IT as a Competitive Advantage Presented by Vaishali

IT as a Competitive Advantage Presented by: Vaishali Soneta Matthew Pasley Megan Cox Michelle Wagener 1

The Importance of IT in an Organization n Understanding IT and its Role can… n Gain a competitive advantage n Improve efficiency of business processes n Expand/revolutionize markets n Not Understanding IT and its Role can… n Lead to Wasted IT budget n Lead to Business Failure 2

IT as a Competitive Advantage n n Understanding Sources of sustained competitive advantage in the field of Strategic Management Obtain sustained competitive advantage by implementing strategies: n n n Exploit their internal strengths Responding to environmental opportunities Neutralizing external threats Avoiding internal weaknesses It works on 2 simplified assumption: n n Environmental models- firms within an industry are identical in terms of relevant resources (control) and the strategies (pursue) Resources used to implement their strategies are highly mobile. 3

Resource Based View n n Based on 2 assumptions: n Firm within an industry may be heterogeneous with respect to strategic resources they control n Resources may not be perfectly mobile across the firms Penrose, Edith, Theory of the Growth of the firm, Oxford, Blackwell 1959 Discussed that a firms strategy focuses on its resources instead of external environment. This is an inward-looking view of strategy 4

RBV According to RBV, firm resources are the main determinant Of competitive advantage and firm profitability. Competitive Advantage ? Firm Resources ? Firm Profitability Michalisin et al, 1997 5

RBV According to RBV, merely having resources doesn’t generate positive competitive advantage and positive firm profitability. Only strategic assets lead to a positive relationship: Strategic Assets + Competitive Advantage + Firm Profitability Michalisin et al, 1997 6

RBV §Physical Capital (property, plant, technologies) §Human Capital (Employee Know. How, insight, judgment) §Organizational Capital (culture, systems, structures, intellectual property rights) §Tangible Resources (have physical properties and include various types of property, plant, equipment, and other physical technologies) Intangible Resources Strategic Assets are intangible assets that are: Ø Valuable Ø Rare Ø Imperfectly Imitable Ø Nonsubstitutable Ø Appropriability Ø Mobility §Intangible Resources (the potentially valuable, non substitutable resource-based advantage is rare and imperfectly imitable) 7

Attributes to Create Competitive Advantage Valuable: if it allows the firm to exploit opportunities in the market or thwart competitive threats (idea of strategic fit of firm resources, firm strategy, competitive context); allow a firm to conceive of or implement strategies that improve efficiency and effectiveness; Rareness: number of firms in competitive arena possessing a resource is less than the number of firms needed to generate perfect competition. Appropriability: Appropriability addresses how easily the resource can be appropriated by a competitor. It assesses the value that the resource creates and whether or not a given firm has the right to accrue these profits Barney, 1991; Michalisin et al, 1997 8

Attributes to Sustain Competitive Advantage Imperfectly Imitable: depends on unique historical conditions, causal ambiguity (neither firm or competitors know how resources yield a CA), social complexity (beyond a managers ability to systematically manage & influence, like culture); also a function of observability; Non-substitutable: no strategic equivalents; the rent-generating capacity of resource A is only lessened to the extent that resource B can provide strategic benefits similar to those afforded by resource A; Mobility: Imperfect Mobility; Captures the extent to which the underlying resources can be acquired through factor markets Ex: A charismatic leader may be a substitute for a superior planning process if both resources yield a clear view of the future to the entire organization. Barney, 1991; Michalisin et al, 1997 & MIS Quarterly vol 28 No. 1/March 2004 9

Case Study Analysis Rehab. Care Group Inc. n Progressive n International Multifoods, Inc. (IMC) n 10

Rehab. Care Group Inc. Matthew Pasley 11

Rehab. Care Group Inc. n Incorporated in 1982 as a provider of temporary healthcare staffing and therapy program management for hospitals and skilled nursing facilities. n Business is divided into two main catagories: Hospital Rehabilitation Services and Healthcare Staffing Services n Annual revenues of $540 million www. rehabcare. com/investor 12

Rehab. Care Group Inc. Example of Revenue Breakdown Rehab. Care Annual Report 13

Rehab. Care Group Inc. n Currently employs over 6, 000 people nationwide n Company has relationships with more than 7, 000 hospitals and skilled nursing facilities. n They serve clients in all 50 states and the District of Columbia. www. rehabcare. com/investor 14

Rehab. Care Group Inc. Rehab. Care Annual Report page 4 15

Rehab. Care Group Inc. Business Model § All Divisions operate based on 3 year to 5 year contracts. § 75% of all contracts are renewed upon completion. Personal interview with CIO Natasha Hawkins 16

Rehab. Care Group Inc. Business Model § Premise of this service is that a hospital or nursing facility does not have the means to deliver Acute or nursing care. The company comes in and runs the facility with the only money out of the hospital’s pocket coming from a monthly bill based on patient stay. § Market is becoming increasingly hostile with new companies breaking in to gain market share. Personal interview with CIO Natasha Hawkins 17

Rehab. Care Group Inc. Business Model § The customer in relation to Rehab. Care is the hospital and the care physicians. § The main measure of success or customer satisfaction is in number of contracts and length of contracts. Personal interview with CIO Natasha Hawkins 18

Rehab. Care Group Inc. Business Model § In the acute setting, most therapists are guaranteed work for the length of the contract while nursing home therapists can be only on one day to one year assignments. § Revenues and margins are being increasingly hard to obtain due to stricter government regulations such as Medicare caps on patient care. Personal interview with CIO Natasha Hawkins 19

Rehab. Care Group Inc. Business Model Rehab. Care Annual Report page 15 20

Rehab. Care Group Inc. IT and the company § As of 2000, the IT division of Rehab. Care consisted of seven people § No training or service was being given to the staff and many processes were manual. § Natasha Hawkins, CIO, stated, “According to upper management and to the field, we in IT were just overhead or a group to call if their cell phones weren’t working. Personal interview with CIO Natasha Hawkins 21

Rehab. Care Group Inc. IT and the company § 2001 saw almost 40% of existing contracts come up for renewal and 1 out of every three were backing out. § The company brought in a consulting firm to diagnose the problem and they found that Rehab. Care was behind in many aspects and one major one being IT. § Currently IT consists of 17 employees ranging from help desk clerks to answer field questions to knowledgeable programmers. Personal interview with CIO Natasha Hawkins 22

Rehab. Care Group Inc. Problem facing Rehab. Care § Early 2001 saw contracts being lost and customer complaints rising. § Customers complained of late, useless data as well as the fact that they felt disconnected with their service provider which was Rehab. Care. § Continual Medicare audits came up with facilities being non compliant with government standards and facilities having to close until they straightened out their data. Personal interview with CIO Natasha Hawkins 23

Rehab. Care Group Inc. Problem facing Rehab. Care § Many clinicians had lost faith in the company and its goals. § Divisions such as the contract therapy division went from signing 10 -15 contracts a month to losing 5 -8 a month and only signing 3 -4 contracts a month. § Many hospitals saw that working with Rehab. Care was too risky as a result of the continual Medicare audits and opted to self operate the facilities themselves. Personal interview with CIO Natasha Hawkins 24

Rehab. Care Group Inc. The Proposal § Natasha Hawkins, CIO: “ The CEO and the division Presidents came to IT and sought answers to how we can gain back the customers confidence. We determined that the main problem was the lack of timely information as well as the feeling that they, the hospital, were disconnected from the company. We also knew that the Medicare audits had to begin having positive results. Our IT team stepped to the front of the line and said lets get this thing rolling. ” Personal interview with CIO Natasha Hawkins 25

Rehab. Care Group Inc. Project Scope § A budget of $1. 5 million dollars was given to IT and a one year period was established to get the process done and the software package built. January 2003 it was to be fully implemented. § Constructed a model that incorporated all the census systems that were currently being used into one central mainframe. § Determined that the census data that was complied daily should be available to all users either in the facility or accessed from the internet. Personal interview with CIO Natasha Hawkins 26

Rehab. Care Group Inc. How daily census was being collected HRS Division § Each facility had paper sheets § A census clerk would then manually input from each sheet into a software called Fox. Pro. § The census clerk would then go in the next day and reconcile each line to the system at the hospital. Personal interview with CIO Natasha Hawkins 27

Rehab. Care Group Inc. How daily census was being collected HRS Division § Data from the facility would not be available to the hospital administrator till the next day. § Since the process was manual and lack internal structure, sometimes days of information would not go in until the end of the month. § Hospital would inaccurately accrue for their monthly bill and issue incorrect estimates. Personal interview with CIO Natasha Hawkins 28

Rehab. Care Group Inc. IT enabled Project § Built in-house software called PROMOS (Performance Management Operating System). § Allowed for update of information instantly. § Consolidated the Fox. Pro and STAR system into one functioning database. Personal interview with Natasha Hawkins CIO 29

Rehab. Care Group Inc. IT enabled Project § PROMOS was web enabled and allowed managers as well as hospital administrators to access it at all times. § Built with the flexibility to produce many statistical reports for management upon request. Personal interview with CIO Natasha Hawkins 30

Rehab. Care Group Inc. IT enabled Project - Results § Took about 3 months longer and $500 K more. § Upper management was very pleased with the results and is now pushing to put more money into IT enabled projects. § Success was contributed to the business lines and not the IT group. § Instant praise was given to management by the hospital administrators. § Days sales outstanding dropped by 7 days in a matter of 3 months. Personal interview with CIO Natasha Hawkins 31

Rehab. Care Group Inc. Market Results – Competitive advantage § In September 2003 Rehab. Care purchased CPR therapists which was over 70 contracts and 13 million in revenue. § In August of 2003 signed a joint venture with UCLA hospitals for 10 years. § Contract therapy is signing approximately 18 new contracts a month. § St. Anthony’s in St. Louis just completed an therapy wing to accommodate patient care that are being given by Rehab. Care Annual Report 2003 32

Rehab. Care Group Inc. Market Results – Competitive Advantage *All of these acquisitions and joint ventures are being done with intense competition from their competitors such as Select Medical and Sundance. “When we first started here in 2001 they shut an entire outpatient program down because they didn’t have enough faith that we could correctly manage it. Now, they have increased our inpatient unit from 19 beds to 48 beds and they are begging us to treat outpatient, subacute, or any type of therapy because we are making their lives easy. We put in systems such as PROMOS that makes operating their business easy, flexible and makes them look good in the hospital market. ” Bridged Jensen, Program Manager St. Anthony’s hospital. Phone call with Bridged Jensen, Program Manager at St. Anthony's Hospital 33

Rehab. Care Group Inc. IT Enhancement Rehab. Care Annual Report page 25 34

Does Rehab. Care Have a Sustainable Competitive Advantage? n Did it contain the necessary Resource Attributes? n Valuable n Rareness n Appropriability n Imperfectly Imitable n Non-substitutable n Imperfect Mobility 35

Extent of Success through 6 attributes Rehab. Care Valuable Joint ventures and acquisitions Rareness In-House built Census software Appropriability Imperfectly Imitable Non-substitutable Unless Internal IT department goes to a competitor Cornered the market No software has flexibility nor is web enabled Imperfect Mobility Strong relationship between IT/Management and hospital administrator 36

Progressive Auto Insurance Megan Cox 37

Background Information n On March 10, 1937 Joseph Lewis and Jack Green started Progressive Mutual Insurance Company because they wanted to provide vehicle owners with security and protection In 1956 the company formed Progressive Casualty Company to write auto insurance for high risk drivers In 1990 the company introduced a full range of personal auto insurance products and immediate response claims service that was available 24 hrs. a day seven days a week source: www. progressive. com 38

Five Year Financial Highlights 39

Progressive and the Internet n In 1995 the company introduced Progressive. com the first industry’s presence on the internet n In 1998 progressive became the first company to allow customers to access their account information online when it launched personal. progressive. com n Also in 1998 Progressive launched its Foragentsonly. com site, which provides a variety of functions to its authorized independent agents source: www. progressive. com 40

Organization of the company n n CEO is Glenn Renwick CFO is Thomas Forrester CIO is Ray Voelker According to Voelker, he and Renwick communicate three or four times a week: n “Its obviously a lot easier for me to discuss technical things with Glenn, “ says Voelker. “Although he was only in technology for two years, he has a context for the things that we need to discuss. ” www. umsl. edu: 2085/pqdweb 41

Products Offered n n n Auto Motorcycle/ATV Boat/PWC RV Segway HT Commercial Auto source: www. progressive. com 42

Progressive and Market Share PRIVATE PASSENGER AUTO RANKINGS Market Share n 1 State Farm 20. 1% n 2 Allstate 11. 4% n 3 Progressive 7. 0% n 4 GEICO 5. 4% n 5 Nationwide 4. 6% n 6 USAA 3. 8% n 7 Farmers/Zurich 3. 8% n 8 Liberty Mutual 2. 5% n 9 AIG 2. 4% n 10 American Family 2. 1% n Based on estimated 2003 Source: net Progressive 2003 Annual Report 43

Progressive’s Customers n n n The combined growth in Progressive Policies in force over the past three years is 57%---a lot of new customers “Our goal to be consumer’s No. 1 choice for auto insurance demands that we not only attract new customers, but also that we make it attractive for them to stay. ” “Everything we do recognizes the needs of busy customers who are cost-conscious, increasingly savvy about insurance and ready for easy new ways to quote, buy and manage their policies, including claims service that respects their time and reduces the trauma and inconvenience of loss. ” source: The Progressive Corporation 2003 Annual Report 44

Progressive’s Shareholders n 30 year compounded annual return to shareholders of 22. 8%, compared to S&P 500 average return of 9. 1% source: Journal of Organizational Excellence; Spring 2002; 21, 2 ABI/INFORM Global 45

Progressive as a Critical Differentiator n n n “By making innovative use of information technology and new service strategies, Progressive has been able to increase its market share and improve bottom line performance. ” The creative application of information technology has become the cornerstone of Progressive’s competitive strategy The company is committed to applying information technology to continuously improve customer service and lower the cost of its operations source: Journal of Organizational Excellence/ spring 2002

Progressive as a Critical Differentiator n According to Peter Lewis: n “Technology is just a tool, but you can turn it into a weapon against competitors if you focus on a single mantra--in our case, speed--and keep innovative around it. It has worked well for us and will continue to do so…” source: www. businessweek. com 47

Technologies Progressive Integrates to Establish Themselves as a Critical Differentiator n n Wireless Application Protocol For. Agents. Only. com (FAO) personal. progressive. com Immediate Response Vehicle 48

Wireless Application Protocol n n n WAP enables Progressive to get onto every cell phone with a web browser Gives Policyholders access to company and account information through WAP Customers can also access direct staff, claims representatives and customer service support through a WAP--enabled device Source: Progressive goes wireless with WAP technology 49

For. Agentsonly. com n Chris Garson, Progressive’s Agency Business IT Director states: n “agents and brokers tell us that they want to work with companies that make things easy and this technology does just that…” n “This speeds up transactions, satisfying agents and their customers. And, agents and brokers can be confident that the information they provide their customers is up-to-date and accurate. ” source: www. ivans. com 50

Personalprogressive. com n Progressive decided that it’s not enough that you can by insurance online at progressive. com--you should be able to manage your policy, by making payments and changing coverages, whenever you want to--with personal progressive you can source: www. progressive. com 51

Immediate Response Vehicle n The IRV is a specially-marked and outfitted vehicle that transports trained claims professionals to wherever the customer needs them n Outfitted with the latest technology, the claim rep. In an IRV is able to make a damage estimate and write a check right on the spot source: www. progressive. com/progre ssive/prg_firsts. asp 52

What has IT done for Progressive? n Since starting its net initiatives, Progressive’s revenues have jumped from $3. 4 billion in 1996 to $9. 5 billion in 2002 --an average of almost 20% annually, vs. 5% for the overall auto-insurance industry source: Business Week: Companies that Really Get It. . . 53

Progressive and the Importance of IT n “I have often described Progressive as a technology company in the auto insurance business. ” n “Much of what we have achieved has been made possible by our talented information technology staff…” n “Our continuous investment in technology over the past several years has positioned us well to remain a leader in technology solutions for service delivery to both our customers and agents…. ” source: Progressive annual 2003 report 54

Question: Does Progressive Demonstrate any of the Six Resource Attributes? 55

Extent of Success through 6 attributes Progressive Valuable Fast delivery of service Rareness IS-business Partnership Appropriability Possess next-generation software to improve efficiency and therefore have rent-earning potential Imperfectly Imitable Difficult for the competitors to imitate Information Integration strategy Nonsubstitutable IS technical skills, development and cost efficient Imperfect Mobility Technological knowledge with managerial experience 56

International Multifoods, Inc. (IMC) Michelle Wagener 57

International Multifoods, Inc. (IMC) n n n Established in late 1800 s A Midwest based flour milling company One of the leading food product and service distribution businesses Operate in Canada, Venezuela, and United States IMC acquired Vending Services of America (VSA) in 1984 Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 58

International Multifoods, Inc. (IMC) 59

Vending Services of America (VSA) n Major subsidiary of IMC n Began in 1970 s as an entrepreneurial venture n Internally grew by acquiring small vending service firms Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 60

VSA Sales and Accounts n 1985 – 1993 grew from $200 million to $900 million n 1994 – VSA operated 20 distribution centers - VSA served 18, 000 accounts - VSA stored 12, 000 items Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 61

IMC and VSA n In 1994, IMC suffered major financial losses n IMC’s upper management decided to focus on the manufacturing and distribution of products n VSA becomes critical to IMC’s strategy n This focus put IMC in the “specialty food service distribution” market Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 62

Vending Industry Sales Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 63

Concern of the Vending Industry n 1994 customers spent $22 billion on vending n Industry in trouble because of decline in manufacturing jobs, changing consumer preferences, and substitutes of vended goods n No barrier to entry in vending industry Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 64

History of IS at VSA n Lagged behind the industry in IT budget n Spent less than. 2% of revenue per year on technology (industry spent. 5%-1%) n IT was not well understood by top managers n IT expense was not a strategic asset n IT at VSA frustrated customers and users Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 65

VSA Challenges n Costs increasing n Profit margins decreasing n Small profit margins (2 -3%) n Problems with customer service and inventory (Customer service is life-blood of VSA) Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 66

VSA Challenges cont. n Poor Information Systems n Sales declined in 1994 n Competed in a decentralized manner n Not achieving economies of scale n Morale problems Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 67

The Proposal n Renaissance IS n “the most advanced system in the industry” n Investment of $20 million n Support a central sales order staff n Allow to better measure: • product freshness • manufacture promotion and rebate programs • product turnover trends • customer usage history n Transform VSA into an integrated company Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 68

Renaissance Project Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 69

Expected Benefits n Reduce operating expenses n Improve customer service n Workstation reductions in purchasing, operations, and administration n GMs will not have to rely on personalized relationships with customers for major sales n Net benefit = $25 million over 5 years Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 70

Implementation Plan n 2 years devoted to system design, implementation, development, followed by a planned roll-out over 2, 6 month phases in 1994 n A major IS consulting firm served as coordinator of the project n Pilot studies completed (revealed major problems) Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 71

Problems with Renaissance n n Reconciling orders processed Response time was poor Disappointing results: n Manpower savings n Overtime requirements n Fill rates n Revenue n Sales margin improvement Poor implementation and misjudgments Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 72

What to do? n Two alternatives after pilot studies revealed disappointing results n 1: scratch the Renaissance system altogether n 2: modify the system and/or the implementation plan in order to enhance the chances of success Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 73

Decision n VSA chose option 2 n Focus on: n Renaissance’s performance (in terms of customer waiting times and order processing cycles) n Improve the system’s capacity (storage and processing) n Improve data integrity (should be 99. 99% accurate, currently is only 70%) n Simplify the system Journal of Information Technology, Sep 2001, Vol. 16 Issue 3, p 175 -190, International Multifoods Case A and B 74

Results: n By 1996: n No improvement in Renaissance system or VSA n Management turnover increasing n Morale problems increasing n Sales declined 1% n IMC management continued to distance itself from VSA and Renaissance project 75

Does Multifoods Have a Sustainable Competitive Advantage? n Did it contain the necessary Resource Attributes? n Valuable n Rareness n Appropriability n Imperfectly Imitable n Non-substitutable n Imperfect Mobility 76

Extent of Success through 6 attributes Multifoods Valuable Not able to manage external relationships; not responding to customer needs Rareness Losing customers and buyers; IT systems not flexible, reacting slowly Appropriability Little money or attention paid to IT; poor IS infrastructure and technical skills; not able to integrate IT and business processes Imperfectly Imitable Lack complex relationships with vendors and customers and a strong IT strategy Non-substitutable IT system Imperfect Mobility Poor relationships with customers, and between management levels 77

Extent of Success through 6 attributes Rehab. Care Progressive Multifoods Valuable Joint ventures and acquisitions Fast delivery of service Not able to manage external relationships; not responding to customer needs Rareness In-House built Census software IS-business Partnership Losing customers and buyers; IT systems not flexible, reacting slowly Appropriability Unless Internal IT department goes to a competitor Possess next-generation software to improve efficiency and therefore have rent-earning potential Little money or attention paid to IT; poor IS infrastructure and technical skills; not able to integrate IT and business processes Imperfectly Imitable Cornered the market Difficult for the competitors to imitate Information Integration strategy Lack complex relationships with vendors and customers and a strong IT strategy Nonsubstitutable No software has flexibility nor is web enabled IS technical skills, development and cost efficient IT system Strong relationship between IT/Management and hospital administrator Technological knowledge with managerial experience Poor relationships with customers, and between management levels Imperfect Mobility 78