dr. chen, management information systems chapter 3 strategy and information systems jason c. h....

Dr. Chen, Management Information Systems

Chapter 3Strategy and

Information Systems

Jason C. H. Chen, Ph.D.Professor of MIS

School of Business AdministrationGonzaga UniversitySpokane, WA 99258

[email protected]

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Chapter Opening Scenario:“Where’s the Data?”

• Buyers don’t communicate with operations when negotiating with vendors

• Buyers need data to look at prices and costs of dealing with individual vendors

• Need more data and people involved in making negotiating deals

• What are missing and needed in this scenario?

• Strategy and Information Systems2


• Recall from Chapter 1 that MIS is the development and use of information systems that enable organizations to achieve their goals and objectives. In Chapter 2, you learned how information systems can help people collaborate.

• This chapter focuses on how information systems support competitive strategy and how IS can create competitive advantages. As you will learn in your organizational behavior classes, a body of knowledge exists to help organizations analyze their industry, select a competitive strategy, and develop business processes.

• In the first part of this chapter, we will survey that knowledge and show how to use it, via several steps, to structure information systems.

• Then, in the last section, we will discuss how companies use information systems to gain a competitive advantage.

Chapter Preview

3


Customercentric

Who are the customers?Where are the customers?Their purchasing habitsHow to reach them?

What they need/want?How many they need/want?When they need/want?How to reach them?

Demands Products

IS/E-BUSINESS

BUSINESS VALUE & FOCUS –IS Perspective

• SCM• CRM• BPR• ERP

Value

Business Models & Strategies

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SCM: Supply Chain Mgt.CRM: Customer Relationship Mgt.BPR: Business Process ReengineeringERP: Enterprise Resource Planning


What is Business Model?

• A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace.

Source: E-Commerce: business, technology, society, Laudon and Traver, A/WN

• The business model is at the center of the business plan.

• An e-commerce business model aims to use and leverage the unique qualities of the Internet and the www.

Why New Models?– Profitability (making money)

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Q1 How does organizational strategy determine information systems structure?

Q2 What five forces determine industry structure?

Q3 How does analysis of industry structure determine competitive strategy?

Q4 How does competitive strategy determine value chain structure?

Q5 How do business processes generate value?

Q6 How does competitive strategy determine business processes and the structure of information systems?

Q7 How do information systems provide competitive advantages?

Q8 2022?

Study Questions

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Planning is everything ...What are Two Major Outputs for an organization?

Products,Services

Customers,market,

competition

Vision

guide

Strategy

create

develop

Tactic

N

Mission

Goals/Objectives

determines

determined by


Q1: How Does Organizational Strategy Determine Information Systems Structure?

• An organization’s goals and objectives determine its competitive strategy.

• Ultimately, an organization’s competitive strategy determines its information system’s

– Structures– Features– Functions

Fig 3-1 Organizational Strategy Determines Information Systems


Organizational Strategy Determines Information Systems

Fig 3-1 Organizational Strategy Determines Information Systems

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Q2 What five forces determine industry structure?Q3 How does analysis of industry structure determine competitive

strategy?





Q8 2022?

Study Questions

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Striving for Competitive Advantage

• Firm level: Industry & Competitive Analysis– Competitive Forces Model– Competitive Strategy

• Business level – Value-Chain Analysis

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• Five competitive forces determine industry profitability: bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants, and rivalry among existing firms (video).

• Intensity of each force determines characteristics of the industry, how profitable it is, and how sustainable that profitability will be.

• Assessing an industry structure based on five questions:1. How much bargaining power do customers have?

2. How much of a threat do substitution products or services pose?

3. How much bargaining power do suppliers have?

4. How great is the threat of new competitors entering the marketplace?

5. How great is the rivalry among existing firms?

Five Forces Model

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http://media.pearsoncmg.com/ph/bp/bp_akamai/kroenke/videos.php?title=Chapter%203-%20What%20five%20forces%20determine%20industry%20structure?&clip=pandc/kroenke/Ch_03_1.flv


PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY COMPETITORS

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

Threats

Bargaining power

NDr. Chen, The Trends of the Information Systems Technology

• Switching cost • Access to

distribution channels

• Economies of scale

• Redefine products and services

• Improve price/performance

• Selection of suppler

• Threat of backward integration

• Buyer selection• Switching costs• Differentiation

• Cost-effectiveness• Market access• Differentiation of

product or service

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Fig 3-2 Porter’s Five Forces Model of Industry Structure14


Q/A - Enhancing your Analytic Skill

Linda is in the computer repair businesses. Mark and Jill, two recent university graduates are unemployed, but are thinking of doing computer repairs at their homes. This is an example of which of the five forces?

a. bargaining power of customersb. bargaining power of suppliersc. threat of new entrantsd. threat of substitutione. rivalry among existing firms … and the answer is:

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Fig 3-3 Examples of Five Forces16


GearUp’s Competitive Strategy

Low Cost/Focused • Do everything to keep costs down

GearUp’s response the customer force is to provide the lowest prices for goods to be found, anywhere

The response to the rivalry threat is to keep its customers’ attention focused on GearUp via compelling emails.

• Focus within sporting goods category• Focus on buyers interested in special, short-term

sales


Fig 3-4: Five Forces at GearUp

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GearUp, organizations examine these five forces and determine how they intend to respond to them. That examination leads to competitive strategy.

Medium









Q8 2022?

Study Questions

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Porter’s Competitive Advantage Strategies

• Cost leadership: be the cheapest• Differentiation: focus on making

your product and/or service stand out for non-cost reasons

• Focus: occupy narrow market niche where the products/services can stand out by virtue of their cost leadership or differentiation.


• Firms engage in one of four competitive strategies: (video)

1. Be the cost leader across a wide industry – Wal-Mart is the lowest cost leader in the retail industry.

2. Differentiate its products across a wide industry – Apple Computer competes on how much better its computers are than PCs.

3. Be the cost leader in a focused industry segment – Southwest Airlines is the cost leader in certain portions of the airline industry.

4. Differentiate its product in a focused industry segment – Apple’s iPhone competes by being different than other cell phones.

Porter’s Competitive Strategy Model

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http://media.pearsoncmg.com/ph/bp/bp_akamai/kroenke/videos.php?title=Chapter%203-%20What%20is%20competitive%20strategy?&clip=pandc/kroenke/Ch_03_2.flv


Figure 3 (Extra): Porter’s Generic Strategy Framework – 3 Strategies for achieving Competitive Advantage

Dr. Chen, The Trends of the Information Systems Technology TM -22

Competitive Mechanism

Overall Cost Leadership

Focus

DifferentiationIndustrywide (Broad Target)

Particular Segment only

(Narrow Target)

Co

mp

etit

ive

Sco

pe

Lower CostPosition

Uniqueness Perceived by

Customer

Competitive Advantage

N


To be effective, organization goals, objectives, culture, and activities must be consistent with organization strategy.

Fig 3-4: Porter’s Four Competitive Strategies

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Q3: How Does Analysis of Industry Structure Determine Competitive Strategy?

Dr. Chen, Management Information Systems 24

In-Class-Group WorkDiscussion Question

• Using the five competitive forces model as described in this chapter to describe how (and what) IT might be used to provide a winning position for:

• A global airline– Use UA as an example (Group work together)


Use the five competitive forces model as described in this chapter to describe how information technology might be used to provide a winning position for each of these businesses

• Ans: The five forces are substitutes, supplier, buyer, new entrants, and inter-industry. The question asks the student to pick a force and describe how each of these 5 types of business might use information resources to reduce the threat of that force. An example of analyzing the substitute force is given below:

• Global airline-it is difficult to think of what might be a substitute threat for a global airline. Perhaps it might be a cruise ship offering "offices at sea". In that case the global airline might use information resources to offer "offices in the air".


PORTER’S FIVE COMPETITIVE FORCES MODEL

THE FIRMINDUSTRY COMPETITORS

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

Threats

Bargaining power

NDr. Chen, The Trends of the Information Systems Technology TM -26

• Cost-effectiveness• Market access• Differentiation of

product or service

Internal Forces:1.customer focus2.communication3.core competencies4.complexity5.Quality

Other forces should be considered in the e-Age:1. Digitalization2. Globalization3. Deregulation


Porter’s Five Forces Model and Value Chain

• According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force.

• Under the perspective of market structure, Porter’s competitive forces model has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats.


Cost Leadership

Business Strategies and its Competitive Advantage

Dr. Chen, The Trends of the Information Systems Technology TM -28

Cost Focus

Differentiation

Differentiation Focus

Industrywide

(Broad Target)

Particular Segment

only (Narrow Target)

Co

mp

etit

ive

Sco

pe

Competitive Mechanism

Lower CostPosition

Uniqueness Perceived by

Customer

Industrial economy Knowledge-based economy

Inn

ovat

ion

All

ian

ce

Gro

wth

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PART II

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Q8 2022?

Study Questions

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Striving for Competitive Advantage

• : Industry & Competitive Analysis– Competitive Forces Model– Competitive Strategy

• – Value-Chain Analysis

Firm level

Business level


Com

petitive

Adv

anta

ge

(Value)

N

Business Level: The Value Chain

Porter’s Value Chain Model

Q4: How Does Competitive StrategyDetermine Value Chain Structure?


Fig 3-7: Task Descriptions for Primary Activities of the Value Chain


• Inbound logistics—receiving, handling raw materials and other inputs Value in parts, time required to contact vendors,

maintaining relationships with vendors, ordering parts, receiving shipment, and so forth

• Operations—transform or assemble materials into finished products

• Outbound logistics—deliver finished products to customers

• Marketing and sales—create marketing strategies and sell products or services to customers

• Services—after-sale customer support

Primary Activities in the Value Chain

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• Contribute indirectly to production, sale, and service of product Procurement—finding vendors, setting up contractual

arrangements, and negotiating prices Technology development—research and development,

developing new techniques, methods, and procedures Human resources—recruiting, compensation, evaluation,

and training of full-time and part-time employees Example: ____________________________

Firm infrastructure—general management, finance, accounting, legal, and government affairs

Support Activities in the Value Chain

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performance measurement IS


• Competitive strategy implemented by creating value Value—amount of money a customer is willing to pay for a

resource, product, or service

Margin—difference between value an activity generates and cost of activity

Value chain—a network of value-creating activities• Primary activities• Support activities

Value Chain

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Rather than automating or improving existing functional systems, Porter contends companies should create new, more efficient business processes that integrate the activities of the entire value chain.


Value Chain in Order Management An Existing Product

SalesProduction

and Manufacturing

Distribution/

LogisticsAccounting Service

Primary Activities

Administrative and Other Indirect Value Added


Support Activities

N D.B.


Value Chain in Order Management A New Product

Sales FinanceProduction

and Manufacturing

Marketing Distribution/

LogisticsService

Primary Activities



Support Activities

D.B.


Fig 3-6: Bicycle Maker’s Value Chain


Support Activities in the Value Chain

Support Activity Description

Technology R & D, New Techniques, Methods, Procedures

Procurement Raw Materials

Human Resources Training, Recruiting, Compensation

Firm Infrastructure General Management, Finance, Accounting, Legal, Government Affairs


• Linkages are the interactions across the value activities. Ex: Manufacturing systems use linkages to reduce

inventory costs, sales forecasts to plan production; production plan to determine raw materials needs; material needs to schedule purchases. End result is just-in-time inventory, which reduces inventory sizes and costs.

• Business process design Organizations should not automate or improve existing

functional systems. Rather, they should create new, more efficient business processes that integrate activities of all departments involved in a value chain.

Value Chain Linkages

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Q5 How do business processes generate value?Q6 How does competitive strategy determine business processes and

the structure of information systems?


Q8 2022?

Study Questions

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• Business process—network of activities that generate value by transforming inputs into outputs.

• Cost of a business process is cost of inputs plus the cost of activities.

• Margin of the business process equals the value of the outputs minus the cost (margin = value – cost)

• Activity transforms input resources into output resources.

• Resources flow between or among activities.• Facilities store resources; some facilities, such as

inventories, store physical items.

How Do Business Processes Generate Value?

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Dr. Chen, Management Information Systems 3-44

How Do Business Processes Generate Value?

• Each company has many business processes which are networks of activities that generate value by transforming inputs into outputs.

• You determine the cost of each business process by adding the cost of inputs plus the cost of activities used in the process.

• You determine the margin of each business process by subtracting the cost of the activity from the value of the output.


An Alternate Process for Bicycle Manufacturer

Fig 3-8 Three Examples of Business Processes45


• Notice that activities get data resources from databases and put data into databases

• Business processes vary in cost and effectiveness. In fact, the streamlining of business processes to increase margin (add value, reduce costs, or both) is key to competitive advantage.

• Example of using a linkage across business processes to improve process margin: Querying both databases allows purchasing department to make

decisions on raw materials quantities and customer demand. By using this data, purchasing can reduce size of raw materials

inventory, reducing production costs and thus adding margin to the value chain.

Compare Three Business Processes For Bicycle Manufacturer

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Fig 3-9: Improved Material Ordering Process47


• Key to a company’s competitive advantage is to increase the margin of its products by adding value, reducing costs, or both.

• Business process redesign helps a business streamline its activities in order to increase its margins.

• Most difficult part of process redesign is associated with employee resistance.

Business Process Summary

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Q8 2022?

Study Questions

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Q6: How Does Competitive Strategy Determine Business Processes and the Structure of Information Systems?

Fig 3-10: Operations Value Chains for Bicycle Rental Companies


Fig 3-10: Operations Value Chains for Bicycle Rental Companies


Fig 3-10: Operations Value Chains for Bicycle Rental Companies52


High-Service Business Bike Rental

Fig 3-11 Business Process & Information System (DB process) for Bike Rental53

[4][1][2] [3]


• Each business must first analyze its industry structure and choose a competitive strategy. Will it be a low-cost provider or differentiate its products from competitors?

• Then it must design its business processes to span value-generating activities.

• Those processes determine scope and requirements of each organization’s information systems.

Bottom Line









Q8 2022?

Study Questions

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Figure 3-12: Principles of Competitive Advantage

• Product Implementation– 1. Create a new product or service– 2. Enhance products or services– 3. Differentiate products or services

• System Implementation– 4. Lock in customers and buyers– 5. Lock in suppliers– 6. Raise barriers to market entry– 7. Establish alliance– 8. Reduce costs

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Q7: How Do Information Systems ProvideCompetitive Advantages?

Dr. Chen, Management Information Systems N

• There are two ways businesses can respond to the five competitive forces.– 1) They can gain a competitive advantage via their products

and services by• creating new products or services, • Enhancing existing products or services, • Differentiating their products and services from those of their

competitors by cost and quality– 2) They can gain a competitive advantage by developing

superior business processes with Information Systems.

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Products/Services

(video)

http://media.pearsoncmg.com/ph/bp/bp_akamai/kroenke/videos.php?title=Chapter%203-%20How%20do%20information%20systems%20provide%20competitive%20advantage?&clip=pandc/kroenke/Ch_03_3.flv


Fig 3-13: Information Systems Create Competitive Advantages as Product or Support (Two Roles)58


Gaining Competitive Advantage by Using Business Processes

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1. Lock in customers Create high switching costs

2. Lock in suppliers Make it easy to connect to and work with your organization

3. Create entry barriers Make it difficult and expensive for new competition

4. Create better business processes to establish alliances Organizations—establish standards, promote product

awareness and needs, develop market size, reduce purchasing costs, and provide other benefits

5. Reduce costs Enables reducing prices and/or to increasing profitability.

Increased profitability means more cash to fund further infrastructure development and greater competitive advantage.


• ABC, Inc, an actual company, created a competitive advantage in shipping industry by: Superior customer service Making it easy for customers to business with by

minimizing data entry:• Drop-down lists, automatic fill-ins, contact lists for

customers• Minimizing data-entry errors

• Following slide shows some of the Web pages of ABC’s information system.

How Does an Actual Company Use IS to Create Competitive Advantages?

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Fig 3-14: ABC, Inc Web Page to Select recipient from customer records61


Fig 3-15: ABC, Inc Web Page to Select Contact from Customer Records62


Fig 3-16: ABC, Inc Web Page to Specify Email Notification63


Fig 3-17: ABC, Inc Web Page to Print a Shipping Labels64


• ABC’s information system helps the company create a competitive advantage: Enhances its existing services - making it easy for the

customer to use its system, and reducing errors. Differentiates its products/services from its competitors who

don’t have a similar service to provide to customers. Provides new services for customers that competitors don’t

provide (i.e., innovation) Locks in customers into its system based on the benefits they

receive from it. Raises barriers to market entry Increases profit margins by decreasing costs and decreasing

errors

How Does This System Create a Competitive Advantage?

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Q8 2022?

Study Questions

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Q8 2022?

• Unlikely GearUp will exist Like most startups, it will go bankrupt or Purchased by a large retailer, or It will merge with other personal shopping sites to form a

supersite, or It grows into a bigger company and becomes a supersite of its

own.

• New opportunities for IT-based organizations Reduce medical costs by supporting governmental functions, like

Medicare and related programs Web-based services to track medical bills, Medicare and

supplemental insurance payments, track unpaid bills


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Essential Value Propositions for a Successful Company

• ________ Model• ________ Competency• ________

– Set corporate goals and get executive sponsorship for the initiative

Business

Core

Execution


Enhanced Model of “Built To Last”: Continuity and Change in Visionary Companies

Strategic Competitive Advantages and creating values

Preserve

• Core Values• Core Purpose

Change• Culture & Operating Practices• Specific Goals and Strategies• Processes

IT

• Efficiency• Effectiveness• Innovation

• Safety• Quality Care

Management

(tangible, strategic mechanism)

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• END OF CHAPTER 3

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dr. chen, management information systems chapter 3 strategy and information systems jason c. h....

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