Chapter 12
Information Systems
for
Strategic Advantage
Alexander Hong
An Advanced Chapter
Focus at this point in the course on the basic
competitive concepts and we will revisit the
more advanced topics later in the quarter.
Pay particular attention to the contents of the
slides that are emphasized in this lecture.
Chapter Objectives
1. Understand options for competitive strategies and
be able to explain how they can be used to confront
competitive forces.
2. Understand how information systems support the
major business strategies of a business and be able
to provide examples of how information technology
can implement these roles and gain and sustain a
competitive advantage.
3. Be able to provide examples of how information
technology can break time, geographic, cost, and
structural barriers in business.
Chapter Objectives
4. Understand the importance of business process
reengineering relative to the strategic use of IT.
5. Understand how total quality management (TQM)
differs from business process reengineering in its
relationship with information technology.
6. Understand how information technology can be used
to help a company be an agile competitor, or to form
a virtual company to meet strategic business
opportunities.
7. Start to better understand the strategic uses of
Internet technologies in business.
Other Student Presentations
Michael Porter and Porter’s Models - Scarlet Grant
Porter Competitive Model - Victoria Santiago
Fundamentals of Strategic Advantage
Information technology that gives a company
certain advantages over a competitor with
developments in products, services and/or
capabilities.
Strategic IS
Information Systems can be used to develop
products and/or services and capabilities.
Information Systems can be any kind of system
that:
1. Helps to gain a competitive advantage.
2. Reduces a competitor’s advantage
3. Meets other strategic objectives.
IT Significance
Information Technology can change the way
that an organization (business or public sector)
competes.
• As the foundation for organizational renewal.
• As a necessary investment that should help
achieve and sustain strategic objectives.
• As an increasingly important communication
network.
Strategic Advantage
IT has become a strategic necessity. Believe it,
act on it, or become a footnote in history.
James Champy
1996
At least do an objective assessment of the
potential of IT both as a company resource and
the likelihood of it being used against you by a
competitor.
Jack Callon
2000
Competitive Strategy Concepts
• Cost Leadership Strategy
• Differentiation Strategy
• Innovation Strategy
• Growth Strategies
• Alliance Strategies
IT role relative to each of these strategies?
Strategic Roles For Information Systems
Specific Examples:
• Lower Costs
• Differentiate
• Innovate
• Promote Growth
• Develop Alliances
• Improve Quality and Efficiency
• Build an IT Platform
• Other Strategies
Breaking Business Barriers
o Time Barriers
Toyota Motor Corp.
o Geographic Barriers
Citibank, Mobil Oil
o Cost Barriers
Hewlett-Packard Co.
o Structural Barriers
Miller Brewing and Reynolds Metals
Strategic Applications
Progression of Information Technology within an
enterprise.
• Level 1: Strategic
• Level 2: Offensive
• Level 3: Defensive
• Level 4: Cost-Justified
• Level 5: Controlled
Chapter Value
• IT and IS can and often will be necessary to
maintain a competitive edge in the business world.
• Among the applications of these information
technologies are improving business quality,
creating a virtual company, and building
knowledge-creating systems.
Possible Exam Questions
• Identify several basic competitive strategies
and explain how they can be used to
confront the competitive forces faced by a
business.
• Give examples of how information
technology can break time, geographic, cost
and structural barriers in business.
Customer connectivity / competition / technology
External Drivers
Using the Internet Strategically
HIGH
LOW
Global Market
Penetration
Product and Service
Transformation
Cost and
Efficiency
Improvements
Performance
Improvement in
Business Effectiveness
collaboration / information and applications
requirements / cost containment
Internal Drivers
HIGH
Michael E. Porter
Mr. Competition
and
The Father of Multiple Models
(Frequently used in MBA and undergraduate business courses)
By Scarlet Grant
Michael E. Porter - The Man
C. Roland Christensen Professor of Business
Administration at the Harvard Graduate Business School
Has served as a consultant on competitive strategy to
many leading U.S. and international companies.
Has created workshops for newly appointed chief executive
officers of billion dollar corporations.
World wide speaker on competitive strategy and
international competitiveness.
Serves as an advisor to governments both local and
national.
Author of 16 books and over 60 articles on competitiveness.
Some Notable Quotes
Awareness of competitive forces can
help a company stake out a position
in its industry that is less vulnerable
to attack.
Michael E. Porter
A nation’s competitiveness depends
on the capacity of its industry to
innovate and upgrade.
Michael E. Porter
His three models are:
1. The Porter Competitive Model
2. The Value Chain
3. The Diamond of National Advantage **
** will not be used in this course
The Point Being . . .
Porter has focused on the factors that are
critical for a company to compete within a
specific industry through the use of the
Competitive Model and Value Chain.
He also led a study that produced the Diamond
of National Advantage that focuses on the role
of the nation as the home base for companies
that have become dominant in a specific
industry on a global basis.
Diamond of National Advantage
Chance
Firm Strategy,
Structure and
Rivalry
Factor
Demand
Conditions
Conditions
Related and
Supporting
Industries
Government
SUPPORT ACTIVITIES
Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
PRIMARY ACTIVITIES
SERVICE
Value Chain
While the Competitive Model deals with the
environment within which a company
competes, the Value Chain addresses the flow
of a product through the organization.
It starts with the original idea in research and
tracks its progress all the way to the
customers.
Competitive Model
• What is driving competition in my current or
future industry?
• What are my current or future competitors likely
to do and how will we respond?
• How can we best posture ourselves to achieve
and sustain a competitive advantage?
Use of Porter’s Competitive Model
• Breaks an industry into logical parts, analyzes
them and puts them back together. (just like an
engineer would do)
• Avoids viewing the industry too narrowly.
• Provides understanding of the structure of an
industry’s business environment and of
competitive threats within and among industries.
Possible Quiz Questions
1. What is the objective in using the Porter
Competitive Model?
2. Why do some people conclude that the Porter
Competitive Model is no longer a valid tool?
Porter Competitive Model
Was not developed as an Information
Systems tool.
Was developed for use by people that run
businesses and for those that deal with developing
strategic plans for businesses.
Can Information Systems:
1. Build barriers to prevent a company from entering
an industry?
2. Build in costs that would make it difficult for a
customer to switch to another supplier?
3. Change the basis for competition within the
industry?
4. Change the balance of power in the relationship
that a company has with customers or suppliers?
5. Provide the basis for new products and services,
new markets or other new business opportunities
Porter Competitive Model
By Victoria Santiago
Presentation Objective
1. To clearly understand how the Porter Competitive
Model will be used in Section I of the Business
Analysis Paper.
2. To remind you that it breaks an industry into logical
parts, analyzes them to understand the competitive
environment for a specific industry and puts them back
together.
Porter Competitive Model
(Identify Specific Market Being Evaluated)
Potential
New Entrants
Bargaining
Power
of Suppliers
Intra-Industry Rivalry
Strategic Business Unit
Substitute
Products
and Services
Bargaining
Power of Buyers
Strategy Options
According to Michael Porter
Primary Strategies
1. Differentiation
2. Least Cost
Supporting Strategies
1. Innovation
2. Growth
3. Alliance
Porter Competitive Model
Education Industry - Universities
U.S. Market
Potential
New Entrants
Bargaining
Power
of Suppliers
• Faculty
• Staff
• Equipment and
Service Suppliers
• Alumni
• Foundations
• Business
• Government
• Foreign Universities
• Shift in Strategy by Universities
or Companies
Intra-Industry Rivalry
SBU: UCSC
Rivals: UC campuses, CSU,
Community Colleges, etc.
Substitute
Products
and Services
• Internet Distance Learning
• Books and Videotapes
• Computer-Based Training
• Company Education Programs
Bargaining
Power of Buyers
• Students
• Parents
• Business
• Employers
• Legislators
U.S. University Industry Structure
Intra-Industry Rivalry:
Low and/or limited growth
rate
Undifferentiated product
Slow to change
Competition for funding
and contributions
Bargaining Power of Buyers:
Price/cost pressures
Increased mobility
School while working
Bargaining Power of Suppliers:
Cost Pressures
Bid Processes Are Common
Unions and Tenure
Barriers to Entry:
Low entry barriers
High exit barriers
Substitutes:
Easy to substitute
Self-study success
Internet-based program growth
Possible Exam Questions
1. Explain the objective for using the Porter
Competition model and respond to the criticism that it
is no longer a valid tool.
2. Identify and explain the five competitive strategies
based on Porter’s evaluation approach.
How Does IS help?
• Lower operational costs.
• Help to differentiation the product or service.
• Help to achieve market specialization.
• Strengthen the ability to build alliances.
• Build inter-organizational systems. (E-business)
Risks of Strategic IS
• Needs to enable the company’s ability to achieve
and sustain a competitive advantage.
• Can get “IT-out gunned” by a larger competitor.
• Can shift the balance of competition.
• Can become a competitive necessity instead of
sustaining a competitive advantage.
Porter Model Tips
1. To incorrectly define the industry can cause major
problems in doing Section I of the business analysis
paper.
2. You must identify the specific market being evaluated.
3. Your analysis company is the Strategic Business Unit.
4. Identify rivals by name for majors, by category for minor
rivals if needed to present the best possible profile of
rivals.
Porter Model
5. Be sure to address the power implications of both
customers and suppliers. Power buys them what?
6. Identify buyers and suppliers by categories versus
companies.
7. Summarize your Porter Model analysis.
Porter Competitive Model
Some additional perspective on the forces.
Competitive Analysis Factors
• Bargaining power of buyers.
• Bargaining power of suppliers.
• Threat of substitute products.
• Threat of new entrants.
• Expected traditional competition.
Reduce the Power of Buyers
• Choose a niche in which buyers are less powerful
and less numerous.
• Differentiate products and/or services to shift the
balance of power.
• Differentiate links that are truly uniquely valuable
to customers.
• Create switching costs.
Reduce the Power of Suppliers
• Use substitute products.
• Develop multiple alliances.
• Vertically integration, or expand backwards
in industry.
• Minimize the cost of the vendors products.
Reduce the Potential for Substitute Products
• Differentiate the product.
• Differentiate the distribution channel.
• Achieve low cost leadership.
Reduce the Threat of New Entrants
• Economies of scale.
• Product differentiation.
• Large capital requirements.
• Access to distribution channels.
• Government policy.
• Expected reaction of existing firms.
• Mandatory information systems capabilities.
Diamond of National Advantage
The playing field each nation establishes and
operates plays a significant role for its homebased companies to become a dominant
competitor on a global basis.
Diamond of National Advantage
Chance
Firm Strategy,
Structure and
Rivalry
Factor
Demand
Conditions
Conditions
Related and
Supporting
Industries
Government
Attributes of the Diamond Model
Factor Conditions
The nation’s position in factors of production necessary to compete in a given
industry
Demand Conditions
The nature of home-market demand for the industries that are internationally
competitive.
Related and Supporting Industries
The presence or absence in the nation of supplier industries and other related
industries that are internationally competitive
Firm Strategy, Structure and Rivalry
The conditions in the nation governing how companies are created,
organized and managed, as well as the nature of domestic rivalry.
Porter Value Chain
Porter Value Chain
Basic Concept:
1. Deals with core business processes.
2. Enables tracking a new idea to create a new product
and/or service from origination all the way to customer
satisfaction.
Manufacturing Industry Value Chain
Research
and
Development
Production
Engineering
and
Manufacturing
Sales
Marketing
and
Distribution
Service
Retail Industry Value Chain
Partnering
with
Vendor
Managing
Buying
Inventory
Distributing Operating
Inventory
Stores
Marketing
and
Selling
SUPPORT ACTIVITIES
Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALES
PRIMARY ACTIVITIES
SERVICE
Property and Casualty Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy
HUMAN
RESOURCE
MANAGEMENT
-Regulatory Compliance
- Accounting
Agent
Training
Actuary
Training
Actuarial Methods
Investment
Practices
TECHNOLOGY
DEVELOPMENT
- Legal
Product
Development
Market Research
Claims
Training
Claims
Procedures
I/T
Communications
PROCUREMENT
•Policy Rating
• Underwriting
• Investment
•Independent
Agent Network
•Billing and
Collections
•Policy Sales
•Policy Renewal
•Agent Management
•Advertising
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
•Claims Settlement
•Loss Control
SERVICE
Technologies in the Value Chain
Information System Technology
Planning and Budgeting Technology
Office Technology
FIRM
INFRASTRUCTURE
Training Technology
Motivation Research
Information Technology
HUMAN
RESOURCE
MANAGEMENT
Product Technology
Computer-Aided Design
Pilot Plant Technology
TECHNOLOGY
DEVELOPMENT
Software Development Tools
Information Systems Technology
Information Systems Technology
Communication System Technology
Transportation System Technology
PROCUREMENT
•Transportation
Technology
•Material Handling
Technology
•Storage and
Preservation
Technology
•Communication
System Technology
•Testing Technology
•Information
Technology
INBOUND
LOGISTICS
•Basic Process
Technology
•Materials
Technology
•Machine Tools
Technology
•Materials Handling
Technology
•Packaging
Technology
•Testing Technology
•I/nformation Tech.
OPERATIONS
•Transportation
Technology
•Material Handling
Technology
•Packaging
Technology
•Communications
Technology
•Information
Technology
•Multi-Media
Technology
•Communication
Technology
•Information
Technology
•Diagnostic and
Testing Technology
•Communications
Technology
•Information
Technology
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
Key Things to Remember
1. The ultimate objective is value to customer.
2. As a new product and/or services moves through the
value chain, it is important to maximize value-add
activities and minimize things that do not add value to
customer.
3. Functional departments must be sure to emphasize the
ultimate goal of value to customer and not do things
that seem to make them look good but contradicts the
ultimate objective.
4. Time has become a major competitive factor so there
are those that say the value chain doesn’t make sense.
Value to You
In both Section I and II of the business analysis paper
there is a need to address the importance of IT/IS.
Section I deals with the significance of IT/IS to the
industry and Section II deals with how important it is
to the company being evaluated.
The use of the appropriate value chain is a good way to
systematically summarize this IT/IS importance.
For Instance:
How important is IT/IS to the Semiconductor
Industry and Intel Corporation?
Research
and
Development
Production
Engineering
and
Manufacturing
Sales
and
Marketing
Distribution
Can Intel do basic research, develop products,
manufacture products, do market analysis, sell
products and service customers without the use of
IT/IS?
Value
Service
to
Customer
Summary
With the focus on core business processes, the importance of
business process reengineering and the complexity and time
pressures faced by most businesses leads me to conclude
that the Porter Value Chain is a good business management
tool.
Despite the fact that the relay team concept suggested by
the value chain is frequently not valid in today’s business
environment.
Two Possible Quiz Questions
1. What is good about the Value Chain model and why
do some people claim that it is outdated?
2. What four things are important to remember in
using the value chain?
Company Examples of Strategic IS
These are a starting point but are much too
general. You can do better than this by final
exam time.
Innovation: Merrill Lynch
Cash Management Account to achieve market
leadership.
Figure 12.4 IT Support of Strategies
Pay attention to the examples of IT support of
the basic and supporting strategies.
Characteristics of a Virtual Company
Adaptability
Borderless
Excellence
Six
Characteristics
of Virtual
Companies
Technology
Trust-Based
Opportunism
A Virtual Business
A business with partners that are treated as if they
were departments of the company.
If you want to earn higher financial returns,
shouldn’t you be more selective and put your
money into activities that add value to customers
and not just into activities that need to be done.
This also results in fewer things to manage and
fewer things that can go wrong.
Improving Business Processes with IT
Could be the basis for an entire course.
Forces rethinking which business processes are really
important, necessary and contribute value to customers.
Eliminates unnecessary steps, activities and even processes.
Streamlines processes with gains in productivity while
reducing time.
Breaks down departmental barriers.
Improves communication and access to information.
Business Process Reengineering
Business Improvement
Reengineering
Definition
Incremental improvement
Radical redesign
Target
Any process
Core bus. Processes
Primary
Enablers
IT and simplifications
It and organization
redesign
Payback
10-50% improvement
10 fold or better
Changes
Some jobs, more efficient
Big job cuts, new
jobs, major redesign
Risk
Low
High (not really)
IT Support of Reengineering
Prospect tracking and management systems using intranets.
Portable sales force automation systems tied into the Internets,
intranets and extranets.
Customers site networking for field and customer site
communications.
EDI and EFT between organizations. (E-Business)
Predictive models for continuous product replenishment.
Cross-functional informational systems.
Data warehouses.
Breaking Business Barriers
Time
Barriers
Geographic
Barriers
Breaking
Business
Barriers
with IT
Cost
Barriers
Structural
Barriers
Reach and Richness
Reach - The number of people receiving or
exchanging information.
Richness - The bandwidth (capacity)
customization and interactivity of information.
The ultimate example of probably the best way to
accomplish this is:
The Internet
A network of networks.
The connection to the world.
The most significant thing that has ever
happened to the business world.
How Businesses View and Employ
Information Technology
Level 1: Strategic
Level 2: Offensive
Levels
Toward
Use of IT
To Create
Competitive
Advantage
Level 3: Defensive
Level 4: Cost-Justified
Level 5: Controlled
TQM and Reengineering
Quality is defined as giving the customer, or the
next person in the process, a product or service
that meets their requirements and doing this in a
way to assure that the right tasks are done right
the first time.
Quality is conformance to customer wants,
needs and expectations at a price he or she is
willing to pay.
Reengineering takes a broader look at the logic
and necessity of the process.
Total Quality Management
How do you say to a long time, loyal,
hard working employee that quality
isn’t good enough?
Total Quality Management
1. We are good, but we must continue to
improve.
2. Individually and/or departmentally we may
be very good but we must be as good in the
total efforts of the entire organization.
What You’d Get From 99.9% Suppliers
• At Least 20,000 Wrong Drug Prescriptions Each Year.
• More than 15,000 Newborn Babies Dropped by Doctors
or Nurses Each Year.
• Unsafe Drinking Water at Least One Hour Each Month.
• No Telephone Service or Television Transmission for Nearly
Ten Minutes Each Week.
• Two Short or Long Landings at O’Hare Airport Each Day.
• Nearly 500 Incorrect Surgical Procedures Each Week.
• 2,000 Lost Articles of Mail Per Hour.
What You’d Get From Six Sigma Suppliers
• One Wrong Prescription in 25 Years.
• Three Newborn Babies Dropped by Doctors or Nurses in
100 Years.
• Unsafe Drinking Water One Second Every Sixteen Years.
• No Telephone Service or Television Transmission for Nearly
Six Seconds in 100 Years.
• One Short or Long Landing in Ten Years in all the Airports
in the U.S.
• One Incorrect Surgical Procedure in Twenty Years.
• Thirty-five Lost Articles of Mail Per Year.
Process and Cultural Change
1. Creating dissatisfaction with the current culture.
2. Training managers and employees in the tools and skills to
work and manage continued improvement.
3. Establishing strong communication to support the quality
effort.
4. Developing standards and measures to use as the basis for
management decision making.
5. Rewarding and recognizing quality-oriented performance.
Business Process Management
Process Control: Define ways to measure and manage
business process performance.
Improvement Plans: Identify and prioritize
opportunities for improving process performance.
Leadership and Participation
Leadership: define management’s role in sponsoring
change and focusing on achieving business success.
• Managing change
• Empowerment
• Employee development
Participation: address methods used to motivate and
involve all employees to contribute to business success.
A WIN - WIN PROPOSITION
DELIGHTED CUSTOMERS
SATISFIED
STOCKHOLDERS
ENHANCED
COMMUNITY
PROUD
EMPLOYEES
SUCCESSFUL
PARTNERS
Figure 16-5
Agile Competition
The Fundamental
Strategies of
Agile Competition
Key Factors for Sustaining Strategic Success
Foundation
Factors
(Infrastructure)
Environment
Management
Actions &
Strategies
(Leadership)
Performance
Firm
Key Terms
Agile Competitor
Breaking Business Barriers
Cost Barriers
Geographic Barriers
Structural Barriers
Time Barriers
Building a Strategic IT
Platform
Business Process Reengineering
Competitive Forces
Competitive Strategies
Creating Switching Costs
Developing a Strategic
Information Base
Improving Business Operations
Interorganizational Information
Systems
Knowledge-Creating Company
Knowledge-Management System
Leveraging Investment in IT
Locking in Customers and
Suppliers
New Economics of Information
Promoting Business Innovation
Raising Barriers to Entry
Strategic Business Use of the
Internet
Strategic Information Systems
Strategic Roles of Information
Systems
Sustaining Competitive Advantage
Total Quality Management
Value Chain
Virtual Company