Information Technology

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Chapter 2

• Information Technologys Strategic Importance

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Introduction

• IT is changing the fabric of our society
• Shifts power from governments to citizens
• Flow of intellectual property is no longer
  constrained by national boundaries
• IT is changing business
• Senior executives expect IT to play a central
  role in streamlining operations and to link
  customers, suppliers, and employees more closely

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The Current Challenge

• Walter Wriston, former Chairman of Citicorp, The
  essence of an information strategy is to turn the
  burden of burgeoning business data into a bounty
  of business opportunity. The business
  organization has to be rebuilt around the goal of
  managing information productively. The object of
  the game is to get information to the person or
  company that needs and can use it in a timely
  way.

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Strategic Issues for Senior Executives

• Obtain or maintain competitive advantage
• Use the Web to facilitate intra- and
  inter-organizational linking
• Enable decentralized operations with effective
  central coordination
• Develop flexible and responsive infrastructures
  for the firm
• Capitalize on fleeting but critical business
  information

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Time Criticality of Information

• Modern IT enables the creation of highly
  decentralized operations that can rapidly respond
  and exploit high value information that is short
  lived
• These decentralized structures must be quickly
  adaptable to shifting opportunities in a highly
  competitive environment
• By enabling these agile operations, IT can be
  expected to directly contribute to the bottom line

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Strategic Information Systems

• These are information systems whose unique
  functions or specific applications shape an
  organizations competitive strategy and provide
  it with competitive advantage
• These are internal or external systems
• These systems provide a firm with competitive
  advantage
• Systems range from transaction processing systems
  to decision-support systems

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Visualizing Competitive Forces

• Michael Porter developed a model to help
  visualize competition
• To gain a competitive edge within an existing
  industry competitors must
• Diminish customer and supplier leverage
• Lower the possibility of substitute products
  entering the marketplace
• Discourage new market entrants

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Strategic Thrusts

• In 1988, Charles Wiseman created a detailed
  addition to the general framework of strategy
  development
• He created a theory based on five thrusts
• Differentiation
• Cost
• Innovation
• Growth
• Alliances

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Differentiation

• The firms products or services are distinguished
  from competitors products or services, or
  conversely a rivals differentiation is reduced
• For example, Automated Teller Machines (ATMs)
  distinguish the services of some financial
  institutions from others

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Cost

• Advantage is attained either by reducing costs to
  the firm, to its suppliers, or customers, or by
  increasing costs incurred by competing firms
• For example, advanced order-entry systems or
  business-to-business e-commerce systems reduce
  both suppliers and customers business costs

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Innovation

• Introducing changes to the product or process
  causes fundamental shifts in the way the industry
  conducts its business
• Web-based trading was introduced by some
  brokerage firms, and became widely offered by
  others as the standard level of service expected
  by customers began to include Web-based access

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Growth

• Advantage is secured by expansion, forward or
  backward innovation, or by diversification in
  product or services
• The Wall Street Journal and other national
  newspapers used electronic transmission and
  remote printing facilities to create a national
  distribution, thus expanding the potential market

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Alliance

• Firms achieve advantage by establishing
  agreements, forming joint ventures, or making
  acquisitions
• Many national companies use joint ventures for
  strategic thrusts. Even rivals join together
  such as Microsoft and IBM when it serves a mutual
  purpose

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Time

• Competitive advantage is secured by rapid
  response to changing market conditions or by
  supplying a more timely flow of products or
  services
• Electronic design automation tools, CAD/CAM
  systems, and production logistics systems are
  thrusts that increase manufacturings response to
  the marketplace

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New Economy Paradigms

• The Internet and the World Wide Web have enabled
  firms to capture the advantages of all six
  thrusts quickly
• The Internet has reshaped the competitive
  landscape for business and industry
• The Internet has created a global marketplace
  with increasing international trade

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Strategic Systems in Action

• Over the past two decades, information systems
  have been used to create value in business. Two
  industries, airlines and financial services,
  created systems that have resulted in significant
  competitive advantage to their owners.
• These systems have not been static, and their
  evolution is impressive given the dramatic
  changes in technology and the business
  environment over time.

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Airline Reservation Systems

• In the 1960s, American Airlines created SABRE
  (Semi-Automated Business Research Environment)
• Initially invested 350 million to create the
  system
• Provides reservation services for airlines,
  hotels, and rental cars
• Links travel agencies, private or corporate
  travel systems, and Internet customers

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SABRE Evolution

• AA continued to expand the system and provide
  outsourcing reservation services to competitors
• Integrated back office management for travel
  agencies
• Added a yield-management system to optimize fare
  structure and load factors
• An upgraded yield-management system in 1997
  increased corporate profits by 200 million

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Competitors

• United Airlines created Apollo in the 1970s to
  compete with SABRE
• Initial cost of 250 million
• 1987 spun off to UAL subsidiary COVIA Corp
• COVIA sold to partners in 1988, valuing the
  company at 1 billion (renamed Galileo)
• Galileos IPO in 1997 valued the company at 2.5
  billion
• In 1999, Galileo earned 218 million on revenues
  of 1.53 billion

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Internet-Based Systems

• Alaska Air Group created ITMs (Instant Travel
  Machines)
• These machines use a kiosk type interface to
  create travel reservations in hotels, airports,
  and business locations
• They bring the power of advanced reservations
  systems to busy travelers in a convenient
  location
• Coupled with paperless ticketing (e-tickets),
  these technologies are reducing business cost and
  increasing customer access

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Stock Brokerage Systems

• In 1977, Merrill Lynch introduced the CMA (Cash
  Management Account)
• Combined checking accounts, debit cards, and
  margin-based brokerage accounts into a single
  entity
• Customers received a consolidated account
  statement at the end of the month
• Cash was automatically swept into a money market
  account
• By 1980, it served 186,000 accounts

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CMA Evolution

• 1981 CMA available nationwide
• 500,000 accounts
• 1982 International CMA launched
• 1987 150 billion in assets under management
• 1.3 million accounts
• Started ATM access via Visa Premier program

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CMA Intellectual Property

• Merrill was granted US patent 4346442 in August
  1982
• This patent effectively allowed Merrill to stop
  competition in unified accounts for 7 years
• During active development of CMA, the Merrill
  Lynch technology budget was estimated to be
  approx. 1.5 billion

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Internet-Based Competitors

• The brokerage industry underwent dramatic changes
  with widespread Internet use
• Barriers to entry were removed as local office
  infrastructure became less important to investors
• Charles Schwab, E-Trade, Fidelity, and others
  embraced Internet transactions to expand and
  increase market share

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Schwab.com Features
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Strategic E-Business Systems

• Internet-based technologies can radically reshape
  markets resulting in massive realignment of
  customer and partner relationships
• Airlines previously viewed travel agents as their
  customers. Due to Web portals, they increasingly
  view individual travelers as customers, now that
  they have been given direct access to booking and
  flight information

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Where are the Opportunities

• Most commonly, opportunities present themselves
  as product or service offerings that
  differentiate themselves from others through the
  application of IT
• Innovative use of technology in the right
  application
• Lowers business costs
• Reduces time barriers

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Importance of Technology

• Advanced technology shapes the products and
  services of the future
• IT offers opportunities for innovative
  organizations to increase their value
• Information is so fundamental to business today,
  that small advances in information management are
  magnified as these increases are amplified across
  business processes

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The Time Dimension

• Time is an irreplaceable asset and source of
  competitive advantage
• Information Technology and modern
  telecommunications systems are well suited to
  leveraging time as a strategic thrust
• Just-in-time manufacturing (JIT) is a common
  example

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McDonnell Douglas Corp

• Implemented a JIT system for coordination of work
  flow. The resulting system required
• 111 new programs
• Modifications to 97 other programs
• 1900 person hours of programming labor
• Meetings for project planning and execution

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JIT Benefits at McDonnell Douglas
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Media Breaks

• Media breaks occur when information goes from
  voice to paper, paper to digital or other like
  transitions
• Media breaks require human intervention, incur
  costs, risk errors, and take time
• Unified information systems eliminate media
  breaks, decreasing cost in time and money

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Strategic Value of Networks

• Offers significant reductions in time and
  distance barriers
• Enhances business processes and improve business
  efficiency
• Digital business information reduces errors,
  lowers costs, and improves control
• Innovative applications of telecom and IT can
  create new markets and expand customer demand

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Networkings Strategic Value
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The Strategist Looks Inward

• Strategic systems are conceived by first
  analyzing the firms internal functions
• 85 of all e-business infrastructures are
  patterned after non online legacies
• Firms commonly have a portfolio of hundreds to
  thousands of applications
• Deciding which ones to automate requires a keen
  understanding of the firms strategy,
  competitors, and culture

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External Strategic Thrusts

• How external factors create strategic
  opportunities
• A more complicated set of questions
• Requires a more global view of the company and
  its place in the industry (upper management)
• Requires a well-grounded understanding of
  technology and its strengths and limitations
  (Information Technologists)

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Integrating the Strategic Vision

• Using a three dimensional model, all three groups
  of strategic influences can be represented
• Strategic Thrusts (Differentiation, Cost,
  Innovation, Growth, Alliance, and Time)
• Competitive Groups (Suppliers, Competitors, and
  Customers)
• Strategic Focus (Internal and External)

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Integrated Model of Strategic Influences
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Value Chains for E-Business

• Modern e-business models operate in nearly all
  the dimensions of the figure
• Use internal (example ERP) and external
  (Web-based B2C and B2B)
• Exploit the six strategic thrusts
• Firms adopting e-business models reconstruct
  their value chains around powerful new
  information technology

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Other Considerations

• Strategic information systems have several common
  characteristics worth noting
• Organization and Environment
• Financial Implications
• Legal Considerations

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Organization and Environment

• Strategic information systems alter the market
  environment and create fundamental changes in the
  field of competition
• Competitors must adapt to the new landscape or
  face disadvantage
• Survivors of this process re-establish an
  equilibrium

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Financial Implications

• Strategic information systems require continued
  investments to sustain their advantages
• First movers capture time at expense of cost and
  potential failure
• Even established firms can be beaten when
  technology appears that is so disruptive, like
  the Internet, that no advantage exists for the
  incumbents

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Legal Considerations

• Resort to the courts can be a tool for
  competitors to blunt the advantages gained by
  technology
• Protection of intellectual property by patents
  can also be a powerful tool to further the
  advantages of an innovator by denying the
  competition access to a newly created market

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Cautions

• Most strategic information systems are
  evolutionary. They are based on pre-existing
  systems within the firm
• Successful firms focus on the details of success
  instead of a grand scheme. Lasting competitive
  advantage is not found in a few grand strokes
• The entire firm must be competitive across all
  areas. IS alone can not deliver a killer app
  that eliminates the competition

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Summary

• Information technology is vital to the continued
  success of modern firms
• Senior leadership understands that IT is a potent
  source of competitive advantage
• They are prepared to invest in needed
  applications and hardware, but expect a
  substantial return on that investment