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Lecture 1

Information Systems and Business Strategy

Business Objectives of Information Systems

Operational excellence
New products, models services, and business

Customer and supplier intimacy

Improved decision making Competitive advantage Survival
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Operational Excellence:
Improved efficiency results in higher profitability Information systems and technologies help to improve higher levels of efficiency and productivity Wal-Mart (largest retailer) is the champion of combining information systems, best business practices, and supportive management to achieve operational efficiency $408 billion in sales in 2010 Wal-Mart is the most efficient store in the world as a result of digital links between its suppliers and stores (the first to use CRP)
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Operational Excellence Cont Continuous replenishment planning system (CRP) is defined as the practice of partnering between distribution channel members that changes the traditional process from distributor-generated purchase orders based on economic order quantities to the replenishment by the vendor of product based on actual and forecast data. (cited in Vergin and Barr, 1999)
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Operational Excellence Cont

The goal of CRP is to reduce the cost of producing and moving product thru the vendor-retailer supply chain as well as to have open communication and seek alliances with manufacturers. Thus, they seek manufacturers who had the capability to:
1. monitor their sales 2. react to changes in sales as quickly as they occurred 3. manage their ordering and inventories efficiently
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Operational Excellence Cont

Benefits of partnering with manufacturers in CRP:

the distributors:
Significant reduction in inventory levels and stockouts Eliminate internal activity by turning over their inventory management to the manufacturers

the manufacturer/suppliers:
Faster flow of retail sales information allow more efficient production Quick adjustment to demand changes before large inventory deficits or excess occurs.
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New products, services, and business models:

Information systems and technologies enable firms to create new products, services, and business models A business model includes how a company produces, delivers, and sells its products or services to create wealth The music industry has seen drastic changes in business models in recent years Apple Inc. transformed and old business model of music distribution based on tapes, records, CD into an online based on iPod technology platform. Apple has been very successful at introducing new products (e.g., iPad, iPod nano, iPod video player, iPhone). Information Systems and Business Strategy 7

Customer and supplier intimacy:

Customers who are served well become repeat customers who purchase more Close relationships with suppliers result in lower costs The Mandarin Oriental in Manhattan uses information systems and technologies to foster an intimate relationship with its customers including keeping track of their preferences (room temperature, check in time, frequently dialed telephone numbers, TV programs store these data in a large data repository.
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Customer and supplier intimacy cont

JCPenney uses information systems to enhance its relationship with its supplier in Hong Kong TAL Apparel Ltd. Everytime a shirt is bought at JCPenny store in US, TAL decides how many replacement shirts to make, what colors, style and sizes. TAL then sends the shirts to each of JCPenny stores bypassing retailers.

Information Systems and Business Strategy

Improved decision making:

A companys bottom line can be hurt by managers being swamped with data that are neither timely nor helpful, forcing them rely on forecasts, best guesses, and luck resulting in over or under production of goods and services, misallocation of resources, and poor response time Real-time data have improved the ability of managers to make decisions Web-based digital dashboard utilised by VerizonCorp. (one of the largest telecomm co in US) can be used to update managers with real-time data on customer complaints, network performance, and line outages
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Competitive advantage:
Achieving the previously mentioned business objectives often leads to competitive advantage Advantages over competitors include charging less for superior products, better performance, and better response to suppliers and customers which add up to higher sales and higher profits Dell Computer is one of the best examples of establishing competitive advantage as the company has continued to be profitable during a time when PC prices have been falling steadily
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Businesses may need to invest in information systems out of necessity
Necessity arises from keeping up with competitors, such as when Citibank New York introduced ATMs in 1977 Necessity also arises from federal and state regulations, such as the Toxic Substances Control Act and the Sarbanes-Oxley Act

Information Systems and Business Strategy


Strategic Information Systems (SIS)

Certain types of systems have become especially critical to firms long term prosperity and survival. Such systems are powerful tools for staying ahead of the competition. They are called strategic information systems (SIS) SIS: computer systems at any level of the organization that change goals, operations, products, services, or environmental relationships to help the organization gain a competitive advantage. Systems that have these effects may even change the business of organizations.

Information Systems and Business Strategy


SIS (contd)
SIS is able to change significantly the manner in which biz is done. How? Contributing to the strategic goals of the organization Ability to increase performance and productivity significantly. SIS should be distinguished from strategic level systems (executive information system) that are used by senior managers. SIS can be used at all organizational levels. SIS profoundly alter the way a firm conducts its business or the very business of the firm itself.

Information Systems and Business Strategy


Different Types of SIS

1. Outward systems: aimed to compete directly with other companies in the industry 2. Inward systems: directed to enhance the competitive position of an organization by increasing employee productivity, improving teamwork, and enhancing communications between various components of the organization. 3. Hybrid systems: for e.g. CAT combined both outward (EDI and CAT TV) and inward (computer integrated manufacturing). 4. Strategic alliances: two or more companies share a SIS. Eg. Banks share the same ATM network.

Information Systems and Business Strategy


Management Challenges
Implementing SIS can be riskythe investment involved in implementing SIS is high SIS requires planningPorter and Millar framework can be used to plan and develop a strategy of how to use SIS Sustainability of competitive advantagecompetitive advantage isnt always sustainable

Information Systems and Business Strategy


Why strategic information systems are difficult to build and sustain

Expensive Risky to build (time consuming) Easily copied by other firms Implementing strategic systems often requires extensive organizational change and a transition from one sociotechnical level to another

Information Systems and Business Strategy


Different Levels of Strategy and Strategic Systems

There is generally no single all encompassing strategic systems, but instead there are a number of systems operating at different levels of strategythe business, the firm, and the industry level. For each level of business strategy, there are strategic uses of systems. And for each level of business strategy, there is an appropriate model used for analysis.
Business-level strategy: Porters value chain model Firm-level strategy: synergy and core competency Industry level strategy: information partnership, competitive forces model, network economics

Information Systems and Business Strategy


Business-Level Strategy and the Value Chain Model

At the business level strategy, the key question is: How can we compete effectively in this particular market? The most common generic strategies at this level are: 1) to become low-cost producer, 2) to differentiate your product or service, and 3) to change the scope of competition by either enlarging the market to include global markets or narrowing the market by focusing on small niches not well served by competitors. Digital firms provide new capabilities for supporting business level strategy by managing the supply chain, building efficient customer sense and respond systems, and participating in value webs to delivery new products and services to market. At the business level the most common analytic tool is value chain analysis.

Information Systems and Business Strategy


IS for achieving product differentiation

Product differentiation: competitive strategy for creating brand loyalty by developing new and unique products and services that are not easily duplicated by competitors. Firms can use IS to create unique new products and services that can be easily distinguished from those of competitors. SIS for product differentiation can prevent the competition from responding in kind so that firms with these differentiated products and services no longer have to compete on the basis of cost.

Information Systems and Business Strategy


IS to focus on market niche

Focused differentiation: competitive strategy for developing new market niches for specialized products or services where a business can compete in the target area better than its competitors. Businesses can create new market niches by identifying a specific target for a product or service that it can serve in a superior manner. Through focused differentiation, the firm can provide a specialized product or service for this narrow target market better than competitors.

Information Systems and Business Strategy


Supply Chain Management and Efficient Customer Response Systems

Digital firms have the capabilities to go far beyond traditional strategic systems for taking advantage of digital links with other organizations. A powerful business-level strategy involves linking the value chains of vendors and suppliers to the firms value chain. Integration of value chains can be carried further through linking the customers value chain to the firms value chain in an efficient customer response system. E.g. Wal-Mart continuous replenishment system.

Information Systems and Business Strategy


Porters Value Chain Model

The value chain model highlights specific activities in the business where competitive strategies can be best applied and where IS are most likely to have a strategic impact. The activities conducted in a co. can be divided into two parts: primary and support activities Primary activities: inbound logistics (inputs), operations (manufacturing and testing), outbound logistics (storage and distribution), marketing and sales, service. The primary activities are sequenced, value is added in each activity. All these activities result in profit. Support activities: the firm infrastructure, human resource management, technology development, procurement. Each support activity support any or all primary activities, and also each other. Value chain model is helpful if your goal is to achieve operational excellence.
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Using Value Chain Model

Evaluate a co. key processes; attention is given to strengths and weaknesses of all activities and the value added by each activity. The activities that add more values are those that might provide strategic advantage Investigate whether or not adding IT can add more value and where in the chain its use is most appropriate. Businesses should try to develop SIS for both the internal value chain activities and external web activities that add the most value. A strategic analysis might, for e.g. identify sales and marketing activities where IS could provide the greatest boost. The analysis might recommend a system to reduce marketing costs by targeting marketing campaigns more efficiently or by providing information for developing products more finely attuned to a firms target market. A series of systems, including some linked to systems of other value web partners, might be required to create strategic advantage.

Information Systems and Business Strategy


Leveraging Technology in the Value Chain

Organizations have competitive advantage when they provide more value to their customers or when they provide the same value to customers at a low price. An IS could have a strategic impact if it helped the firm provide products or services at a lower cost than competitors or if it provided products and services at the same cost as competitors but with greater value. Today the concept of a firms value chain also include the firms suppliers and business partners into a single value web. A value web: digitally-enabled network of a firm and its suppliers and business partners. A firm can achieve a strategic advantage by providing value to internal value chain processes and through powerful, efficient ties to value web partners.

Information Systems and Business Strategy


Firm-Level Strategy and IT

A business firm is typically a collection of business. Important questions: How can the overall performance of the business units be achieved? And How can IT contribute? Answers: synergy and core competency. Synergy: when some units can be used as inputs to other units, or two organizations can pool markets and expertise, these relationships can lower costs and generate profits. One use of IT in a synergy situation is to tie together the operations of disparate business units so that they can act as a whole. E.g. Citigroup can cross market the financial products of both Cititcorp and Travelers to customers. Such systems would lower retailing costs, increase customer access to new financial products and speed up the process of marketing new instruments.

Information Systems and Business Strategy


Enhancing Core Competencies

A second concept for firm-level strategy involves the notion of core competency. The argument is that the performance of all business units can increase insofar as these business units develop, or create, a central core of competencies. Core-competency: activity at which a firm excels as a worldclass leader. How can IT be used to advance or create core competencies?
Any system that encourages the sharing of knowledge across business units enhances competency.

Information Systems and Business Strategy


Industry-level strategy and IS: competitive forces and network economics

Key question: How and when should we compete as opposed to cooperate with others in the industry? 3 principal concepts for analyzing strategy at the industry level are information partnerships, the competitive forces model, and network economics. Information partnerships: both companies can join forces, without actually merging, by sharing information.

Information Systems and Business Strategy


The Competitive Forces Model

Competitive forces model: model used to describe the interaction of external influences, specifically threats and opportunities, that affect an organizations; strategy and ability to compete. Most well-known model for analyzing competitiveness Has been used to develop strategies for companies to increase their competitive edge Five Forces:
The threat of new competitors The bargaining power of suppliers The bargaining power of customers (buyers) The threat of substitute products The rivalry among existing firms in the industry
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Network Economics
Model of strategic systems at the industry level based on the concept of a network where adding another participant entails zero marginal costs but can create much larger marginal gain.

Information Systems and Business Strategy



Major problem is how to sustain competitive advantage SIS of the 1970s and 1980s were primarily outward systems They are visible and easily imitable Advances in computerized system development methodologies, such as CASE tools and objectoriented programming, allow companies to duplicate visible systems in a fast manner (in months vs years)
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Create inward system Create comprehensive, innovative, system. e.g. CAT case (250m) expensive

Implemented a GIS, sensors in machines computers that diagnosed problems and instruct technicians in how to make repairs and IS that ties together all its factories, distribution centers, dealers, and large customers.

Combine SIS with structural changes

Attempted in BPR and organizational transformation

Information Systems and Business Strategy


Aligning IT and Business objectives

Luftman (2003) reported that the more successful a firm can align IT with biz goals, the more profitable it will be, and half of biz firms profits can be explained by alignment of IT with biz. Perform a strategic system analysis:
What is the structure of the industry? What are the biz, firm and industry value chain for the firm? Have we align IT with our biz strategy and goals?

Information Systems and Business Strategy


References for lecture notes 1

Laudon, K & Laudon, J, (2012). Management Information Systems: Managing the Digital Firm, Pearson Education. (Laudon). Twelve Edition. Turban, E, McLean, E & Wetherbe, J. Information Technology for Management: Making Connections for Strategic Advantage, John Wiley & Sons, Inc. Laudon & Traver (2002). E-Commerce: Business, Technology, Society. Addison Wesley Turban, E, Jae Lee, David King, H, Micheal Chung, Electronic Commerce: A Managerial Perspective, Prentice Hall.

Information Systems and Business Strategy