1175005033

ISMT 101

IS & Business Integration

Technology components

HW(2)

SW(3)

Network(5)

Internet(6)

DB(4)

Org

anizatio

nal u

se

DecisionMaking (8)

Business implications

EB(7)

(1) Digital Economy

Major IS (1)

People

Mgmt

(10) IS-BizIntegration

Now we move to the strategic level…

• Does IT indeed payoff?• Why do some firms obtain

real benefits while othersdid NOT?

• How to use IT to support corporate strategy?

Does IT indeed payoff

“We see computers everywhere, but in the productivity statistics.”

Robert Solow, Nobel Prize-winning economist

Substantial IT investment has been made But, in general, IT-performance relationship is not clear

Worldwide IT spending

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Source: IDC 2004

$ Billions

1960s 1970s 1980s 1990s 2000s

Substantial tech investment, but…

-10%

-5%

0%

5%

10%

15%

20%

25%

1965 1970 1975 1980 1985 1990 1995

Year

% A

nn

ua

l C

ha

ng

e

U.S. OCAM Investment per Worker

U.S. Output per Worker

*

* OCAM is BEA's Office, Computing & Acctg Machinery

16.9%

30.8%32.7%

35.1%

25.6%

1.5% 2.1% 1.8%3.0%

1.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

United States Japan France Germany United Kingdom

Growth Rate of IT Capital per Worker

Growth Rate of Output per Worker

Substantial tech investment, but…

Economy Slowdown in the G5

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

1965 1970 1975 1980 1985 1990 1995

Year

% A

nn

ua

l Ch

an

ge

in O

utp

ut

pe

r W

ork

er

U.S.

Japan

France

Germany

U.K.

Country-level recap

Substantial IT investment was made worldwide.

However, the substantial IT investment was associated with country-level economic slowdown.

IT leads to different outcomes

Source: Brynjolfsson, Erik, The IT Productivity Gap, "Optimize" magazine, July 2003, Issue 21

Firm-level recap

At the firm level, there is a positive relationship between IT investment and firm performance.

But, companies have achieved vastly different results.

IT does not help improve firm performance, if there is no clear strategy.

External Environment

InternalActivities

CorporateStrategy

Value ChainAnalysis

Competitive Forces

IT-EnabledStrategy

What’s strategy?

Doing things right? Doing right things?

Doing right things—leapfrogging

Children playing leapfrogging in CA, 1930s

Leapfrogging in WWII

When the US Navy joined the Pacific War, the Japanese Navy had captured many islands

Strategy 1—attack those islands one by one (123456)

Strategy 2—”leapfrogging”(146)

1

2

34

56

Strategy

Long-term planning of business operations in a specific market to improve firm performance strategy offers a guideline for the internal operations

(logistics, operations, marketing, and services) strategy fits into the external environment the objective is to improve profitability, ROA, stock

market return.

Leapfrogging by IBM

In 1980s, Apple was successful in the PC industry IBM wanted to quickly build its PC IBM also used “leapfrogging” strategy

Operating System Microprocessor

Assembly

Leapfrogging by IBM

“IBM could have captured the entire PC market”

-Larry Ellison, co-founder and CEO of Oracle, 1999

Leapfrogging by IBM

Is IBM’s leapfrogging strategy good or bad? Worked in short term In long-term, is this a good strategy??

What theories can be used to analyze IT strategy? Porter’s theories (value chain, competitive forces) How can Porter’s theories be applied to analyze IT-enabled

corporate strategy our analysis is IT-specific IBM, Dell, Harrah’s, Cisco, Wal-Mart

Value Chain in Industry

B2BB2B B2CB2C

Rawmaterial

Transportation& logistics

Manufacturing


Distribution


Retailing

Complementaryservices

The value chain of PC industry

Dedrick and Kraemer (2006)


Shifting trend: US companies shift from “covering the whole chain”

to design Chinese companies (mainland and Taiwan) are

dominating physical production.

Design requires innovation capability. Such capability can be acquired only in a learning-by-

doing process. It takes time. Chinese companies can buy assembly line and

mature technologies, but not the innovation capability.


Physical production is labor-intensive. In the PC industry, the profit margin of the

design phase is much higher than that of mass production. More value is added in the design phase.

Value Chain within a Firm Value chain – activities within an organization

that bring products and services to market

Recall e-business value chain – external We are now discussing internal value chain

Value Chain Primary activitiesPrimary activities – take raw materials and

transform them into something of greater value E.g., purchase steel make parts, engines assemble a car E.g., purchase from wholesalers sell to consumers

Including… Inbound logistics: purchasing and receiving the raw materials Operations: making products using raw materials Outbound logistics: delivering to buyers Marketing and sales: distributing product info and making sales Post-sales services: post-sales services, customer support

Value Chain Supporting activitiesSupporting activities – those functions that the

company requires to do business but do not directly add value to a product or service

HR management (recruiting, hiring, and training) Procurement of MRO (Maintenance, Repair and

Operations) and office supply Accounting office General management (administration and management) Research & development (R&D)

Value Chain

Value is added when a company conducts value chain activities. Each activity will add some value.

Total value added will lead to profit. Greater profit margin comes from greater value added.

IT can enhance the value added process. IT can increase efficiencies of each value chain activity.

IT and value chain

IT can support specific value chain activities… Supply chain management (SCM) systems help reduce

logistics costs. Enterprise resource planning (ERP) systems help reduce

operational costs. Customer relationship management (CRM) systems help

reduce costs in customer-oriented activities.

ISMT 524, ISMT 564, ISMT 527 are focused on SCM, ERP, and CRM, respectively.

Sell directly to consumers Allow customers build own models Quickly launch newer models/technologies Use EDI to connect all suppliers Enjoy above-average profitability

1990: Sales $546m using $126m operating assets

1998: Sales of $18.2b of built-to-order product using $493m operating assets

2002 Sales of approx $30b Operating expenses are 50%

that of closest rival Inventory of 4 days supply

(10% that of closest rival) Best customer service in

16 of past 17 quarters

Which value chain activity is Dell’s primary focus?

Case 1

Dell Dell uses IT to support JIT (just-in-time) inventory mgmt. With JIT, Dell only carries a small amount of the raw materials. Efficient inbound logistics supports BTO. Low inventory allows Dell to offer customized computers with

the latestlatest technologies/models.

3-Step Value Chain Analysis

1. Describe the specific activitiesspecific activities within your company’s value chain

2. Choose a particular portion of the value chain, focused onfocused on which your company can add great value

3. Use IT to improveIT to improve your company’s performance on those activities of your focus

i.e., use IT to increase the efficiencies (reduce the costs) of the activities) increase profit margin

Case 2

Harrah’s casino Web-based “Total Gold” program, receiving US patent Online database allowing repeat customers to earn rewards

based on the amount of time and money they spend Track consumer behavior, improve customer loyalty Harrah’s is better able to identify and meet customer demand.

Case 3

Cisco Web-based Hub that connects all suppliers. Using that Hub, Cisco outsourced manufacturing, logistics,

marketing, and services. Cisco is fully focused on R&D. Has achieved product leadership over years in the networking

HW markets.

Porter’s Competitive Forces Model Unlike the value chain analysis, the Competitive

Forces Model deals with external factors

Industrycompetitors

Intensityof rivalry

Industrycompetitors

Intensityof rivalry

SuppliersSuppliers

Bargainingpower ofsuppliers

CustomersCustomers

Bargaining powerof customers

New entrantsNew entrants Threat ofnew entrants

SubstitutesSubstitutesThreat ofsubstitutes

Porter’s Competitive Forces Model

Widely used in MGTO, MKT, ACT… Profitability = f (rivalry, threat of substitution,

threat of new entrants, bargaining power of suppliers, bargaining power of customers) Rivalry (–) : price cut Threat of substitution (–) : reduce revenue Threat of new entrants (–) : price war, increase rivalry Bargaining power of suppliers (–) : increase costs Bargaining power of customers (–) : reduce price

revisited

Mistake #1—outsourced microprocessor to Intel Microprocessor makers may enjoy high profitability, due to

high entry barrier This is a technology-intensive area, requiring learning-by-

doing over years

Mistake #2—outsourced OS to Microsoft OS developers may enjoy high profitability Consumers face high costs of switching to another OS

Mistake #3—work in a low-entry-barrier sector, computer assembly, which becomes very competitive today

A case study – HP

To illustrate the importance of considering external factors

Hewlett-Packard (HP)

A case study – HP

In the 1980s, HP set up its R&D and manufacturing divisions in Washington. the biggest market for printers was in the US. the technology development was still in an early stage.

Later, HP set up the manufacturing facilities in Spain and Singapore when demand grew in other parts of the world

Singapore become the largest production facility because there were more competitors in the market to achieve economies of scale to survive

A case study – HP

In mid-1990s, HP outsourced most of the production to vendors because the printer-manufacturing technologies have

matured. Outsourcing in a global market helps HP to reduce

costs in order to survive in a competitive market.

HP’s strategy – facilities of R&D and production, degree of outsourcing market, competitor, availability of global vendors

Porter (2001), Harvard Business Review

IT Rivalry among existing competitors (-) Increased price pressure due to price transparency (+/-) Increased geographic competition, but larger

markets

How IT affect Porter’s Five Forces


IT Barriers to entry (-) Due to substitution of electronic for physical assets (+) Cost of IT investment itself can be an entry barrier (+) IT-enabled asset can be an entry barrier

E.g., online reputation system at eBay



IT Threat of substitute products/services (+) IT can increase efficiency and increase the size of

the pie (i.e., the entire market) E.g., ATM and banking

(+/-) Disintermediation can create new opportunities and threats

E.g., Dell versus Best-Buy



IT Bargaining power of buyers (-) Reduced search and switching costs of buyers (+) Eliminates powerful channels (i.e., downstream

corporate buyers), increasing bargaining power



IT Bargaining power of suppliers (+/-) Online procurement can shift bargaining power

relative to physical channels (-) Disintermediation: Suppliers can reach end users

directly


Direct Sale

High

Medium

Low

High

Medium

PC industry rivalry =Threat of new entrants =

Threat of substitution = Bargaining power of

customers = Bargaining power of

suppliers =

Analyze ATM:

Based on networking Costs of ATM $20000 Difficult ATM is a necessity

Shared ATM network

IT and competitive forcesStrategic questions:

Can IT be incorporated into or generate products/services?

Can IT create entry barriers? Can IT lock-in customers? Can IT change the basis of

competition? Can IT change the relationship

with suppliers and partners?

Dell’s strategy to combat the 5 forces

Direct Sale

Web-based customizationhelps lock-in consumers

Efficient inboundlogistics enableWeb-basedcustomization


InternalActivities

Value ChainAnalysis

Competitive Forces

Competitive AdvantageCompetitive Advantage

Cost Leadership

Differentiation Focus

ITIT

Strategies to achieve competitive advantage

Competitive advantage: above-average profit within an industry

To achieve competitive advantage… Cost leadership strategy seeks to provide goods and

services at the lowestlowest price. Differentiation strategy seeks to provide uniqueunique

products and services that customers value. Focus strategy is focused on finding and developing a

niche marketniche market (a small segment in the market).


InternalActivities

Value ChainAnalysis

Competitive Forces


Cost Leadership


ITITIT reduces inventoryholding costs

Web-basedcustomizationhelps lock-incustomers


InternalActivities

Value ChainAnalysis

Competitive Forces


Cost Leadership


ITITWeb-basedhub enablesoutsourcing

Tech. leadershipleads to entry barrier and customer lock-in

Wal-Mart

World’s #1 retailer with 4,800 stores and 1.5 million employees

World’s largest company in sales volume

48% more productive than the rest of the retail industry

How Wal-Mart Does It?

Powerful information systems Leader in the use of EDI Smart in-store systems for inventory and operations Satellite communications network for tracking material flows Vendor managed inventory (VMI) systems

VMI is based on EDI (EDI is a technological innovation) VMI is a managerial innovation – vendor checks

inventory level continuously, and decides when to replenish Wal-Mart’s inventory.


InternalActivities

Value ChainAnalysis

Competitive Forces


Cost Leadership


ITITUse EDI to enhanceefficiencies of logistics

Require suppliersto use EDI, thus increasing lock-in


InternalActivities

Value ChainAnalysis

Competitive Forces


Cost Leadership


ITIT“Total Gold”increaseefficienciesof CRM

Increase customerloyalty

Homework – analyzing a new case

Industry features

Low-tech industry—different than Dell

Mature products—different than Cisco

Less room to enhance customers’ experience—different

than Harrah’s

More like Wal-Mart, but lack monopoly power

Homework – analyzing a new case

Case analysis

1. How to use IT to improve efficiencies of (some of)

the value chain activitiesvalue chain activities

2. How to use IT to shape (some of) the five

competitive forcescompetitive forces

3. What is the best strategy among the three strategies

(cost leadership, differentiation, focuscost leadership, differentiation, focus)

Approach to competitive advantage

Create entry barrier (tech leadership, monopoly) Create entry barrier (tech leadership, monopoly) E.g., Cisco, Wal-Mart

Develop systems with high switching costsDevelop systems with high switching costs E.g., Dell, eBay, Harrah’s

Use IT to change the industry natureUse IT to change the industry nature E.g., Skype

1175005033

Documents

clear strategy

islands strategy

strategy good

good strategy

leapfrogging strategy

s leapfrogging

s substantial tech investment

ocam investment