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ISMT 101
IS & Business Integration
Technology components
HW(2)
SW(3)
Network(5)
Internet(6)
DB(4)
Org
anizatio
nal u
se
DecisionMaking (8)
Business implications
EB(7)
(1) Digital Economy
Major IS (1)
People
Mgmt
(10) IS-BizIntegration
Now we move to the strategic level…
• Does IT indeed payoff?• Why do some firms obtain
real benefits while othersdid NOT?
• How to use IT to support corporate strategy?
Does IT indeed payoff
“We see computers everywhere, but in the productivity statistics.”
Robert Solow, Nobel Prize-winning economist
Substantial IT investment has been made But, in general, IT-performance relationship is not clear
Worldwide IT spending
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Source: IDC 2004
$ Billions
1960s 1970s 1980s 1990s 2000s
Substantial tech investment, but…
-10%
-5%
0%
5%
10%
15%
20%
25%
1965 1970 1975 1980 1985 1990 1995
Year
% A
nn
ua
l C
ha
ng
e
U.S. OCAM Investment per Worker
U.S. Output per Worker
*
* OCAM is BEA's Office, Computing & Acctg Machinery
16.9%
30.8%32.7%
35.1%
25.6%
1.5% 2.1% 1.8%3.0%
1.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
United States Japan France Germany United Kingdom
Growth Rate of IT Capital per Worker
Growth Rate of Output per Worker
Substantial tech investment, but…
Economy Slowdown in the G5
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
1965 1970 1975 1980 1985 1990 1995
Year
% A
nn
ua
l Ch
an
ge
in O
utp
ut
pe
r W
ork
er
U.S.
Japan
France
Germany
U.K.
Country-level recap
Substantial IT investment was made worldwide.
However, the substantial IT investment was associated with country-level economic slowdown.
IT leads to different outcomes
Source: Brynjolfsson, Erik, The IT Productivity Gap, "Optimize" magazine, July 2003, Issue 21
Firm-level recap
At the firm level, there is a positive relationship between IT investment and firm performance.
But, companies have achieved vastly different results.
IT does not help improve firm performance, if there is no clear strategy.
External Environment
InternalActivities
CorporateStrategy
Value ChainAnalysis
Competitive Forces
IT-EnabledStrategy
What’s strategy?
Doing things right? Doing right things?
Doing right things—leapfrogging
Children playing leapfrogging in CA, 1930s
Leapfrogging in WWII
When the US Navy joined the Pacific War, the Japanese Navy had captured many islands
Strategy 1—attack those islands one by one (123456)
Strategy 2—”leapfrogging”(146)
1
2
34
56
Strategy
Long-term planning of business operations in a specific market to improve firm performance strategy offers a guideline for the internal operations
(logistics, operations, marketing, and services) strategy fits into the external environment the objective is to improve profitability, ROA, stock
market return.
Leapfrogging by IBM
In 1980s, Apple was successful in the PC industry IBM wanted to quickly build its PC IBM also used “leapfrogging” strategy
Operating System Microprocessor
Assembly
Leapfrogging by IBM
“IBM could have captured the entire PC market”
-Larry Ellison, co-founder and CEO of Oracle, 1999
Leapfrogging by IBM
Is IBM’s leapfrogging strategy good or bad? Worked in short term In long-term, is this a good strategy??
What theories can be used to analyze IT strategy? Porter’s theories (value chain, competitive forces) How can Porter’s theories be applied to analyze IT-enabled
corporate strategy our analysis is IT-specific IBM, Dell, Harrah’s, Cisco, Wal-Mart
Value Chain in Industry
B2BB2B B2CB2C
Rawmaterial
Transportation& logistics
Manufacturing
Transportation& logistics
Distribution
Transportation& logistics
Retailing
Complementaryservices
The value chain of PC industry
Dedrick and Kraemer (2006)
The value chain of PC industry
Shifting trend: US companies shift from “covering the whole chain”
to design Chinese companies (mainland and Taiwan) are
dominating physical production.
Design requires innovation capability. Such capability can be acquired only in a learning-by-
doing process. It takes time. Chinese companies can buy assembly line and
mature technologies, but not the innovation capability.
The value chain of PC industry
Physical production is labor-intensive. In the PC industry, the profit margin of the
design phase is much higher than that of mass production. More value is added in the design phase.
Value Chain within a Firm Value chain – activities within an organization
that bring products and services to market
Recall e-business value chain – external We are now discussing internal value chain
Value Chain Primary activitiesPrimary activities – take raw materials and
transform them into something of greater value E.g., purchase steel make parts, engines assemble a car E.g., purchase from wholesalers sell to consumers
Including… Inbound logistics: purchasing and receiving the raw materials Operations: making products using raw materials Outbound logistics: delivering to buyers Marketing and sales: distributing product info and making sales Post-sales services: post-sales services, customer support
Value Chain Supporting activitiesSupporting activities – those functions that the
company requires to do business but do not directly add value to a product or service
HR management (recruiting, hiring, and training) Procurement of MRO (Maintenance, Repair and
Operations) and office supply Accounting office General management (administration and management) Research & development (R&D)
Value Chain
Value is added when a company conducts value chain activities. Each activity will add some value.
Total value added will lead to profit. Greater profit margin comes from greater value added.
IT can enhance the value added process. IT can increase efficiencies of each value chain activity.
IT and value chain
IT can support specific value chain activities… Supply chain management (SCM) systems help reduce
logistics costs. Enterprise resource planning (ERP) systems help reduce
operational costs. Customer relationship management (CRM) systems help
reduce costs in customer-oriented activities.
ISMT 524, ISMT 564, ISMT 527 are focused on SCM, ERP, and CRM, respectively.
Sell directly to consumers Allow customers build own models Quickly launch newer models/technologies Use EDI to connect all suppliers Enjoy above-average profitability
1990: Sales $546m using $126m operating assets
1998: Sales of $18.2b of built-to-order product using $493m operating assets
2002 Sales of approx $30b Operating expenses are 50%
that of closest rival Inventory of 4 days supply
(10% that of closest rival) Best customer service in
16 of past 17 quarters
Which value chain activity is Dell’s primary focus?
Case 1
Dell Dell uses IT to support JIT (just-in-time) inventory mgmt. With JIT, Dell only carries a small amount of the raw materials. Efficient inbound logistics supports BTO. Low inventory allows Dell to offer customized computers with
the latestlatest technologies/models.
3-Step Value Chain Analysis
1. Describe the specific activitiesspecific activities within your company’s value chain
2. Choose a particular portion of the value chain, focused onfocused on which your company can add great value
3. Use IT to improveIT to improve your company’s performance on those activities of your focus
i.e., use IT to increase the efficiencies (reduce the costs) of the activities) increase profit margin
Case 2
Harrah’s casino Web-based “Total Gold” program, receiving US patent Online database allowing repeat customers to earn rewards
based on the amount of time and money they spend Track consumer behavior, improve customer loyalty Harrah’s is better able to identify and meet customer demand.
Case 3
Cisco Web-based Hub that connects all suppliers. Using that Hub, Cisco outsourced manufacturing, logistics,
marketing, and services. Cisco is fully focused on R&D. Has achieved product leadership over years in the networking
HW markets.
Porter’s Competitive Forces Model Unlike the value chain analysis, the Competitive
Forces Model deals with external factors
Industrycompetitors
Intensityof rivalry
Industrycompetitors
Intensityof rivalry
SuppliersSuppliers
Bargainingpower ofsuppliers
CustomersCustomers
Bargaining powerof customers
New entrantsNew entrants Threat ofnew entrants
SubstitutesSubstitutesThreat ofsubstitutes
Porter’s Competitive Forces Model
Widely used in MGTO, MKT, ACT… Profitability = f (rivalry, threat of substitution,
threat of new entrants, bargaining power of suppliers, bargaining power of customers) Rivalry (–) : price cut Threat of substitution (–) : reduce revenue Threat of new entrants (–) : price war, increase rivalry Bargaining power of suppliers (–) : increase costs Bargaining power of customers (–) : reduce price
revisited
Mistake #1—outsourced microprocessor to Intel Microprocessor makers may enjoy high profitability, due to
high entry barrier This is a technology-intensive area, requiring learning-by-
doing over years
Mistake #2—outsourced OS to Microsoft OS developers may enjoy high profitability Consumers face high costs of switching to another OS
Mistake #3—work in a low-entry-barrier sector, computer assembly, which becomes very competitive today
A case study – HP
To illustrate the importance of considering external factors
Hewlett-Packard (HP)
A case study – HP
In the 1980s, HP set up its R&D and manufacturing divisions in Washington. the biggest market for printers was in the US. the technology development was still in an early stage.
Later, HP set up the manufacturing facilities in Spain and Singapore when demand grew in other parts of the world
Singapore become the largest production facility because there were more competitors in the market to achieve economies of scale to survive
A case study – HP
In mid-1990s, HP outsourced most of the production to vendors because the printer-manufacturing technologies have
matured. Outsourcing in a global market helps HP to reduce
costs in order to survive in a competitive market.
HP’s strategy – facilities of R&D and production, degree of outsourcing market, competitor, availability of global vendors
Porter (2001), Harvard Business Review
IT Rivalry among existing competitors (-) Increased price pressure due to price transparency (+/-) Increased geographic competition, but larger
markets
How IT affect Porter’s Five Forces
Porter (2001), Harvard Business Review
IT Barriers to entry (-) Due to substitution of electronic for physical assets (+) Cost of IT investment itself can be an entry barrier (+) IT-enabled asset can be an entry barrier
E.g., online reputation system at eBay
How IT affect Porter’s Five Forces
Porter (2001), Harvard Business Review
IT Threat of substitute products/services (+) IT can increase efficiency and increase the size of
the pie (i.e., the entire market) E.g., ATM and banking
(+/-) Disintermediation can create new opportunities and threats
E.g., Dell versus Best-Buy
How IT affect Porter’s Five Forces
Porter (2001), Harvard Business Review
IT Bargaining power of buyers (-) Reduced search and switching costs of buyers (+) Eliminates powerful channels (i.e., downstream
corporate buyers), increasing bargaining power
How IT affect Porter’s Five Forces
Porter (2001), Harvard Business Review
IT Bargaining power of suppliers (+/-) Online procurement can shift bargaining power
relative to physical channels (-) Disintermediation: Suppliers can reach end users
directly
How IT affect Porter’s Five Forces
Direct Sale
High
Medium
Low
High
Medium
PC industry rivalry =Threat of new entrants =
Threat of substitution = Bargaining power of
customers = Bargaining power of
suppliers =
Analyze ATM:
Based on networking Costs of ATM $20000 Difficult ATM is a necessity
Shared ATM network
IT and competitive forcesStrategic questions:
Can IT be incorporated into or generate products/services?
Can IT create entry barriers? Can IT lock-in customers? Can IT change the basis of
competition? Can IT change the relationship
with suppliers and partners?
Dell’s strategy to combat the 5 forces
Direct Sale
Web-based customizationhelps lock-in consumers
Efficient inboundlogistics enableWeb-basedcustomization
External Environment
InternalActivities
Value ChainAnalysis
Competitive Forces
Competitive AdvantageCompetitive Advantage
Cost Leadership
Differentiation Focus
ITIT
Strategies to achieve competitive advantage
Competitive advantage: above-average profit within an industry
To achieve competitive advantage… Cost leadership strategy seeks to provide goods and
services at the lowestlowest price. Differentiation strategy seeks to provide uniqueunique
products and services that customers value. Focus strategy is focused on finding and developing a
niche marketniche market (a small segment in the market).
External Environment
InternalActivities
Value ChainAnalysis
Competitive Forces
Competitive AdvantageCompetitive Advantage
Cost Leadership
Differentiation Focus
ITITIT reduces inventoryholding costs
Web-basedcustomizationhelps lock-incustomers
External Environment
InternalActivities
Value ChainAnalysis
Competitive Forces
Competitive AdvantageCompetitive Advantage
Cost Leadership
Differentiation Focus
ITITWeb-basedhub enablesoutsourcing
Tech. leadershipleads to entry barrier and customer lock-in
Wal-Mart
World’s #1 retailer with 4,800 stores and 1.5 million employees
World’s largest company in sales volume
48% more productive than the rest of the retail industry
How Wal-Mart Does It?
Powerful information systems Leader in the use of EDI Smart in-store systems for inventory and operations Satellite communications network for tracking material flows Vendor managed inventory (VMI) systems
VMI is based on EDI (EDI is a technological innovation) VMI is a managerial innovation – vendor checks
inventory level continuously, and decides when to replenish Wal-Mart’s inventory.
External Environment
InternalActivities
Value ChainAnalysis
Competitive Forces
Competitive AdvantageCompetitive Advantage
Cost Leadership
Differentiation Focus
ITITUse EDI to enhanceefficiencies of logistics
Require suppliersto use EDI, thus increasing lock-in
External Environment
InternalActivities
Value ChainAnalysis
Competitive Forces
Competitive AdvantageCompetitive Advantage
Cost Leadership
Differentiation Focus
ITIT“Total Gold”increaseefficienciesof CRM
Increase customerloyalty
Homework – analyzing a new case
Industry features
Low-tech industry—different than Dell
Mature products—different than Cisco
Less room to enhance customers’ experience—different
than Harrah’s
More like Wal-Mart, but lack monopoly power
Homework – analyzing a new case
Case analysis
1. How to use IT to improve efficiencies of (some of)
the value chain activitiesvalue chain activities
2. How to use IT to shape (some of) the five
competitive forcescompetitive forces
3. What is the best strategy among the three strategies
(cost leadership, differentiation, focuscost leadership, differentiation, focus)
Approach to competitive advantage
Create entry barrier (tech leadership, monopoly) Create entry barrier (tech leadership, monopoly) E.g., Cisco, Wal-Mart
Develop systems with high switching costsDevelop systems with high switching costs E.g., Dell, eBay, Harrah’s
Use IT to change the industry natureUse IT to change the industry nature E.g., Skype