Strategic Uses of Information Systems MODULE 2 Management

Strategic Uses of Information Systems MODULE 2 – Management of Information Systems

Objectives • Explain what business strategy and strategic moves are • Illustrate how information systems can give businesses a competitive advantage • Identify basic initiatives for gaining a competitive advantage • Explain what makes an information system a strategic information system • Identify fundamental requirements for developing strategic information systems • Explain circumstances and initiatives that make one IT strategy succeed another fail.

Strategy and Strategic Moves • Strategy: framework, or approach, to obtaining an advantageous position • Business strategy: a plan to help an organization outperform its competitors • Often done by creating new opportunities, not beating rivals • Information system may be built to solve a problem or to seize an opportunity

Strategy and Strategic Moves (continued) • Strategic information system (SIS): an information system that helps seize opportunities • Strategic advantage: using strategy to maximize company strengths • Competitive advantage: having maximized an organization’s strengths to beat its rivals • Using the Web strategically can be advantageous • Simply extending business to the Web is no longer a strategic advantage

Achieving a Competitive Advantage • Competitive advantage is achieved when a for-profit company increases its profits significantly, usually through increased market share • Many initiatives can be used to gain competitive advantage • Strategic moves often combine two or more initiatives • The essence of strategy is innovation

Reduce Costs Initiative #1 • Customers want to pay as little as possible for products or services • Reduce costs to lower price • Automation greatly reduces manufacturing costs • Web can automate customer service activities • Companies that are first to adopt advanced systems that reduce labor enjoy competitive advantage until their rivals do likewise

Raise Barriers to Market Entrants Initiative #2 • Less competition is better for company • Gain competitive advantage by making it difficult or impossible for others to produce the same product or service • To lower competition, raise barriers to entrants • Obtain legal protection of intellectual property (copyrights and patents on inventions, techniques, and services) • Examples: Amazon’s one-click, Priceline’s reverse auction • Build unmatchable information systems • Rivals must do likewise or license your technology • Example: State Street Corp. ’s pension fund management ISs

Establish High Switching Costs Initiative #3 • Switching costs: expenses incurred when customer stops buying from one company and starts buying from another • Explicit: charge customer for switching (early termination of contract) • Implicit: indirect costs over period of time, such as implementation of new product, staff retraining • High switching costs lock in customers • Example: proprietary software, such as ERP systems, that have custom modifications

Create New Products or Services Initiative #4 • Having a unique product or service gives competitive advantage for a period of time • First mover: organization that is first to offer a new product or service • Usually results in superior brand name, better technology, more experience, or critical mass • Critical mass: body of clients that is large enough to attract other clients • Examples: e. Bay, Apple’s i. Phone

Create New Products or Services (continued) Initiative #4 • Being a first mover is not a guarantee of long-term success • Netscape • Infoseek • Must continue to improve and innovate to maintain competitive advantage

Differentiate Products or Services Initiative #5 • Product differentiation: persuading customers that your product is better than competitors’ • Usually achieved through advertising and customer experience • Exemplified by brand name success • Promotes brand name • Example: Skype, You. Tube

Enhance Products or Services Initiative #6 • Enhance existing products or services to increase value to consumer • Many products and services have been enhanced by use of the Web • Examples: Charles Schwab, Progressive Groups

Establish Alliances Initiative #7 • Alliance: two companies combining services • Makes product more attractive • Reduces costs • Provides one-stop shopping • Affiliate program: linking to other companies and rewarding the linker for click-throughs

Lock in Suppliers or Buyers Initiative #8 • Accomplished by achieving bargaining power • Bargaining power: leverage to influence buyers and suppliers • Achieved by being major competitor or eliminating competitors • Uses purchase volume as leverage over suppliers • Lock in buyers by making them fear high switching costs • Lock in clients by: • Giving away a product to make it become a standard (Microsoft’s Internet Explorer, Adobe’s Acrobat Reader, Macromedia’s Flash player) • Creating a physical or software limitation on using technology (Apple Computer’s i. Tunes)

Creating and Maintaining Strategic Information Systems • Many opportunities to accomplish competitive edge with information technology • Innovative software can establish a competitive advantage • Strategic information systems can be created from scratch or by modifying a previous system • To be an SIS, an information system must: • Serve an organization goal • Collaborate with other functional units of company

Creating an SIS • Top management must be involved throughout the process • Strategic information system must be part of the overall organizational strategic plan • Management should ask questions to determine whether to develop a new SIS • Estimating the financial benefits of SIS is extremely difficult • Many fundamental business changes may be involved

Creating an SIS (continued)

Reengineering and Organizational Change • To implement SIS, organizations must rethink the way they operate • Reengineering: Eliminating and rebuilding operations from the ground up • Often involves new machinery and elimination of management layers • Frequently involves information technology • Goal is to achieve huge efficiency improvements • New SIS requires revamping business processes

Competitive Advantage as a Moving Target • Competitive advantage is often short-lived • Competitors soon imitate the leader, diminishing the advantage • SIS quickly becomes a standard business practice • Must continually modify and enhance technology to sustain competitive advantage

Jet. Blue: A Success Story • Jet. Blue: airline company that entered a formerly hurting market with great success • • Ticketless travel Automation with IT Reduced costs Improved service

Jet. Blue: A Success Story (continued)

Massive Automation • Jet. Blue developed Open Skies software to automate ticket handling • Avoids travel agents and their fees • Uses reservation agents who work from home using Vo. IP • Encourages Internet flight booking by customers • Maintenance information system used to log airplane parts and time cycles for replacement

Massive Automation (continued) • Flight planning to maximize occupied seats is automated • Operational data is updated flight by flight and available to management at all times • Training management system eliminates need for paper records, allows tracking of employee training

Away from Tradition • Jet. Blue used innovative technique for routing airplanes • Does not use hub-and-spokes method, only point to point • Take most profitable route between cities • Keeping flight manuals on laptop computers allows for paperless cockpits • Saves preflight time associated with calculating weight of plane (annual savings of ~4800 hours) • Uses biometrics for authentication and authorization • Implemented a paperless frequent flier program

Enhanced Service • Technology helps Jet. Blue offer better service • • • Leather seats Real-time in-flight television On-schedule departures and arrivals Fewest mishandled bags in the industry Rapid check-in times and fast baggage retrieval Better security

Impressive Performance • Most important metric in airline industry is cost per available seatmile (CASM) • Measures how much it costs to fly a passenger one mile • Jet. Blue had lowest or second-lowest CASM for its first three years of operations • Less than 7 cents (industry average is 11 cents) • Jet. Blue fills 78% of its seats, while competitors fill only 71%

Late Mover Advantage • Late mover: enters the market later than other competitors • Can be viewed as advantage • Implements latest available technologies • Not burdened with legacy systems • Jet. Blue used 40% beta software

Ford on the Web: A Failure Story • Some strategic moves end up being colossal failures • May fail because of lack of attention to details • Unable to predict customer or business partner response • Ford’s great failed initiative was undertaken by Jacque Nasser, CEO of Ford

The Ideas • Nasser was eager to push Ford to the Web; his ideas included: • Install devices in vehicles to enable drivers and passengers to access Web • Establish Web site to market parts to auto manufacturers via auctions to encourage price competition among parts suppliers • Push vehicle sales to Web and bypass dealers and their fees

Hitting the Wall • Customers not very interested in Web access in vehicles in 2000 • Other car companies learned to use online part auctioning • State franchising laws did not allow car companies to bypass dealers • Online sales initiative failed

The Retreat • Ford abandoned plan to sell directly to consumers online • Web site used to select proper model only, but consumers must still utilize a dealer • Web site sold cars, but not enough to save Nasser’s job

The Bleeding Edge • Ford case shows that being a first mover is risky • Pioneers sometimes get burned even with careful planning • Bleeding edge: failure occurring because of company trying to be on leading edge • No prior experience from which to learn • Implementation costs are greater than anticipated • Technology ends up losing money for company

The Bleeding Edge (continued) • Due to bleeding edge, companies often wait before implementing newer technologies • Microsoft’s approach is to seize an existing idea, improve it, and promote it with marketing power • Also known as competing by emulating and improving

Summary • Some information systems have become strategic tools as a result of strategic planning; others have evolved into strategic tools • Strategic information systems help companies gain strategic advantage • Company achieves strategic advantage by using strategy to maximize its strength, resulting in a competitive advantage

Summary (continued) • Various initiatives for establishing strategic advantage: • Cost reduction, raising barriers to competitors, establishing high switching costs, new products, differentiating products, enhancing products, alliances, and locking suppliers • Creating standards often establishes strategic advantage in software industry

Summary (continued) • Reengineering: the process of redesigning a business process from scratch to significantly reduce costs • Strategic advances from information systems are short-lived; new opportunities must always be sought • Must keep systems on the leading edge to maintain strategic advantage • Bleeding edge is the undesirable result of a failed innovation effort

Questions?