increase or decrease switching costs? High Frequency Trading (Exchange’s perspective)

A different approach to Strategy and Technology …

Weill and Ross’ IT Savvy A more recent approach to Strategy, less analytical and more empirical Study of hundreds of large corporations and the IT investment, IT practices and company performance IT Savvy companies include – 7-Eleven Japan – Procter & Gamble – ING – UPS – Swiss RE – Pepsi America – Cemex 16

Digital Platforms and Business Agility 1.Enhanced performance by empowering people – Make customer and product data available to customer-facing and operational employees – Provide analytics to decision makers 2.Accelerated product innovation – Automate repetitive process to allow more management focus on innovation – Facilitate through standard interfaces addition of new products and replicate across sites – Introduce information-based customer services – Create revenue-generating services 3.Reorganization around customers – Provide information to support decisions specific to individual customer segments – Provide straight-through processing to support global functions 4.Integration of a merger or acquisition – Provide a platform to replace systems and processes of acquired firm – Provide process components that can be reused in acquired buinsess 17