Competitve Advantage of IT

2 - 1Copyright © 2006, The McGraw-Hill Companies, Inc. All rights reserved.

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• Technology is no longer an afterthought in business strategy, but the cause and driver

• IT can change the way businesses compete

• A strategic information system is any information system that uses IT to help an organization…

• Gain a competitive advantage

• Reduce a competitive disadvantage

• Or meet other strategic enterprise objectives

Strategic ITStrategic IT


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• Does IT matter?

• No• Nicholas Carr argues that IT is infrastructure,

much like electricity• Too commonplace to offer a competitive

advantage

• Yes• It is not just networks and computers• The important part is the software and information

and how IT is used

Case 1: GE, Dell, Intel, GM and OthersCase 1: GE, Dell, Intel, GM and Others


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• Do you agree with the argument made by Nicholas Carr to support his position that IT no longer gives companies a competitive advantage?

• Do you agree with the argument made in support of the competitive advantage that IT can provide to a business?

• What are several ways that IT could provide competitive advantage to a business?

Case Study QuestionsCase Study Questions


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• To succeed, a business must develop strategies to counter these forces…

• Rivalry of competitors within its industry

• New entrants into an industry and its markets

• Substitute products that may capture market share

• Bargaining power of customers

• Bargaining power of suppliers

Competitive ForcesCompetitive Forces


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Competitive Forces and StrategiesCompetitive Forces and Strategies


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• Cost Leadership

• Become low-cost producers

• Help suppliers or customers reduce costs

• Increase cost to competitors

• Example: Priceline uses online seller bidding so the buyer sets the price

• Differentiation Strategy

• Differentiate a firm’s products from its competitors’

• Focus on a particular segment or niche of market

• Example: Moen uses online customer design

Five Competitive StrategiesFive Competitive Strategies


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• Innovation Strategy

• Unique products, services, or markets

• Radical changes to business processes

• Example: Amazon’s online, full-service customer systems

• Growth Strategy

• Expand company’s capacity to produce

• Expand into global markets

• Diversify into new products or services

• Example: Wal-Mart’s merchandise ordering via global satellite tracking

Competitive Strategies (continued)Competitive Strategies (continued)


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• Alliance Strategy

• Establish linkages and alliances with customers, suppliers, competitors, consultants, and other companies

• Includes mergers, acquisitions, joint ventures, virtual companies

• Example: Wal-Mart uses automatic inventory replenishment by supplier

Competitive Strategies (continued)Competitive Strategies (continued)


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• These strategies are not mutually exclusive• Organizations use one, some, or all

• A given activity could fall into one or more categories of competitive strategy

• Not everything innovative serves to differentiate one organization from another• Likewise, not everything that differentiates

organizations is necessarily innovative

Using Competitive StrategiesUsing Competitive Strategies


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Ways to Implement Basic StrategiesWays to Implement Basic Strategies


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• Lock in Customers and Suppliers• Deter them from switching to competitors

• Build in Switching Costs• Make customers and suppliers dependent on

the use of innovative IS

• Erect Barriers to Entry• Discourage or delay other companies from

entering the market• Increase the technology or investment

needed to enter

Other Competitive StrategiesOther Competitive Strategies


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• Build Strategic IT Capabilities• Take advantage of strategic opportunities

when they arise• Improve efficiency of business practices

• Leverage Investment in IT• Develop products and service that would not

be possible without a strong IT capability



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• What is the business value in being customer-focused?• Keep customers loyal• Anticipate their future needs• Respond to customer concerns• Provide top-quality customer service

• Focus on customer value• Quality, not price, has become the primary

determinant of value• Consistently

Customer-Focused BusinessCustomer-Focused Business


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• Companies that consistently offer the best value from the customer’s perspective…

• Track individual preferences

• Keep up with market trends

• Supply products, services, and information anytime, anywhere

• Tailor customer services to the individual

• Use Customer Relationship Management (CRM) systems to focus on the customer

Providing Customer ValueProviding Customer Value


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Building Customer Value via the InternetBuilding Customer Value via the Internet


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• View the firm as a chain of basic activities that add value to its products and services• Primary processes directly relate to

manufacturing or delivering products

• Support processes help support the day-to-day running of the firm and indirectly contribute to products or services

• Use the value chain to highlight where competitive strategies will add the most value

The Value Chain and Strategic ISThe Value Chain and Strategic IS


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Using IS in the Value ChainUsing IS in the Value Chain


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• A company that emphasizes strategic business use of IT would use it to gain a competitive differentiation

• Products

• Services

• Capabilities

Strategic Uses of ITStrategic Uses of IT


Strategic Information SystemsStrategic Information Systems

Definition:

• Any kind of information system that uses information technology to help an organization gain a competitive advantage, reduce a competitive disadvantage, or meet other strategic enterprise objectives.


Competitive Strategy ExamplesCompetitive Strategy Examples



• Locking in customers or suppliers by building valuable new relationships with them and Lock out Competitors

• Building switching costs so a firm’s customers or suppliers are reluctant to pay the costs in time, money, effort, and inconvenience that it would take to switch to a company’s competitors.



• Raising barriers to entry that would discourage or delay other companies from entering a market, by increasing Investments in Technology required to compete.

• Leveraging investment in information technology by developing new products and services that would not be possible without a strong IT capability.


Advantage vs. NecessityAdvantage vs. Necessity

• Competitive Advantage – developing products, services, processes, or capabilities that give a company a superior business position relative to its competitors and other competitive forces

• Competitive Necessity – products, services, processes, or capabilities that are necessary simply to compete and do business in an industry


Value Chain ExamplesValue Chain Examples

• Support Processes

• Career development intranet can help the human resources management function provide employees with professional development training programs.

• Computer-aided engineering and design extranets enable a company and its business partners to jointly design products and processes.



• Support Processes

• Extranets can dramatically improve procurement of resources by providing an online e-commerce website for a firm’s suppliers.



• Primary Processes

• Automated just-in-time warehousing systems to support inbound logistic processes involving storage of inventory, computer-aided flexible manufacturing (CAM) systems for manufacturing operations, and online point-of-sale and order processing systems to improve outbound logistics processes that process customer orders.



• Primary Processes

• Support of marketing and sales processes by developing an interactive target marketing capability on the Internet and its World Wide Web.

• Customer service can be dramatically improved by a co-ordinated and integrated customer relationship management system.


Business Process ReengineeringBusiness Process Reengineering

Definition:• Fundamental rethinking and radical

redesign of business processes to achieve dramatic improvements in cost, quality, speed, and service.

• Examples: VMI using Internet & Extranets• CRM using corporate Intranets• Cross functional ERP solution for

integrating manufacturing, distribution, finance and HR processes


Business Process ReengineeringBusiness Process Reengineering

The Role of Information Technology• Information technology plays a major

role in reengineering business processes. The speed, information processing capabilities and connectivity of computers and Internet technologies can substantially increase the efficiency of business processes, as well as communication and collaboration among the people responsible for their operation and management.


BPR vs. Business ImprovementBPR vs. Business Improvement


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• IT plays a major role in reengineering most business processes

• Can substantially increase process efficiencies

• Improves communication

• Facilitates collaboration

The Role of Information TechnologyThe Role of Information Technology


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• Many processes are reengineered with…

• Enterprise resource planning software

• Web-enabled electronic business and commerce systems

A Cross-Functional ProcessA Cross-Functional Process


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• IT that supports this process…

• CRM systems using intranets and the Internet

• Supplier-managed inventory systems using the Internet and extranets

• Cross-functional ERP software to integrate manufacturing, distribution, finance, and human resource processes

• Customer-accessible e-commerce websites for order entry, status checking, payment, and service

• Customer, product, and order status databases accessed via intranets and extranets

Reengineering Order ManagementReengineering Order Management


Cross-Functional ProcessesCross-Functional Processes

PPT Slides by Dr. Craig Tyran & Kraig Pencil

B. Role of Information Technology (IT)

1. Conception of information technology – and status – has evolved

1950s 2000s

Number Crunching

Report Generation

Decision Support

Strategic Weapon


B. Role of Information Technology (cont.)

2. A key goal for business (and MIS 320)• Learn to recognize and identify opportunities

for strategic applications of IT

3. How to do this???• Combine

• Strategy concepts• Business knowledge• IS knowledge

Multiple perspectives are required


C. Competition and Strategy1. Positioning is key

• Competition is fierce

• Can’t be “all things to all people”

• To survive, organizations adopt a specific “strategy”

2. Ways to gain competitive advantage: Examples• “Do it cheaper … or do it better”

3. Examples of business strategy• Lower Cost

• Cost efficiency, lower prices

• Differentiation• Higher quality, faster, unique product/service


Value Chain Activities

The Value Chain includes nine common categories of organizational “activities”


E. IS and the Value Chain (cont.)

3. Value chain: Linkages• Internal linkage: Information/goods shared across

activities within one firm • External linkage: Information/goods shared across

activities between different firms

• “Linkages” are defined by• VC activities involved• Information exchanged

• Examples of linkages: see figures


Internal Linkages: Examples

A. Sales sends production request to Production Dept

(“Operations” activity)

B. Production Dept (“Operations” activity) sends raw materials request to Warehouse

(“Inbound Logistics” activity)


External Linkages: ExamplesSupplier

Desk Chair, Inc. (DCI)

Corporate Buyer

B. Supplier’s Outbound Logistics activity sends shipment invoice (and

shipment) to DCI’s Inbound Logistics activity

C. DCI’s Marketing/Sales activity sends marketing

and sales related information to Buyer’s Procurement activity

A. DCI’s Procurement activity sends purchase

order to Supplier’s Marketing/Sales activity


IS & Value Chain Analysis: Amazon – a Value-Added Activity

• Problem: How to encourage follow-up purchases? How to target ads to the needs/wants of the customer?

• Solution: Add value to Marketing activities through data mining. “Customers who have purchased ABC also enjoy XYZ.” Data mining can reveal patterns, such as what products certain types of consumers might be interested in.


InboundLogistics

Production OutboundLogistics

Marketing/Sales Service

IS & Value Chain Analysis: Talbot Ties – New Live LinkagesProblem: Sales people do not know inventory status and therefore cannot guarantee delivery on time.

Solution: Add value by creating a new linkage between Sales and Warehousing.

Sales activities: In-stock guarantee: • Support better information on what products are available for the

customer • How? Live linkage between Sales and Warehousing.

Request Inventory Status

Send Inventory Status

ProductDatabase

Field Rep


IS & Value Chain Analysis: Portland Pine Products – Redraw Linkages

Portland Pine Products

Customer

Linkage between Customer and PPP for orders was a critical linkage. Problem: Time wasted via “back and

forth” flows. (dotted arrows)

New approach: Eliminate the bottle neck by using IT to empower

the Warehouse to accept/process orders.

(solid arrows)

Problem: Paperwork delaysSolution: Rapid order fulfillment by

rerouting and automating the linkage to/from external customer, bypassing Marketing


G. Strategic Information Systems1. Strategic information system (SIS)

– A system that significantly shapes or supports an organization’s strategy

– A famous SIS: Dell’s “sell-source-ship” approach to the PC retailing process

• Approach was enabled by IS applications


IT for Competitive Advantage: Dell Computer Example

• Traditional Retail Model: Buy-Hold-Sell– Buy: PC Retailer buys

from maker/distributor– Hold: PCs sit in

warehouse, sit on store shelves

– Sell: Sell PC

Note: Some PCs are sold – and some are not

• Direct Sell Model: Sell-Source-Ship– Sell: Customer buys a

PC online– Source: PC

components are purchased (sourced) & assembled using “Alliance Partners”

– Ship: PC is shipped to customerNote: No unsold PCs – only sold PCs


G. Strategic Information Systems (cont.)

2. Sustainability of Strategic Information Systems• Is a SIS going to provide

competitive advantage forever???

• Not likely Business landscape changes over time

• Need to reanalyze VC and competitive forces periodically Modify/enhance SIS,

develop new SIS, etc.

Management Information Systems, Sixth Edition 48

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

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



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


Achieving a Competitive Advantage (continued)


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


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

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



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


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


Initiative #4: Create New Products or Services (continued)

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



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

Initiative #5: Differentiate Products or Services (continued)



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


Initiative #6: Enhance Products or Services (continued)


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


Initiative #7: Establish Alliances (continued)


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

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)



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


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


Creating an SIS (continued)


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


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


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


JetBlue: A Success Story (continued)


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

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



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)

Away from Tradition (continued)

• Uses biometrics for authentication and authorization

• Implemented a paperless frequent flier program



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


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%


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


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


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


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


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


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


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

Competitve Advantage of IT

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