Management Information System Competing with Information Technology 2 Judi Prajetno Sugiono [email protected] ©2008.

Management Information System

Competing with Information Technology

2

Judi Prajetno [email protected]

©2008

Objectives

Identify basic competitive strategies and explain how IT may be used to gain competitive advantage.

Identify strategic uses of information technology.

How does business process engineering frequently use e-business technologies for strategic purposes?

(Objectives – continued)

Identify the business value of using e-business technologies for total quality management, to become an agile competitor, or to form a virtual company.

Explain how knowledge management systems can help a business gain strategic advantage.

Section IFundamentals of

Strategic Advantage

Competitive Advantage

Competitive Advantage is an advantage over competitors in some measure such as cost, quality, or speed, leads to control of a market and to larger- than average profits.

Types of Competitive Advantage Barriers to entry that restrict supply Demand control Economies of scale Process efficiency

In the IS field, competitive advantage refers to the use of information to gain marketplace leverage

Fundamentals of Strategic Advantage

In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

Threat of Threat of

Bargaining Power of Bargaining Power ofCompetitive Rivalry within an Industry

Threat of Threat of

Bargaining Power of Bargaining Power ofCompetitive Rivalry within an Industry

Porter’s Five Forces Model

The Determinants Of Competitive Rivalry

For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as

innovation, marketing, etc. number of competitors rate of industry growth intermittent industry overcapacity exit barriers diversity of competitors informational complexity and asymmetry fixed cost allocation per value added level of advertising expense

The Determinants Of The Threat Of Substitute Products

The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand). buyer propensity to substitute relative price performance of substitutes buyer switching costs perceived level of product differentiation

The Determinants Of The Threat Of The Entry Of New Competitors

Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

the existence of barriers to entry (patents, rights, etc.) economies of product differences brand equity switching costs or sunk costs capital requirements access to distribution absolute cost advantages learning curve advantages expected retaliation by incumbents government policies

The Determinants Of The Bargaining Power Of Customers

The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

buyer concentration to firm concentration ratio bargaining leverage buyer volume buyer switching costs relative to firm switching costs buyer information availability ability to backward integrate availability of existing substitute products buyer price sensitivity price of total purchase

The Determinants OfThe Bargaining Power Of Suppliers

Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

supplier switching costs relative to firm switching costs

degree of differentiation of inputs presence of substitute inputs supplier concentration to firm concentration ratio threat of forward integration by suppliers relative to

the threat of backward integration by firms cost of inputs relative to selling price of the product

Competitive Strategies

Porter argues that firms achieve competitive advantage by providing one of the following: products and services at a lower price, higher quality products and services, or meeting the special needs of certain market

segments

Competitive Strategies & the Role of IT

Cost Leadership (low cost producer) Reduce inventory (JIT) Reduce manpower costs per sale (see Real

World Case 1) Help suppliers or customers reduce costs Increase costs of competitors Reduce manufacturing costs (process control)

Competitive Strategies & the Role of IT (continued)

Differentiation Create a positive difference between your

products/services & the competition. May allow you to reduce a competitor’s

differentiation advantage. May allow you to serve a niche market.

Competitive Strategies & the Role of IT (continued)

Innovation New ways of doing business

Unique products or services New ways to better serve customers Reduce time to market New distribution models

Competitive Strategies & the Role of IT (continued)

Growth Expand production capacity Expand into global markets Diversify Integrate into related products and services.

Competitive Strategies & the Role of IT (continued)

Alliance Broaden your base of support

New linkages Mergers, acquisitions, joint ventures, “virtual

companies” Marketing, manufacturing, or distribution

agreements.

Competitive Strategies & the Role of IT (continued)

Other Competitive Strategies Locking in customers or suppliers

Build value into your relationship Creating switching costs

Extranets Proprietary software applications

Raising barriers to entry Improve operations or promote innovation

Leveraging investment in IT Allows the business to take advantage of strategic

opportunities

The Value Chain

Porter argued that firm’s opportunities to create competitive advantage occur at different steps in the value chain

The ultimate goal of any business is to provide value to its customers.

The Value chain means views a firm as a series, chain, or network of activities that add value to its products and services.

Value Chain

Business system consist of interdependent activities connected by linkages.

To gain competitive advantage a company must perform these activities to have values greater than the cost

Value Chain Thinking

Determine the firm’s competitive strengths and weaknesses

…by analysing firm’s value-added stream

Try to understand “the behaviour of cost and the existing and potential

sources of differentiation”

"value" added is the values added to the product …as it moves through the functional areas of the

business, through the distribution channels, and is finally acquired by the consumer.

Porter’s Value Chain

Margin is the value of the firm’s product and services, as perceived by the firm’s customers, less the cost

Firm Infrastructure (administrative coordination and support service)

Human Resources Management

Technology Development

Procurement

Inbound Logistics

Operations Outbound Logistics

Marketing & Sales

Service

SupportActivities

Primary Activities

cost

revenue

Margin

Mar

gin

Type Activity Definition

Primary activity: directly create the value as perceived by the customers

Inbound Logistic Material receiving, storing and distribution to manufacturing premises

Operations Transforming inputs into finish products

Outbound logistic Storing and distribution products

Marketing and sales Promotion and sales force

Service Service to maintain or enhance product value

Support activity: indirectly create value by supporting the primary processes

Corporate infrastructure

Support the entire value chain, such as general management, planning, finance, accounting, legal services, government affair, and quality management

Human resource management

Recruiting, hiring, training and development

Technology development

Improving product and manufacturing process

Procurement Purchasing input

Technological dependence: IT?

The key elements of IT dependence are its ability to: Improve market access Provide product and company differentiation Facilitate new product and service

introductions [change of focus] Introduce operational efficiencies [cost

leadership] improve decision making capabilities. increase the sharing of knowledge.

ServiceServiceMarketingand SalesMarketingand Sales

OutboundLogisticsOutboundLogisticsOperationsOperationsInbound

LogisticsInboundLogistics

EDI-BasedPurchasingSystem

Computer-IntegratedMftg.

AutomatedOrderingSystem

ExpertSystems forSalespeople

Tele-maintenanceExpertSystems

Downstream Chains of Customers

Upstream Chainsof Suppliers

Value Chain with Typical Strategic IS

Example: a hypothetical restaurant(Alter – Information Systems 4th ed. © 2002 Prentice Hall)

Based on the primary processes shown, this is probably not the value chain for the type of fast food restaurant that cooks the food before taking orders.

Value Activities

Primary ActivitiesPrimary Activities Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

Support ActivitiesSupport Activities Corporate

Infrastructure

Human Resource

Management

Technology

Development

Procurement

Primary Activities: Inbound Logistics

Materials receiving, storing, and distributing to manufacturing

IT Impact: improved scheduling cut down warehousing

reduce disruptions lower price better vendor selection more flexibility

Primary Activities: Operations

Transforming inputs into finished products

IT Impact : increase product offerings new products

Primary Activities: Outbound Logistics

Storing and distributing finished products IT Impact:

influence customer behaviour through screen placement

piggy back other products on the same electronic distribution channel

Primary Activities: Marketing and Sales

Promotion and sales force

IT Impact: on-line order entry for customers ordering aids such as modelling systems for

farmers

Primary Activities: Service

Maintain or enhance product value IT Impact:

improved support via IT remote diagnostics expert systems for self-help

all reduce support cost and improve customer satisfaction

Support Activities: Corporate Infrastructure

Supports entire chain General management, planning, finance,

accounting, legal services, government affair, quality control

IT Impact: improve control via better tracking of activities enhance co-ordination better alignment of rewards with corporate

goals

Support Activities: Human Resource Management

Recruiting, hiring, training and development

IT Impact: improved staff selection and assignment tailoring benefit packages (see Resumix example in WSF lectures)

Support Activities: Technology Development

Improving product and manufacturing process

IT Impact: improved design analysis bigger and faster modelling more flexible designs

Support Activities: Procurement

Purchasing inputs IT Impact:

electronic shopping around reduced prices

Channelvaluechains

Suppliervaluechains

Buyervaluechains

Firmvaluechain

Expanded Value Chain

partssupplier

partssupplier

partssupplier

warehouse warehouse

suppliersuppliersupplier

toolmanufacturerManufacturer

workers

wholesalerwholesaler

distributordistributordistributor

retail storeretail storeretail storeretail store

Consumers

Production Chain

E Commerce in Value Chain

ManufacturerManufacturer Wholesaler/distributor

Wholesaler/distributor

Retailer Retailer Consumer Consumer

InfomediaryInfomediaryManufacturerManufacturer E-Retailer

E-Retailer

AggregatorAggregator

Portal

Portal Consumer Consumer

ManufacturerManufacturer Wholesaler/distributor

Wholesaler/distributor

Retailer Retailer Consumer Consumer

(a) Traditional Value Chain(a) Traditional Value Chain

(b) Intermediaries Eliminated (Deintermediation)(b) Intermediaries Eliminated (Deintermediation)

(b) New Intermediaries Introduced (Reintermediation)(b) New Intermediaries Introduced (Reintermediation)

Section II

Using Information Technology for Strategic Advantage

Strategic Uses Of Information Technology

Major competitive differentiatorDevelop a focus on the customer

Customer value Best value Understand customer preferences Track market trends Supply products, services, & information anytime,

anywhere Tailored customer service

Strategic Uses of IT (continued)

Business Process Reengineering (BPR) Rethinking & redesign of business processes Combines innovation and process

improvement There are risks involved. Success factors

Organizational redesign Process teams and case managers Information technology

Business Improvement vs. Business Reengineering

Business Process and Traditional Business Functions

Example of IT that Support Reengineering of sales and order management process

Strategic Uses of IT (continued)

Improve business quality Total Quality Management (TQM)

Quality from customer’s perspective Meeting or exceeding customer expectations Commitment to:

Higher quality Quicker response Greater flexibility Lower cost

Strategic Uses of IT (continued)

Becoming agile Agility in business performance is the ability of a

company to prosper in rapidly changing, continually fragmenting global markets for high quality, high performance, customer-configured products and services.

Four basic strategies Customers’ perception of product/service as solution to

individual problem Cooperate with customers, suppliers, other companies

(including competitors) Thrive on change and uncertainty Leverage impact of people and people’s knowledge

Example: Business model of AVNET Marshall to Agile Company

Leverage theImpact of People and IS Resources

Leverage theImpact of People and IS Resources

Give Customers Solutions

to Problems

Give Customers Solutions

to Problems

Cooperate with Business Partnersand Competitors

Cooperate with Business Partnersand Competitors

Organize toMasterChange

Organize toMasterChange

Strategic Uses of IT (continued)

The virtual company Uses IT to link people, assets, and ideas Forms virtual workgroups and alliances with

business partners Interorganizational information systems

Virtual Company (continued)

The Virtual Company (continued)

Strategies Share infrastructure & risk with alliance partners Link complementary core competencies Reduce concept-to-cash time through sharing

Increase facilities and market coverage Gain access to new markets and share market or

customer loyalty Migrate from selling products to selling solutions

Learning Organizations

Learning organization – knowledge creating company

Exploit two kinds of knowledge Explicit knowledge: data, document and etc. Tacit knowledge: the “how-tos” of knowledge,

which reside in workers

Learning Organizations (continued)

Knowledge Management

Learning Organizations (continued)

Knowledge management systems Help create, organize, and share business

knowledge wherever and whenever needed within the organization

Discussion Questions

You have been asked to develop e-business & e-commerce applications to gain competitive advantage. What reservations might you have about doing so?

How could a business use IT to increase switching costs and lock in its customers and suppliers?

Discussion Questions (continued)

How could a business leverage its investment in IT to build strategic IT capabilities that serve as a barrier to entry by new entrants into its markets?

What strategic role can information technology play in business process reengineering and total quality management?

Discussion Questions (continued)

How can Internet technologies help a business form strategic alliances with its customers, suppliers, and others?

How could a business use Internet technologies to form a virtual company or become an agile competitor?

Discussion Questions (continued)

IT can’t really give a company a strategic advantage, because most competitive advantages don’t last more than a few years & soon become strategic necessities that just raise the stakes of the game. Discuss.

MIS author & consultant Peter Keen says: “We have learned that it is not technology that creates a competitive edge, but the management process that exploits technology.” What does he mean?

Real World Case 1 – WESCO International, Inc.

Business-to-Business

Describe WESCO’s original system.

Describe WESCO’s new system.

Real World Case 1 (continued)

What are the business benefits to WESCO and its suppliers of its new e-procurement system?

Is WESCO’s new system a strategic use of IT?

Real World Case 1 (continued)

Does WESCO’s new system give the company a competitive advantage?

What other strategic moves could WESCO implement to gain competitive advantage?

Real World Case 2 – Staples, Inc.

What is the strategic business value to Staples and their large business clients of the new web-based procurement system?

What is the strategic business value to Staples and the value proposition to their customers of their new clicks and bricks capabilities?

Real World Case 2 (continued)

Is an integrated clicks and bricks strategy the Internet strategy that most businesses, large and small, should adopt?

What competitive strategies is Staples pursuing?

Real World Case 2 (continued)

What other e-business or e-commerce strategy would you recommend to Staples to help them gain a competitive advantage in their industry?

Real World Case 3 – Enron Corp.

What mistakes did Enron make in the use or management of IT?

Did those mistakes play a part in the failure of Enron?

Real World Case 3 (continued)

“Is it time to go back to the days when IT supported the business rather than became the business?” Explain your position.

What are the major lessons for the future use of IT in business that you gained from this case?

Real World Case 3 (continued)

How would you apply one of the lessons from this case in your present job or in your future business career?

Real World Case 4 – Delta Technology & FirstHealth Group

What are Delta Technology’s new requirements for IT investments?

What is the business value of Delta’s new requirements?

Real World Case 4 (continued)

Explain FirstHealth’s “return on opportunity” guidelines.

Is FirstHealth’s “return on opportunity” guideline for IT investments a good way to evaluate investments in IT?

Real World Case 4 (continued)

What should be the role of ROI in IT decision-making?

Are the IT investment guidelines of Delta and FirstHealth applicable to other companies, including small businesses?

Real World Case 5 – Ford, Dow Chemical, IBM, et al.

What is Six Sigma?

What do critics of Six Sigma see as its shortcomings?

Real World Case 5 (continued)

Is Six Sigma “an enterprise-wide business strategy?”

What role does information technology play in Six Sigma business initiatives?

Real World Case 5 (continued)

What are the benefits and limitations of Six Sigma as a business strategy?

Can Six Sigma make up for poor management and faulty vision?