Chapter 2 Strategic Uses of Information Systems

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Chapter 2Strategic Uses ofInformation Systems
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Learning 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

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Learning Objectives (Cont.)

• Explain what makes an information system a
  strategic information system (SIS)
• Identify fundamental requirements for developing
  strategic information systems
• Explain circumstances and initiatives that make
  one SIS succeed and another fail

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Strategy and Strategic Moves

• Strategy
• A plan designed to help an organization
  outperform its competitors
• A best response counteracting to the competitors
  reactions
• As a plan a guide or course of action toward
  the goal and into the future
• As a pattern consistency in behavior/decision
  over time
• As a positioning determining the particular
  value proposition in a particular market segment
• As a perspective a concept of shaping the
  business
• As a ploy a specific maneuver intended to outwit
  an opponent
• Strategic Information Systems
• Information systems that help seize opportunities
• Can be developed from scratch, or they can evolve
  from existing ISs

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Strategy and Strategic Moves (Cont.)

• Strategic advantage
• Using a strategy to maximize strength/seek
  monopolistic rents
• Competitive advantage
• The result of the use of a strategic advantage

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Achieving a Competitive Advantage

• Increase profits through increased market
  share/profit margin
• Innovation results in advantage
• Strategies that no one has tried before, or
  conducted more efficiently than others did
• Example Dell using the Web to take customer
  orders quicker than the competitors

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Achieving a Competitive Advantage (Cont.)
Innovation leadership
Product proliferation
Co-option
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Achieving a Competitive Advantage (Cont.)
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Initiative 1 Reduce Costs

• Lower costs results in lower price
• Economies of scale, and experience curve
• Bigger Market Share
• The spill-over effect of a common
  reputation/goodwill
• Implement automation to become more productive
• The Web has made this possible for many

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Initiative 2 Raise Barriers to Market Entrants

• Patenting, (rent protection enforced by the
  public orders, mandated monopoly)
• High capital of entering industry, high-level
  sunk cost
• Limit pricing/predatory pricing/raising cost for
  entry deterrence
• State Street, Inc. (Pension fund management
  business)

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Analysis of entry/exit barrier
Exit barrier
low
high
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low
Entry barrier
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high
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Initiative 3 Establish High Switching Costs

• Explicit Switching Costs
• Fixed and nonrecurring, penalty costs expiated
  for breach of contract
• Implicit Switching Costs
• Indirect costs in time and money of adjusting to
  a new product

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Initiative 4 Create New Products or Services

• Lasts only until competition offers an identical
  or similar product or service for a comparable or
  lower price
• First Mover Creates assets
• Brand Name
• Better Technology
• Delivery Methods
• Cannibalization for leadership
• Critical Mass body of clients that attracts
  other clients for crossing the diffusion chasm
• Network externalities

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Initiative 5 Differentiate Products or Services

• Product differentiation
• Distinctive Brand recognition, re-branding for
  re-positioning
• Examples of brand name success
• Levis jeans
• Chanel perfumes
• Gap clothes

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Initiative 6 Enhance Products or Services

• Examples
• Auto manufacturers enticing customers with a
  longer warranty
• Real estate agents providing useful financing
  information to potential buyers
• Charles Schwab moving stock trading services
  on-line before Merrill Lynch

Total solutions!
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Initiative 7 Establish Alliances

• Combined services may attract customers
• Lower cost
• Convenience
• The whole product/the total solution resulted
  from the aggregation of necessary complements
• Examples
• Travel industry linking related tourist
  businesses
• HP and FedEx collaborated for the convenient
  ordering process and fast delivery/return service

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Establishing Alliances (Cont.)
Ref. Expedia.com
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Initiative 8 Lock in Suppliers or Buyers

• Bargaining Powerassets specificity
• Purchase volumemonopsony or monopoly
• Strengthen perception as a leaderbandwagon
  effects of promotion (sunk costs as credible
  commitments) and market share
• Create a standard for issuing the problem of
  compatibility

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Types of Lock-in and Associated Switching Costs

• Contractual commitments
• Compensatory or liquidated damages
• Durable purchases
• Replacement of equipment tends to decline as the
  durable ages
• Brand-specific training
• Learning a new system, both direct costs and lost
  productivity tends to rise over time
• Information and databases
• Converting data to new format tends to rise over
  time as collection grows

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Types of Lock-in and Associated Switching Costs
(Cont.)

• Specialized suppliers
• Funding of new supplier may rise over time if
  capabilities are hard to find/maintain
• Search costs
• Combined buyer and supplier search costs
  includes learning about quality of alternatives
• Loyalty programs
• Any lost benefits from incumbent supplier, plus
  possible need to rebuild cumulative use

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Strategic Information Systems (SIS)

• An IS that helps achieve long-term competitive
  advantage
• SIS embodies two types of ideas
• Potentially-winning business move
• How to harness IT to implement that move
• Two conditions for SIS
• Serve an organizational goal
• Work with the managers of the other functional
  units

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Creating an SIS

• Top management involvement
• From initial consideration through development
  and implementation
• Must be a part of the overall organizational
  strategic plan

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Steps for Considering a new SIS
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Steps to Take in an SIS Idea-Generated Meeting
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Re-engineering and Organizational Change

• To implement an SIS and achieve a competitive
  advantage, organization must rethink entire
  operation
• Goal of re-engineering
• Remove the process bottleneck, the key dead logs
• Achieve efficiency leaps of 100 or higher

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Competitive Advantage as Moving Target

• SISs developed as strategic advantages quickly
  become standard businesses
• Banking industry (ATMs and banking by
  phone/Internet)
• Continuous search for new ways of utilizing
  information technology to their advantage
• SABRE, American Airlines reservation system
  enhanced continuously by several functions
  including web-based travel site, Travelocity.

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JetBlue A Success Story

• Gained competitive advantage where others failed
• Proper technology and management methods
• Reservation system, Electronic ticket, ticketless
  traveling service, revenue analysis for route
  management
• Reducing costs resulting in lower prices
• Improving serviceon-time departures and arrivals

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JetBlue A Success Story (Cont.)

• Massive Automation
• Automation of services with software
• Combination reservation system and accounting
  system
• Supports customer services and sales tracking

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JetBlue A Success Story (Cont.)

• Massive Automation, continued
• Electronic tickets
• No paper handling or expense
• Encourages online ticket purchases
• Avoids travel agents
• Significant savings in cost

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JetBlue A Success Story (Cont.)

• Massive Automation, continued
• Maintenance information system
• Logs all airplane parts and time cycles
• Reduces manual tracking costs
• Flight planning software
• Maximize seats occupied on a flight
• Reduced planning costs

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JetBlue A Success Story (Cont.)

• Massive Automation, continued
• Blue Performance
• In-house software for tracking operational data
• Updated on a flight by flight basis for
  maximizing yield
• Accessible by airlines 2,800 employees
• Managers are able to respond immediately to
  problems

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JetBlue A Success Story (Cont.)

• Massive Automation, continued
• Wireless devices for employees
• Report and respond to irregular events
• Quick response
• Events recorded for future analysis
• Training records stored electronically
• Easy to update
• Efficient retrieval

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JetBlue A Success Story (Cont.)

• Away from Tradition
• Decision to not use the hub and spoke routing
  method
• Paperless Cockpits
• Laptops for Pilots
• Harnessing IT to maintain a strategic gap

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JetBlue A Success Story (Cont.)

• Enhanced Service
• Available on all flights and all class tickets
• Live TV through contract with DirecTV
• Leather Seating
• Excellent on-schedule arrivals and departures
• Fewest mishandled bags
• Rapid check-in time
• Security upgrades

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JetBlue A Success Story (Cont.)

• Impressive Performance
• Maintains excellent statistics
• 7 cent cost per available seat-mile (CASM) lesser
  than the industrial average
• 78 of seats are filled higher than the
  industrial average
• Late Mover Advantage
• New Technology vs. legacy systems

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Ford on the Web A Failure Story

• The Ideas
• Wingcast telematics
• Technology in vehicles to enable Web access
• Business to Business Covisint
• Joint venture with General Motors and
  DaimelerChrysler
• Electronic market for parts suppliers
• Vendor bidding for proposals from automakers

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Ford on the Web A Failure Story (Cont.)

• The Ideas (cont.)
• Business to Consumer FordDirect.com
• Sell vehicles direct to consumers via the Web
• Bypass dealerships
• Provide service while saving dealer fees
• ConsumerConnect
• Special unit to build Web site and handle direct
  sales

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Ford on the Web A Failure Story (Cont.)

• Hitting the Wall
• Wingcast Failed
• Buyers not interested (as the failure of WAP)
• Product eliminated in June 2001
• Covisint Successful
• Now includes more automakers, Renault and Nissan

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Ford on the Web A Failure Story (Cont.)

• Hitting the Wall
• FordDirect.com Failed
• Not a result of faulty technology
• Ford failed to consider state laws and dealership
  relationships
• Dealership relationship was still needed for
  purchases not on the Web

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Ford on the Web A Failure Story (Cont.)

• The Retreat
• ConsumerConnect disbanded
• FordDirect.com used by dealerships now
• Sells used cars
• Price tag for failure 1 billion
• FordDirect.com today results in 10,000 vehicle
  per month, and 100,000 sales in 2001

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Success and Failure on the Web

• Being first is not enough for success
• Business ideas must be sound
• An organization must carefully define what buyers
  want
• Establishing a recognizable brand name is
  important but does not guarantee success
  satisfying needs is more important

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The Bleeding Edge

• Business owners must develop new features to keep
  the system on the leading edge
• Adopting a new technology involves great risk
• No experience from which to learn
• No guarantee new technology will work or
  customers and employees will welcome it
• Bet on standard competition
• Wait-and-see hesitation

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The Bleeding Edge (Cont.)

• The bleeding edge failure in an organizations
  effort to be on the technological leading edge
• First-mover dis-advantage?
• Allow competitors to assume the risk
• Risk losing initial rewards
• Can quickly adopt and even improve pioneer
  organizations successful technology
• Second-mover advantage?

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Summary

• Business strategy and strategic moves can give an
  organization an advantage
• Basic initiatives for gaining a competitive
  advantage
• Strategic information systems require fundamental
  elements
• Circumstances and initiatives that make one SIS
  succeed and another fail

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Homework 1 Amazon vs. eBay

• Refer to the pp.59-62.
• Please specify the differences of business played
  between theses two dotcom giants.
• Compare the sources of profit between these two
  firms.
• Analyze the sustainability of competitive
  advantage among two.
• Articulate the possible challenges for the future
  expansion respectively.