Chapter 3 Effects of IT on Strategy and Competition

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Chapter I & 1:
The Information Systems
Strategy Triangle
Jason C. H. Chen, Ph.D.
Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
MIS
• Management
• Information
• Systems
Which component is
mostly important?
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INTRODUCTION
• Shouldn’t managers rely on experts when it comes
to making the decisions on IS for their
organizations?
– Managers today need to know about their
organization’s capabilities and uses of information as
much as they need to understand how to obtain and
budget financial resources.
– A manager who does not understand the basics of
managing and using information cannot expect to be
successful in today’s business environment.
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Figure I.1 - Reasons why business managers should
participate in information systems decisions
Reasons:
•IS must be managed as a critical resource
•IS enables change in the way people work
together
•IS integrates with almost every aspect of
business IS enables business opportunities and
new strategies
•IS can be used to combat business
challenges from competitors
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A Business View of Why Managers
Need to Participate:
• IT accounts for more than 50% of the
capital-goods dollars spent in the US.
• US companies spend $7,500 per
employee on IT and use is growing
exponentially.
• As managers decide which activities
receive funding, it is essential that they
have a basic grounding in managing
and using IS.
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Information Ecology
•
•
Data = simple observations
______
Information = data endowed with
___________
relevance and purpose.
Knowledge = information that
• ___________
has been situationalized and
contextualized to provide value.
6
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Figure I.9 System Hierarchy
Oversee
Develop
System’s
Architecture
Design
Requirements
Management
and
Strategies
Structure
Information System
Infrastructure
People
Technology
Information
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
Process
7
7
Essential Value Propositions
for a Successful Company
• Business Model
• Core Competency
– Outsourcing
– Offshoring
• Execution
– Set corporate goals and get executive
sponsorship for the initiative
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WHY STRATEGY?
(DBQ)
• Why is it important for business
strategy to drive organizational
strategy and IT strategy? What
might happen if business strategy
were not the driver?
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Planning is everything ...
What are Two Major Outputs for an organization?
develop
Customers,
market,
competition
Vision
Mission
guide
Strategy
create
Tactic
Products,
Services
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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N
Real World Example
• During an ice storm in 2007 many airlines were
cancelling flights.
• Jet Blue waited to cancel flights and paid a heavy
price.
• Had to cancel 1,000 flights over 5 days.
• Up to 9 planes full of passengers were stranded for
up to 6 hours on the tarmac.
• An inadequate reservation system and shoestring
communication system was blamed for the
problems by Neelman.
• Changes had to be made.
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Why is it important for business strategy to drive
organizational strategy and IT strategy? What might happen if
business strategy were not the driver?
Typically, managers seem to think that changing or upgrading an information
system (or even a component of an information system) will only positively
impact a business. Quite the opposite, in fact, is true. By making changes in
organizational strategy or IT strategy first, the triangle is "out of balance"
and there will be consequences in the affected areas.
For example, building a virtual organization, but not changing the
business strategy to something like …
"insuring our people are
productive and have the widest possible work place opportunities"
can lead to significant disconnects between workers, their managers,
and their customers. And, worse, without supplying the virtual
worker with the appropriate information system (a computer at home,
a laptop, etc) will lead to a decrease in productivity by the virtual
worker, and a major disruption of business operations.
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Information System Strategy Triangle
Strategy Triangle
Business (Firm)
Strategy
Where is the business
going and why?
Needs and priorities
IS/IT Strategy
Organizational Strategy
What is required?
Infrastructure and
services
How it can be delivered?
1. Architecture/Infrastructure
2. MIS organization
3. Funding
4. Project Management
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Information System Strategy Triangle
• A business strategy is a well-articulated
vision of where the business seeks to go and
how it expects to get there.
• An organizational strategy is the
organization’s design, as well as the choices it
makes to define, set up, coordinate, and control
its work processes.
• IS strategy is the plan the organization uses in
providing information systems and services.
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The Information Systems Strategy
Triangle
• Successful firms’ business strategy drives
both their organizational and IS strategies:
• They must, therefore, seek to balance
business, organizational, and IS strategies
• IS Strategy is affected by the other strategies
a firm uses. Changes in IS strategy must be
accompanied by constant adjustments in the
other two
• IS strategy can have (sometimes
unintentional) consequences on business and
organizational strategies
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Example
• Give an example in which a company fails to
perform well because it does not align its three
strategies.
• Any?
– too much focus on IT
– used to be considered as a “hardware” company (PC,
DOS etc.)
– new division established in early 1990: GLOBAL
SERVICIE DIVISION
– it now becomes a “Service” corp. – “TOTAL
solution”
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Louis V. Gerstner, Jr. IBM former CEO and president (1992-2002)
Prior to joining IBM, Mr. Gerstner served for four years as chairman and
chief executive officer of RJR Nabisco, Inc. This was preceded by an 11year career at American Express Company, where he was president of the
parent company and chairman and CEO of its largest subsidiary, American
Express Travel Related Services Company. Prior to that, Mr. Gerstner was
a director of the management consulting firm of McKinsey & Co., Inc.,
which he joined in 1965.
In January 2003 he assumed the position of chairman of The Carlyle
Group, a global private equity firm located in Washington, DC.
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BRIEF OVERVIEW OF
BUSINESS STRATEGY
FRAMEWORKS
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Striving for Competitive Advantage
• Firm level: Industry & Competitive Analysis
Competitive Forces Model (discussed in chap.2)
Competitive Strategy
D’Aveni’s Hypercompetition Model (7s)
• Business level
Value-Chain Analysis
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PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
INDUSTRY
COMPETITORS
THE FIRM
•Selection of suppler
•Threat of backward
integration
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
•Cost-effectiveness
•Market access
•Differentiation of
product or service
Bargaining power
John WileyDr.
& Sons,
Dr. Chen,
Information
Theory and Practices
Chen,Inc.
The&Trends
of the
InformationSystems
Systems–Technology
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
20
TM -20
N
Business Strategy Frameworks
• Porter’s Generic Strategies Framework
(and its variants)
• Hypercompetition and the New 7-Ss
framework (D’Aveni)
N
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Figure 1.2: Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Lower Cost
Position
Industrywide
(Broad
Target)
Overall Cost
Leadership
Particular
Segment only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Differentiation
Focus
N
Competitive Mechanism
Dr. Chen,
John
The
Wiley
Trends
& Sons,
of the
Inc.
Information
& Dr. Chen,
Systems
Information
Technology
Systems – Theory and Practices
TM -22
22
Porter’s Competitive
Advantage Strategies
• Cost leadership: be the cheapest
• Differentiation: focus on making
your product and/or service stand out
for non-cost reasons
• Focus: occupy narrow market niche
where the products/services can stand
out by virtue of their cost leadership
or differentiation.
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Variants on Differentiation
Strategy
• Shareholder value model: create
advantage through the use of
knowledge and timing
• Unlimited resources model:
companies with a large resource can
sustain losses more easily than ones
with fewer resources (deep pocket
advantage)
N
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Profits relative to competitions (%)
Relationship between profits and time
of market introduction
300
250
200
150
100
50
0
-10
-5
0
5
10
Time of market introduction relative to competition (months)
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Business Strategies
and its Competitive Advantage
Lower Cost
Position
Industry
wide
(Broad
Target)
Particular
Segment
only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Cost
Leadership
Differentiation
Cost Focus
Differentiation
Focus
Industrial economy
Knowledge-based
economy
Competitive Mechanism
Dr. Chen,
John
The
Wiley
Trends
& Sons,
of the
Inc.
Information
& Dr. Chen,
Systems
Information
Technology
Systems – Theory and Practices
N
TM -26
26
Figure I.6 (2.4) Business Level: The Value Chain
(Value)
N
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Manufacturing Industry Value Chain
Product and Service Flow
Support Activities
Administrative and Other
Indirect Value Added
Research and
Development
Production
Engineering
and
Manufacturing
Sales and
Marketing
Distribution
Service
Primary Activities
N
Dr. Chen, The Trends of the Information Systems Technology
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The Value System:
Interconnecting relationships between organizations
Upstream
value
Firm
value
Downstream
value
29
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Hypercompetition and
the New 7-S’s framework (D’Aveni)
Every advantage is eroded.
• _______________________
• Sustaining an advantage uses too much time and
resources that can be a deadly distraction.
• The goal should be___________,
disruption not
_______________
sustainability of advantage.
• Initiatives are achieved with a series of small steps.
• Hypercompetiton occurs when technologies or
offerings are so new that standards and rules are
influx, resulting in competitive advantages that cannot
be sustained. It is characterized by intense and rapid
competitive moves, in which competitors must move
quickly to build new advantages and erode the
advantages of their rivals.
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D’Aveni’s Disruption and 7-S’s
Vision for Disruption
Old 7Ss:
structure, strategy,
system, style, skills,
staff, and superordinate goals.
Identifying and creating opportunities for
temporary advantage through understanding
• Stakeholder satisfaction
• Strategic Soothsaying
directed at identifying new ways to serve existing
customers better or new customers that are not
currently served by others
Market Disruption
Capability for Disruption
Sustaining momentum by developing
flexible capacities for
• Speed
• Surprise
That can be applied across actions to
Build temporary advantage
By Richard D’Aveni, professor of business strategy at Dartmouth College
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Tactics for Disruption
Seizing the initiative to gain advantage by
• Shifting the rules
• Signaling
• Simultaneous and sequential strategic
thrusts
With actions that shape, mold, or influence
the direction or nature of the competitor’s
response
N
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D’Aveni’s Hypercompetition Model (cont.)
• Hypercompetiton Strategies
for Disruption
• Hypercompetition Tactics
for Disruption
– 1. Stakeholder satisfaction is key
– 1. Shifting rules of the market
to winning each dynamic
to create tremendous
interaction with competitors
disruption for competitors.
– 2. Strategic soothsaying is the
– 2. Signals out to (a) make
process for seeking out new
announcements of strategic
knowledge for predicting what
intent to dominate a
customers will want in the future
marketplace, or (b) manipulate
the future moves of rivals.
– 3. Speed is crucial to take
advantage of opportunities and
– 3. Simultaneous or sequential
respond to counterattacks by
strategic thrusts using several
competitors
moves to mislead or confuse a
competitor.
– 4. Surprise enhances a
company’s ability to stun a
competitor, to build up superior
position before a competitor can
counterattack.
Speed of the disruptive turbulence created by hypercometition is driven by globalization,
more appealing substitute products, more fragmented customer tastes, deregulation, and
the invention of new business models – all contributing to structural disequilibrium,
falling barriers to market entry, and the dethronement of industry leaders
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Example:
• At General Electric, Jack Welch,
implemented a DYB (“Destroy Your
Business”) approach by placing employees
in the shoes of competitors to highlight
weaknesses and find fresh ways of meeting
customer needs.
• Similarly GE’s Medical Systems Division
used DYB to respond to the challenges
posed by the Internet.
N
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“Be fearful when others are greedy, and
be greedy when others are fearful.”
-- Warren E. Buffett, CEO, Berkshire Hathawy, Inc.
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BRIEF OVERVIEW OF
ORGANIZATIONAL
STRATEGIES
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Figure 1.6 Summary of Key Strategy
Frameworks
• Generic Strategies: Competitive
Advantage (CA) through low cost,
differentiation or focus
• Hypercompetition: CA is temporary,
created through speed and aggression
in the market
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Porter’s Model vs. Hypercompetition Model
Industries
Competitive
Advantage
(Characteristics)
Competitive
Advantage
(How to)
Porter’s
Model
Relatively stable
Establish a strong,
long-term position
and defend it.
Attain a fit with the
environment as in
traditional markets
Hypercompetition
Model
Dynamic
1) Ever-increasing
competition
2) Changing
power between
players
Short-lived, take
advantage of any
small window of
opportunity that
arises (thru speed
and aggression)
1) change rules of
competition
2) create disruptions
(during which
temporary advantages
can be exploited)
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Figure 1.6 The Business Diamond
Business
Process
Tasks and
Structure
(Source: Hammer et al, 1994)
Values and
Beliefs
Management and
Measurement
Systems
(control)
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N
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Figure 1.7 Managerial Levers
Execution
Organization
Control
Decision
rights
Business
processes
Strategy
Formal
reporting
relationships
Data
People,
Information, and
Technology
Informal
networks
Values
Source: Cash, et al., 1994
Incentives
and
rewards
Planning
Organizational
effectiveness
Performance
measurement
and
evaluation
Culture
39
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Figure 1.8 Summary of Org. Strategy Frameworks
Framework
Key Idea
Usefulness in IS
Discussions
Business Diamond
There are 4 components
of an organization:
business processes,
values and beliefs,
management control
systems, and tasks and
structures.
Using IS in an organization
will affect each of these
components. Use this
framework to identify
where these impacts are
likely to occur
Management
levers
Organizational
variables, control
variables, and cultural
variables are the levers
manager can use to
affect change in their
organizations
This is a more detailed model
than the Business diamond
and gives specific areas
where IS can be used to
manage the organization
and to change it
40
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Summary of Key Strategy Frameworks
Framework
Key Idea
Usefulness in Information Systems
Discussions
Porter’s generic
strategies
framework
Firms achieve
competitive advantage
through cost leadership,
differentiation, or
focus.
Understanding which strategy is chosen
by a firm is critical to choosing IS to
complement that strategy.
D’Aveni’s
hypercompetition
model
Speed and aggressive
moves and countermoves by a firm
create
competitive advantage.
The 7-S’s give the manager suggestions
on what moves and counter moves to
make and IS are critical to achieve the
speed needed for these moves.
Brandenberg and
Nalebuff’s
co-opetition model
Companies cooperate
and compete at the
same time.
Being cooperative and competitive at the
same time requires IS that can manage
these two roles.
41
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Figure. Enhanced Model of “Built To Last”:
Continuity and Change in Visionary Companies
 Strategic Competitive Advantages and creating values
Preserve
•Core Values
•Core Purpose
Change
•Culture &
Operating Practices
•Specific Goals
and Strategies
•Processes
•Safety
•Quality Care
•Efficiency
•Effectiveness
•Innovation
Management
IT
(tangible, strategic mechanism)
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What is Web 2.0?
• "Web 2.0" refers to the second generation of web
development and web design.
– It is characterized as facilitating communication,
information sharing, interoperability, user-centered design
and collaboration on the World Wide Web. It has led to
the development and evolution of web-based
communities, hosted services, and web applications.
– Examples include social-networking sites, video-sharing
sites, wikis, blogs, mashups and folksonomies.
– Web 2.0 is the business revolution in the computer
industry caused by the move to the Internet as a platform,
and an attempt to understand the rules for success on that
new platform.
Source: http://en.wikipedia.org/wiki/Web_2.0
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Major Issues for the Next
Society
1. Internationalization
4I + 1K
2. Technology
Internationalization
Integration
Innovation
Information
and
Knowledge
3. Population
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Mini Case Study
• Case Study 1-1: Roche’s new scientific
method (p.41-43)
• Form Groups
• Group discussion and work on the case
and answers to questions
• Questions #1 thru #4
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#1. IS/IT Strategy Triangle
• Each group:
• Complete the case using “Strategy
Triangle” model
46
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Information System Strategy Triangle
Business (Firm)
Strategy
Organizational Strategy
IS/IT Strategy
N
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Information System Strategy Triangle for
Roche’s new scientific method
1. Genomics Revolution/ Breakthroughs
2. First to the Market with a new drug to
cure cancer or other diseases (First Mover)
1. Culture of failure is alright
(Fail Fast Approach)
2. Hire people who can adapt to
changing
3. Build Teams
4. Reward system
Business (Firm)
Strategy
Organizational Strategy
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IS/IT Strategy
IT revolution (Process voluminous data fast)
1. To screen compounds
2. To run simulations or GeneChip experiments
3. To identify and locate genes that are associated
with stroke using Decode
48
N
Q#1: According to Case Study 1-1 (Pearlson’s text,
pp. 41-42), how and what does the business strategy
affect information systems and organizational
decisions?
• In order to take advantage of advances in the genomics
revolution, Roche is rethinking the way it builds teams
(organizational strategy), rewards teams (organizational
strategy), hires people (organizational strategy), creates a
culture (organizational strategy) and processes data (IS
strategy).
• In particular, it is shedding its ultracompetitive approach in
favor of culture-changing collaborative approaches. It is now
recruiting through advertisements run on the back pages of
Science magazine. Its IS strategy incorporates the GeneChip
and Fail Fast approach to speed the screening of compounds
that are tested. IS must be designed to handle the large volume
of data that must be analyzed.
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Q#2: What “generic” strategy (by Porter) does Roche
appear to be using based upon this case? Provide a
rationale for your response.
•
•
Roche’s business strategy appears to be first to
market with a new drug to cure cancer or other
diseases whose genes are identified in through the
genomics project.
Thus, they appear to be applying the
differentiation strategy of having a drug that adds
value in the cure of a disease. (It could be argued,
though, that Roche is applying a
focus/differentiation strategy by concentrating on
cancer or strokes… it is not entirely clear what
Roche’s overarching business strategy is from the
case).
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Q#3: Apply the Hypercompetition model to Roche.
Which of the 7 Ss are demonstrated in this case?
•
•
The hypercompetition model suggests that speed
and aggressiveness of moves and countermoves in
any given market can create strategic advantage.
Clearly this case demonstrates Roche’s concern with
a speedy discovery.
An example is its ‘Fail Fast’ philosophy. To
uncover successful drugs, it is conducting thousands
of experiments… a series of small steps. To
compete, Roche is taking advantage of its deep
pockets and is relying on its timing and know-how.
Below are some possible applications of D’Aveni’s
7-Ss:
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7-S
Application
Superior stakeholder satisfaction
Maximizing customer satisfaction by adding value through
the discovery of breakthrough drugs to cure cancer, stroke,
or other disabling diseases
Strategic soothsaying
Seeking new knowledge in a variety of ways: applying
new technologies such as GeneChip; advertising for new
employees in a wide range of sources, including Science
magazine; leveraging on the knowledge of it employees
through more collaboration and teamwork
Positioning for speed
Using IS to process large volumes of data more efficiently;
applying ‘Fail Fast’ philosophy to identify winners more
speedily
Positioning for surprise
Altering its organizational and IS strategies to speed the
discovery of new breakthrough drugs
Shifting the rules of competition
Using breakthrough discoveries of revolutionary drugs to
treat major diseases can result in new ways to serve
customers that transforms the industry; Trying to take
advantage of discoveries in the genomics projects
Signaling strategic intent
?
Simultaneous and sequential
strategic thrusts
?
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Q#4: How do information systems support
Roche’s business strategy?
•
The case discusses a number of ways in
which IS supports Roche’s business
strategy:
–
–
–
to screen compounds,
to run simulations or GeneChip experiments
with potential new drugs, and
to identify and locate genes that are
associated with stroke using Decode.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Q#5 (Extra) What is the risk(s) of using/adopting
the information systems?
• Roche may awaken a sleeping giant with
better resources for implementing a better
system (and/or reverse engineering of their
system)
• Concern of loss of data will cause disaster
to the company (e.g., 10 people are using
90% of the company total computer
capacity)
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Potential Risks
There are many potential risks that a firm faces when attempting to
use IT to outpace their competition.
• Awakening a sleeping giant – a large competitor with deeper
pockets may be nudged into implementing IS with even better
features
• Demonstrating bad timing – sometimes customers are not
ready to use the technology designed to gain strategic advantage
• Implementing IS poorly – information systems that fail because
they are poorly implemented
• Failing to deliver what users want – systems that don’t meet
the firm’s target market likely to fail
• Web-based alternative removes advantages – consider risk of
losing any advantage obtained by an information resource that
later becomes available as a service on the web
• Running afoul of the law – Using IS strategically may promote
litigation
N
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End of Chapter 1
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