Competitive Advantage

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Competive Advantage

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Using Information Technology for Competitive AdvantageJolanta Zadlo & Gary GrayMIS 480 GROUP PRESENTATION IT and Competitive Advantage Sustainability of Competitive Advantage Case Studies Sabre GE ConclusionIT as a Competitive WeaponDefinition:Information TechnologyInformation Technology (IT) is the amalgamation of hardware, software, data, people and procedures that enables or inhibits business objectives depending on managements involvement in IT.Source: Why General Managers Need to Understand Information Technology, lecture notes, Lacity, 2002 How the information revolution affects competition Changes industry structure thereby altering the rules of competition Creates competitive advantage by giving new ways to outperform rivals Spawns whole new businessesSource: How information gives you competitive advantage, Porter and Millar, 1985 How IT creates a competitive advantage Differentiate a product or service Improve business processes (lower costs) Change a business structure Create new businessSource: IS 480 lecture notes, Lacity, 2002 Competitive advantage comes from critical differentiatorsSource: IS 480 lecture notes, Lacity, 2002CriticalCommoditiesCritical DifferentiatorsUseful CommoditiesEliminate/MigrateCriticalUseful Commodity DifferentiatorIT as a Competitive Weapon -SustainabilityVery few companies sustain their competitive edge over the long termSustainability occurs when it is difficult or impossible for the competition to respondIT as a Basis for Sustainable Competitive Advantage, Feeny & IvesIT as a Competitive Weapon -SustainabilityIT Resources-Easily Duplicated

Capital for investment

Proprietary technology

Technical Skills IT as a Basis for Sustainable Competitive Advantage, Feeny & IvesIT as a Competitive Weapon -SustainabilityIT Resources-NOT Easily Duplicated

Managerial IT Skills

Understanding business needs

Collaborating with colleagues

Managing market & technical risk of innovation IT as a Basis for Sustainable Competitive Advantage, Feeny & IvesIT as a Competitive Weapon -SustainabilitySustainable AdvantageLead TimeCompetitive AsymmetryPre-emption PotentialIT as a Basis for Sustainable Competitive Advantage, Feeny & IvesSupply System AnalysisCompetitor AnalysisProject Life-cycle AnalysisHow long before a competitor responds?Which competitors can/will respond?Will the response be effective?IT as a Competitive Weapon -Sustainability3 Pillars Supporting Sustainable Advantage

Lead Time Information leaks Followers take short cuts Followers implement better solutions

Competitor Analysis(Difficulty of competitor to respond or copy application)

Supply system analysis Market capture Switching costs Case studies selected:

AmericanAirlinesGeneral Electric Company

Sabre Holdings Corporation Current Company Background S&P Fortune 500 Company $2.1B in revenues in 2001

TSG The Sabre GroupTraded on the NYSE 1996Current Price about $21 Headquarters Dallas/Fort Worth, TXSource: www.sabre.com

Sabre Holdings CorporationCurrent Company Background 7,000 employees in 45 countries Sabre connects more than 60,000travel agency locations worldwide, providing content for 400 airlines (complete flight data, seat maps, etc) , 55,000 hotel properties (room availability, type, price), 52 car rental companies, nine cruise lines, 33 railroads and 229 tour operators.Source: www.sabre.com

Sabre Holdings CorporationFinancial Data Revenues from operations declined 19% in 2001 due to 9/11 events and lower US and worldwide travel volumes, but were more than compensated for by revenue from outsourcing to EDS, profits did not fare as well.Source: Sabres 2001 Summary Annual Report

Sabre Holdings CorporationFinancial Picture Source: Sabres 2001 Summary Annual Report

Sabre Holdings CorporationInformation Technology Both Carol Kelly, Senior VP and CIO, and Craig Murphy, Senior VP and CTO report to the CEO

Sabre outsourced its mainframe and data center to EDS. However, Sabre has retained a sizeable investment in IT.Source: Interview of Jim Menge, VP Technology Sales, Sabre

Semi- Automatic Business Research EnvironmentWhat is SabreSource: Computerworld, Technology Takes Flight, Sep 2002 Source: Computerworld, Technology Takes Flight, 9/02 American Airlines developed Sabre to automate the process of reserving airline seats.

IT to Improve Business Processes:

American Airlines: improves a business process 1959 American Airlines (AA) and IBM sign a contract for the joint development of a real-time reservation system that combines in a centralized electronic unit, 2 basic reservation records the passenger name record (PNR) and the seat inventory. AA spends $150M on the development of the system. Sabre was based upon technology created by MIT for DOD.Source: Data Management, Sep 1981 & Computerworld Mar 1999

American Airlines: improves a business process AAs reservation process used a system based on computer cards and teletypes and required the efforts of 12 people, at least 15 steps and up to 3 hours to recorda roundtrip reservation. The error rate was 8%.

Sabre reduced costs and the error rate. Source: www.sabre.com

1960 American Airlines (AA) installed the first Sabre system, a computer reservation system (CRS). Represented state-of-the-art technology and processed 84,000 calls per day. Research, development and installation cost $40 million with an investment of 400 man-years of effort.Source: www.sabre.com

American Airlines: improves a business process

1964 AA completes cutover to Sabre with a coast to coast network in the US. Sabre is the largest, private real-time data processing system.Source: www.sabre.com

American Airlines: improves a business process Competitive Edge Competitive advantage from process changeSource: www.sabre.com

Competitive Edge AA saved 30% of its investment in staff alone Sabre delivers an error rate of less than 1% Sabre creates a competitive edge that lasts for 5 to 7 yearsSource: www.sabre.com

Competitive Edge Other CRS providers today: Apollo rolled out by United in 1976 Worldspan Delta, Northwest and TWA Amadeus largest foreign owned CRS Sabre continues as the industry leader today Worldspan is the only airline owned CRSSource: www.sabre.com and BTMC records

Sabre System History 1970s 1972 Sabre system upgraded to IBM 360s 1976 Sabre system first installation in a travel agency by year end 130 locations and captured about 86% of the marketUnited Airlines introduces Apollo

1978 Sabre stores 1M faresSource: www.sabre.com

Sabre System History 1980s 1981 Sabre has a slight market share advantage over Apollo The competitive edge has all but disappeared 1981 AA introduces the first airline frequent flyer program 1984 Sabre introduces low-fare search engine a service unmatched in the industrySources: Business Week, Aug 1982, Direct Marketing, Jul 1983 and www.sabre.com

Sabre System History 1980s 1985 AA allows travel agencies to use personal computers to tap into the Sabre system via computer online services to access airline, hotel and car rental reservations 1986 AA/Sabre installs the industrys first automated yield management system 1988 Sabre system stores 36 million fares Source: www.sabre.com

Sabre System History 1980s 1987 With airlines in their 8th year of deregulation, information and transaction processing has become more profitable than selling seats. AAs Sabre System produced pretax margins of 30% vs. 5.2% percent from tickets.Source: Business Week, 1987

Sabre System History 1980s 1988 Sabre system stores 36 million fares 1989 A computer foul-up shut down AAs Sabre ticketing system for 12 hours, apparently the result of a glitch written into the system. The system failure left 14,000 travel agencies and a large part of AA without flight information.Lesson ?Sources: New York Times and Business Week, 1989

Sabre System History 1990s 1995 Sabre begins to prepare for Y2K software is distributed to 40,000 travel agents in 1998. Y2K costs estimated at $78M. 1996 Sabre names its first CIOSource: www.sabre.com & Computerworld, May 1996 and Computerworld, Mar 1998

The Web Threat Airlines begin to focus on the Web as a means to further reduce their distribution costsSource: www.sabre.com

A New Way to Cut Costs 1995 AA and all major US carriers reduce travel agency commissions on domestic flights. Commission is capped at $50. Additional reductions are made in 1997 (% decreased from 10% to 8%), 1998 (international commissions capped at $100), 1999 (% decreased to 5%), 2001 (domestic caps reduced to $20) and 2002 (commissions eliminated)

Source: www.sabre.com and BTMC records

Sabre System History 1990s 1996 Sabre becomes a separate subsidiary of AMR and AMR releases 18% to be publicly traded (total spin-off in 2000)Source: www.sabre.com

Sabre System History 1990s 1996 Travelocity.com, currently the industrys leading online consumer travel website is launched.

Source: www.sabre.com

Sabre System History 1990s By 1998 Sabre had evolved into a global distribution system (GDS) for travel reservations connecting more than 30,000 travel agents and 3 million online customers with 400 airlines, 50 car rental companies, 35,000 hotels and dozens of railways, tour companies and cruise lines. About 1% of all airline tickets are purchased on the web in early 1998. Source: Computerworld,