Chapter 2
Information Technology’s
Introduction
•
IT is changing the fabric of our society
– Shifts power from governments to citizens – Flow of intellectual property is no longer
constrained by national boundaries
•
IT is changing business
– Senior executives expect IT to play a
central role in streamlining operations and to link customers, suppliers, and employees more closely
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
inter-organizational 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
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
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
Strategic Thrusts
•
In 1988, Charles Wiseman created a
detailed addition to the general
framework of strategy development
•
He created a theory based on five
thrusts:
– Differentiation – Cost – Innovation – Growth – AlliancesDifferentiation
• 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
•
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
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
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
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
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
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
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
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 a portfolio of
hundreds to thousands of applications
– Deciding which ones 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 (Information Technologists)
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)
Integrated Model of Strategic
Influences
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
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 pre-existing 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
