Chapter 2 STRATEGIC AND COMPETITIVE OPPORTUNITIES Using IT for Competitive Advantage

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Management Information Systems Management Information Systems for the Information Agefor the Information Age

Second Canadian EditionSecond Canadian Edition

Copyright 2004 Copyright 2004 The McGraw-Hill Companies, Inc. The McGraw-Hill Companies, Inc.

All rights reservedAll rights reserved

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Chapter 2Chapter 2

STRATEGIC AND COMPETITIVE STRATEGIC AND COMPETITIVE OPPORTUNITIESOPPORTUNITIES

Using IT for Competitive AdvantageUsing IT for Competitive Advantage

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Competitive AdvantageCompetitive Advantage

Providing a product or service in a way that customers Providing a product or service in a way that customers value more than what the competition is able to do.value more than what the competition is able to do.

It is all about …It is all about …

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Its not the IT, it’s the PeopleIts not the IT, it’s the People

It is not the information technology that gives a It is not the information technology that gives a company the competitive advantage; it is the company the competitive advantage; it is the wayway

people use the technology that makes the difference.people use the technology that makes the difference.

In perspective (do not be fooled) …In perspective (do not be fooled) …

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Like the car and its driverLike the car and its driver

The car is a Ferrari. The drivers are a regular average The car is a Ferrari. The drivers are a regular average everyday Chevrolet car driver, and a race-car driver. everyday Chevrolet car driver, and a race-car driver.

Only the race-car driver can take full advantage of the Only the race-car driver can take full advantage of the Ferrari by using the technology embodied into it Ferrari by using the technology embodied into it

more effectively and appropriately.more effectively and appropriately.

Think about it …Think about it …

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The house and the ArchitectThe house and the Architect

To build a house to meet a certain objective you need To build a house to meet a certain objective you need an Architect. To build / have an information system an Architect. To build / have an information system (IS) you need an IS Architect that understands the (IS) you need an IS Architect that understands the business problem and the available technologies.business problem and the available technologies.

Like an Architect …Like an Architect …

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Competitive Advantage ExamplesCompetitive Advantage Examples FedExFedEx SchwabsSchwabs DellDell CiscoCisco

Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet Age The five forces modelThe five forces model The three generic strategiesThe three generic strategies The value chainThe value chain

Key E-Commerce StrategiesKey E-Commerce Strategies Mass customizationMass customization DisintermediationDisintermediation Global reachGlobal reach

The U.S. Airline IndustryThe U.S. Airline Industry

… … Main Chapter Menu…Main Chapter Menu…

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Competitive Advantage ExamplesCompetitive Advantage Examples

In this book, we feel that the best way to understand In this book, we feel that the best way to understand competitive advantage is by seeing it in action.competitive advantage is by seeing it in action.

Here you have 4 examples showing you how IT is used to Here you have 4 examples showing you how IT is used to gain a competitive advantage gain a competitive advantage

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Federal ExpressFederal Express BeforeBefore

Call a 1 800 numberCall a 1 800 number Listen to some musicListen to some music Get your tracking number from your order readyGet your tracking number from your order ready After a while you end up speaking with a customer service clerkAfter a while you end up speaking with a customer service clerk The clerk will access the databaseThe clerk will access the database The clerk will tell youThe clerk will tell you

• Whether the product has arrived or notWhether the product has arrived or not• Who signed for the product if it has arrived to its destinationWho signed for the product if it has arrived to its destination

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Federal ExpressFederal Express

StrategyStrategy Build an information system to allow the customer to access the Build an information system to allow the customer to access the

database.database. Use the internet as the vehicle to deploy the information systemUse the internet as the vehicle to deploy the information system

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NowNow Go to Go to www.fedex.cawww.fedex.ca Enter customer service areaEnter customer service area Enter you tracking number to access the database and obtain all Enter you tracking number to access the database and obtain all

the information you needthe information you need

http://www.fedex.ca/

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GainsGains To the customerTo the customer

• Easier and less painful process to track your shipmentEasier and less painful process to track your shipment• Less time consumingLess time consuming• Better informationBetter information

To FedExTo FedEx• Cheaper, as they would need now less customer service clerksCheaper, as they would need now less customer service clerks• Happier customersHappier customers

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Competitive Advantage ExamplesCompetitive Advantage ExamplesFederal ExpressFederal Express

Figure 2.2Figure 2.2 FedEx Package FedEx Package

Tracking ScreenTracking Screenpage 45page 45

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Competitive Advantage ExamplesCompetitive Advantage ExamplesCharles SchwabCharles Schwab

BeforeBefore Typical brokerage businessTypical brokerage business Call officesCall offices Speak with an agentSpeak with an agent Get adviceGet advice Make buy/sell decisionsMake buy/sell decisions

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StrategyStrategy Pioneer in the discount brokerage businessPioneer in the discount brokerage business Target investors that are comfortable making their Target investors that are comfortable making their

own tradesown trades Develop and deploy an information system to Develop and deploy an information system to

accommodate the target investoraccommodate the target investor Embrace the internet as the technology vehicle for Embrace the internet as the technology vehicle for

attaining objectivesattaining objectives

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NowNow www.schwab.comwww.schwab.com Internet brokerage serviceInternet brokerage service Buy/sell and get information online, in real-Buy/sell and get information online, in real-

time and 24hrs a day.time and 24hrs a day.

http://www.schwab.com/

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Competitive Advantage ExamplesCompetitive Advantage ExamplesDell ComputerDell Computer

BeforeBefore Dell would sell its computers via retailers Dell would sell its computers via retailers Buy-hold-sell approachBuy-hold-sell approach

• Build computersBuild computers• Stock computers on shelves in warehouseStock computers on shelves in warehouse• Sell computersSell computers

Customer service all by telephoneCustomer service all by telephone

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StrategyStrategy Eliminate the retail middle man and sell Eliminate the retail middle man and sell

directly to customerdirectly to customer Build and deploy an information system for Build and deploy an information system for

purchasingpurchasing Use internet as the technology vehicle to Use internet as the technology vehicle to

reach its customer for sales and servicereach its customer for sales and service

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NowNow www.dell.cawww.dell.ca Sell-source-shipSell-source-ship

• Dell receives an order by internetDell receives an order by internet• Dell outsources to initiate the construction of the computer Dell outsources to initiate the construction of the computer

soldsold• Dell then ships the productDell then ships the product

Top of the line automated customer care componentTop of the line automated customer care component

http://www.dell.ca/

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Information Information partnership - partnership - lets two lets two or more companies or more companies cooperate by cooperate by integrating their IT integrating their IT systems. systems.

On Your Own

Looking for Opportunities Close to Home

(p. 47)

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Competitive Advantage Competitive Advantage ExamplesExamples

Dell ComputerDell Computer

Figure 2.3Figure 2.3 Buy-hold-sell versus Buy-hold-sell versus

sell-source-shipsell-source-shippage 48page 48

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Competitive Advantage ExamplesCompetitive Advantage ExamplesCisco SystemsCisco Systems

Cisco Systems - a leader in utilizing the direct sell model Cisco Systems - a leader in utilizing the direct sell model over the Internet. over the Internet.

Business to Business (B2B) - Business to Business (B2B) - companies whose companies whose customers are primarily other businesses.customers are primarily other businesses.

Business to Consumer (B2C) -Business to Consumer (B2C) -companies whose companies whose customers are primarily individuals. customers are primarily individuals.

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Developing A Strategy For The Developing A Strategy For The Internet AgeInternet Age

1.1. Business people quite often use the three frameworks of Business people quite often use the three frameworks of Professor Michael Porter to think about business strategies.Professor Michael Porter to think about business strategies.

2.2. Professor McFarland showed how these three frameworks can Professor McFarland showed how these three frameworks can also be used in coming with ideas on how information technology also be used in coming with ideas on how information technology can be harnessed to create a competitive advantage.can be harnessed to create a competitive advantage.

3.3. Professor Porter observed that the internet provides better Professor Porter observed that the internet provides better opportunities for companies to establish business strategies than opportunities for companies to establish business strategies than previous IT.previous IT.

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet Age

Porter’s three frameworks are:Porter’s three frameworks are: The Five Forces modelThe Five Forces model The Three Generic StrategiesThe Three Generic Strategies The Value ChainThe Value Chain

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeThe Five Forces ModelThe Five Forces Model

Figure 2.4Figure 2.4 The Five Forces The Five Forces

ModelModelpage 50page 50

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Five forces modelFive forces model - determines the relative - determines the relative attractiveness of an industry. attractiveness of an industry.

This model was intended to be used as a tool for This model was intended to be used as a tool for managers to use in deciding whether they managers to use in deciding whether they should should enterenter a new market or a new market or expandexpand in the one in the one they are already in.they are already in.

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Buyer power - Buyer power - high when buyers have many choices of high when buyers have many choices of whom to buy from, and low when the choices are few. whom to buy from, and low when the choices are few. (Less attractive market if buyer power is high)(Less attractive market if buyer power is high)

Supplier power Supplier power - high when buyers have few choices of - high when buyers have few choices of whom to buy from, and low when there are many whom to buy from, and low when there are many choices. (Less attractive market if supplier power is high)choices. (Less attractive market if supplier power is high)

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Threat of substitute products or services -Threat of substitute products or services - low if there are very low if there are very few alternatives to using the product or service.few alternatives to using the product or service. Switching costs -Switching costs - costs that costs that can make customers reluctant to switch to can make customers reluctant to switch to

another product or service. If there are switching costs then it is an another product or service. If there are switching costs then it is an advantage to the supplier.advantage to the supplier.

Threat of new entrants - Threat of new entrants - high when it is easy for competitors to high when it is easy for competitors to enter the market. enter the market.

Rivalry among existing competitors –Rivalry among existing competitors – An industry is less An industry is less attractive to enter when the rivalry is high and more attractive when attractive to enter when the rivalry is high and more attractive when it is lowit is low..

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeUsing the Five Forces ModelUsing the Five Forces Model

Buyer powerBuyer power Giving choices to the buyerGiving choices to the buyer For example: hotel chainsFor example: hotel chains

• Give pointsGive points• Other loyalty programsOther loyalty programs• Cash the points for free hotel stays at one of their resort Cash the points for free hotel stays at one of their resort

hotelshotels Such programs have the effect of increasing the Such programs have the effect of increasing the

likelihood that a traveler will stay at a single chain.likelihood that a traveler will stay at a single chain.

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Supplier powerSupplier power The objective is to reduce supplier power.The objective is to reduce supplier power. How to reduce supplier powerHow to reduce supplier power

• B2B marketplace - B2B marketplace - an Internet-based service an Internet-based service which brings together many buyers and sellers. which brings together many buyers and sellers.

• Find a way to put more information into the buyer’s Find a way to put more information into the buyer’s handshands

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Threat of substitute products or servicesThreat of substitute products or services Consider the introduction of alternative IT Consider the introduction of alternative IT

products such as income tax preparation products such as income tax preparation software.software.

Consumers now use it.Consumers now use it. Accountant has less clients.Accountant has less clients. Accountant livelihood is threatened.Accountant livelihood is threatened.

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Threat of new entrantsThreat of new entrants It is not a good thing when it is very easy for others to enter into It is not a good thing when it is very easy for others to enter into

your market.your market. Companies can use IT to develop and create barriers for others.Companies can use IT to develop and create barriers for others. Entry barrierEntry barrier - a product or service feature that customers have - a product or service feature that customers have

come to expect from companies in a particular industry. come to expect from companies in a particular industry. A good example is what banks did:A good example is what banks did:

• Introduce the bank card and as many ATMs around the world as Introduce the bank card and as many ATMs around the world as possible.possible.

• Banking on the internet to pay bills, transfer funds and print reports.Banking on the internet to pay bills, transfer funds and print reports.

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Rivalry among existing competitorsRivalry among existing competitors Using IT systems to be more efficient and Using IT systems to be more efficient and

compete more strongly with others.compete more strongly with others. An example would be PRICE.An example would be PRICE.

• Computer systems can be bought from two Computer systems can be bought from two different stores but one is cheaper than the other.different stores but one is cheaper than the other.

• This is possible when one company uses IT in This is possible when one company uses IT in such a way to reduce its price.such a way to reduce its price.

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeThe Three Generic StrategiesThe Three Generic Strategies

Porter says that a business should adopt Porter says that a business should adopt only one of the three generic strategies:only one of the three generic strategies: Cost leadershipCost leadership DifferentiationDifferentiation Focused strategyFocused strategy

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Trying to follow more than one of these Trying to follow more than one of these strategies at the same time is almost strategies at the same time is almost

always unsuccessful.always unsuccessful.

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Figure 2.5Figure 2.5 The Three The Three

Generic Generic StrategiesStrategiespage 52page 52

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeUsing the Three Generic StrategiesUsing the Three Generic Strategies

Companies can use the three generic strategies Companies can use the three generic strategies to change the basis of their competition to their to change the basis of their competition to their advantage.advantage.

If they find that they are caught in a fierce If they find that they are caught in a fierce marketplace of low pricing then they could marketplace of low pricing then they could modify their strategy to compete of the basis of modify their strategy to compete of the basis of differentiation.differentiation.

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeUsing the Three Generic StrategiesUsing the Three Generic Strategies

Amazon.com is a good example of this. Amazon.com is a good example of this. Provides competitive low pricesProvides competitive low prices InformativeInformative Easy to navigate andEasy to navigate and Uses sophisticated software to personalize Uses sophisticated software to personalize

the site for each individual.the site for each individual.

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Developing A Strategy For The Internet AgeDeveloping A Strategy For The Internet AgeThe Value ChainThe Value Chain

Once you understand how IT can help Once you understand how IT can help you develop business strategy, you can you develop business strategy, you can

ensure that IT supports all important ensure that IT supports all important business processes.business processes.

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Business processBusiness process - a standardized set of activities that - a standardized set of activities that accomplishes a specific task, such as processing a customer’s accomplishes a specific task, such as processing a customer’s order.order.

An important tool to visualize the important processes is Porters’ An important tool to visualize the important processes is Porters’ value chain.value chain.

Value chainValue chain - views the organization as a chain – or series – of - views the organization as a chain – or series – of processes, each of which adds value to the product or service for processes, each of which adds value to the product or service for the customer. the customer.

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Figure 2.6Figure 2.6 The Components The Components

of a Value Chainof a Value Chainpage 54page 54

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Talbott (a premier necktie manufacturer in Talbott (a premier necktie manufacturer in North America) used the value chain to North America) used the value chain to better meet customer demands:better meet customer demands: Plan for a better way of meeting customer Plan for a better way of meeting customer

demands.demands. Identifying processes that add value.Identifying processes that add value. Identifying processes that reduce value.Identifying processes that reduce value.

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Figure 2.7Figure 2.7The Value-The Value-Added View of a Added View of a Necktie Necktie ManufacturerManufacturerpage 55page 55

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Figure 2.8Figure 2.8The Value-The Value-Reduced View Reduced View of a Necktie of a Necktie ManufacturerManufacturerpage 55page 55

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Key E-Commerce StrategiesKey E-Commerce Strategies

With the Internet and the WWW, new wave of With the Internet and the WWW, new wave of creative entrepreneurship developed.creative entrepreneurship developed.

New ways were found to reach out to New ways were found to reach out to customers and suppliers.customers and suppliers.

New never have been seen business models New never have been seen business models were created.were created.

A time of experimentation with some A time of experimentation with some spectacular successes and failures.spectacular successes and failures.

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The main difference between the NEW and The main difference between the NEW and OLD economies is the OLD economies is the INTERNETINTERNET..

The Internet is global.The Internet is global.

The Internet is affordable.The Internet is affordable.

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Three capabilities made possible by the Three capabilities made possible by the Internet should be kept in mind by Internet should be kept in mind by companies searching for ways to use the companies searching for ways to use the new economy to gain competitive advantage:new economy to gain competitive advantage: Mass customization and personalizationMass customization and personalization DisintermediationDisintermediation Global reachGlobal reach

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Key E-Commerce StrategiesKey E-Commerce StrategiesMass Customization and PersonalizationMass Customization and Personalization

Mass customizationMass customization - a business gives its customers the - a business gives its customers the opportunity to tailor its product or service to the customer’s opportunity to tailor its product or service to the customer’s specifications. specifications.

PersonalizationPersonalization - a Web site can know enough about your likes - a Web site can know enough about your likes and dislikes that it can fashion offers that are more likely to appeal and dislikes that it can fashion offers that are more likely to appeal to you. to you.

Collaborative filtering - Collaborative filtering - a method of placing you in an affinity group a method of placing you in an affinity group of people with the same characteristics. of people with the same characteristics.

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Key E-Commerce StrategiesKey E-Commerce StrategiesDisintermediationDisintermediation

Disintermediation – Disintermediation – using the Internet as using the Internet as a delivery vehicle, intermediate players in a delivery vehicle, intermediate players in a distribution channel can be bypassed. a distribution channel can be bypassed.

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Key E-Commerce StrategiesKey E-Commerce StrategiesDisintermediationDisintermediation

Figure 2.10Figure 2.10 Disintermediation at Disintermediation at WorkWorkpage 58page 58

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Key E-Commerce StrategiesKey E-Commerce StrategiesGlobal ReachGlobal Reach

Global reach - Global reach - the the ability to extend a ability to extend a company’s reach to company’s reach to customers anywhere customers anywhere there is an Internet there is an Internet connection, and at a connection, and at a much lower cost. much lower cost.

Team Work

Finding the Best IT Strategy for your

Industry(p. 56)

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The U.S. Airline IndustryThe U.S. Airline IndustryAirline Reservation SystemsAirline Reservation Systems

The airlines really began using IT in a The airlines really began using IT in a significant way when American Airlines significant way when American Airlines and United Airlines introduced the first and United Airlines introduced the first airline reservations systems.airline reservations systems. SABRESABRE APPOLO APPOLO

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Airline Reservation SystemsAirline Reservation Systems

American and United got a tremendous American and United got a tremendous competitive advantage from being the competitive advantage from being the owners of the reservation systems.owners of the reservation systems. They were very profitableThey were very profitable They had access to information on the sales They had access to information on the sales

volumes of their competitorsvolumes of their competitors

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The U.S. Airline IndustryThe U.S. Airline IndustryFrequent Flyer ProgramsFrequent Flyer Programs

Frequent flyer programs are a great example of Frequent flyer programs are a great example of using IT to alter Porter’s five forces. using IT to alter Porter’s five forces. They reduced buyer power by making it less likely a They reduced buyer power by making it less likely a

traveler would choose another airline.traveler would choose another airline. They reduced the threat of substitute products or They reduced the threat of substitute products or

services by increasing switching costs.services by increasing switching costs. They erected entry barriers by making a frequent flyer They erected entry barriers by making a frequent flyer

program a practical necessity for any airline to program a practical necessity for any airline to compete effectively. compete effectively.

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The U.S. Airline IndustryThe U.S. Airline IndustryYield Management SystemsYield Management Systems

Yield management systems are designed Yield management systems are designed to maximize the amount of revenue that an to maximize the amount of revenue that an airline generates on each flight. airline generates on each flight.

Yield management systems are the Yield management systems are the reason that an airfare you’re quoted over reason that an airfare you’re quoted over the phone can be $100 higher when you the phone can be $100 higher when you call back an hour later. call back an hour later.

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The U.S. Airline IndustryThe U.S. Airline IndustryYield Management SystemsYield Management Systems

Figure 2.11 Figure 2.11 The Payoff From Yield Management The Payoff From Yield Management page 61page 61

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Disintermediating the Travel AgentDisintermediating the Travel Agent Airlines realized that agents Airlines realized that agents

commissions were their third-highest commissions were their third-highest cost after payroll and fuel.cost after payroll and fuel.

They decided to first reduce and then They decided to first reduce and then eliminate travel agents commissions.eliminate travel agents commissions.

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Disintermediating the Travel AgentDisintermediating the Travel Agent What airlines did?What airlines did?

Offered up to 1000 frequent flyers miles to Offered up to 1000 frequent flyers miles to travelers that use the web for reservation.travelers that use the web for reservation.

Toll free 800 numbers for frequent flyers Toll free 800 numbers for frequent flyers elite groups with shorter waiting times.elite groups with shorter waiting times.

Introduced e-tickets.Introduced e-tickets.

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Disintermediating the Travel AgentDisintermediating the Travel Agent Expert surveys have Expert surveys have

estimated that the estimated that the number of travel agents number of travel agents in the U.S. will be in the U.S. will be sharply reduced as a sharply reduced as a result of result of disintermediation.disintermediation.

Team Work

Helping the Little Guy Compete

(p. 62)

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Utilizing Emerging TechnologiesUtilizing Emerging Technologies

Permission marketingPermission marketing - when you have - when you have given a merchant your permission to send given a merchant your permission to send you special offers. you special offers.

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Summing It UpSumming It Up

Important considerations you should keep in Important considerations you should keep in mind as you work to bring an IT competitive mind as you work to bring an IT competitive advantage to your organization include:advantage to your organization include: Be efficient and effective.Be efficient and effective. Competition is all around you.Competition is all around you. Push the state-of-the-art.Push the state-of-the-art. IT competitive advantages are only temporary.IT competitive advantages are only temporary.

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Summing It UpSumming It Up

On Your Own

Building on the State of the Art

(p. 64)

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Closing Case Study OneClosing Case Study OneGM Tries to Lure Customers with OnStarGM Tries to Lure Customers with OnStar

GM added an in-car cellular service, GM added an in-car cellular service, OnStar, to update its image and increase OnStar, to update its image and increase sales.sales.

Did the OnStar system give GM a Did the OnStar system give GM a competitive advantage?competitive advantage?

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Closing Case Study TwoClosing Case Study TwoSpeedpass: Throw Away Your Plastic?Speedpass: Throw Away Your Plastic?

Speedpass offers a short plastic cylinder, called Speedpass offers a short plastic cylinder, called a Key Tag, that transfers customer billing a Key Tag, that transfers customer billing information automatically.information automatically.

Speedpass is an alternative to a credit card.Speedpass is an alternative to a credit card.

How is Speedpass an example of a first mover?How is Speedpass an example of a first mover?

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Summary Summary Student Learning OutcomesStudent Learning Outcomes

1.1. Describe how the creative use of information Describe how the creative use of information technology can give an organization a technology can give an organization a competitive advantage.competitive advantage.

2.2. Demonstrate how to generate ideas for using Demonstrate how to generate ideas for using information technology in innovative ways, and information technology in innovative ways, and apply tools that can help.apply tools that can help.

3.3. Describe how e-commerce technologies “up Describe how e-commerce technologies “up the stakes” and give organizations even more the stakes” and give organizations even more opportunities.opportunities.

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Summary Summary Student Learning OutcomesStudent Learning Outcomes

4.4. Summarize how one specific industry Summarize how one specific industry has consistently used information has consistently used information technology for competitive advantage.technology for competitive advantage.

5.5. Describe how to use information Describe how to use information technology for competitive advantage in technology for competitive advantage in an organization.an organization.

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Summary Summary Assignments & ExercisesAssignments & Exercises

1.1. Evaluating telemedicineEvaluating telemedicine2.2. Comparing parcel delivery servicesComparing parcel delivery services3.3. Disintermediation in the travel agent Disintermediation in the travel agent

industryindustry

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Real Hot Electronic CommerceReal Hot Electronic CommerceOrdering Products On The InternetOrdering Products On The Internet

Books and musicBooks and music Clothing and accessoriesClothing and accessories Internet auction housesInternet auction houses AutomobilesAutomobiles

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Auction housesAuction houses Books and musicBooks and music Clothing and accessoriesClothing and accessories ComputersComputers AutomobilesAutomobiles

Visit the Web to Learn MoreVisit the Web to Learn Morewww.mcgrawhill.ca/college/haagwww.mcgrawhill.ca/college/haag

Chapter 2 STRATEGIC AND COMPETITIVE OPPORTUNITIES Using IT for Competitive Advantage

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