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2 Competing with Information Technology
I. CHAPTER OVERVIEW
This chapter introduces the fundamental concepts of competitive advantage through information technology, and illustrates strategic applications of information systems that can gain competitive advantages for today’s global e-business enterprises.
Section I: Fundamentals of Strategic Advantage Section II: Using Information Technology for Strategic Advantage
II. LEARNING OBJECTIVES
Learning Objectives
- Identify several basic competitive strategies and explain how they can use information technologies to confront the competitive forces faced by a business.
- Identify several strategic uses of Internet technologies and give examples of how they give competitive advantages to a business.
- Give examples of how business process reengineering frequently involves the strategic use of Internet technologies.
- Identify the business value of using Internet technologies to become an agile competitor or to form a virtual company.
- Explain how knowledge management systems can help a business gain strategic advantages.
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III. TEACHING SUGGESTIONS
Section 1 concentrates on the strategic role of information systems. Figure 2.2 can be used to illustrate the competitive environment of an industry. According to Porter’s model, there are five competitive forces that determine the profitability and survival of the firms within an industry. This figure outlines a matrix that businesses can use to develop competitive strategies to confront each of the competitive forces they confront in the market. Figure 2.3 gives a summary of how information technology can be used to implement the five basic competitive strategies. Figure 2.5 outlines a number of additional ways that information technology can be used to implement competitive strategies. Figure 2.6 illustrates the interrelationships in a customer-focused business. Intranets, extranets, e-commerce websites, and web-enabled internal business processes form the invisible IT platform that supports this e-business model. Figure 2.7 explains Porter’s concept of the value chain of a firm. This figure illustrates how Strategic Information Systems (SIS) can be applied to a firm’s basic activities for competitive advantage.
Section 2 dives into the strategic uses of information technology. Figure 2.9 points out that while the potential payback of reengineering are high, so is its risk of failure and level of disruption to the organizational environment. Figure 2.12 discusses how information technology can help a company be an agile competitor with the help of customer and business partners. Internet technologies can make customers the focal point of a business. This should generate a fair amount of discussion with your students, and a good open discussion can be developed by demonstrating ways in which major companies are making extensive use of Inernet, Intranets, and extranet websites to compete more effectively. Figure 2.13 and Figure 2. deal with creating a virtual company. Figure 2.13 illustrates how virtual companies use the Internet, intranets, and extranets to form virtual workgroups and support alliances with business partners. Figure 2. expresses the basic business strategies of virtual companies.
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- Develop ways to differentiate products and services from competitors
- Reduce the differentiation advantages of competitors
- Innovation Strategy
- Find new ways of doing business: a) Develop unique products and services b) Enter into unique markets or marketing niches c) Establish new business alliances d) Find new ways of producing products/services e) Find new ways of distributing products/services
- Growth Strategies
- Significantly expand the company’s capacity to produce goods and services
- Expand into global markets
- Diversify into new products and services
- Integrate into related products and services
- Alliance Strategies
- Establish new business linkages and alliances with customers, suppliers, competitors, consultants and other companies (mergers, acquisitions, joint ventures, forming “virtual companies”, etc.).
Strategic Uses of Information Technology: [ Figure 2.3 ]
How can the preceding competitive strategy concepts be applied to the strategic role of information systems? Information technology can be used to implement a variety of competitive strategies. These include the five basic competitive strategies (differentiation, cost, innovation, growth, and alliance), as well as other ways that companies can use information systems strategically to gain a competitive edge. For example:
- Lower Costs
- Differentiate
- Innovate
- Promote Growth
- Develop Alliances
Other Competitive Strategies [Figures 2.2 & Figure 2.5]
Several key strategies that are also implemented with information technology include:
- Locking in Customers or suppliers
- Building valuable new relationships with them. This can deter both customers and suppliers from abandoning a firm for its competitors or intimidating a firm into accepting less-profitable relationships.
- Building switching costs
- Make customers or suppliers dependent on the continued use of innovative, mutually beneficial interenterprise information systems.
- Customers or suppliers become reluctant to pay the costs in time, money, effort, and inconvenience that it would take to change to a company’s competitors.
- Raising barriers to entry
- Increasing the amount of investment or the complexity of the technology required to compete in an industry or a market segment can discourage or delay other companies from entering a market.
- Leveraging investment in information technology
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- By investing in advanced computer-based information systems to improve their own efficiency, firms are able to developing new products and services that would not be possible without a strong IT capability.
- Corporate Intranets and extranets enable firms to leverage their previous investments in Internet browsers, PCs, servers, and client/server networks.
Building a Customer-Focused Business : [ Figure 2.6 ]
For many companies, the chief business value of becoming a customer-focused business lies in its ability to help them:
- Keep customers loyal
- Anticipate customers future needs
- Respond to customer concerns
- Provide top quality customer service
The concept of customer-focused e-business focuses on customer value. This strategy recognizes that quality, rather than price, has become the primary determinant in a customer’s perception of value. From a customer’s point of view, companies that consistently offer the best value are able to:
- Keep track of their customers’ individual preferences
- Keep up with market trends
- Supply products, services and information anytime and anywhere
- Provide customer services tailored to individual needs.
Increasingly, businesses are serving many of their customers and prospective customers via the Internet. This large and fast-growing group of customers wants and expects companies to communicate with them and service their needs at e-commerce websites. The Internet has become a strategic opportunity for companies large and small to offer fast, responsive, high-quality products and services tailored to individual customer preferences.
The Value Chain and Strategic IS : [Figure 2.7]
An important concept that can help a manager identify opportunities for strategic information systems is the value chain concept as developed by Michael Porter. This concept:
- Views a firm as a series or "chain” of basic activities that add value to its products and services and thus, add a margin of value to the firm.
- Some business activities are viewed as primary activities, and others are support activities. This framework can highlight where competitive strategies can best be applied in a business.
- Managers and business professionals should try to develop a variety of strategic uses of Internet and other technologies for those activities that add the most value to a company’s product or service, and thus to the overall business value of the company.
Value Chain Examples : [Figure 2.7]
Collaborative workflow internet-based systems can increase the communications and collaboration needed to dramatically improve administrative co-ordination and support services. Examples of support processes:
- Career development intranet can help the human resources management function provide employees with professional development training programs.
- Computer-aided engineering and design extranets enable a company and its business partners to jointly
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IV. LECTURE NOTES (con’t)
Section II: Using Information Technology for Strategic Advantage :
Strategic Uses of IT:
Companies may use information systems strategically, or may be content to use IT to support efficient everyday operation. But if a company emphasized strategic business uses of information technology, its management would view IT as a major competitive differentiator.
Analyzing The U.S. Department of Commerce
We can learn a lot about the strategic importance of knowledge management systems from this case. Take a few minutes to read it, and we will discuss it (See The U.S. Department of Commerce: Using IT to Tap Experts’ Know-How Through Knowledge Management in Section IX).
Reengineering Business Processes : [ Figure 2.9 ]
One of the most popular competitive strategies today is business process reengineering - most often simply called reengineering. Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in cost, quality, speed, and service. BPR combines a strategy of promoting business innovation with a strategy of making major improvements to business processes so that a company can become a much stronger and more successful competitor in the marketplace. The potential payback of reengineering is high, but also is its level of risk and disruption to the organizational environment.
The Role of Information Technology
Information technology plays a major role in reengineering business processes. The speed, information processing capabilities and connectivity of computers and Internet technologies can substantially increase the efficiency of business processes, as well as communication and collaboration among the people responsible for their operation and management.
Becoming an Agile Competitor:
Agility in competitive performance is the ability of a business to prosper in rapidly changing, continually fragmenting global markets for high-quality, high-performance, customer-configured products and services. An agile company can:
- Make a profit in markets with broad product ranges and short model lifetimes.
- Process orders individually or in arbitrary lot sizes.
- Offer individualized products while maintaining high volumes of production.
Agile companies depend heavily on information technology to:
- Enrich its customers with customized solutions to their needs.
- Cooperate with other businesses to bring products to market as rapidly and cost-efficiently as possible.
- Combine the flexible, multiple organizational structures it uses.
- Leverage the competitive impact of its people and information resources.
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Creating a Virtual Company: [Figure 2.13]
- A virtual company (also called a virtual corporation or virtual organization) is an organization that uses information technology to link people, assets, and ideas.
- Virtual companies also form interenterprise information systems with suppliers, customers, subcontractors, and competitors.
Virtual Company Strategies:
Several major reasons why people are forming virtual companies include:
- Share infrastructure and risk
- Link complementary core competencies
- Reduce concept-to-cash time through sharing
- Increase facilities and market coverage
- Gain access to new markets and share market or customer loyalty
- Migrate from selling products to selling solutions
Building the Knowledge-Creating Company
To many companies today, lasting competitive advantage can only be theirs if they become knowledge-creating companies or learning organizations. That means consistently creating new business knowledge, disseminating it widely throughout the company, and quickly building the new knowledge into their products and services.
Knowledge-creating companies exploit two kinds of technology:
- Explicit Knowledge - data, documents, things written down or stored on computers.
- Tacit Knowledge – “how-tos” of knowledge, which reside in workers.
Successful knowledge management creates techniques, technologies, and rewards for getting employees to share what they know and to make better use of accumulated workplace knowledge.
Knowledge Management Systems:
Knowledge management has become one of the major strategic uses of information technology. Many companies are building knowledge management systems (KMS) to manage organizational learning and business know-how. The goal of KMS is to help knowledge workers create, organize, and make available important business knowledge, wherever and whenever it’s needed in an organization. This includes processes, procedures, patterns, reference works, formulas, “best practices,” forecasts, and fixes. Internet and intranet websites, groupware, data mining, knowledge bases, discussion forums, and videoconferencing are some of the key information technologies for gathering, storing, and distributing this knowledge.
Characteristics of KMS:
- KMSs are information systems that facilitate organizational learning and knowledge creation.
- KMSs use a variety of information technologies to collect and edit information, assess its value, disseminate it within the organization, and apply it as knowledge to the processes of a business.
- KMSs are sometimes called adaptive learning systems. That’s because they create cycles of organizational learning called learning loops , where the creation, dissemination, and application of knowledge produces an adaptive learning process within a company.
- KMSs can provide rapid feedback to knowledge workers, encourage behavior changes by employees, and significantly improve business performance.
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IV. LECTURE NOTES (con’t)
Summary
● Strategic Uses of Information Technology. Information technologies can support many competitive strategies. They can help a business cut costs, differentiate and innovate in its products and services, promote growth, develop alliances, lock in customers and suppliers, create switching costs, raise barriers to entry, and leverage its investment in IT resources. Thus, information technology can help a business gain a competitive advantage in its relationships with customers, suppliers, competitors, new entrants, and producers of substitute products. Refer to Figures 2.3 and 2.5 for summaries of the uses of information technology for strategic advantage.
● Building a Customer-Focuses Business. A key strategic uses of internet technologies is to build a company that develops its business value by making customer value its strategic focus. Customer-focuses companies use Internet, intranet, and extranet e-commerce websites and services to keep track of their customers’ preferences; supply products, services, and information anytime, anywhere; and provide services tailored to the individual needs of their customers.
● Reengineering Business Processes. Information technology is a key ingredient in reengineering business operations by enabling radical changes to business processes that dramatically improve their efficiency and effectiveness. Internet technologies can play a major role in supporting innovative changes in the design of workflows, job requirements, and organizational structures in a company.
● Becoming an Agile Company. A business can use information technology to help it become an agile company. Then it can prosper in rapidly changing markets with broad product ranges and short model lifetimes in which it must process orders in arbitrary lot sizes, and can offer its customers customized products while maintaining high volumes of production. An agile company depends heavily on Internet technologies to help it be responsive to its customers with customized solutions to their needs and cooperate with its customers, suppliers, and other businesses to bring products to market as rapidly and cost-effectively as possible.
● Creating a Virtual Company. Forming virtual companies has become an important competitive strategy in today’s dynamic global markets. Internet and other information technologies play an important role in providing computing and telecommunication resources to support the communications, coordination, and information flows needed. Managers of a virtual company depend on IT to help them manage a network of people, knowledge, financial, and physical resources provided by many business partners to quickly take advantage of rapidly changing market opportunities.
● Building a Knowledge-Creating Company. Lasting competitive advantage today can only come from innovative use and management of organizational knowledge by knowledge-creating companies and learning organizations. Internet technologies are widely used in knowledge management systems to support the creation and dissemination of business knowledge and its integration into new products, services, and business processes.
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V. KEY TERMS AND CONCEPTS - DEFINED
Agile Company (54): A company with the ability to profitably operate in a competitive environment of continual and unpredictable changes in customer opportunities.
Business Process Reengineering (51): The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in cost, quality, speed, and service.
Competitive Forces (42): A business must confront (1) rivalry of competitors within its industry, (2) threat of new entrants, (3) threat of substitutes, (4) the bargaining power of customers, and (5) the bargaining power of suppliers.
Competitive Strategies (43): A business can develop cost leadership, product differentiation, and business innovation strategies to confront its competitive forces.
Creating Switching Costs (45): The cost in time, money, effort, and inconvenience that it would take a customer or supplier to switch its business to a firm’s competitors.
Customer-Focused business (47): Internet technologies enable a company to emphasize customer value as its strategic focus.
Interenterprise information systems (45): A business can use information systems to build barriers to entry, promote innovation, create switching costs, etc.
Knowledge-Creating Company (57): A firm that consistently creates new business knowledge, disseminates it widely throughout the company, and quickly builds the new knowledge into their products and services.
Knowledge Management System (58): An information system that helps knowledge workers create, organize, and make available important business knowledge, wherever and whenever it’s needed in an organization.
Leveraging Investment in IT (46): A firm can leverage investment in information technology by developing new products and services.
Locking in Customers and Suppliers (44): Building valuable relationships with customers and suppliers, which deter them from abandoning a firm for its competitors or intimidating it into accepting less profitable relationships.
Raising Barriers to Entry (46): Technological, financial, or legal requirements which deter firms from entering an industry.
Strategic Information System (40): Information systems that provide a business with competitive products and service that give it a strategic advantage over its competitors in the marketplace.
Strategic uses of Information Technology (51): Information systems, which promote business innovation, improve operational efficiency, and build strategic information resources for a firm.
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VI. REVIEW QUIZ - Match one of the key terms and concepts
1 3 Competitive forces 10 14 Strategic uses of information technology 2 4 Competitive strategies 11 2 Business process reengineering 3 12 Raising barriers to entry 12 1 Agile company 4 11 Locking in customers and suppliers 13 17 Virtual company
5 5 Creating switching costs 14 15 Strategic uses of information technology 6 13 Strategic information systems 15 8 Knowledge-creating company 7 6 Customer-focused e-business 16 9 Knowledge-management system
8^16 Value chain^ 17^7 Inter-enterprise information systems 9 10 Leveraging investment in IT
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VII. ANSWERS TO DISCUSSION QUESTIONS
1. Suppose you are a manager being asked to develop e-business and e-commerce applications to gain a competitive advantage in an important market for your company. What reservations might you have about doing so? Why?
Unless the individual is familiar with the tools involved in information technology, and how to effectively use these tools to accomplish the given task, there is always a high level of apprehension. Reservations would be the fear of being totally out of the realm of this dynamic field of technology, and the feeling of helplessness and dependence on others.
2. How could a business use information technology to increase switching costs and lock in its customers and suppliers? Use business examples to support your answers.
Switching Costs: Investment in IT can make customers or suppliers depend on the continued use of your system, therefore, they are reluctant to pay the cost in time, money, effort, and inconvenience that it would take to change to another firm.
Lock in customers and suppliers: Investment in IT can lock in customers and suppliers by building valuable relationships with them, where both parties are experiencing mutual benefits; therefore they are reluctant to go to another firm.
3. How could a business leverage its investment in information technology to build strategic IT capabilities that serve as a barrier to entry by new entrants into its markets?
The cost of building and maintaining a strategic IT platform can be very expensive. Businesses may look to leverage some of these costs to their customers, thereby building IT platforms that can be utilized by their customers and suppliers. Initially, both the company and the customer are experiencing mutual benefits from the new system; however, as time goes by the customers become dependent on using the platform. In the long run, the company’s investment in IT results in locking in their customers and suppliers, creates switching costs, and creates barriers to entry from competitors.
4. Refer to the Real World Case of GE, Dell, Intel, and Others in the chapter. Can information technology give a competitive advantage to a small business? Why or why not? Use an example to illustrate your answer.
Reasons could include:
- A small business can use the level of technology that it can afford to make improvements in its value chain.
- A business of any size can adopt a strategic plan for the use of IT that will enable it to improve its competitive status whether through the creation of a Web-based e-commerce or e-business feature, or through the improvement of its relationship with its customers and suppliers.
- IT can enable even small businesses to reengineer its business processes.
- IT can enable even small businesses to built at its level of affordability a knowledge-based company.
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VIII. ANSWERS TO APPLICATION EXERCISES
1. Avent Marshall and Hilton Hotels: Customer-Focused e-Business
a. Which site provides you with the best quality of service as a prospective customer? Explain.
b. How could these companies improve their website design and marketing to offer even better services to their customers and prospective customers?
Students’ answers will vary. Both Avent and Hilton Hotels offer an attractive and fairly easy to use interface. Students may note each site's ease of use. Site visitors typically have a specific objective in mind when visiting a site, and they evaluate the site's performance according to how quickly and successfully the site allowed them to meet their objective. However, e-commerce vendors have several objectives:
- Up-sell
- Cross-sell
- Promote return business
- Facilitate word of mouth promotion
- Reinforce their brand's image
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2. Sabre’s Travelocity and American Airlines: Competing for e-Travel Services
a. How do their e-commerce websites and business models seem to differ?
Both websites provide a variety of travel related booking services. However, the AA website highlights AA related services and allows visitors to access their Frequent Flier accounts whereas the Travelocity site provides more comprehensive travel information.
b. Refer to the summaries of strategic uses of IT in Figures 2.3 and 2.5. Which strategies can you see each company using? Explain.
From Figure 2.3 students should basically be able to give examples for the majority of these strategies. For example, both companies are striving to keep their costs low by allowing potential customers to access the information for themselves. This saves time in areas such as personnel in call centers who would have to look the information up for the customer and give it to them over the phone.
c. How has the new entrant to this market, Orbitz (www.orbitz.com), sought to gain a competitive advantage among its well-established competitors?
Students should use an Internet search engine to learn more about Orbitz. Orbitz, owned by several major air carriers, obtained signed contracts from many major air carriers guaranteeing them the lowest available price on many fairs. Bargain hunters quickly noticed Orbitz met or beat the best prices available on other sites and quickly adopted Orbitz as their main air travel booking site. This enabled Orbitz to leap into one of the top travel booking sites in a matter of months after start up and earn revenues that the other leading sites had taken years to achieve.
See: http://news.com.com/2009-1017_3-879314.html for a very interesting News.com article: Fare Play.
d. What strategies might traditional travel agents adopt in order to compete?
Students' answers will vary. Travel agents must find products or services that web sites do not or cannot offer. Travel agents have the ability to learn, incorporate, and enforce an organization's employee travel policies. Through such a partnership arrangement, organizations may find it cheaper and easier to let travel agents manage and enforce their travel policies rather than doing it themselves. Travelers find it easier to get necessary information regarding travel, accommodations, visas, and a variety of other tips from a seasoned travel agent than from a website. Travel agents can provide personalized service at the individual level.
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- Just-in-Time Inventory Systems for Pinnacle Manufacturing
a. Create a spreadsheet based on estimated below. Your spreadsheet should include a column showing the number of days of inventory of each raw material currently held (Inventory value divided by inventory used per production day). It should also include columns showing the inventory needed under the new system (inventory used per day times 10 or 5) and the reduction in inventory under the new system for each raw material. Finally include columns showing the dollar value of existing inventories, the dollar value of inventories under the new system and the reduction in dollar value of the inventories held.
b. Assume that the annual cost of holding inventory is 10 percent times the level of inventory held. Add a summary column showing the overall annual savings for the new system.
[See Data/Solutions Files - Ch 02 - Exercise 4.xls]
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- Knowledge Management
a. What steps might a manager take to encourage his or her employees to use their organization's knowledge management system?
Students' answers will vary, but they should remain practical. Managers might consider any or all of the following.: Train employees about how to use knowledge management tools. Provide practical demonstrations of how these tools immediately benefit the employee and also the organization. Recognize and reward early technology adopters. Ensure that managers lead the way in usage.
b. Should managers set minimum quotas for system usage for each employee? Why or why not?
No. If managers "keep score" in this way, then employees can easily figure out how to inflate their scores. For example, an employee can spend a few minutes each morning opening and closing various items in a knowledge management system while not actually benefiting from the activity.
c. Aside from employee quotas, how else might an organization benefit from usage statistics?
Students' answers will vary, but they should remain practical. For example, managers should primarily reflect on the processes affecting the numbers. They should ask themselves several questions. Have my employees received sufficient training? Have I adequately demonstrated the tool's usefulness? What more can I do to promote the tool? Is the tool truly useful? Could developers or content managers improve the tools in some fashion? Is the tool sufficiently accessible?
Product Websites Exchange and Domino are the leading, proprietary e-mail and groupware vendors. WorkSite is one of the most sophisticated and widely adopted 3-tier, web-based applications available. Exchange: http://www.microsoft.com/exchange/ Domino: http://www.lotus.com/products/r5web.nsf/webhome/nr5serverhp-new WorkSite: http://www.imanage.com/products/index.html
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