1. 1 Chapter 4. Strategic Use of Information Resources Managing and Using Information Systems: A Strategic Approach by Keri Pearlson PowerPoint Slides prepared by Gene Mesher Copyright © 2001 John Wiley & Sons, Inc.

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3. 3 Introduction zChapter 4 enables a manager to understand the link between business strategy and information strategy. zThe chapter looks at: yHow the strategic use of information resources has evolved. yHighlights the difference between simply using IS and using IS strategically. yLooks at how information resources can be used to support the strategic goals of an organization.

4. 4 EVOLUTION OF INFORMATION RESOURCES

5. 5 IT Eras (Figure 4.1) zIT has evolved through 4 eras since the 1960s zEra I (1960s-70s) focused on using IT to increase efficiency zEra II (1980s) focused on using IT to increase worker productivity through the use of PCs zEra III (1990s) used client-server technologies to improve the competitive position of the organization zEra IV (now) is about using IT to create value for the corporation.

6. 6 Fig. 4.1 Eras of information usage in organizations Primary Role of IT EfficiencyEffectivenessStrategicValue creation Justify IT expenditure ROIIncreasing productivity and decision making Competitive position Adding Value Target of systems OrganizationIndividual manager/ Group Business processes Customer, supplier, ecosystem Information model Application specific Data-drivenBusiness- Driven Knowledge- driven Dominant technology Mainframe- based Minicomputer- based Client-Server “distribution intelligence” Internet “ubiquitous intelligence” 1960s1970s1980s2000

7. 7 INFORMATION RESOURCES AS STRATEGIC TOOLS

8. 8 Using Information resources to create strategic advantage zStrategic advantage must be crafted by combining all of the firm’s resources including: yproduction resources, yhuman resources, and yInformation resources zInformation resources include not only data, but also technology, people and processes.

9. 9 Examples of information resources available to a firm: zIS infrastructure zInformation and knowledge zProprietary technology zTechnical skills of the IT staff zEnd users of the IS zRelationship between IT and business managers zBusiness processes

10. 10 What advantages might an information resource create? zA manager might consider the following to understand the type of advantage the information resource might create: yWhat makes the information resource valuable? yWho appropriates the value created by the information resource? yIs the information resource equally distributed across firms? yIs the information resource highly mobile? yHow quickly does the information resource depreciate?

11. 11 HOW CAN INFORMATION RESOURCES BE USED STRATEGICALLY?

12. 12 Aligning IS strategy with business strategy zUsing multiple approaches to evaluating the strategic landscape is helpful in determining strategic opportunities. zHere, we look at three such approaches: yPorter’s five forces model of the competitive advantage of firms yPorter’s value chain model of internal organizational operations yWiseman’s theory of strategic thrusts and strategic option generator

13. 13 Porter’s Five Forces Model of Competitive Advantage (Fig. 4.2) zPorter’s Five Forces Model divides entities in the competitive landscape into five groups as follows: yThreat of New Entrants: new firms that may enter a companies market. yBargaining Power of Buyers: the ability of buyers to use their market power to decrease a firm’s competitive position yBargaining Power of Suppliers: the ability suppliers of the inputs of a product or service to lower a firm’s competitive position yThreat of Substitutes: providers of equivalent or superior alternative products yIndustry Competitors: current competitors for the same product.

14. 14 Potential threat of new entrants Bargaining power of buyers Bargaining power of suppliers Industry competitors Threat of substitutes Strategic use Cost effectiveness Market access Differentiation of product or service Strategic use Selection of supplier Threat of backward integration Strategic use Switching costs Access to distribution channels Economics of scale Strategic use Redefine products and services Improve price/performance Strategic use Buyer selection Switching costs Differentiation Figure 4.2 Porter’s competitive forces with potential strategic use of information

15. 15 Porter’s Five Forces zThreat of New Entrants: can be lowered if there are barriers to entry. Sometimes IS can be used to create barriers to entry. zBargaining Power of Buyers: can be high if it’s easy to switch. Switching costs are increased by giving buyers things they value in exchange such as lower costs or useful information. zBargaining Power of Suppliers: forces is strongest when there are few firms to choose from, quality is inputs is crucial or the volume of purchases is insignificant to the supplier.

16. 16 Porter’s Five Forces (cont.) zThreat of Substitutes: depends on buyers’ willingness to substitute and the level of switching costs buyer’s face. zIndustry Competitors: Rivalry is high when it is expensive to leave and industry, the industry’s growth rate is declining, or products have lost differentiation.

17. 17 The Five Forces Model and IS zThe Five Forces Model provides a way to think about how information resources can create competitive advantage. zUsing Porter’s Model, General Managers can: yIdentify key sources of competition they face. yIdentify uses of information resources to enhance their competitive position against competitive threats yConsider likely changes in competitive threats over time

18. 18 Porter’s Value Chain Model zPorter’s Value Chain Model looks at increasing competitive advantage by reorganizing the activities related to create, support and deliver a firm’s product or service. zThese activities can be divided into two broad categories (See Figure 4.3): yPrimary activities that relate directly to how value is created for a product or service. ySupport activities that make the primary activities possible and that manage the coordinate of different activities.

19. 19 Figure 4.3 Value Chain of the Firm Firm Infrastructure Human Resource Management Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Materials handling delivery Primary Activities Support Activities Mfg. & assembly Order processing Shipping Product Pricing Promotion Place Customer service Repair

20. 20 Gaining competitive value zThe Value Chain model suggest that competition can come from two sources: yLowering the cost to perform an activity and yAdding value to a product or service so buyers will be willing to pay more. zLowering costs only achieves competitive advantage if the firm possesses information on the competitor’s costs zAdding value is a strategic advantage if a firm possesses accurate information regarding its customer such as: which products are valued? Where can improvements be made?

21. 21 The Value System (Fig 4.4) zThe model can be extended by linking many value chains into a value system. zMuch of the advantage of supply chain management comes from understanding how information is used within each value chain of the system. zThis can lead to the formation of entire new businesses designed to change the information component of value-added activities.

22. 22 Supplier’s value chain Firm’s value chain Channel’s value chains Buyer’s value chains Figure 4.4 The value system: interconnecting Relationships between organizations

23. 23 The Value System and Strategic Alliances zMany industries are experiencing the growth of strategic alliances that are directly linked to sharing information resources across existing value systems. zAn alliance between American Airlines, Marriott and Budget Rent-A-Car called AMRIS provides travelers with a single point of contact. zThus, electronically pooling information services of several companies can create competitive advantage by saving customers time.

24. 24 Wiseman’s Strategic Options Generator zWiseman’s theory of strategic thrusts helps identify how a firm’s information resources can be used for competitive advantage. zWiseman asks three questions to refine the process of identifying strategic opportunities: yWhat is the mode of the thrust? yWhat is the direction of the thrust? yWhat is the strategic target of the thrust? zThe heart of Wiseman’s model is built around five strategic thrusts organizations use to gain competitive advantage (see next slide).

25. 25 Types of Strategic Thrusts zDifferentiation Thrusts: focus resources on unfilled product or service gaps. zCost Thrusts: focus is on reducing costs or increasing competitor’s costs zInnovation Thrusts: focus on creating new products or new ways to sell, create, produce or deliver products. zGrowth Thrusts: focus on increasing size of the market size or adding more value adding activities in the value chain zAlliance Thrusts: combine with other groups to create a more competitive position.

26. 26 What is the Mode? zA firm has two choices for the mode of a a strategic thrust: yThe firm can act offensively to improve its competitive advantage -- or yA firm can act defensively to reduce the opportunities available to competitors. zFor example, a firm can innovate offensively to gain product leadership in a market, while others use innovation defensively to imitate the product leader.

27. 27 What is the Direction? zA firm also has two choices for the direction of a a strategic thrust: yThe firm can use the information system to create competitive advantage -- or yA firm can provide the system to its chosen strategic target. zMany firms have done both: developed systems for internal use and then offered them to customers or suppliers. zFor example, although FedEx developed its Powership system internally, it was able to offer it to its best customers, thereby increasing their switching costs.

28. 28 What is the Strategic Target? (Figure 4.5) zWiseman describes three target’s on which the firm can focus its strategic thrusts (see Figure 4.5): ySuppliers yCustomers yCompetitors

29. 29 Figure 4.5 Example of strategic targets Suppliers: Raw materials Information Labor Capital Insurance Utilities Transportation Customers: Channel distributors Consumers Industrial Reseller Government International Competitors: Direct Potential Substitute

30. 30 Strategic Options Generator zWiseman combined the questions of mode, direction and strategic thrust into a strategic options generator (Figure 4.6). zExample: Dell computer’s initial thrust: yStrategic Target: (direct market to) the customer yMode: Offensive yDirection: Use IS to gain advantage zSecond thrust: provide customer information to suppliers zThird thrust: let customers auto-configure systems directly via the Internet.

31. 31 Figure 4.6 Strategic option generator What is the strategic target? What is the strategic market? What is the mode? What is the direction? SupplierCustomerCompetitor CostInnovationAllianceGrowthDifferentiation OffensiveDefensive Use Provide

32. 32 FOOD FOR THOUGHT: TIME-BASED COMPETITIVE ADVANTAGE

33. 33 Time-Based Competitive Advantage zThe Internet is increasing the pace of technological change by refocusing competitive efforts towards creating time-based competitive advantage. zInformation resources are the key to creating those advantages. zFor example, Dell’s direct strategy has been to build and deliver computers in as little as 5 days. zThus, the speed at which an organization adapts its business processes will the true measure of its’ ability to maintain competitive advantage.

34. 34 End of Chapter 4