1. Copyright © 2014 Pearson Education, Inc. 1 A firm has competitive advantage over rival firms when it can do something better, faster, more economically, or uniquely Chapter 2 - Gaining Competitive Advantage through Information Systems

2. Copyright © 2014 Pearson Education, Inc. 2 Review of Last Sessions Mega-trends in IT Types of Information Systems The role of the knowledge worker in Information Systems I was didactic about creating competitive advantage in the previous classes. We will now talk about how to do this

3. Copyright © 2014 Pearson Education, Inc. 3 Agenda Enabling organizational strategy – Layers of the organization – Porter’s Puzzle – Competitive Advantage Globalized Firm Strategy – Four options

4. Copyright © 2014 Pearson Education, Inc. 4 Another Quick Review What is the objective of the firm? – Maximize Profit – π = R - C How does the firm accomplish this? – Identify maintainable, sustainable, competitive advantage

5. Copyright © 2014 Pearson Education, Inc. 5 Chapter 2 Learning Objectives Enabling Organizational Strategy through Information Systems Discuss how information systems can be used for automation, organizational learning, and strategic advantage. International Business Strategies in the Digital World Describe international business and IS strategies used by companies operating in the digital world. Valuing Innovations Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage. Freeconomics: Why Free Products are the Future of the Digital World Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

6. Copyright © 2014 Pearson Education, Inc. 6 Enabling Organizational Strategy through Information Systems Discuss how information systems can be used for automation, organizational learning, and strategic advantage. International Business Strategies in the Digital World Describe international business and IS strategies used by companies operating in the digital world. Valuing Innovations Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage. Freeconomics: Why Free Products are the Future of the Digital World Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

7. Copyright © 2014 Pearson Education, Inc. 7 Types of Decisions Faced by the Firm

8. Copyright © 2014 Pearson Education, Inc. 8 Levels of Decision Making Three of them – Operational Level Typically transactional, highly structured, decisions Goal: Reduction of waste through operational efficiency – Managerial / Tactical Level Semi-structured decisions focused on monitoring the day to day operations of the firm Goal: Improve organizational effectiveness – Executive Non-structured decision making about firm course Goal: Situate the firm within competitive market niche

9. Copyright © 2014 Pearson Education, Inc. 9 Organizational Decision-Making Levels

10. Copyright © 2014 Pearson Education, Inc. 10 Conceptual Highroad At an abstract level, what is a firm? – Firms are a bundle of capabilities and resources The implementation of these capabilities and resources are what allows the firm to function – Accounting – Marketing – Operations – Supply Chain – Sales – Human Resources IT and information systems are what facilitate communication between the different parts of the firm to facilitate the execution of strategy

11. Copyright © 2014 Pearson Education, Inc. 11 Organizational Functions and Functional Levels

12. Copyright © 2014 Pearson Education, Inc. 12 Major IS Tasks: Business Value Added What do we mean when we say we create business value? How can we do this at each of the three levels? – Automate – Operational Level – Learn – Managerial Level – Strategize – Executive Level

13. Copyright © 2014 Pearson Education, Inc. 13 Information Systems for Automating: Doing Things Faster Primary Activities of Loan Processing Manual Loan Process Technology- Supported Fully Automated Complete and submit application Completed at home (1.5 days) Completed online (15 minutes) Check application for errors Done in batches (2.5 days) Computerized (3.5 sec) Input data into the information system NA some paper handling (1 hr) Done in batches (2.5 days) NA (already done) Assess loan apps under $250K Done by hand (15 days) Computer assisted (1 hr) Computer processed (1 sec) Committee decides if loan over $250k (15 days) Applicant notifiedBatches (5 days)(1 day)E-mail (3.5 sec) Total time25 to 40 days5 to 20 days15 min to 15 days

14. Copyright © 2014 Pearson Education, Inc. 14 Information Systems for Organizational Learning: Doing Things Better Information systems can track and identify trends and seasonality Managers can use this to plan staffing levels and cross-training

15. Copyright © 2014 Pearson Education, Inc. 15 Information Systems for Supporting Strategy: Doing Things Smarter Firms have a competitive strategy – This is how they differentiate themselves from others in the competitive marketplace Recall Carr, what is the implication of this for how info systems should be used in the organization? – Information Systems should be implemented that support that strategy Low cost strategy implies information systems to minimize expenses – Classic Defender / Reactor High quality strategy implies information systems to support ensuring excellent quality and minimal defects – Analyzer / Prospector

16. Copyright © 2014 Pearson Education, Inc. 16 Conceptual Detour How do I begin to think about the strategy my firm should implement? Arguably it should be a consideration of the competitive environment as a whole, as well as future potential changes This is the root of Porter’s Puzzle

17. Copyright © 2014 Pearson Education, Inc. 17 17 The Five Forces Model – Evaluating Business Segments Reduce prices Increase quality Value added services ERP reduce costs CRM CAD/CAM improve quality Increased costs Reduced quality Electronic connections to more suppliers Product returns Lower market share Lost customers Decision support and business intelligence CAD product redesign Reduced prices Lost market share Better web presence Lower costs through ERP, supply chain, etc. Competition in price, distribution and service ERP to reduce costs and react more quickly

18. Copyright © 2014 Pearson Education, Inc. 18 Sources of Competitive Advantage Each successful firm has its own source of competitive advantage This can be either born of, or assisted by, IT Ultimately we achieve this by aligning the IT with the strategy of the firm. This is called Business/IT Alignment

19. Copyright © 2014 Pearson Education, Inc. 19 Pursuit of Competitive Advantage What technologies enable an organization: Best-made product Superior customer service Lower costs than rivals Proprietary manufacturing technology Shorter development/test lead times Well-known brand name More value for the money

20. Copyright © 2014 Pearson Education, Inc. 20 Recall from last week The advent of the digital/information age, has facilitated what business trend – Outsourcing and Globalization Why?

21. Copyright © 2014 Pearson Education, Inc. 21 International Business Strategies in the Digital World Enabling Organizational Strategy through Information Systems Discuss how information systems can be used for automation, organizational learning, and strategic advantage. International Business Strategies in the Digital World Describe international business and IS strategies used by companies operating in the digital world. Valuing Innovations Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage. Freeconomics: Why Free Products are the Future of the Digital World Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

22. Copyright © 2014 Pearson Education, Inc. 22 International IS Strategies There are four international business strategies – Home Replication – Global – Multidomestic – Transnational Each has pros and cons in terms of complexity, cost benefits, local responsiveness, and control

23. Copyright © 2014 Pearson Education, Inc. 23 Home-Replication Strategy Definition – A locally focused strategy where the firm merely exports products to garner additional sales – Think manufacturing (Porsche is the Valacich example) Strength – No heterogeneity in core competency Weakness – Local Market conditions are ignored Nobody really does this anymore… IS is basically a bit player

24. Copyright © 2014 Pearson Education, Inc. 24 Global Strategy Definition – Centralized organization with standard offerings across markets – Think manufacturing (Caterpillar, Master Lock) or entertainment (music / film) Strength – Huge economies of scale Weakness – Local Market conditions are ignored IS funnels information to central decision making (Hegemony)

25. Copyright © 2014 Pearson Education, Inc. 25 Global Business Strategy

26. Copyright © 2014 Pearson Education, Inc. 26 Multi-Domestic Strategy Definition – Decentralized set of business units each of which locally optimize their behavior – Think food service (KFC) Strength – React quickly to local market conditions Weakness – Limits the ability to knowledge share and exploit economies of scale IS is decentralized. Information sharing may occur but control is not enforced (confederacy)

27. Copyright © 2014 Pearson Education, Inc. 27 Multidomestic Business Strategy

28. Copyright © 2014 Pearson Education, Inc. 28 Transnational Strategy Definition – Semi-centralized integrated network of firms that work as a cohesive unit – Think of the firms who do everything (GE, UTC) Strength – Can garner the benefits of both global and multi- domestic through integration Weakness – Really really really really hard to manage This is the integrated global market place. IS make the maestro’s work possible

29. Copyright © 2014 Pearson Education, Inc. 29 Transnational Business Strategy

30. Copyright © 2014 Pearson Education, Inc. 30 Business/Information Systems Strategies

31. Copyright © 2014 Pearson Education, Inc. 31 Time for a Break Enabling organizational strategy – Layers of the organization – Porter’s Puzzle – Competitive Advantage Globalized Firm Strategy – Four options

32. Copyright © 2014 Pearson Education, Inc. 32 Before we start Cell phones off Laptops away I have heard rumor that I talk too fast

33. Copyright © 2014 Pearson Education, Inc. 33 Review From Last Session Enabling organizational strategy – Layers of the organization – Porter’s Puzzle Globalized Firm Strategy – Four options

34. Copyright © 2014 Pearson Education, Inc. 34 An Observation Porter’s Puzzle contains three contemporaneous factors and two forward looking factors In order to internalize how the forward looking factors will affect the firm’s strategic position what must we consider? Industrial Change… Innovation and Market Evoluation

35. Copyright © 2014 Pearson Education, Inc. 35 Valuing Innovations Enabling Organizational Strategy through Information Systems Discuss how information systems can be used for automation, organizational learning, and strategic advantage. International Business Strategies in the Digital World Describe international business and IS strategies used by companies operating in the digital world. Valuing Innovations Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage. Freeconomics: Why Free Products are the Future of the Digital World Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

36. Copyright © 2014 Pearson Education, Inc. 36 The Need for Constant IS Innovation “The most important discoveries of the next 50 years are likely to be ones of which we cannot now even conceive” - John Maddox Transformation Technologies are difficult or even impossible to see coming – Think of the Internet in 1995 – Many of the critical discoveries in the next 50 years will be in areas we don’t see coming Well, why does IT innovation move so fast?

37. Copyright © 2014 Pearson Education, Inc. 37 Miniaturization – What is Moore’s Law? The number of transistors that can be placed on a semiconductor die doubles every 18 months

38. Copyright © 2014 Pearson Education, Inc. 38 Watch for falling prices... The price of computer hardware has been falling steadily at 20-30% per year since the 1960s If cars improved at at this rate, we would all be driving $25 cars that get 1000 miles per gallon -- Bill Gates

39. Copyright © 2014 Pearson Education, Inc. 39 Managing Innovation Is Difficult. Why? Innovation is often fleeting. – The advantages gained from innovations are often short lived. Recall Carr… I nnovation is often risky.  Sometimes even superior products can lose the race.  Blu-ray vs. HD DVD  Betamax and VHS Innovation choices are often difficult.  Foreseeing the future is not always possible.  In 1994, the Internet was not given much attention.

40. Copyright © 2014 Pearson Education, Inc. 40

41. Copyright © 2014 Pearson Education, Inc. 41 Organizational Requirements for Innovation. What is required of the organization? Process requirements— the organization has to be willing to implement the change. Resource requirements— need to have the human and financial capital necessary for successful deployment of the innovation Risk tolerance requirements— organizational members must have appropriate tolerance of risk and uncertainty.

42. Copyright © 2014 Pearson Education, Inc. 42 This creates an inherent uncertainty in innovation Traditionally termed the innovator’s dilemma (Christensen, 1997) – More or less a rebirth of Schumpeter (1920) The contrast – If you have a customer focus Ensures meeting present demand You may fail to meet future need – If you focus on innovation Does not ensure meeting present demand You may STILL fail to meet future need

43. Copyright © 2014 Pearson Education, Inc. 43 Disruptive Innovations Examples from Table 2.8 Disruptive InnovationDisplaced or Marginalized Technology Digital photographyChemical photography Online stock brokerageFull-service stock brokerages Online retailingBrick-and-mortar retailing Distance educationClassroom education Unmanned aircraftManned aircraft SemiconductorsVacuum tubes MP3 players and music downloadingCompact discs and music stores SmartphonesMP3 players, dedicated GPS navigation TabletsNotebook computers

44. Copyright © 2014 Pearson Education, Inc. 44 Predicting the Next New Thing Deciding which innovations to adopt is very difficult. Diffusion of Innovations  Classic view of adoption of innovations

45. Copyright © 2014 Pearson Education, Inc. 45 Predicting the Next New Thing: Should we even try? Many innovations can be copied – Limited time span of any advantage – May become a requirement for staying competitive Some innovations deliver longer advantages – Unique customer service based on customer data – High levels of customer investment in proprietary systems – high switching costs – Technologies that are very difficult to copy

46. Copyright © 2014 Pearson Education, Inc. 46 Disruptive Innovations 1970s: mid- and high- performance users were bulk of the market Digital Equipment Company (DEC) tried to sell to those markets Microcomputers seen as “toys”

47. Copyright © 2014 Pearson Education, Inc. 47 Disruptive Innovations (cont’d) 1980s: Microcomputers focusing on low- performance users’ needs Ignored by DEC

48. Copyright © 2014 Pearson Education, Inc. 48 Disruptive Innovations (cont’d) 1990s: Growing performance of Microcomputers, meeting mid- performance users’ needs DEC lost biggest market segment

49. Copyright © 2014 Pearson Education, Inc. 49 Disruptive Innovations (cont’d) Today, micro- computers meeting entire market’s needs DEC out of business Next disruptive innovation: 3G and 4G mobile phones?

50. Copyright © 2014 Pearson Education, Inc. 50 The Innovator’s Solution Christensen outlines a process—disruptive growth engine—that helps organizations respond to disruptive innovations more effectively. 1. Start early. 2. Executive leadership. 3. Build a team of expert innovators. 4. Educate the organization.

51. Copyright © 2014 Pearson Education, Inc. 51 Implementing the Innovation Process E-Business Innovation Cycle – The key to success is the extent of IS use in timely and innovative ways. Based on: Wheeler (2002)

52. Copyright © 2014 Pearson Education, Inc. 52 E-Business Innovation Cycle Choosing Enabling/Emerging Technologies Process/ group devoted to looking for emerging IT Based on: Wheeler (2002)

53. Copyright © 2014 Pearson Education, Inc. 53 E-Business Innovation Cycle (cont’d) 2-53 Matching Technologies to Opportunities Most promising new technology matched with current economic opportunities Based on: Wheeler (2002)

54. Copyright © 2014 Pearson Education, Inc. 54 E-Business Innovation Cycle (cont’d) Executing Business Innovation for Growth Stage at which the change is actually implemented Based on: Wheeler (2002)

55. Copyright © 2014 Pearson Education, Inc. 55 E-Business Innovation Cycle (cont’d) Assessing Value Value created for customers and internal operations assessed Based on: Wheeler (2002)

56. Copyright © 2014 Pearson Education, Inc. 56 Freeconomics: Why Free Products are the Future of the Digital World Enabling Organizational Strategy through Information Systems Discuss how information systems can be used for automation, organizational learning, and strategic advantage. International Business Strategies in the Digital World Describe international business and IS strategies used by companies operating in the digital world. Valuing Innovations Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage. Freeconomics: Why Free Products are the Future of the Digital World Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

57. Copyright © 2014 Pearson Education, Inc. 57 What is Freeconomics? Consider the traditional business model

58. Copyright © 2014 Pearson Education, Inc. 58 Digital Business How does this differ? MC  0

59. Copyright © 2014 Pearson Education, Inc. 59 59 Implications of MC  0 How much does it cost a studio to make a movie? How much does it cost Netflix to stream that movie to a customer? Key Difference – Information goods High (and sunk) fixed costs / Very low marginal costs – Non digital goods Variable fixed costs / Marginal cost does not approach zero Information goods are expensive to produce and cheap to reproduce

60. Copyright © 2014 Pearson Education, Inc. 60 60 Implications of MC  0 – The big one!

61. Copyright © 2014 Pearson Education, Inc. 61 The Freeconomics Value Proposition Free doesn’t mean no profit – Google gives away search free to users – Users give Google search results their attention This can include attention to sponsored links Google sells space for sponsored links – Advertisers pay Google for that attention to sponsored links Some users convert into customers Customers pay advertising firms for their products This is a basic networks story, with a sufficient corpus of users the advertisers will subsidize the service in order to access the network

62. Copyright © 2014 Pearson Education, Inc. 62 Applying Freeconomics in the Digital World ApproachWhat it MeansExamples AdvertisingFree services are provided to customers & paid for by a third party ▪ Yahoo!’s banner ads ▪ Google’s pay-per-click FreemiumBasic services are free, a premium is charged for special features ▪ Skype ▪ Dropbox.com Cross subsidiesSale price of one item is reduced in order to sell something else of value ▪ Free cell phone with two- year contract Zero Marginal Cost Products are distributed to customers without an appreciable cost to anyone ▪ iTunes music distribution ▪ Software distribution ▪ YouTube Video content Labor ExchangeThe act of customers using free services creates value ▪ Yahoo! Answers ▪ Answers.com Gift EconomyPeople participate and collaborate to create value for Everyone ▪ Open source software ▪ Wikipedia

63. Copyright © 2014 Pearson Education, Inc. 63 Review Organizational Strategy International Business Strategy enabled through IT The Management of Innovation Freeconomics