Chapter 2 Strategic Uses of Information Systems

1. Chapter 2Strategic Uses of Information Systems

2. Learning Objectives • When you finish this chapter, you will: • Understand business strategy and strategic moves. • Recognize how information systems can give business a competitive advantage. • Understand basic initiatives for gaining a competitive advantage.

3. Learning Objectives • Know what makes an information system a strategic information system. • Understand the fundamental requirements for developing strategic information systems. • Recognize circumstances and initiatives that make one SIS succeed and another fail.

4. Strategy and Strategic Moves • Strategy • A plan designed to help an organization outperform its competitors. • Strategic Information Systems • Information systems that help seize opportunities. • Can be developed from scratch, or they can evolve from existing ISs.

5. Achieving aCompetitive Advantage • Profits increase significantly through increased market share. • The essence of strategy is innovation, so competitive advantage often occurs when an organization tries a strategy that no one has tried before. • Dell was the first PC manufacturer to use the Web to take customer orders.

6. Achieving aCompetitive Advantage • Reduce Costs • Raise Barriers to Entry • Establish High Switching Costs • Create New Products or Services • Differentiate Products or Services • Enhance Products or Services • Establish Alliances • Lock In Suppliers or Buyers

7. Figure 2.2 Many strategic moves can work together to achieve a competitive advantage Achieving aCompetitive Advantage

8. Achieving aCompetitive Advantage • Initiative #1: Reduce Costs • Lower Costs • Lower Price • Bigger Market Share

9. Achieving aCompetitive Advantage • Initiative #2: Raise Barriers to Entrants • Patenting • High expense of entering industry • State Street, Inc. (Pension fund management business)

10. Achieving aCompetitive Advantage • Initiative #3: Establish High Switching Costs • Explicit Switching Costs • Fixed and nonrecurring • Implicit Switching Costs • Indirect costs in time and money of adjusting to a new product

11. Achieving aCompetitive Advantage • Initiative #4: Create New Products and Services • Dynamic • The advantage lasts only until other organizations in the industry start offering an identical or similar product or service for a comparable or lower price.

12. Achieving aCompetitive Advantage • Initiative #5: Differentiate Products and Services • Product differentiation – usually achieved through advertising • Brand recognition • Examples of brand name success • Levi’s jeans • Chanel perfumes • Calvin Klein clothing • The Internet as a business tool

13. Achieving aCompetitive Advantage • Initiative #6: Enhance Products and Services • Instead of differentiating a product or service, add to it in order to enhance its value • Examples • Auto manufacturers enticing customers with a longer warranty • Real estate agents providing useful financing information to potential buyers • Charles Schwab moving stock trading services on-line before Merrill Lynch

14. Achieving aCompetitive Advantage • Initiative #7: Establish Alliances • Combined service may attract customers • Lower cost • Convenience • Examples • Travel industry • HP and FedEx

15. Figure 2.3 Strategic alliances combine services to create synergies Achieving a Competitive Advantage

16. Achieving aCompetitive Advantage • Initiative #8: Lock in Suppliers or Buyers • Bargaining Power • Purchase volume • Strengthen perception as a leader • Create a standard

17. Strategic Information as a Competitive Weapon • Strategic Information Systems (SIS) • Any IS that can help an organization achieve a long-term competitive advantage • SIS embodies two types of ideas • Potentially-winning business move • How to harness IT to implement that move • Two conditions for SIS • IS must be serving an organizational goal • IS unit must be working with the managers of the other functional units

18. Strategic Information as a Competitive Weapon • Creating an SIS • Top management must be involved from initial consideration through development and implementation. • SIS must be a part of the overall organizational strategic plan.

19. Figure 2.4 Steps for considering a new SIS Strategic Information as a Competitive Weapon

20. Strategic Information as a Competitive Weapon • Re-engineering and Organizational Change • To implement an SIS and achieve a competitive advantage, organization must rethink the entire way in which it operates. • Goal of re-engineering is to achieve efficiency leaps of 100 percent or even higher.

21. Strategic Information as a Competitive Weapon • Competitive Advantage as Moving Target • SISs developed as strategic advantages quickly become standard business. • Banking industry (ATMs and banking by phone) • Companies must continuously contemplate new ways of utilizing information technology to their advantage. • SABRE, American Airlines’ reservation system

22. Strategic Information as a Competitive Weapon • Sources of Strategic Information Systems • Existing System • New Service • New Technology • Excess Information • Vertical Information

23. Strategic Information as a Competitive Weapon • From Automation to SIS • An organization can gain a competitive advantage through automation of a manual process. • American Hospital Supply automated manual orders and improved services, resulting in a seventeen percent (17%) compound annual growth rate in sales.

24. Strategic Information as a Competitive Weapon • SIS from a New Service • A company may gain competitive advantage by providing a new service using IT. • Merrill Lynch was the first to use IT to provide a cash-on-demand service for their investors and captured a lion’s share of the market.

25. Strategic Information as a Competitive Weapon • SIS from New Technology • Often, technology involved in an SIS has been around for some time • Just waiting to be used strategically • Sometimes, new technology sparks major change in the way a firm does business • A company that figures out how to use a new technology can gain a competitive advantage.

26. Strategic Information as a Competitive Weapon • SISs from Excess Information • An organization can gain an advantage by putting excess information toward a new product or service. • A company can look for strategic use of its information • What information do we have that another company could use? • What information do we have that could be used to start a new business? • Can we produce information to assist in creation of new products or services for ourselves to other companies?

27. Strategic Information as a Competitive Weapon • SISs from Vertical Information • Organizations use ISs to augment their businesses vertically by offering related services. • Realtors offer financing and relocation information in addition to information about houses for sale.

28. Acumax Plus: An SIS Success • Good SIS ideas must be carefully executed if a company is to seize opportunities. • McKesson Drugs, Inc., automated its operations and gained a competitive advantage. • Enhanced existing services • Provided new services • Cut costs • Created high switching costs for clients

29. Acumax Plus: An SIS Success • Improving Existing Services • McKesson devised a new information system to automate order entry and order processing • Implementation of a wearable computer and scanner called Acumax to automate collection and fulfillment of orders • Business Process Redesign • Acumax and its successor, Acumax Plus, contributed to significant cost cutting and increased market share at McKesson Corporation.

30. Acumax Plus: An SIS Success • Providing New Services • McKesson delivers about ninety-three percent of its over-the-counter items and ninety-nine percent of prescribed drugs the next day. • This creates an almost just-in-time supply cycle. • McKesson succeeded in forming an alliance with drugstores, thereby helping drugstores save time

31. Mortgagepower Plus: An SIS Failure • Identifying the Competitive Advantage • Citicorp had all the ingredients necessary for successful implementation of new ideas using IT • In 1987 a great new idea was conceived: a 15-minute mortgage approval process • Equivalent to a 10-minute oil change or one-hour photo processing.

32. Mortgagepower Plus: An SIS Failure • The SIS Plan • Citicorp removed the requirement for mortgage insurance • Did not compensate by increasing its reserve for potential losses • Low-document and non-document loans • Checked borrowers’ credit reports and abridged employment histories but not their assets or incomes • At worst, the executives believed, the bank could profit by selling a foreclosed house and recoup the loan

33. Mortgagepower Plus: An SIS Failure • How the SIS Failed • Failed strategically due to unwise business shortcuts. • Failed operationally due to poor technical implementation. • Losing Ground • Mortgagepower Plus rejected seventy percent of all applicants (twice the bank’s normal rate of thirty-five percent) • Citicorp’s management reduced size of mortgage unit and removed its responsibility for originating loans for later sale

34. Success and Failure on the Web • Just being first on the Web is not enough to be successful; business ideas must be sound. • An organization must carefully define what buyers want. • Establishing a recognizable brand name is important but does not guarantee success; satisfying needs is more important. • To succeed, Web business must offer a new product or service others are willing to pay for.

35. The Bleeding Edge • Business owners must develop new features to keep the system on the leading edge. • Adopting a new technology involves great risk. • No experience from which to learn • No guarantee technology will work or customers and employees will welcome it

36. The Bleeding Edge • The bleeding edge: failure in an organization’s effort to be on the technological leading edge. • Some organizations let competitors assume the risk associated with being on the leading edge. • Risk losing initial rewards. • Can quickly adopt and even improve pioneer organization’s successful technology.

37. Ethical and Societal IssuesThe Power of Information • At what point is a successful strategy considered as a predatory, unfair business practice? • Court cases against Microsoft have focused on questions such as these.