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Computer Application in Business

C h a p t e r

2 CompetingwithInformation Technology

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Id entify several basic competitive strategiesan d explain how they can use informationtechnologies to confront the competitive forcesface d by a business.Id entify several strategic uses of informationtechnology for electronic business an d commerce, an d give examples of how they givecompetitive a d vantages to business.Give examples of how business processreengineering frequently involves the strategicuse of e-business technologies.

Chapter Objectives

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Id entify the business value of using e-businesstechnologies for total quality management, tobecome an agile competitor, or to form a virtualcompany.

Explain how knowle d ge management systemscan help a business gain strategic a d vantages.

Chapter Objectives

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T he Competitive Environment

Threat ofNewEntrants

Rivalry AmongExisting

Competitors

Bargaining Powerof Customers

Bargaining Powerof Suppliers

Threat ofSubstitutes

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Competitive Forces and Strategies

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T he Competitive Environment A firm can survive in the long run if it successfully develops

strategies to confront five generic competitive forces that operatein the firm's relevant environment.

Threat of New Entrants. Many threats to long run survival comefrom companies that do not yet exist or have a presence in a givenindustry or market. The threat of new entrants forces topmanagement to monitor the trends, especially in technology, thatmight give rise to new competitors.

"domestic only" competition will encounter new internationalcompetitors.

Bargaining Power of Suppliers. Suppliers with access to key or limited resources, or who dominate their industries, may exertundue influence on the firm. Many firms seek to reduce their dependence on a single firm to limit the suppliers' bargaining

power.

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T he Competitive Environment Rivalry Among Existing Firms. In mature industries, existing

competitors are not much of the threat: typically each firm hasfound its "niche". However, changes in management, ownership,or "the rules of the game" can give rise to serious threats to longterm survival from existing firms.

the airline industry faces serious threats from airlines operating in bankruptcy, who do not pay on the debts while slashing faresagainst those healthy airlines who do pay on debt.

Bargaining Power of Customers. Customers can grow large and powerful as a result of their market share. For example, Wal-Mart is the largest customer for consumer package goods andoften dictates terms to the makers of those goods -- even a giantlike Procter & Gamble.

Threat of Substitutes. To the extent that customers can usedifferent products to fulfill the same need, the threat of substitutes

exists.

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Fundamental Competitive Strategies - Cont.

Differentiation Strategies

Innovation Strategies

Growth Strategies

Alliance Strategies

Cost Leadership Strategies

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Fundamental Competitive Strategies - Cont.

Competitive Advantage is created or maintained with thecompany succeeds in performing some activity of value tocustomers significantly better than does its competition.According to Porter, competitive advantage can be developed byfollowing one or more of these strategies:

Cost Strategies . Becoming a low-cost producer in the industryallows the company to lower prices to customers. Competitorswith higher costs cannot afford to compete with the low-costleader on price.

Differentiation Strategies . Some companies create competitiveadvantage by distinguishing their products on one or morefeatures important to their customers. Unique features or benefitsmay justify price differences and/or stimulate demand

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Fundamental Competitive Strategies - Cont.

I nnovation Strategies . Unique products or services or changesin business processes can cause fundamental changes in the wayan industry does business. E.g. applying TQM, originallydeveloped for manufacturing, to the service industry helped RitzCarlton when the Malcolm Balridge Award for excellence.

Growth Strategies . Significantly expanding production capacity,entering new global markets, diversifying into new areas, or integrating related products or services can all be a springboard tostrong company growth. Intel has increased its capacity (andlowered its costs) just as competitors were close to matching its

previous technology in integrated chip manufacturing and design.Alliance Strategies . Establishing new business linkages andalliances with customers, suppliers, former competitors,consultants, and others can create competitive advantage

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B asic strategies in the B usiness use of I T

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Strategic Uses of Information T echnologyImprovingBusiness

Process

PromoteBusinessInnovation

Locking inCustomersan d Suppliers

Use I T to

reduce costsof doingbusiness

Use I T toimprove qualityUse I T to linkbusiness tocustomers andsuppliers

Use I T tocreate newproducts or services

EnhanceEfficiency

Create NewBusinessOpportunities

Maintain ValuableCustomers an d Relationships

Strategy

IT Role

Outcome

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Strategic Uses of Information T echnology

RaiseBarriersto Entry

Build

aStrategic ITPlatform

Build

aStrategicInformation Base

Increase

amount of investment or complexity of IT needed tocompete

Use I T to

provideinformation tosupport firmscompetitivestrategy

Leverageinvestment inIS resourcesfrom operat-ional uses tostrategic uses

IncreaseMarket Share

Create NewBusinessOpportunities

EnhanceOrganizationalCollaboration

Strategy

IT Role

Outcome

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Other competitive strategies

Lock in customers and suppliers And lock out competitors Deter them from switching to competitors

Build in switching costs Make customers and suppliers dependent on the useof innovative IS

Barriers to entry Discourage or delay other companies from entering

market Increase the technology or investment needed to

enter

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Other competitive strategies (cont.)

Include IT components in products Makes substituting competing products more

difficult Leverage (Influence) investment in IT Develop new products or services not possible

without IT

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T he Value Chain

Ad ministrative Coor d ination & Support Services

Human Resource Management

Technology Development

Procurement of Resources

Inboun d

LogisticsOperations Outboun

d

Logistics

Marketingan d

Sales

Customer

Service

Page 44 figure 2.6

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Porter and Millars Value Chain Concept provides a means to evaluate business activitiesand the use of information technology.

Strategic Use of I T

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Porter and Millars Value Chain

Value Activities = those activities a firm must doto do business

Primary activities create, market, deliver, andservice a product

Support activities make the primary activities possible. Information Systems is a supportactivity

Strategic Use of Information

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The way one activity in chain is performed mayaffect the performance of other.

Example; superior product design may reduceafter sales service costs. Activities are linked. Information systems helpmanagers to manage the linkages betweenactivities.

Value Chain

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Inbound Logistics: material handling, logistics. Operations: Manufacturing, parts assembly. Outbound Logistics: Order processing, shipping Marketing and Sales: advertising, promotion. Service: after sales service and repair. Organization: gerneral management, accounting,

legal work. Human Resources: Acquiring the right perso

Value Chain: Primary Activities

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T he Value Chain

T he Value Chain Concept d evelope d by Michael Porter views a firmas a series of basic activities (the "chain") that add value to its productsand services that support a profit margin for the firm.

In the value chain concept, some business activities are primaryactivities and others support activities. For each activity, the role of strategic information systems (SIS) can contribute significantly to thatactivity's contribution to the value chain:Support Activities. Support activities create the internal infrastructurethat provides direction to and support for the specialized work of primaryactivities:

Management and Administrative Services. T he key role of SIShere is in automated office systems. Human Resources Management. SIS role: Employee SkillsDatabase.

Technology Development. SIS role: Computer-Aided Design.

Procurement of Resources. SIS role: EDI with suppliers.

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T he Value Chain

Primary Activities. T hese activities d irectly contribute to thetransformation process of the organization.Inboun d Logistics. S IS role: Automate d Warehousing, J IT .

Operations. S IS role: Computer-Ai d e d Manufacturing.

Outboun d Logistics. S IS role: Online Data Entry.

Marketing an d Sales. S IS role: Market Analysis.

Service. S IS role: Diagnostic Expert System.

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T he Internet Value Chain

Marketing an dPro d uctResearch

Sales and

Distribution Support and

Customer Fee d back

Data for

marketresearch,establishesconsumer responses

Access tocustomer com-ments onlineImmediate re-sponse tocustomer problems

Low costdistributionReaches newcustomersMultipliescontact points

IncreaseMarket Share

Lower Cost Margins

Enhance d CustomersSatisfaction

InternetCapability

Benefitsto

Company

Opportunityfor

Advantage

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Customer-Focused e- B usiness

Let customersplace or d ers thrud istributionpartners

T ransactionDatabase

Link Employeesan d d istributionpartners

Let customerscheck or d er historyan d d elivery status

Let customersplace or d ersd irectly

Customer Database

Buil d acommunityof customers,employees,an d partners

Give allemployees acomplete viewof customers

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Customer-Focused e- B usiness A key strategy for becoming a successful e-business is to

maximize customer value . This strategic focus on customer value recognizes that quality rather than price becomes the

primary determinant in a customers perception of value. ACustomer-Focused e-business, then, is one that uses Internet

technologies to keep customer loyal by anticipating their futureneeds, responding to concerns, and providing top qualitycustomer service.

technologies like intranets , the Internet , and extrane t websitescreate new channels for interactive communications within acompany, with customers, and with suppliers, business partners,and others in the external business environment. Thereby,encouraging cross-functional collaboration with customers in

product development, marketing, delivery, service and technical

support.

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Customer-Focused e- B usiness

A successful Customer-Focused e-business attempts to own thecustomer's total business experience through such approaches as: Letting the customer place orders directly, and through

distribution partners

Building a customer database that captures customers' preferencesand profitability, and allowing all employees access to a completeview of each customer.

Letting customers check order, history and delivery status Nurturing an online community of customers, employees, and business partners.

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B usiness Reengineering and Quality Management

Business QualityImprovement BusinessReengineering

Definition

Target

PotentialPayback

Risk

What Changes?

PrimaryEnablers

Incrementally ImprovingExisting Processes

Ra d ically Re d esigningBusiness Systems

Any Process Strategic Business

Processes 10%-50% Improvements 10-Fol d Improvements

Low High

Same Jobs - More Efficient Big Job Cuts; New Jobs;Major Job Re d esign

IT an d Work Simplification IT an d OrganizationalRe d esign

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B usiness Reengineering and Quality Management

One of the most important competitive strategies today is b usiness processreengineering (BPR) most often simply called reengineering . Reengineeringis more than automating business processes to make modest improvements inthe efficiency of business operations. Reengineering is a fundamentalrethinking and radical redesign of business processes to achieve dramaticimprovements in cost, quality, speed, and service. BPR combines astrategy of promoting business innovation with a strategy of making major improvements to business processes so that a company can become a muchstronger and more successful competitor in the marketplace.

However, while many companies have reported impressive gains, many othershave failed to achieve the major improvements they sought through

reengineering projects.Business quality improvement is a less dramatic approach to enhancing

business success. One important strategic thrust in this area is called TotalQuality Management (TQM).

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B usiness Reengineering and Quality Management

TQM emphasizes quality improvement that focuses on the customer requirements and expectations of products and services . This may involvemany features and attributes, such as performance, reliability, durability,responsiveness etc.

TQM uses a variety of tools and methods to provide: More appealing, less-variable quality of products or services Quicker less-variable turnaround from design to production and distribution Greater flexibility in adjusting to customer buying habits and preferences Lower costs through rework reductions, and non-value-adding waste

elimination.

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T he Customer- Focused Agile Competitor

Leverage theImpact of People an d IS Resources

Anticipation of future nee d s

CustomizationConformance

Give CustomersSolutions

to Problems

Cooperate withBusiness Partnersan d Competitors

Organize toMaster Change

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T he Customer- Focused Agile Competitor Agility in competitive performance is the ability of a business to prosper in

rapidly changing, continually fragmenting global markets for high-quality,high-performance, customer-configured products and services. Agilecompanies depend heavily on information technology to support and manage

business processes. The four fundamental strategies of agile competitionare:

Enrich Customers. Agile companies enrich customers with solutions to their problems. Long term value-added products and services succeed when theysolve problems based on customer needs. As conditions change, the agilecompetitor establishes a relationship based on the ability and willingness tochange to meet new customer problem situations.Cooperate. Agile companies cooperate to enhance competitiveness. Thismeans internal cooperation and, where necessary, cooperation with competitorsin order to bring products and services to market more quickly.Organize. Agile companies organize to master change and uncertainty. This isa key component of agile competition because it seeks development of theanticipation and rapid response to changing conditions, not an attempt to stifle

change itself.

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T he Customer- Focused Agile Competitor L

everage People andInformation. Agile companies leverage the impact of people and information by nurturing an entrepreneurial spirit and providing

incentives to employees to exercise responsibility, adaptability, and innovation.Free Dimension. Emphasizes that most customers want the lower cost for value received, but are willing to pay more for a value-added service.Perfect Dimension. Emphasizes that products and services should not only bedefect free, but should be enhanced by customization, added features andshould further anticipate future customer needs.Now Dimension. Emphasizes that customers want 24x7 accessibility to

products and services, short delivery times, and consideration of the time-to-market for their own products.

Example Dell page 54

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Bor d erless

Technology

Excellence

Trust-Base d

Ad aptability

Opportunism

SixCharacteristicsof Virtual

Companies

Virtual Corporations

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Virtual Corporations

A Virtual Company is an organization that uses informationtechnology to link people, assets, and ideas. People and corporations are forming virtual companies in order to

take advantage of strategic opportunities that require time, peoplecompetencies and information technologies resources that maynot exist within a single company.

By making strategic alliances with other companies and quicklyforming a virtual company of all-star partners, the virtualcompany is best able to assemble the components needed to

provide a world-class solution for customers and capture theopportunity.

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Virtual Corporations

To succeed the virtual company must possess six characteristics:Adapta b ility : Able to adapt to a diverse, fast-changing businessenvironment. Virtual companies must further reduce concept-to-cash time through sharing.

Opportunism: Created, operated, and dissolved to exploit

business opportunities when they appear. They must gain accessto new markets and share market or customer loyalty, whileincreasing facilities and market coverage.Excellence : Possess all-star, world-class excellence in the corecompetencies that are needed. These competencies must beseamlessly linked through the use of Internet technologies.

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K nowledge Management Systems

SolutionKnowle d ge

DevelopmentEngineers

T echnicalSupportStaff

Pro d uctManagers Other

Ven d ors

Customers

TheInternet

Intranet

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K nowledge Management SystemsK

nowledge Management has become one of the major strategic uses of information technology. K nowledge Management Systems ( K MS) aresystems that are used to manage organizational learning and business know-how. The goal of knowledge management systems is to help knowledgeworkers create, organize, and make available important business knowledge,whenever, and wherever its needed.

Such knowledge may include explicit knowledge like reference works,formulas, and processes, or tacit knowledge like best practices, and fixes.Internet and intranet technologies, along with such other technologies likeGroupWare, data mining, and online discussion groups are used by KMS tocollect, edit, evaluate and disseminate knowledge within the organization.

Knowledge management systems are sometimes called adaptive learning systems, because they create cycles of organizational learning called adaptivelearning loops, which allow the knowledge company to continually build andintegrate knowledge into business processes, products, and services. Thereby,helping the company to become a more innovative, agile provider of goods andservices.

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Information systems can play several strategicroles in business.T he Internet, intranets, extranets, an d other Internet-base d technologies can be use d strategically for e-business an d e-commercethat provi d e a competitive a d vantage.A key strategic use of Internet technologies isto buil d an e-business which d evelops itsbusiness value by making customer value itsstrategic focus.

Chapter Summary

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IT is a key ingre d ient in reengineering businessoperations, by enabling ra d ical changes tobusiness processes that d ramatically improvetheir efficiency an d effectiveness.

IT can be strategically use d to improve thequality of business performance.A business can use IT to help it become anagile company, that can respon d quickly tochanges in its environment .

Chapter Summary (cont)

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Chapter Summary (cont)

Forming virtual companies has becomean important competitive strategy into d ays d ynamic global market .

Lasting competitive a d vantages to d aycan only come from innovative use an d management of organizational knowle d geby knowle d ge creating companies an d learning organizations.