Chapter 12

Information Systemsfor

Strategic Advantage

Alexander Hong

An Advanced Chapter

Focus at this point in the course on the basic competitive concepts and we will revisit the more advanced topics later in the quarter.

Pay particular attention to the contents of the slides that are emphasized in this lecture.

Chapter ObjectivesChapter Objectives

1. Understand options for competitive strategies and be able to explain how they can be used to confront competitive forces.

2. Understand how information systems support the major business strategies of a business and be able to provide examples of how information technology can implement these roles and gain and sustain a competitive advantage.

3. Be able to provide examples of how information technology can break time, geographic, cost, and structural barriers in business.

Chapter ObjectivesChapter Objectives

4. Understand the importance of business process reengineering relative to the strategic use of IT.

5. Understand how total quality management (TQM) differs from business process reengineering in its relationship with information technology.

6. Understand how information technology can be used to help a company be an agile competitor, or to form a virtual company to meet strategic business opportunities.

7. Start to better understand the strategic uses of Internet technologies in business.

Other Student PresentationsOther Student PresentationsOther Student PresentationsOther Student Presentations

Michael Porter and Porter’s Models - Scarlet Grant

Porter Competitive Model - Victoria Santiago

Fundamentals of Strategic Advantage

Information technology that gives a company

certain advantages over a competitor with

developments in products, services and/or

capabilities.

Strategic IS

Information Systems can be used to develop products and/or services and capabilities.

Information Systems can be any kind of system that:

1. Helps to gain a competitive advantage.

2. Reduces a competitor’s advantage

3. Meets other strategic objectives.

IT Significance

Information Technology can change the way that an organization (business or public sector) competes.

• As the foundation for organizational renewal.

• As a necessary investment that should help

achieve and sustain strategic objectives.• As an increasingly important communication

network.

Strategic Advantage

James Champy

1996

IT has become a strategic necessity. Believe it, act on it, or become a footnote in history.

At least do an objective assessment of the potential of IT both as a company resource and the likelihood of it being used against you by a competitor. Jack Callon

2000

Competitive Strategy Concepts

• Cost Leadership Strategy

• Differentiation Strategy

• Innovation Strategy

• Growth Strategies

• Alliance Strategies

IT role relative to each of these strategies?

Strategic Roles For Information Systems

Specific Examples:• Lower Costs• Differentiate• Innovate• Promote Growth• Develop Alliances• Improve Quality and Efficiency• Build an IT Platform• Other Strategies

Breaking Business Barriers

o Time BarriersToyota Motor Corp.

o Geographic BarriersCitibank, Mobil Oil

o Cost BarriersHewlett-Packard Co.

o Structural BarriersMiller Brewing and Reynolds Metals

Strategic ApplicationsStrategic ApplicationsStrategic ApplicationsStrategic Applications

Progression of Information Technology within an

enterprise.• Level 1: Strategic• Level 2: Offensive• Level 3: Defensive• Level 4: Cost-Justified• Level 5: Controlled

Chapter Value

• IT and IS can and often will be necessary to maintain a competitive edge in the business world.

• Among the applications of these information technologies are improving business quality, creating a virtual company, and building knowledge-creating systems.

Possible Exam Questions

• Identify several basic competitive strategies and explain how they can be used to confront the competitive forces faced by a business.

• Give examples of how information technology can break time, geographic, cost and structural barriers in business.

Using the Internet Strategically

Global MarketPenetration

Global MarketPenetration

Product and ServiceTransformation

Product and ServiceTransformation

Cost andEfficiency

Improvements

Cost andEfficiency

Improvements

PerformanceImprovement in

Business Effectiveness

PerformanceImprovement in

Business Effectiveness

Ext

erna

l Driv

ers

Cus

tom

er c

onne

ctiv

ity /

com

petit

ion

/ tec

hnol

ogy

collaboration / information and applicationsrequirements / cost containment

Internal Drivers

LOW

HIGH

HIGH

Michael E. Porter

Mr. Competition

and

The Father of Multiple Models(Frequently used in MBA and undergraduate business courses)

By Scarlet Grant

Michael E. Porter - The ManC. Roland Christensen Professor of Business Administration at the Harvard Graduate Business School

Has created workshops for newly appointed chief executive officers of billion dollar corporations.

World wide speaker on competitive strategy and international competitiveness.

Author of 16 books and over 60 articles on competitiveness.

Has served as a consultant on competitive strategy to many leading U.S. and international companies.

Serves as an advisor to governments both local and national.

Awareness of competitive forces can help a company stake out a position in its industry that is less vulnerable to attack.

Michael E. Porter

A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.

Michael E. Porter

Some Notable Quotes

His three models are:

1. The Porter Competitive Model

2. The Value Chain

3. The Diamond of National Advantage **

** will not be used in this course

The Point Being . . .

Porter has focused on the factors that are critical for a company to compete within a specific industry through the use of the Competitive Model and Value Chain.

He also led a study that produced the Diamond of National Advantage that focuses on the role of the nation as the home base for companies that have become dominant in a specific industry on a global basis.

Firm Strategy, Structure and

Rivalry

Factor

ConditionsDemand

Conditions

Related and Supporting Industries

Government

Chance

Diamond of National Advantage

Value ChainValue Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SU

PP

OR

T A

CT

IVIT

IES

Value Chain

While the Competitive Model deals with the environment within which a company competes, the Value Chain addresses the flow of a product through the organization.

It starts with the original idea in research and tracks its progress all the way to the customers.

Competitive Model

• What is driving competition in my current or

future industry?

• What are my current or future competitors likely

to do and how will we respond?

• How can we best posture ourselves to achieve

and sustain a competitive advantage?

Use of Porter’s Competitive Model

• Breaks an industry into logical parts, analyzes them and puts them back together. (just like an engineer would do)

• Avoids viewing the industry too narrowly.

• Provides understanding of the structure of an industry’s business environment and of competitive threats within and among industries.

Possible Quiz Questions

1. What is the objective in using the Porter

Competitive Model?

2. Why do some people conclude that the Porter

Competitive Model is no longer a valid tool?

Porter Competitive Model

Was not developed as an Information Systems tool.

Was developed for use by people that run businesses and for those that deal with developing strategic plans for businesses.

Can Information Systems:1. Build barriers to prevent a company from entering

an industry?2. Build in costs that would make it difficult for a

customer to switch to another supplier?3. Change the basis for competition within the

industry?4. Change the balance of power in the relationship

that a company has with customers or suppliers?5. Provide the basis for new products and services,

new markets or other new business opportunities

Porter Competitive Model

By Victoria Santiago

Presentation Objective

1. To clearly understand how the Porter Competitive

Model will be used in Section I of the Business

Analysis Paper.

2. To remind you that it breaks an industry into logical

parts, analyzes them to understand the competitive

environment for a specific industry and puts them back

together.

Porter Competitive ModelPorter Competitive Model(Identify Specific Market Being Evaluated)(Identify Specific Market Being Evaluated)

Intra-Industry RivalryStrategic Business Unit

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Strategy OptionsStrategy OptionsAccording to Michael PorterAccording to Michael Porter

Primary Strategies

1. Differentiation

2. Least Cost

Supporting Strategies

1. Innovation

2. Growth

3. Alliance

Porter Competitive ModelPorter Competitive ModelEducation Industry - UniversitiesEducation Industry - Universities

U.S. Market U.S. Market

Intra-Industry Rivalry SBU: UCSC Rivals: UC campuses, CSU, Community Colleges, etc.

BargainingPower of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

• Faculty• Staff• Equipment and Service Suppliers• Alumni• Foundations• Business• Government

• Internet Distance Learning• Books and Videotapes• Computer-Based Training• Company Education Programs

• Students• Parents• Business• Employers• Legislators

• Foreign Universities• Shift in Strategy by Universities or Companies

U.S. University Industry Structure

Intra-Industry Rivalry:

Low and/or limited growth rate

Undifferentiated product

Slow to change

Competition for funding

and contributions

Bargaining Power of Buyers:

Price/cost pressures

Increased mobility

School while working

Bargaining Power of Suppliers:

Cost Pressures

Bid Processes Are Common

Unions and Tenure

Barriers to Entry:

Low entry barriers

High exit barriers

Substitutes:

Easy to substitute

Self-study success

Internet-based program growth

Possible Exam Questions

1. Explain the objective for using the Porter

Competition model and respond to the criticism that it

is no longer a valid tool.

2. Identify and explain the five competitive strategies

based on Porter’s evaluation approach.

How Does IS help?

• Lower operational costs.

• Help to differentiation the product or service.

• Help to achieve market specialization.

• Strengthen the ability to build alliances.

• Build inter-organizational systems. (E-business)

Risks of Strategic IS

• Needs to enable the company’s ability to achieve and sustain a competitive advantage.

• Can get “IT-out gunned” by a larger competitor.• Can shift the balance of competition.• Can become a competitive necessity instead of

sustaining a competitive advantage.

Porter Model Tips1. To incorrectly define the industry can cause major

problems in doing Section I of the business analysis

paper.

2. You must identify the specific market being evaluated.

3. Your analysis company is the Strategic Business Unit.

4. Identify rivals by name for majors, by category for minor

rivals if needed to present the best possible profile of

rivals.

Porter Model

5. Be sure to address the power implications of both

customers and suppliers. Power buys them what?

6. Identify buyers and suppliers by categories versus

companies.

7. Summarize your Porter Model analysis.

Porter Competitive Model

Some additional perspective on the forces.

Competitive Analysis Factors

• Bargaining power of buyers.

• Bargaining power of suppliers.

• Threat of substitute products.

• Threat of new entrants.

• Expected traditional competition.

Reduce the Power of Buyers

• Choose a niche in which buyers are less powerful and less numerous.

• Differentiate products and/or services to shift the balance of power.

• Differentiate links that are truly uniquely valuable to customers.

• Create switching costs.

Reduce the Power of Suppliers

• Use substitute products.

• Develop multiple alliances.

• Vertically integration, or expand backwards in industry.

• Minimize the cost of the vendors products.

Reduce the Potential for Substitute Products

• Differentiate the product.

• Differentiate the distribution channel.

• Achieve low cost leadership.

Reduce the Threat of New Entrants

• Economies of scale.

• Product differentiation.

• Large capital requirements.

• Access to distribution channels.

• Government policy.

• Expected reaction of existing firms.

• Mandatory information systems capabilities.

Diamond of National Advantage

The playing field each nation establishes and operates plays a significant role for its home-based companies to become a dominant competitor on a global basis.

Firm Strategy, Structure and

Rivalry

Factor

ConditionsDemand

Conditions

Related and Supporting Industries

Government

Chance

Diamond of National Advantage

Attributes of the Diamond ModelFactor Conditions

The nation’s position in factors of production necessary to compete in a given industry

Demand ConditionsThe nature of home-market demand for the industries that are internationally competitive.

Related and Supporting IndustriesThe presence or absence in the nation of supplier industries and other related industries that are internationally competitive

Firm Strategy, Structure and RivalryThe conditions in the nation governing how companies are created, organized and managed, as well as the nature of domestic rivalry.

Porter Value Chain

Porter Value Chain

Basic Concept:

1. Deals with core business processes.

2. Enables tracking a new idea to create a new product

and/or service from origination all the way to customer

satisfaction.

Service Sales and

Distribution Marketing

Production and

Manufacturing Engineering

Manufacturing Industry Value Chain

Research and

Development

Marketing and

Selling

Operating Stores

Distributing Inventory

Managing Inventory

Buying

Retail Industry Value Chain

Partneringwith

Vendor

Value ChainValue Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PRIMARY ACTIVITIES

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SU

PP

OR

T A

CT

IVIT

IES

Property and Casualty Industry Value ChainProperty and Casualty Industry Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

-Financial Policy -Regulatory Compliance - Legal - Accounting

Actuary Training

Agent Training

Claims Training

Claims Procedures

•Claims Settlement•Loss Control

•Policy Sales•Policy Renewal•Agent Manage- ment•Advertising

•Independent Agent Network•Billing and Collections

• Underwriting• Investment

•Policy Rating

Actuarial MethodsInvestment Practices

I/TCommunications

Product DevelopmentMarket Research

Technologies in the Value Chain

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING AND SALES

SERVICE

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE

MANAGEMENT

FIRM INFRASTRUCTURE

Information System Technology

Planning and Budgeting TechnologyOffice Technology

Training TechnologyMotivation Research

Information Technology

Product TechnologyComputer-Aided DesignPilot Plant Technology

•Diagnostic and Testing Technology•Communications Technology•Information Technology

•Transportation Technology•Material Handling Technology•Storage and Preservation Technology•Communication System Technology•Testing Technology•Information Technology

Information Systems TechnologyCommunication System TechnologyTransportation System Technology

Software Development ToolsInformation Systems Technology

•Basic Process Technology•Materials Technology•Machine Tools Technology•Materials Handling Technology•Packaging Technology•Testing Technology•I/nformation Tech.

•Transportation Technology•Material Handling Technology•Packaging Technology•Communications Technology•Information Technology

•Multi-Media Technology•Communication Technology•Information Technology

Key Things to Remember1. The ultimate objective is value to customer.

2. As a new product and/or services moves through the

value chain, it is important to maximize value-add

activities and minimize things that do not add value to

customer.

3. Functional departments must be sure to emphasize the

ultimate goal of value to customer and not do things

that seem to make them look good but contradicts the

ultimate objective.

4. Time has become a major competitive factor so there

are those that say the value chain doesn’t make sense.

Value to You

In both Section I and II of the business analysis paper there is a need to address the importance of IT/IS. Section I deals with the significance of IT/IS to the industry and Section II deals with how important it is to the company being evaluated.

The use of the appropriate value chain is a good way to systematically summarize this IT/IS importance.

Value to

Customer Service

Sales and

Distribution Marketing

Production and

Manufacturing Engineering

For Instance:

How important is IT/IS to the Semiconductor Industry and Intel Corporation?

Can Intel do basic research, develop products, manufacture products, do market analysis, sell products and service customers without the use of IT/IS?

Research and

Development

Summary

With the focus on core business processes, the importance of business process reengineering and the complexity and time pressures faced by most businesses leads me to conclude that the Porter Value Chain is a good business management tool.

Despite the fact that the relay team concept suggested by the value chain is frequently not valid in today’s business environment.

Two Possible Quiz Questions

1. What is good about the Value Chain model and why do some people claim that it is outdated?

2. What four things are important to remember in using the value chain?

Company Examples of Strategic IS

These are a starting point but are much too general. You can do better than this by final exam time.

Innovation: Merrill Lynch

Cash Management Account to achieve market leadership.

Figure 12.4 IT Support of Strategies

Pay attention to the examples of IT support of the basic and supporting strategies.

Characteristics of a Virtual CompanyCharacteristics of a Virtual Company

Borderless

Technology

Excellence

Trust-Based

Adaptability

Opportunism

SixCharacteristics

of VirtualCompanies

A Virtual Business

A business with partners that are treated as if they were departments of the company.

If you want to earn higher financial returns, shouldn’t you be more selective and put your money into activities that add value to customers and not just into activities that need to be done.

This also results in fewer things to manage and fewer things that can go wrong.

Improving Business Processes with IT

Could be the basis for an entire course.

Forces rethinking which business processes are really

important, necessary and contribute value to customers.

Eliminates unnecessary steps, activities and even processes.

Streamlines processes with gains in productivity while reducing time.

Breaks down departmental barriers.

Improves communication and access to information.

Business Process Reengineering

Business Improvement Reengineering

Definition Incremental improvement Radical redesign

Target Any process Core bus. Processes

Primary IT and simplifications It and organization Enablers redesign

Payback 10-50% improvement 10 fold or better

Changes Some jobs, more efficient Big job cuts, newjobs, major redesign

Risk Low High (not really)

IT Support of ReengineeringProspect tracking and management systems using intranets.

Portable sales force automation systems tied into the Internets,

intranets and extranets.

Customers site networking for field and customer site communications.

EDI and EFT between organizations. (E-Business)

Predictive models for continuous product replenishment.

Cross-functional informational systems.

Data warehouses.

Breaking Business Barriers

Breaking Business Barriers

BreakingBusinessBarrierswith IT

TimeBarriers

GeographicBarriers

CostBarriers

StructuralBarriers

Reach and Richness

Reach - The number of people receiving or exchanging information.

Richness - The bandwidth (capacity) customization and interactivity of information.

The ultimate example of probably the best way to accomplish this is:

The Internet

A network of networks.

The connection to the world.

The most significant thing that has ever happened to the business world.

How Businesses View and EmployInformation Technology

How Businesses View and EmployInformation Technology

Level 1: StrategicLevel 1: Strategic

Level 2: OffensiveLevel 2: Offensive

Level 3: DefensiveLevel 3: Defensive

Level 4: Cost-JustifiedLevel 4: Cost-Justified

Level 5: ControlledLevel 5: Controlled

LevelsTowardUse of ITTo CreateCompetitiveAdvantage

TQM and Reengineering

Reengineering takes a broader look at the logic and necessity of the process.

Quality is conformance to customer wants, needs and expectations at a price he or she is willing to pay.

Quality is defined as giving the customer, or the next person in the process, a product or service that meets their requirements and doing this in a way to assure that the right tasks are done right the first time.

Total Quality Management

How do you say to a long time, loyal,

hard working employee that quality

isn’t good enough?

Total Quality Management

1. We are good, but we must continue to

improve.

2. Individually and/or departmentally we may

be very good but we must be as good in the

total efforts of the entire organization.

What You’d Get From 99.9% Suppliers

• At Least 20,000 Wrong Drug Prescriptions Each Year.

• More than 15,000 Newborn Babies Dropped by Doctors

or Nurses Each Year.

• Unsafe Drinking Water at Least One Hour Each Month.

• No Telephone Service or Television Transmission for Nearly

Ten Minutes Each Week.

• Two Short or Long Landings at O’Hare Airport Each Day.

• Nearly 500 Incorrect Surgical Procedures Each Week.

• 2,000 Lost Articles of Mail Per Hour.

What You’d Get From Six Sigma Suppliers

• One Wrong Prescription in 25 Years.

• Three Newborn Babies Dropped by Doctors or Nurses in

100 Years.

• Unsafe Drinking Water One Second Every Sixteen Years.

• No Telephone Service or Television Transmission for Nearly

Six Seconds in 100 Years.

• One Short or Long Landing in Ten Years in all the Airports

in the U.S.• One Incorrect Surgical Procedure in Twenty Years.

• Thirty-five Lost Articles of Mail Per Year.

Process and Cultural Change1. Creating dissatisfaction with the current culture.

2. Training managers and employees in the tools and skills to work and manage continued improvement.

3. Establishing strong communication to support the quality effort.

4. Developing standards and measures to use as the basis for management decision making.

5. Rewarding and recognizing quality-oriented performance.

Business Process Management

Process Control: Define ways to measure and manage business process performance.

Improvement Plans: Identify and prioritize opportunities for improving process performance.

Leadership and Participation

Leadership: define management’s role in sponsoring change and focusing on achieving business success.

• Managing change

• Empowerment

• Employee development

Participation: address methods used to motivate and involve all employees to contribute to business success.

A WIN - WIN PROPOSITION

DELIGHTED CUSTOMERS

SATISFIED

STOCKHOLDERS PROUD

EMPLOYEES

ENHANCED COMMUNITY

SUCCESSFUL PARTNERS

Figure 16-5

Agile CompetitionAgile Competition

The FundamentalStrategies of

Agile Competition

The FundamentalStrategies of

Agile Competition

Enrich C

ustom

ers w

ith

Solutio

ns to T

heir

Problem

s

Organ

ize to

Mas

ter C

hange

and U

ncerta

inty

Leverage the Impact of

People and Information

Cooperate to Enhance

Competitiveness

Key Factors for Sustaining Strategic SuccessKey Factors for Sustaining Strategic Success

FirmFirm

EnvironmentEnvironment

PerformancePerformance

FoundationFactors

(Infrastructure)

ManagementActions & Strategies

(Leadership)

Key TermsKey TermsAgile CompetitorBreaking Business Barriers Cost Barriers Geographic Barriers Structural Barriers Time BarriersBuilding a Strategic IT PlatformBusiness Process ReengineeringCompetitive ForcesCompetitive StrategiesCreating Switching CostsDeveloping a Strategic Information BaseImproving Business OperationsInterorganizational Information Systems

Agile CompetitorBreaking Business Barriers Cost Barriers Geographic Barriers Structural Barriers Time BarriersBuilding a Strategic IT PlatformBusiness Process ReengineeringCompetitive ForcesCompetitive StrategiesCreating Switching CostsDeveloping a Strategic Information BaseImproving Business OperationsInterorganizational Information Systems

Knowledge-Creating CompanyKnowledge-Management SystemLeveraging Investment in ITLocking in Customers and SuppliersNew Economics of InformationPromoting Business InnovationRaising Barriers to EntryStrategic Business Use of the InternetStrategic Information SystemsStrategic Roles of Information SystemsSustaining Competitive AdvantageTotal Quality ManagementValue ChainVirtual Company

Knowledge-Creating CompanyKnowledge-Management SystemLeveraging Investment in ITLocking in Customers and SuppliersNew Economics of InformationPromoting Business InnovationRaising Barriers to EntryStrategic Business Use of the InternetStrategic Information SystemsStrategic Roles of Information SystemsSustaining Competitive AdvantageTotal Quality ManagementValue ChainVirtual Company