1. Management Information Systems, Sixth Edition
Chapter 2
Strategic Uses of Information Systems

2. Objectives Explain what business strategy and strategic moves are
Illustrate how information systems can give businesses a competitive advantage
Identify basic initiatives for gaining a competitive advantage
Explain what makes an information system a strategic information system
Management Information Systems, Sixth Edition

3. Objectives (continued)
Identify fundamental requirements for developing strategic information systems
Explain circumstances and initiatives that make one IT strategy succeed and another fail
Management Information Systems, Sixth Edition

4. Strategy and Strategic Moves
Strategy: framework, or approach, to obtaining an advantageous position
Business strategy: a plan to help an organization outperform its competitors
Often done by creating new opportunities, not beating rivals
Information system may be built to solve a problem or to seize an opportunity
Management Information Systems, Sixth Edition

5. Strategy and Strategic Moves (continued)
Strategic information system (SIS): an information system that helps seize opportunities
Strategic advantage: using strategy to maximize company strengths
Competitive advantage: having maximized an organization’s strengths to beat its rivals
Using the Web strategically can be advantageous
Simply extending business to the Web is no longer a strategic advantage
Management Information Systems, Sixth Edition

6. Achieving a Competitive Advantage
Competitive advantage is achieved when a for-profit company increases its profits significantly, usually through increased market share
Many initiatives can be used to gain competitive advantage
Strategic moves often combine two or more initiatives
The essence of strategy is innovation
Management Information Systems, Sixth Edition

7. Achieving a Competitive Advantage (continued)
Management Information Systems, Sixth Edition

8. Achieving a Competitive Advantage (continued)
Management Information Systems, Sixth Edition

9. Initiative #1: Reduce Costs
Customers want to pay as little as possible for products or services
Reduce costs to lower price
Automation greatly reduces manufacturing costs
Web can automate customer service activities
Companies that are first to adopt advanced systems that reduce labor enjoy competitive advantage until their rivals do likewise
Management Information Systems, Sixth Edition

10. Initiative #2: Raise Barriers to Market Entrants
Less competition is better for company
Gain competitive advantage by making it difficult or impossible for others to produce the same product or service
To lower competition, raise barriers to entrants
Obtain legal protection of intellectual property (copyrights and patents on inventions, techniques, and services)
Examples: Amazon’s one-click, Priceline’s reverse auction
Management Information Systems, Sixth Edition

11. Initiative #2: Raise Barriers to Market Entrants (continued)
Build unmatchable information systems
Rivals must do likewise or license your technology
Example: State Street Corp.’s pension fund management ISs
Management Information Systems, Sixth Edition

12. Initiative #3: Establish High Switching Costs
Switching costs: expenses incurred when customer stops buying from one company and starts buying from another
Explicit: charge customer for switching (early termination of contract)
Implicit: indirect costs over period of time, such as implementation of new product, staff retraining
High switching costs lock in customers
Example: proprietary software, such as ERP systems, that have custom modifications
Management Information Systems, Sixth Edition

13. Initiative #4: Create New Products or Services
Having a unique product or service gives competitive advantage for a period of time
First mover: organization that is first to offer a new product or service
Usually results in superior brand name, better technology, more experience, or critical mass
Critical mass: body of clients that is large enough to attract other clients
Examples: eBay, Apple’s iPhone
Management Information Systems, Sixth Edition

14. Initiative #4: Create New Products or Services (continued)
Management Information Systems, Sixth Edition

15. Initiative #4: Create New Products or Services (continued)
Being a first mover is not a guarantee of long-term success
Netscape
Infoseek
Must continue to improve and innovate to maintain competitive advantage
Management Information Systems, Sixth Edition

16. Initiative #5: Differentiate Products or Services
Product differentiation: persuading customers that your product is better than competitors’
Usually achieved through advertising and customer experience
Exemplified by brand name success
Promotes brand name
Example: Skype, YouTube
Management Information Systems, Sixth Edition

17. Initiative #5: Differentiate Products or Services (continued)
Management Information Systems, Sixth Edition

18. Initiative #5: Differentiate Products or Services (continued)
Management Information Systems, Sixth Edition

19. Initiative #6: Enhance Products or Services
Enhance existing products or services to increase value to consumer
Many products and services have been enhanced by use of the Web
Examples: Charles Schwab, Progressive Groups
Management Information Systems, Sixth Edition

20. Initiative #6: Enhance Products or Services (continued)
Management Information Systems, Sixth Edition

21. Initiative #7: Establish Alliances
Alliance: two companies combining services
Makes product more attractive
Reduces costs
Provides one-stop shopping
Affiliate program: linking to other companies and rewarding the linker for click-throughs
Management Information Systems, Sixth Edition

22. Initiative #7: Establish Alliances (continued)
Management Information Systems, Sixth Edition

23. Initiative #8: Lock in Suppliers or Buyers
Accomplished by achieving bargaining power
Bargaining power: leverage to influence buyers and suppliers
Achieved by being major competitor or eliminating competitors
Uses purchase volume as leverage over suppliers
Lock in buyers by making them fear high switching costs
Management Information Systems, Sixth Edition

24. Initiative #8: Lock in Suppliers or Buyers (continued)
Lock in clients by:
Giving away a product to make it become a standard (Microsoft’s Internet Explorer, Adobe’s Acrobat Reader, Macromedia’s Flash player)
Creating a physical or software limitation on using technology (Apple Computer’s iTunes)
Management Information Systems, Sixth Edition

25. Creating and Maintaining Strategic Information Systems
Many opportunities to accomplish competitive edge with information technology
Innovative software can establish a competitive advantage
Strategic information systems can be created from scratch or by modifying a previous system
To be an SIS, an information system must:
Serve an organization goal
Collaborate with other functional units of company
Management Information Systems, Sixth Edition

26. Creating an SIS Top management must be involved throughout the process
Strategic information system must be part of the overall organizational strategic plan
Management should ask questions to determine whether to develop a new SIS
Estimating the financial benefits of SIS is extremely difficult
Many fundamental business changes may be involved
Management Information Systems, Sixth Edition

27. Creating an SIS (continued)
Management Information Systems, Sixth Edition

28. Reengineering and Organizational Change
To implement SIS, organizations must rethink the way they operate
Reengineering: Eliminating and rebuilding operations from the ground up
Often involves new machinery and elimination of management layers
Frequently involves information technology
Goal is to achieve huge efficiency improvements
New SIS requires revamping business processes
Management Information Systems, Sixth Edition

29. Competitive Advantage as a Moving Target
Competitive advantage is often short-lived
Competitors soon imitate the leader, diminishing the advantage
SIS quickly becomes a standard business practice
Must continually modify and enhance technology to sustain competitive advantage
Management Information Systems, Sixth Edition

30. JetBlue: A Success Story
JetBlue: airline company that entered a formerly hurting market with great success
Ticketless travel
Automation with IT
Reduced costs
Improved service
Management Information Systems, Sixth Edition

31. JetBlue: A Success Story (continued)
Management Information Systems, Sixth Edition

32. Massive Automation
JetBlue developed Open Skies software to automate ticket handling
Avoids travel agents and their fees
Uses reservation agents who work from home using VoIP
Encourages Internet flight booking by customers
Maintenance information system used to log airplane parts and time cycles for replacement
Management Information Systems, Sixth Edition

33. Massive Automation (continued)
Flight planning to maximize occupied seats is automated
Operational data is updated flight by flight and available to management at all times
Training management system eliminates need for paper records, allows tracking of employee training
Management Information Systems, Sixth Edition

34. Away from Tradition
JetBlue used innovative technique for routing airplanes
Does not use hub-and-spokes method, only point to point
Take most profitable route between cities
Keeping flight manuals on laptop computers allows for paperless cockpits
Saves preflight time associated with calculating weight of plane (annual savings of ~4800 hours)
Management Information Systems, Sixth Edition

35. Away from Tradition (continued)
Uses biometrics for authentication and authorization
Implemented a paperless frequent flier program
Management Information Systems, Sixth Edition

36. Enhanced Service Technology helps JetBlue offer better service
Leather seats
Real-time in-flight television
On-schedule departures and arrivals
Fewest mishandled bags in the industry
Rapid check-in times and fast baggage retrieval
Better security
Management Information Systems, Sixth Edition

37. Impressive Performance
Most important metric in airline industry is cost per available seat-mile (CASM)
Measures how much it costs to fly a passenger one mile
JetBlue had lowest or second-lowest CASM for its first three years of operations
Less than 7 cents (industry average is 11 cents)
JetBlue fills 78% of its seats, while competitors fill only 71%
Management Information Systems, Sixth Edition

38. Late Mover Advantage
Late mover: enters the market later than other competitors
Can be viewed as advantage
Implements latest available technologies
Not burdened with legacy systems
JetBlue used 40% beta software
Management Information Systems, Sixth Edition

39. Ford on the Web: A Failure Story
Some strategic moves end up being colossal failures
May fail because of lack of attention to details
Unable to predict customer or business partner response
Ford’s great failed initiative was undertaken by Jacque Nasser, CEO of Ford
Management Information Systems, Sixth Edition

40. The Ideas
Nasser was eager to push Ford to the Web; his ideas included:
Install devices in vehicles to enable drivers and passengers to access Web
Establish Web site to market parts to auto manufacturers via auctions to encourage price competition among parts suppliers
Push vehicle sales to Web and bypass dealers and their fees
Management Information Systems, Sixth Edition

41. Hitting the Wall
Customers not very interested in Web access in vehicles in 2000
Other car companies learned to use online part auctioning
State franchising laws did not allow car companies to bypass dealers
Online sales initiative failed
Management Information Systems, Sixth Edition

42. The Retreat Ford abandoned plan to sell directly to consumers online
Web site used to select proper model only, but consumers must still utilize a dealer
Web site sold cars, but not enough to save Nasser’s job
Management Information Systems, Sixth Edition

43. The Bleeding Edge Ford case shows that being a first mover is risky
Pioneers sometimes get burned even with careful planning
Bleeding edge: failure occurring because of company trying to be on leading edge
No prior experience from which to learn
Implementation costs are greater than anticipated
Technology ends up losing money for company
Management Information Systems, Sixth Edition

44. The Bleeding Edge (continued)
Due to bleeding edge, companies often wait before implementing newer technologies
Microsoft’s approach is to seize an existing idea, improve it, and promote it with marketing power
Also known as competing by emulating and improving
Management Information Systems, Sixth Edition

45. Summary
Some information systems have become strategic tools as a result of strategic planning; others have evolved into strategic tools
Strategic information systems help companies gain strategic advantage
Company achieves strategic advantage by using strategy to maximize its strength, resulting in a competitive advantage
Management Information Systems, Sixth Edition

46. Summary (continued)
Various initiatives for establishing strategic advantage:
Cost reduction, raising barriers to competitors, establishing high switching costs, new products, differentiating products, enhancing products, alliances, and locking suppliers
Creating standards often establishes strategic advantage in software industry
Management Information Systems, Sixth Edition

47. Summary (continued)
Reengineering: the process of redesigning a business process from scratch to significantly reduce costs
Strategic advances from information systems are short-lived; new opportunities must always be sought
Must keep systems on the leading edge to maintain strategic advantage
Bleeding edge is the undesirable result of a failed innovation effort
Management Information Systems, Sixth Edition