1. Management Information System Competing with Information Technology 2 Judi Prajetno Sugiono jpsugiono@gmail.com ©2008

2. Objectives  Identify basic competitive strategies and explain how IT may be used to gain competitive advantage.  Identify strategic uses of information technology.  How does business process engineering frequently use e-business technologies for strategic purposes?

3. (Objectives – continued)  Identify the business value of using e- business technologies for total quality management, to become an agile competitor, or to form a virtual company.  Explain how knowledge management systems can help a business gain strategic advantage.

4. Section I Fundamentals of Strategic Advantage

5. Competitive Advantage  Competitive Advantage is an advantage over competitors in some measure such as cost, quality, or speed, leads to control of a market and to larger- than average profits.  Types of Competitive Advantage  Barriers to entry that restrict supply  Demand control  Economies of scale  Process efficiency  In the IS field, competitive advantage refers to the use of information to gain marketplace leverage

6. Fundamentals of Strategic Advantage In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers. Porter’s Five Forces Model

7. The Determinants Of Competitive Rivalry  For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as  innovation, marketing, etc.  number of competitors  rate of industry growth  intermittent industry overcapacity  exit barriers  diversity of competitors  informational complexity and asymmetry  fixed cost allocation per value added  level of advertising expense

8. The Determinants Of The Threat Of Substitute Products  The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).  buyer propensity to substitute  relative price performance of substitutes  buyer switching costs  perceived level of product differentiation

9. The Determinants Of The Threat Of The Entry Of New Competitors  Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).  the existence of barriers to entry (patents, rights, etc.)  economies of product differences  brand equity  switching costs or sunk costs  capital requirements  access to distribution  absolute cost advantages  learning curve advantages  expected retaliation by incumbents  government policies

10. The Determinants Of The Bargaining Power Of Customers  The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.  buyer concentration to firm concentration ratio  bargaining leverage  buyer volume  buyer switching costs relative to firm switching costs  buyer information availability  ability to backward integrate  availability of existing substitute products  buyer price sensitivity  price of total purchase

11. The Determinants Of The Bargaining Power Of Suppliers  Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.  supplier switching costs relative to firm switching costs  degree of differentiation of inputs  presence of substitute inputs  supplier concentration to firm concentration ratio  threat of forward integration by suppliers relative to the threat of backward integration by firms  cost of inputs relative to selling price of the product

12. Competitive Strategies  Porter argues that firms achieve competitive advantage by providing one of the following:  products and services at a lower price,  higher quality products and services, or  meeting the special needs of certain market segments

14. Competitive Strategies & the Role of IT  Cost Leadership (low cost producer)  Reduce inventory (JIT)  Reduce manpower costs per sale (see Real World Case 1)  Help suppliers or customers reduce costs  Increase costs of competitors  Reduce manufacturing costs (process control)

15. Competitive Strategies & the Role of IT (continued)  Differentiation  Create a positive difference between your products/services & the competition.  May allow you to reduce a competitor’s differentiation advantage.  May allow you to serve a niche market.

16. Competitive Strategies & the Role of IT (continued)  Innovation  New ways of doing business  Unique products or services  New ways to better serve customers  Reduce time to market  New distribution models

17. Competitive Strategies & the Role of IT (continued)  Growth  Expand production capacity  Expand into global markets  Diversify  Integrate into related products and services.

18. Competitive Strategies & the Role of IT (continued)  Alliance  Broaden your base of support  New linkages  Mergers, acquisitions, joint ventures, “virtual companies”  Marketing, manufacturing, or distribution agreements.

19. Competitive Strategies & the Role of IT (continued)  Other Competitive Strategies  Locking in customers or suppliers  Build value into your relationship  Creating switching costs  Extranets  Proprietary software applications  Raising barriers to entry  Improve operations or promote innovation  Leveraging investment in IT  Allows the business to take advantage of strategic opportunities

22. The Value Chain  Porter argued that firm’s opportunities to create competitive advantage occur at different steps in the value chain  The ultimate goal of any business is to provide value to its customers.  The Value chain means views a firm as a series, chain, or network of activities that add value to its products and services.

23. Value Chain  Business system consist of interdependent activities connected by linkages.  To gain competitive advantage a company must perform these activities to have values greater than the cost

24. Value Chain Thinking  Determine the firm’s competitive strengths and weaknesses  …by analysing firm’s value-added stream  Try to understand  “the behaviour of cost and the existing and potential sources of differentiation”  "value" added is the values added to the product  …as it moves through the functional areas of the business, through the distribution channels, and is finally acquired by the consumer.

25. Porter’s Value Chain Margin is the value of the firm’s product and services, as perceived by the firm’s customers, less the cost Firm Infrastructure (administrative coordination and support service) Human Resources Management Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Support Activities Primary Activities cost revenue Margin

26. TypeActivityDefinition Primary activity: directly create the value as perceived by the customers Inbound LogisticMaterial receiving, storing and distribution to manufacturing premises OperationsTransforming inputs into finish products Outbound logisticStoring and distribution products Marketing and salesPromotion and sales force ServiceService to maintain or enhance product value Support activity: indirectly create value by supporting the primary processes Corporate infrastructure Support the entire value chain, such as general management, planning, finance, accounting, legal services, government affair, and quality management Human resource management Recruiting, hiring, training and development Technology development Improving product and manufacturing process ProcurementPurchasing input

27. Technological dependence: IT?  The key elements of IT dependence are its ability to:  Improve market access  Provide product and company differentiation  Facilitate new product and service introductions [change of focus]  Introduce operational efficiencies [cost leadership]  improve decision making capabilities.  increase the sharing of knowledge.

28. Service Marketing and Sales Marketing and Sales Outbound Logistics Outbound Logistics Operations Inbound Logistics Inbound Logistics EDI-Based Purchasing System Computer- Integrated Mftg. Automated Ordering System Expert Systems for Salespeople Tele-maintenance Expert Systems Downstream Chains of Customers Upstream Chains of Suppliers Value Chain with Typical Strategic IS

29. Example: a hypothetical restaurant (Alter – Information Systems 4th ed. © 2002 Prentice Hall) Based on the primary processes shown, this is probably not the value chain for the type of fast food restaurant that cooks the food before taking orders.

30. Value Activities  Primary Activities  Inbound Logistics  Operations  Outbound Logistics  Marketing and Sales  Service  Support Activities  Corporate Infrastructure  Human Resource Management  Technology Development  Procurement

31. Primary Activities: Inbound Logistics  Materials receiving, storing, and distributing to manufacturing  IT Impact:  improved scheduling cut down warehousing  reduce disruptions  lower price  better vendor selection  more flexibility

32. Primary Activities: Operations  Transforming inputs into finished products  IT Impact :  increase product offerings  new products

33. Primary Activities: Outbound Logistics  Storing and distributing finished products  IT Impact:  influence customer behaviour through screen placement  piggy back other products on the same electronic distribution channel

34. Primary Activities: Marketing and Sales  Promotion and sales force  IT Impact:  on-line order entry for customers  ordering aids such as modelling systems for farmers

35. Primary Activities: Service  Maintain or enhance product value  IT Impact:  improved support via IT  remote diagnostics  expert systems for self-help  all reduce support cost and improve customer satisfaction

36. Support Activities: Corporate Infrastructure  Supports entire chain  General management, planning, finance, accounting, legal services, government affair, quality control  IT Impact:  improve control via better tracking of activities  enhance co-ordination  better alignment of rewards with corporate goals

37. Support Activities: Human Resource Management  Recruiting, hiring, training and development  IT Impact:  improved staff selection and assignment  tailoring benefit packages  (see Resumix example in WSF lectures)

38. Support Activities: Technology Development  Improving product and manufacturing process  IT Impact:  improved design analysis  bigger and faster modelling  more flexible designs

39. Support Activities: Procurement  Purchasing inputs  IT Impact:  electronic shopping around  reduced prices

40. Channel value chains Supplier value chains Buyer value chains Firm value chain Expanded Value Chain

41. parts supplier parts supplier parts supplier warehouse supplier tool manufacturer Manufacturer workers wholesaler distributor retail store Consumers Production Chain

42. E Commerce in Value Chain Manufacturer Wholesaler/ distributor Wholesaler/ distributor Retailer Consumer Infomediary Manufacturer E-Retailer E-Retailer Aggregator Portal Portal Consumer Manufacturer Wholesaler/ distributor Wholesaler/ distributor Retailer Consumer (a) Traditional Value Chain (b) Intermediaries Eliminated (Deintermediation) (b) New Intermediaries Introduced (Reintermediation)

43. Section II Using Information Technology for Strategic Advantage

44. Strategic Uses Of Information Technology  Major competitive differentiator  Develop a focus on the customer  Customer value  Best value  Understand customer preferences  Track market trends  Supply products, services, & information anytime, anywhere  Tailored customer service

46. Strategic Uses of IT (continued)  Business Process Reengineering (BPR)  Rethinking & redesign of business processes  Combines innovation and process improvement  There are risks involved.  Success factors  Organizational redesign  Process teams and case managers  Information technology

47. Business Improvement vs. Business Reengineering

48. Business Process and Traditional Business Functions

49. Example of IT that Support Reengineering of sales and order management process

50. Strategic Uses of IT (continued)  Improve business quality  Total Quality Management (TQM)  Quality from customer’s perspective  Meeting or exceeding customer expectations  Commitment to:  Higher quality  Quicker response  Greater flexibility  Lower cost

51. Strategic Uses of IT (continued)  Becoming agile  Agility in business performance is the ability of a company to prosper in rapidly changing, continually fragmenting global markets for high quality, high performance, customer-configured products and services.  Four basic strategies  Customers’ perception of product/service as solution to individual problem  Cooperate with customers, suppliers, other companies (including competitors)  Thrive on change and uncertainty  Leverage impact of people and people’s knowledge

52. Example: Business model of AVNET Marshall to Agile Company Leverage the Impact of People and IS Resources Leverage the Impact of People and IS Resources Give Customers Solutions to Problems Give Customers Solutions to Problems Cooperate with Business Partners and Competitors Cooperate with Business Partners and Competitors Organize to Master Change Organize to Master Change

53. Strategic Uses of IT (continued)  The virtual company  Uses IT to link people, assets, and ideas  Forms virtual workgroups and alliances with business partners  Interorganizational information systems

54. Virtual Company (continued)

55. The Virtual Company (continued)  Strategies  Share infrastructure & risk with alliance partners  Link complementary core competencies  Reduce concept-to-cash time through sharing  Increase facilities and market coverage  Gain access to new markets and share market or customer loyalty  Migrate from selling products to selling solutions

56. Learning Organizations  Learning organization – knowledge creating company  Exploit two kinds of knowledge  Explicit knowledge: data, document and etc.  Tacit knowledge: the “how-tos” of knowledge, which reside in workers

57. Learning Organizations (continued)  Knowledge Management

58. Learning Organizations (continued)  Knowledge management systems  Help create, organize, and share business knowledge wherever and whenever needed within the organization

59. Discussion Questions  You have been asked to develop e- business & e-commerce applications to gain competitive advantage. What reservations might you have about doing so?  How could a business use IT to increase switching costs and lock in its customers and suppliers?

60. Discussion Questions (continued)  How could a business leverage its investment in IT to build strategic IT capabilities that serve as a barrier to entry by new entrants into its markets?  What strategic role can information technology play in business process reengineering and total quality management?

61. Discussion Questions (continued)  How can Internet technologies help a business form strategic alliances with its customers, suppliers, and others?  How could a business use Internet technologies to form a virtual company or become an agile competitor?

62. Discussion Questions (continued)  IT can’t really give a company a strategic advantage, because most competitive advantages don’t last more than a few years & soon become strategic necessities that just raise the stakes of the game. Discuss.  MIS author & consultant Peter Keen says: “We have learned that it is not technology that creates a competitive edge, but the management process that exploits technology.” What does he mean?

63. Real World Case 1 – WESCO International, Inc.  Business-to-Business  Describe WESCO’s original system.  Describe WESCO’s new system.

64. Real World Case 1 (continued)  What are the business benefits to WESCO and its suppliers of its new e-procurement system?  Is WESCO’s new system a strategic use of IT?

65. Real World Case 1 (continued)  Does WESCO’s new system give the company a competitive advantage?  What other strategic moves could WESCO implement to gain competitive advantage?

66. Real World Case 2 – Staples, Inc.  What is the strategic business value to Staples and their large business clients of the new web-based procurement system?  What is the strategic business value to Staples and the value proposition to their customers of their new clicks and bricks capabilities?

67. Real World Case 2 (continued)  Is an integrated clicks and bricks strategy the Internet strategy that most businesses, large and small, should adopt?  What competitive strategies is Staples pursuing?

68. Real World Case 2 (continued)  What other e-business or e-commerce strategy would you recommend to Staples to help them gain a competitive advantage in their industry?

69. Real World Case 3 – Enron Corp.  What mistakes did Enron make in the use or management of IT?  Did those mistakes play a part in the failure of Enron?

70. Real World Case 3 (continued)  “Is it time to go back to the days when IT supported the business rather than became the business?” Explain your position.  What are the major lessons for the future use of IT in business that you gained from this case?

71. Real World Case 3 (continued)  How would you apply one of the lessons from this case in your present job or in your future business career?

72. Real World Case 4 – Delta Technology & FirstHealth Group  What are Delta Technology’s new requirements for IT investments?  What is the business value of Delta’s new requirements?

73. Real World Case 4 (continued)  Explain FirstHealth’s “return on opportunity” guidelines.  Is FirstHealth’s “return on opportunity” guideline for IT investments a good way to evaluate investments in IT?

74. Real World Case 4 (continued)  What should be the role of ROI in IT decision-making?  Are the IT investment guidelines of Delta and FirstHealth applicable to other companies, including small businesses?

75. Real World Case 5 – Ford, Dow Chemical, IBM, et al.  What is Six Sigma?  What do critics of Six Sigma see as its shortcomings?

76. Real World Case 5 (continued)  Is Six Sigma “an enterprise-wide business strategy?”  What role does information technology play in Six Sigma business initiatives?

77. Real World Case 5 (continued)  What are the benefits and limitations of Six Sigma as a business strategy?  Can Six Sigma make up for poor management and faulty vision?