The effects of IT on strategy and competition

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The effects of IT on strategy and competition

• 615350 lecture 2

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Lecture plan
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Building a successful business requires a fit
between

• Competitive positioning
• Is the strategy correct?
• Have we defined a strategy which will add value
  for all shareholders?
• Economic Positioning
• How will we make money in each product?
• Are we building and safeguarding assets?
• Enterprise resources design
• Do we have access to the required resources?
• Is the extended enterprise design appropriate?
  (i.e. how good is the value chain design).

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Building a successful IT strategy usually requires

• Resources
• So more established companies may be able to
  obtain leverage from their
• Funds
• Established relationships
• Risk-taking
• So start-ups may be able to obtain leverage
  because they have
• No reputation
• No established relationships to damage
• No existing revenue streams to preserve

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What type of competitive advantage?

• Strategies
• Cost leadership (i.e. lowest cost)
• Broad market differentiation (e.g. brand)
• Focused differentiation (e.g. niche market)
• Also referred to as Richness versus Reach
• Principles
• Firm must define type of competitive advantage it
  wants and focus on that strategy
• Firm must identify core competencies which can
  be used to achieve strategy

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Five forces that shape strategy

• Bargaining power of suppliers
• Bargaining power of buyers
• Threat of new entrants into the industry segment
• Threat of substitute products or services
• Positioning of traditional intraindustry rivals

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IT and strategy Switching costs

• Building switching costs
• Embed IT into products/services to make competing
  products look unattractive
• Tactics
• Package product with other useful products
• Build product so that customer has high reliance
  and migration to other systems is difficult
• Build brand loyalty
• May change basis of competition and so create a
  barrier to market entry

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IT and strategy Changing the balance of power

• Traditional markets are inefficient
• Search costs (hard for buyer/seller to check more
  than a few prices, therefore largely ignorant)
• Evaluation costs (hard to test quality or fit
  with requirements)
• IT dramatically reduces search costs
• Can help reduce evaluation costs
• Easier access to quality indicators (e.g. trusted
  reviews)
• Virtual community (similar to asking
  friends/family)

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Traditional approach to flexibility

• Traditionally, flexible manufacturing/services
  have been expensive to produce
• More expensive equipment
• More expensive average unit production cost
• More expensive handling cost
• More expensive sales/after sales

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Why is Electronic Commerce different?

• All components of a transaction can be
  transparently separated and performed by
  different organisations
• Physical location does not determine ability to
  participate in many aspects of a transaction

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EC and strategy

• Corporate strategy
• What business are we in/not in?
• What resources are needed?
• What activities should we perform?
• What activities should we outsource?
• To whom should we outsource?
• Business strategy
• How do we differentiate ourselves?
• Functional strategy
• How do we coordinate resources (e.g. finance,
  personnel, inventory) to support the business
  strategy?

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Mass customisation

• IT enables product customisation
• Customisation of customer experience
• Customisation of product choice and pricing
• Particularly applies to
• Digital products such as pictures, software
  music
• Information products
• Benefits
• May reduce demand risk
• May reduce innovation risk
• BUT
• Must fit with other business strategies
• May increase inefficiency risk (flexible
  manufacturing is usually more expensive, even for
  virtual products)

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IT can create new products

• Via embedded technology which creates
• New value-added services
• Additional product options
• Via IT enabled data capture storage
• E.g. motor-vehicle fault-recording
• Via more powerful analytic capability
• E.g. mining of supermarket data

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Where can opportunities be found?

• Within each support area
• Infrastructure
• HR
• Technology development
• Procurement
• Within each step of the value chain
• inbound logistics (e.g. cross-docking,
  substitute relationships for forward buying)
• Operations (e.g. re-use)
• Marketing (e.g. fly-buys, relationship marketing)

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IT enabled strategy must be designed and executed
with care

• IT may lower switching costs
• E.g. application file format filters (want to
  allow translation inwards, but not necessarily
  outwards)
• Proprietary features may be easy to replicate
• IT may lower entry costs
• E.g. on-line selling
• IT may change basis of competition
• Incompatible software
• Innovative IT may be copied and enhanced by
  competitors
• Product may be too successful
• Xerox
• United airlines, American Airlines

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Which investments enable EC?

• Four types of investment
• Strategic
• Informational
• Transactional
• Infrastructure
• From Peter Weills classification framework for
  IT investments

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Types of IT Investment(Module 8)
All are necessary to provide electronic commerce
capability
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Investing in ResourcesGeneral rule for choice
of IT

• Choose industry standards
• Cheaper
• Large user base
• Well understood problems
• Larger software base
• Likely to be
• System independent
• Vendor independent
• What if no standards exist?
• Look at large vendors
• Look at popular products
• Capabilities must support strategic goals

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Investing in ResourcesInformational Investments

• Provides firm with information needed to manage
  and control resources
• A medium-terminvestment
• Example systems
• Accounting
• MIS
• Communications

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Investing in ResourcesTransactional Investments

• Supports operations management
• Supports operational tasks
• Cuts costs substitutescapital for labour
• Short-term view/payoff
• Example systems
• Order-entry
• Inventory (receipt dispatch)

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Investing in ResourcesInfrastructure Investments

• Base foundation of organisation-wide IT
  capability
• Supports users and applications
• Provides storage, network,and processing
  resources
• Does not run applications
• Long-term investment
• Often spans multiplebusiness units
• Difficult for individual business units to
  cost-justify
• Usually must be authorised and funded by top
  management

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Which infrastructure investments enable
electronic commerce?

• Manage groupwide or firmwide messaging services
• Manage firmwide or business-unit applications and
  databases
• Enforce IT architecture and standards
• Manage firmwide or business-unit data, including
  standards
• Develop and manage electronic linkages to
  suppliers and customers
• Develop a common systems development environment
• All are examples ofOrganisation boundary
  spanning infrastructure

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Why boundary-spanning?

• Allows firm-wide information sharing
• Competitive pressures forcing within firm system
  integration
• Enables linkages to external bodies
• Competitive pressures forcing between firm system
  integration
• Firms in a supply chain are increasingly reliant
  on the performance of other firms
• Enables reengineering (usually needed to provide
  EC capability)
• Easier to communicate and coordinate change
• ? change can be rapid, significant, innovative
• Enables firm to be more responsive to market
• Better able to change operations and structure

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Investing in ResourcesStrategic Investments

• Aim to to change the way a firm competes
• Procedures
• Products
• Services
• Top management involvement
• Long term
• Technology may be a combination of
  infrastructure, transaction systems, or
  informational systems

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Overall lessons

• A broad strategy must be defined
• What market are we in/not in?
• Strategy is enabled by infrastructure
• Strategy must be considered carefully and results
  monitored
• Opposition may catch up
• Strategy may even be counterproductive