Chapter 2
Information Technology’s Strategic
Importance
The Current Challenge
• Walter Wriston, former Chairman of
Citicorp, “The essence of an information
strategy is to turn the burden of
burgeoning business data into a bounty of
business opportunity. The business
organization has to be rebuilt around the
goal of managing information productively.
The object of the game is to get
information to the person or company that
needs and can use it in a timely way.”
Strategic Issues for Senior
Executives
1. Obtain or maintain competitive advantage
2. Use the Web to facilitate intra- and interorganizational linking
3. Enable decentralized operations with effective
central coordination
4. Develop flexible and responsive infrastructures
for the firm
5. Capitalize on fleeting but critical business
information
Time Criticality of Information
• Modern IT enables the creation of highly
decentralized operations that can rapidly
respond and exploit high value information that
is short lived
• These decentralized structures must be quickly
adaptable to shifting opportunities in a highly
competitive environment
• By enabling these agile operations, IT can be
expected to directly contribute to the bottom line
Strategic Information Systems
• These are information systems whose
unique functions or specific applications
shape an organization’s competitive
strategy and provide it with competitive
advantage
– These are internal or external systems
– These systems provide a firm with competitive
advantage
– Systems range from transaction processing
systems to decision-support systems
IS/IT for Competitive Advantage
• Competitive Advantage
– That value perceived by the customer that
makes the customer purchase your product
instead of your competitors
• Interorganizational systems
Visualizing Competitive Forces
• Michael Porter developed a model to help
visualize competition
• To gain a competitive edge within an
existing industry competitors must:
– Diminish customer and supplier leverage
– Lower the possibility of substitute products
entering the marketplace
– Discourage new market entrants
Porter’s Model of Industry
Competitive Forces
Your
Firm
Porter’s Model of Industry
Competitive Forces
Threat of
New Entrants
Your
Firm
Porter’s Model of Industry
Competitive Forces
Threat of
New Entrants
Bargaining Power
of Suppliers
Your
Firm
Porter’s Model of Industry
Competitive Forces
Threat of
New Entrants
Bargaining Power
of Suppliers
Your
Firm
Threat of
Substitute Products
or Services
Porter’s Model of Industry
Competitive Forces
Threat of
New Entrants
Bargaining Power
of Suppliers
Your
Firm
Bargaining Power
of Customers
Threat of
Substitute Products
or Services
Porter’s Model of Industry
Competitive Forces
Threat of
New Entrants
Bargaining Power
of Suppliers
Level of
Industry Rivalry
Your
Firm
Bargaining Power
of Customers
Threat of
Substitute Products
or Services
Porter’s Model of Competitive
Advantage Strategies
• Low cost/price efficiency
• Differentiation
• Special market niche/Innovation
Strategic Thrusts
• In 1988, Charles Wiseman extended
Porter’s CA strategies
• Wiseman created a theory based on five
thrusts/strategies:
– Differentiation
– Cost
– Innovation
– Growth
– Alliances
Strategic Roles of Information
Systems
• Improve Operational Efficiency
• Promote Business Innovation
• Build Strategic IT Resources ?????????
Strategic Roles for Information
Systems
• Create barriers to entry
– Impacts new entrants
• Lock In customers
– Impacts bargaining power of customers
• Lock in suppliers
– Impacts bargaining power of customers
• Create switching costs
Electronic Data
Interchange
• Supplier
– Decreases bargaining power of customers
– Makes it difficult for competitors
– Makes it more difficult to enter industry
• Customer
– Decreases bargaining power of suppliers
– Improves efficiency - lowers cost
Differentiation
• The firm’s products or services are
distinguished from competitors’ products
or services, or conversely a rival’s
differentiation is reduced
– For example, Automated Teller Machines
(ATMs) distinguish the services of some
financial institutions from others
Cost
• Advantage is attained either by reducing
costs to the firm, to its suppliers, or
customers, or by increasing costs incurred
by competing firms
– For example, advanced order-entry systems
or business-to-business e-commerce systems
reduce both suppliers’ and customers’
business costs
Innovation
• Introducing changes to the product or
process causes fundamental shifts in the
way the industry conducts its business
– Web-based trading was introduced by some
brokerage firms, and became widely offered
by others as the standard level of service
expected by customers began to include
Web-based access
Growth
• Advantage is secured by expansion,
forward or backward innovation, or by
diversification in product or services
– The Wall Street Journal and other national
newspapers used electronic transmission and
remote printing facilities to create a national
distribution, thus expanding the potential
market
Alliance
• Firms achieve advantage by establishing
agreements, forming joint ventures, or
making acquisitions
– Many national companies use joint ventures
for strategic thrusts. Even rivals join together
such as Microsoft and IBM when it serves a
mutual purpose
Time – a sixth strategy/thrust
• Competitive advantage is secured by rapid
response to changing market conditions or
by supplying a more timely flow of
products or services
– Electronic design automation tools, CAD/CAM
systems, and production logistics systems are
thrusts that increase manufacturing’s
response to the marketplace
New Economy Paradigms
• The Internet and the World Wide Web
have enabled firms to capture the
advantages of all six thrusts quickly
• The Internet has reshaped the competitive
landscape for business and industry
• The Internet has created a global
marketplace with increasing international
trade
Strategic Systems in Action
• Over the past two decades, information systems
have been used to create value in business.
Two industries, airlines and financial services,
created systems that have resulted in significant
competitive advantage to their owners.
• These systems have not been static, and their
evolution is impressive given the dramatic
changes in technology and the business
environment over time.
Airline Reservation Systems
• In the 1960s, American Airlines created
SABRE (Semi-Automated Business
Research Environment)
• Initially invested $350 million to create the
system
– Provides reservation services for airlines,
hotels, and rental cars
– Links travel agencies, private or corporate
travel systems, and Internet customers
SABRE Evolution
• AA continued to expand the system and
provide outsourcing reservation services
to competitors
– Integrated back office management for travel
agencies
– Added a yield-management system to
optimize fare structure and load factors
– An upgraded yield-management system in
1997 increased corporate profits by $200
million
Competitors
• United Airlines created “Apollo” in the
1970s to compete with SABRE
– Initial cost of $250 million
– 1987 spun off to UAL subsidiary COVIA Corp
– COVIA sold to partners in 1988, valuing the
company at $1 billion (renamed Galileo)
– Galileo’s IPO in 1997 valued the company at
$2.5 billion
– In 1999, Galileo earned $218 million on
revenues of $1.53 billion
Internet-Based Systems
• Alaska Air Group created ITMs (Instant Travel
Machines)
– These machines use a kiosk type interface to create
travel reservations in hotels, airports, and business
locations
– They bring the power of advanced reservations
systems to busy travelers in a convenient location
– Coupled with paperless ticketing (e-tickets), these
technologies are reducing business cost and
increasing customer access
Stock Brokerage Systems
• In 1977, Merrill Lynch introduced the CMA
(Cash Management Account)
– Combined checking accounts, debit cards,
and margin-based brokerage accounts into a
single entity
– Customers received a consolidated account
statement at the end of the month
– Cash was automatically swept into a money
market account
– By 1980, it served 186,000 accounts
CMA Evolution
• 1981 – CMA available nationwide
– 500,000 accounts
• 1982 – International CMA launched
• 1987 – $150 billion in assets under
management
– 1.3 million accounts
– Started ATM access via Visa Premier program
CMA Intellectual Property
• Merrill was granted US patent 4346442 in
August 1982
– This patent effectively allowed Merrill to stop
competition in unified accounts for 7 years
• During active development of CMA, the
Merrill Lynch technology budget was
estimated to be approx. $1.5 billion
Internet-Based Competitors
• The brokerage industry underwent
dramatic changes with widespread
Internet use
– Barriers to entry were removed as local office
infrastructure became less important to
investors
– Charles Schwab, E-Trade, Fidelity, and others
embraced Internet transactions to expand and
increase market share
Schwab.com Features
Strategic E-Business Systems
• Internet-based technologies can radically
reshape markets resulting in massive
realignment of customer and partner
relationships
– Airlines previously viewed travel agents as
their customers. Due to Web portals, they
increasingly view individual travelers as
customers, now that they have been given
direct access to booking and flight information
Where are the Opportunities
• Most commonly, opportunities present
themselves as product or service
offerings that differentiate themselves
from others through the application of IT
• Innovative use of technology in the right
application
– Lowers business costs
– Reduces time barriers
Importance of Technology
• Advanced technology shapes the products
and services of the future
• IT offers opportunities for innovative
organizations to increase their value
• Information is so fundamental to business
today, that small advances in information
management are magnified as these
increases are amplified across business
processes
The Time Dimension
• Time is an irreplaceable asset and source
of competitive advantage
• Information Technology and modern
telecommunications systems are well
suited to leveraging time as a strategic
thrust
• Just-in-time manufacturing (JIT) is a
common example
McDonnell Douglas Corp
• Implemented a JIT system for coordination
of work flow. The resulting system
required:
– 111 new programs
– Modifications to 97 other programs
– 1900 person hours of programming labor
– Meetings for project planning and execution
JIT Benefits at McDonnell
Douglas
Media Breaks
• Media breaks occur when information
goes from voice to paper, paper to digital
or other like transitions
– Media breaks require human intervention,
incur costs, risk errors, and take time
– Unified information systems eliminate media
breaks, decreasing cost in time and money
Strategic Value of Networks
• Offers significant reductions in time and
distance barriers
• Enhances business processes and
improve business efficiency
• Digital business information reduces
errors, lowers costs, and improves control
• Innovative applications of telecom and IT
can create new markets and expand
customer demand
Networking’s Strategic Value
The Strategist Looks Inward
• Strategic systems are conceived by first
analyzing the firm’s internal functions
– 85% of all e-business infrastructures are
patterned after non “online” legacies
• Firms commonly have an application
portfolio of hundreds to thousands of
programs
– Deciding which choices to automate requires
a keen understanding of the firm’s strategy,
competitors, and culture
External Strategic Thrusts
• How external factors create strategic
opportunities
• A more complicated set of questions
– Requires a more global view of the company
and its place in the industry (upper
management)
– Requires a well-grounded understanding of
technology and its strengths and limitations
Integrating the Strategic Vision
• Using a three dimensional model, all three
groups of strategic influences can be
represented
– Strategic Thrusts (Differentiation, Cost,
Innovation, Growth, Alliance, and Time)
– Competitive Groups (Suppliers, Competitors,
and Customers)
– Strategic Focus (Internal and External)
Integrated Model of Strategic Influences
Competitive Forces
Supplier
Customer Competitor
New
Entrant
Competitive Strategies
Differentiation
Cost
Innovation
Growth
Alliance
Other
Strategies
O
D
U P
P S T
Substitute
O = Offensive
D = Defensive
U = Use
P = Provision
P = Processing
S = Storage
T = Transmission
Value Chains for E-Business
• Modern e-business models operate in
nearly all the dimensions of the figure
– Use internal (example ERP) and external
(Web-based B2C and B2B)
– Exploit the six strategic thrusts
• Firms adopting e-business models
reconstruct their value chains around
powerful new information technology
Other Considerations
• Strategic information systems have
several common characteristics worth
noting:
– Organization and Environment
– Financial Implications
– Legal Considerations
Organization and Environment
• Strategic information systems alter the
market environment and create
fundamental changes in the field of
competition
• Competitors must adapt to the new
landscape or face disadvantage
• Survivors of this process re-establish an
equilibrium
Financial Implications
• Strategic information systems require
continued investments to sustain their
advantages
• First movers capture time at expense of
cost and potential failure
• Even established firms can be beaten
when technology appears that is so
disruptive, like the Internet, that no
advantage exists for the incumbents
Legal Considerations
• Resort to the courts can be a tool for
competitors to blunt the advantages
gained by technology
• Protection of intellectual property by
patents can also be a powerful tool to
further the advantages of an innovator by
denying the competition access to a newly
created market
Cautions
• Most strategic information systems are
evolutionary. They are based on preexisting systems within the firm
• Successful firms focus on the details of
success instead of a grand scheme.
Lasting competitive advantage is not found
in a few grand strokes
• The entire firm must be competitive across
all areas. IS alone can not deliver a “killer
app” that eliminates the competition
Summary
• Information technology is vital to the
continued success of modern firms
• Senior leadership understands that IT is a
potent source of competitive advantage
• They are prepared to invest in needed
applications and hardware, but expect a
substantial return on that investment