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Dr. Chen, Dr. Chen, Management Information Systems Management Information Systems

Chapter 3Information Systems for Competitive Advantage

Jason C. H. Chen, Ph.D.Professor of MIS

School of Business AdministrationGonzaga UniversitySpokane, WA 99223

[email protected]

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• Recall from Chapter 1 that MIS is the development and use of information systems that enable organizations to achieve their goals and objectives. In Chapter 2, you learned how information systems can help people collaborate.

• This chapter focuses on how information systems support competitive strategy and how IS can create competitive advantages. As you will learn in your organizational behavior classes, a body of knowledge exists to help organizations analyze their industry, select a competitive strategy, and develop business processes.

• In the first part of this chapter, we will survey that knowledge and show how to use it, via several steps, to structure information systems.

• Then, in the last section, we will discuss how companies use information systems to gain a competitive advantage.

Chapter Preview

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Customercentric

Who are the customers?Where are the customers?Their purchasing habits

What they need/want?How many they need/want?When they need/want?How to reach them?

Demands Products

IS/E-BUSINESS

BUSINESS VALUE & FOCUS –IS Perspective

•SCM•CRM•BPR•ERP

Value

Business Models & Strategies

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What is Business Model?

• A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace.

Source: E-Commerce: business, technology, society, Laudon and Traver, A/WN

• The business model is at the center of the business plan.• An e-commerce business model aims to use and leverage the unique qualities of the Internet and the www.

Why New Models?– Profitability (making money)

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Q1 How does organizational strategy determine information systems structure?

Q2 What five forces determine industry structure?

Q3 How does analysis of industry structure determine competitive strategy?

Q4 How does competitive strategy determine value chain structure?

Q5 How do business processes generate value?

Q6 How does competitive strategy determine business processes and the structure of information systems?

Q7 How do information systems provide competitive advantages?

Q8 2020?

Study Questions

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• An organization’s goals and objectives are determined by its competitive strategy.

• In turn, an organization’s competitive strategy determines every information system’s

– Structures

– Features

– Functions

Fig 3-1 Organizational Strategy Determines Information Systems6


Organizational Strategy Determines Information Systems

Fig 3-1 Organizational Strategy Determines Information Systems

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Q2 What five forces determine industry structure?Q3 How does analysis of industry structure determine competitive

strategy?





Q8 2020?

Study Questions

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Dr. Chen, Dr. Chen, Management Information Systems Management Information Systems 9

What is the “Competitive Advantage”?

• A competitive advantage is a benefit derived from something a company does or has that its customers want and its competitors cannot (or choose not to) match.


Striving for Competitive Advantage

• Firm level: Industry & Competitive Analysis– Competitive Forces Model

– Competitive Strategy

• Business level – Value-Chain Analysis

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• Five competitive forces determine industry profitability: bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants, and rivalry among existing firms (video).

• Intensity of each force determines characteristics of the industry, how profitable it is, and how sustainable that profitability will be.

• Assessing an industry structure based on five questions:1. How much bargaining power do customers have?

2. How much of a threat do substitution products or services pose?

3. How much bargaining power do suppliers have?

4. How great is the threat of new competitors entering the marketplace?

5. How great is the rivalry among existing firms?

Five Forces Model

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Porter’s Five Forces Model and Value Chain

• According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force.

• Under the perspective of market structure, Porter’s competitive forces model has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats.


PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY COMPETITORS

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

ThreatsThreats

Bargaining power

NDr. Chen, The Trends of the Information Systems Technology

•Switching cost •Access to distribution channels•Economies of scale

•Redefine products and services•Improve price/performance

•Selection of suppler•Threat of backward integration

•Buyer selection•Switching costs•Differentiation

•Cost-effectiveness•Market access•Differentiation of product or service

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Fig 3-2 Porter’s Five Forces Model of Industry Structure

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Fig 3-2: Porters Five Forces Model of Industry Structure

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Q/A - Enhancing your Analytic Skill

Linda is in the computer repair businesses. Mark and Jill, two recent university graduates are unemployed, but are thinking of doing computer repairs at their homes. This is an example of which of the five forces?

a. bargaining power of customersb. bargaining power of suppliersc. threat of new entrantsd. threat of substitutione. rivalry among existing firmsf. … and the answer is:

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Fig 3-3 Examples of Five Forces

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Fig 3-4: Five Forces at FlexTime

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Q8 2020?

Study Questions

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• Firms engage in one of four competitive strategies: (video)

1. Be the cost leader across a wide industry – Wal-Mart is the lowest cost leader in the retail industry.

2. Differentiate its products across a wide industry – Apple Computer competes on how much better its computers are than PCs.

3. Be the cost leader in a focused industry segment – Southwest Airlines is the cost leader in certain portions of the airline industry.

4. Differentiate its product in a focused industry segment – Apple’s iPhone competes by being different than other cell phones.

Porter’s Competitive Strategy Model

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To be effective, organization goals, objectives, culture, and activities must be consistent with organization strategy.

Fig 3-4: Porter’s Four Competitive Strategies

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• Focus, differentiated Focus downtown Urban, city workers Sophisticated environment Adults only Provide superior product, intense, to-the-max workouts

that leave clients “pumped and excited”

FlexTime Strategy

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In-Class-Group WorkDiscussion Question

• Using the five competitive forces model as described in this chapter to describe how (and what) IT might be used to provide a winning position for:

• A global airline– Use UA as an example (Group work together)


PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY COMPETITORS

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

ThreatsThreats

Bargaining power

NDr. Chen, The Trends of the Information Systems Technology TM -24

•Cost-effectiveness•Market access•Differentiation of product or service

Internal Forces:1.customer focus2.communication3.core competencies4.complexity5.Quality

Other forces should be considered in the e-Age:1. Digitalization2. Globalization3. Deregulation


Cost Leadership

Business Strategies and its Competitive Advantage

Dr. Chen, The Trends of the Information Systems Technology TM -25

Cost Focus

Differentiation

Differentiation Focus

Industrywide

(Broad Target)

Particular Segment

only (Narrow Target)

Co

mp

etit

ive

Sco

pe

Competitive Mechanism

Lower CostPosition

Uniqueness Perceived by

Customer

Industrial economy Knowledge-based economy

Inn

ovat

ion

All

ian

ce

Gro

wth

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PART II

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Q8 2020?

Study Questions

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• Competitive strategy implemented by creating value Value—amount of money a customer is willing to pay for a

resource, product, or service

Margin—difference between value an activity generates and cost of activity

Value chain—a network of value-creating activities

• Primary activities

• Support activities

Value Chain

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Rather than automating or improving existing functional systems, Porter contends companies should create new, more efficient business processes that integrate the activities of the entire value chain.


Com

petitive

Adv

anta

ge

(Value)

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Business Level: The Value Chain

Porter’s Value Chain Model


• Inbound logistics—receiving, handling raw materials and other inputs Value in parts, time required to contact vendors, maintaining

relationships with vendors, ordering parts, receiving shipment, and so forth

• Operations—transform or assemble materials into finished products

• Outbound logistics—deliver finished products to customers

• Marketing and sales—create marketing strategies and sell products or services to customers

• Services—after-sale customer support

Primary Activities in the Value Chain

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• Contribute indirectly to production, sale, and service of product Procurement—finding vendors, setting up contractual

arrangements, and negotiating prices Technology development—research and development,

developing new techniques, methods, and procedures Human resources—recruiting, compensation, evaluation,

and training of full-time and part-time employees Firm infrastructure—general management, finance,

accounting, legal, and government affairs

Support Activities in the Value Chain

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Fig 3-6: Bicycle Maker’s Value Chain

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Fig 3-7: Summary of Value Chain Primary Activities

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• Linkages are the interactions across the value activities. Ex: Manufacturing systems use linkages to reduce inventory

costs, sales forecasts to plan production; production plan to determine raw materials needs; material needs to schedule purchases. End result is just-in-time inventory, which reduces inventory sizes and costs.

• Business process design Organizations should not automate or improve existing

functional systems. Rather, they should create new, more efficient business processes that integrate activities of all departments involved in a value chain.

Value Chain Linkages

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Q5 How do business processes generate value?Q6 How does competitive strategy determine business processes and

the structure of information systems?


Q8 2020?

Study Questions

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• Business process—network of activities that generate value by transforming inputs into outputs.

• Cost of a business process is cost of inputs plus the cost of activities.

• Margin of the business process equals the value of the outputs minus the cost.

• Activity transforms input resources into output resources.

• Resources flow between or among activities.• Facilities store resources; some facilities, such as

inventories, store physical items.

How Do Business Processes Generate Value?

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Dr. Chen, Dr. Chen, Management Information Systems Management Information Systems 3-37

How Do Business Processes Generate Value?

• Each company has many business processes which are networks of activities that generate value by transforming inputs into outputs.

• You determine the cost of each business process by adding the cost of inputs plus the cost of activities used in the process.

• You determine the margin of each business process by subtracting the cost of the activity from the value of the output.


An Alternate Process for Bicycle Manufacturer

Fig 3-8 Three Examples of Business Processes38


• Notice that activities get data resources from databases and put data into databases

• Business processes vary in cost and effectiveness. In fact, the streamlining of business processes to increase margin (add value, reduce costs, or both) is key to competitive advantage.

• Example of using a linkage across business processes to improve process margin: Querying both databases allows purchasing department to make decisions on

raw materials quantities and customer demand. By using this data, purchasing can reduce size of raw materials inventory,

reducing production costs and thus adding margin to the value chain.

Compare Three Business Processes For Bicycle Manufacturer

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Dr. Chen, Dr. Chen, Management Information Systems Management Information Systems 3-40

Fig 3-9 Improved Materials Ordering Process

Which process(es) was improved/redesigned?

Value


• Key to a company’s competitive advantage is to increase the margin of its products by adding value, reducing costs, or both.

• Business process redesign helps a business streamline its activities in order to increase its margins.

• Most difficult part of process redesign is associated with employee resistance.

Business Process Summary

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Q8 2020?

Study Questions

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Fig 3-10: Operations Value Chainsfor Bicycle Rental Companies

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High-Service Business Bike Rental

Fig 3-11 Business Process & Information System for Bike Rental44


• Each business must first analyze its industry and choose a competitive strategy. Will it be a low-cost provider or differentiate its products from competitors?

• Given that strategy, they design business processes that span value-generating activities.

• Those processes determine scope and requirements of each organization’s information systems.

Bottom Line

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Q8 2020?

Study Questions

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Competitive Techniques

Figure 3-12: Principles of Competitive Advantage47


Figure 3-12: Principles of Competitive Advantage

• Product Implementation– 1. Create a new product or service

– 2. Enhance products or services

– 3. Differentiate products or services

• System Implementation– 4. Lock in customers and buyers

– 5. Lock in suppliers

– 6. Raise barriers to market entry

– 7. Establish alliance

– 8. Reduce costs

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Sustainable Competitive Advantages

• Can we sustain an organization’s competitive advantage? Yes/No.– Yes. How– No. Why?

• However, firms may create/improve their competitive advantages only if they:– have to learn (an learning organization )

• Two types of people lead a company to succeed– Those know how to innovate the enterprise

– Those know how to execute their strategy onto the enterprise

capacity

Dr. Chen, Dr. Chen, Management Information Systems Management Information Systems N

• There are two ways businesses can respond to the five competitive forces.– They can gain a competitive advantage via their products

and services.

– They can gain a competitive advantage by developing superior business processes with Information Systems.

Products/Services

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(video)

1. Competitive advantage via products or services: Creating new products or services, Enhancing existing products or services, Differentiating their products and services from those

of their competitors.

• Information systems can help create a competitive advantage by being part of the product or by providing support to the product or service.

Two Ways to Respond to the Five Competitive Forces

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Fig 3-13: Information Systems Create Competitive Advantages as Product or Support

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Lock in customers via high switching costs—make it too expensive for customer to switch to a competitor.

Lock in suppliers—be easy to connect to and work with

Create entry barriers—make it difficult and expensive for new competition to enter the market.

Establish alliances with other organizations—establish standards, promote product awareness and needs, develop market size, reduce purchasing costs, and provide other benefits

Reduce costs—enables reducing prices and/or to increasing profitability. Increased profitability means more cash to fund further infrastructure development and greater competitive advantage.

Gaining Competitive Advantage by Using Business Processes

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• ABC, Inc, an actual company, created a competitive advantage in shipping industry by: Superior customer service Making it easy for customers to business with by

minimizing data entry:

• Drop-down lists, automatic fill-ins, contact lists for customers

• Minimizing data-entry errors

• Following slide shows some of the Web pages of ABC’s information system.

How Does an Actual Company Use IS to Create Competitive Advantages?

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Fig 3-14: ABC, Inc Web Page to Select recipient from customer records55


Fig 3-15: ABC, Inc Web Page to Select Contact from Customer Records56


Fig 3-16: : ABC, Inc Web Page to Specify Email Notification57


Fig 3-17: Preparation of Shipping Labels58


• ABC’s information system helps the company create a competitive advantage:

Enhances its existing services—making it easy for the customer to use its system, and reducing errors.

Differentiates its service from its competitors who don’t have a similar service to provide to customers.

Provides new services for customers that competitors don’t provide.

Locks in customers into its system based on the benefits they receive from it.

Raises barriers to market entry

Reduces costs

How Does This System Create a Competitive Advantage?

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Q8 2020?

Study Questions

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• Assume FlexTime keeps pace with emerging research on optimal workout schedules (http://www.angelfire.com/wa3/loserschallenge/cardio.html, http://www.sportsci.org/jour/0101/cf.htm)

• Optimist view Could develop information systems that track client workouts and their

intensity and relate that data into net cardiovascular benefits. Could correlate workout data with dietary data and client weight loss or

gain. Maybe provide data to medical insurers and help its active clients to

obtain reductions in medical insurance premiums. FlexTime could, but should it? Is it worthwhile for FlexTime to

develop such systems?

What Does Flextime Look Like in 2020?

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• Suppose economic downturn proves too much for FlexTime and it is forced to reconfigure into a shadow of its former self No longer a single business entity. Maybe it becomes a

federation of trainers, workout spaces, dieticians, and recreational sports leagues.

Federation uses free data storage, data communication, and emerging collaboration tools and systems to appear as a virtual organization to clients, but is composed of independently owned and operated small business entities.

Who knows?

Pessimistic View

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Essential Value Propositions for a Successful Company

• Model• Competency• Execution

– Set corporate goals and get executive sponsorship for the initiative

BusinessCore


Enhanced Model of “Built To Last”: Continuity and Change in Visionary Companies

Strategic Competitive Advantages and creating values

Preserve

•Core Values•Core Purpose

Change•Culture & Operating Practices•Specific Goals and Strategies•Processes

IT

•Efficiency•Effectiveness•Innovation

•Safety•Quality Care

Management

(tangible, strategic mechanism)

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• END OF CHAPTER 3

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