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4-1
Chapter 4
Information Systems Investment & Strategic Advantage
“The most important discoveries of the next 50 years are likely to be ones of which we cannot now
even conceive.”
Sir John Maddox, 1999
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
4-2
1) Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.
2) Describe how to formulate and present the business case for an information system.
3) Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.
4) Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.
Learning Objectives
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Valuing Information Systems
• Information systems can have strategic value to an organization
• Information systems can be used in three ways to add value to an organization:
1. Automating
2. Informating
3. Strategizing
4-3Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
IS for Automating: Doing Things Faster
• With automation, tasks can be completed:o Fastero Cheapero More accuratelyo With greater
consistency
4-4Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Automating: Example
• Loan processing comparison for 3 methods (from the moment the customer takes the application until the applicant is notified of decision)o Manual loan process—25 to 40 dayso Technology-supported process—5 to 20 dayso Fully automated process—1 hour to 15 days
4-5Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
IS for Organizational Learning: Doing Things Better
• Information systems can also be used to:o Learn about
processeso Improve
processeso Support
organizational learning
4-6Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Informating: Example• Computer-based
loan system identifies peak times during the year when specific loans are processed
4-7Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
IS for Supporting Strategy: Doing Things Smarter
• IS used to gain or sustain competitive advantageo Turning benefits
of automating and informating into strategic advantage
4-8Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Strategizing: Five Types of Organizational Strategies
• Organizational strategies define the way in which a company plans to gain/sustain competitive advantage
4-9
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Overall Low Cost Leadership Strategy
• Offer best prices in the industry or product/service category
• Broad focuso Wal-Mart
4-10
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Broad Differentiation Strategy
• Offer better products/services than competitors
• Broad Focuso Nordstrom
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Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Focused Low-Cost Strategy
• Offer best prices in the industry or product/service in specific category
• Focus on nicheo Dell
4-12
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Focused Differentiation Strategy
• Offer better products/services than competitors
• Focus on nicheo Apple
•High-quality computers
•Home and educational markets
4-13
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Best-Cost Provider Strategy
• Provide products of reasonably good quality at competitive priceso Target
4-14
Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Sources of Competitive Advantage1. Best-made product on the market2. Superior customer service3. Achieving lower costs than rivals4. Having proprietary manufacturing technology5. Having shorter lead times in research and
development projects6. Having a well-known brand name and
reputation7. Giving customers more value for their money
4-15Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Competitive Advantage• Manager use value chain Analysis to
identify opportunities to use information systems for competitive advantage?
• Look at organization as big input/output process
• Porter’s Value Chain
4-16Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Value Chain Analysis• Tool used by managers to identify opportunities
for gaining competitive advantageo Analyzing an organization activities to determine
where value added to product & cost incurred
4-17Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
IS and Value Chain Analysis• Information systems use in adding value:
oUse of InternetoUse of Extranet/Intranet
4-18Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Learning Objectives
1. Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.
2. Describe how to formulate and present the business case for an information system.
3. Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.
4. Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.
4-19Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Making the Business Case for an IS• Identification of benefits that the
proposed information system will bring to the organizationoAutomating benefitso Informating benefits Lawyers defense
oStrategic benefits
• People ask for justification, quantifying why they should spend on IS
• Presenting the value provided by IS4-20Dr. Ali Zolait - Information Systems Today: Managing in the
Digital World
What Dose Making the Business Case for an IS Mean?
Productivity Gains
• Easy to identify costs with developing an IS
• Difficult to identify productivity gainsoThere are limitation to productivity gains with
development of an IS
• Why hasn’t productivity increased at the rate of IS investments?o IS may have increased productivity, but
other forces simultaneously may work to reduce it
4-21Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
The Productivity Paradox• Information systems may be used
in unintended ways, employees spending time on oWeb surfingoJunk mailoGames
4-22Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Measurement Problems
• IS Benefits difficult to quantifyoWrong things
measured•efficiency vs.
effectiveness
• Example: ATM
4-23Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Time Lags
• Benefits do not always occur at the same time IS is implementedo Some IS/IT
implementation requires people to gain experience
o System must be integrated with existing systems
4-24Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Redistribution
• IS may be beneficial for individual firms but not for a particular industry
• IS may redistribute the pieces of the pie rather than make the pie biggero Increases in market share
come at the expense of the competitors’ market share
4-25Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Mismanagement
• Bad business model cannot be overcome by good information systemo IS implementation
poorly, or as a temporary fix
o Creation of unanticipated bottlenecks
4-26Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Making a Successful Business Case• Difficult to quantify
benefits of IS• Money doesn’t grow
on trees• Need to make a
strong business case & managers arguments are o Based on: (3Fs)
•Faith•Fear•Facts
4-27Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Fiction
Arguments Based on Faith
• Arguments based on beliefs about:o Organizational
strategyo Competitive
advantageo Industry forceso Customer perceptions
• Example: Procter & Gamble
4-28Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Arguments Based on Fear• Arguments based on
the notion that if system is not implemented:o Company loses to a
competitoro Goes out of business
• Example: Automotive industry
4-29Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Factors in IS Investment Decisions
• Often considered when presenting arguments based on fear
4-30Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Porter’s Five Forces Model
• Framework used to analyze competition within an industry
4-31Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Arguments Based on Fact
• Arguments based on:oDataoQuantitative
analysiso Indisputable
factors
4-32Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Arguments Based on Fact (cont’d)
• Primary tools: oCost-benefit analysis
• Identify costs
• Identify benefits
•Contrast expected costs and benefits
oWeighted multicriteria analysis
4-33Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Cost-Benefit Analysis
• Identifying costsoTotal cost of ownership (TCO)
•Cost of acquisition
•Cost of use
•Cost of maintenance
oRecurring vs. nonrecurring costsoTangible vs. intangible costs
4-34Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Cost-Benefit Analysis (cont’d)
• Identifying BenefitsoTangible benefits
•5 percent increase in sales
•Reduction of order entry errors
o Intangible benefits• Improvement to customer service
• Improvement in overall perception of a firm
4-35Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Cost-Benefit Analysis (cont’d)
• Contrasts total expected tangible costs with total tangible benefitsoBreak-even analysis—identifies the point
when tangible costs equal tangible benefitsoNet-present-value analysis—identifies the
present value of future cash flows
• Comparing computing investment
4-36Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Comparing computing investment • Weighted Multicriteria Analysis
o Method used for deciding between alternative IS investments or alternatives of the same system
4-37Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Presenting the Business Case• Persuade decision makers in the firm
oKnow the audienceo Identify stakeholder groups
4-38Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Presenting the Business Case (cont’d)
• Convert benefits to monetary terms
4-39Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Presenting the Business Case (cont’d)
• Devise proxy variableso Used when clear-cut assessment is not possible
•Measures of perceived value of change to the organization
• Measure what is important to managemento Case becomes more meaningfulo Focus on senior management’s “hot button” issues
• Hot issues for the senior managers could be the cycle time (how long it takes to process an order), customer feedback…etc
4-40Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Assessing Value for IS Infrastructure
• Present holistic view o Economic value (contribution)o Architectural value (ability to extend infrastructure) o Operational value (measure the cost of not investing)o Regulatory and compliance value (measure the
impact)
• View IS as asset rather than necessary expense
4-41Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Howard Rubin, president of Meta group argued that , when assessing IS value
Learning Objectives
1. Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.
2. Describe how to formulate and present the business case for an information system.
3. Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.
4. Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.
4-42Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Valuing Innovations• Which new technology will make or break your
business?
4-43Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Successful Innovation Is Difficult• Innovation is often fleeting
o The advantages gained from innovations are often short lived
4-44
Innovation is often risky Sometimes even superior
products can lose the race Blu-ray vs. HD DVD
Innovation choices are often difficult Foreseeing the future is not always possible
In 1994 the Internet was not given much attention
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Organizational Requirements for Innovation
• Process requirements—the organization has to be willing to do whatever it takes to implement the change
• Resource requirements—need to have the human capital necessary for successful deployment of the system
• Risk tolerance requirements—organizational members must have appropriate tolerance of risk and uncertainty
4-45Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Competitive environments require that organizations must remain at the cutting edge their use of IS
Predicting the Next New Thing• Deciding which innovations to adopt is very
difficult
4-46
Diffusion of Innovations Classic view
of adoption of innovations
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
The Innovator’s Dilemma• Disruptive innovations
o New technologies, products, or services that eventually surpass dominant technologies
•Online vs. brick-and-mortar retailing
•Automobiles vs. horses
•CDs vs. records
•MP3 vs. CDso Undermine effective management practices
4-47Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Disruptive Innovations• 1970s:
mid- and high-performance users were bulk of the market
• Digital Equipment Company (DEC) tried to sell to those markets
• Microcomputers seen as “toys”
4-48Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Disruptive Innovations (cont’d)
• 1980s:Microcomputers focusing on low-performance users’ needs
• Ignored by DEC
4-49Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Disruptive Innovations (cont’d)• 1990s:
Growing performance of Microcomputers, meeting mid-performance users’ needs
• DEC lost biggest market segment
4-50Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Disruptive Innovations (cont’d)• Today, micro-
computers meeting entire market’s needs
• DEC out of business
• Next disruptive innovation: 3G and 4G mobile phones?
4-51Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
The Innovator’s Solution• Christensen outlines a process—
disruptive growth engine—that helps organizations respond to disruptive innovations more effectively
1. Start early
2. Executive leadership
3. Build a team of expert innovators
4. Educate the organization
4-52Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Implementing the Innovation Process
• E-Business Innovation Cycleo The model
holds that the key to success is the extent of IS use in timely and innovative ways
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Based on: Wheeler (2002)
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
E-Business Innovation CycleChoosing Enabling/Emerging Technologies
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Organization first jobs, groups and Process that all devoted to looking for emerging IT
Based on: Wheeler (2002)
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
E-Business Innovation Cycle (cont’d)Matching Technologies to Opportunities
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Most promising new technology matched with current economic opportunities
Based on: Wheeler (2002)
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
E-Business Innovation Cycle (cont’d)
Executing Business Innovation for Growth
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Stage at which the change is actually implemented
Based on: Wheeler (2002)
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
E-Business Innovation Cycle (cont’d)
Assessing Value
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Value created for customers and internal operations assessed
Based on: Wheeler (2002)
Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Three Ways to Think About Investments in Disruptive Innovations
• Put technology ahead of strategy o Technology is so important to success it needs to be
considered first.o Strategy is developed afterwards.
• Put technology ahead of marketingo Rapid development of technology makes it
impossible for people to know what they want.
• Innovation is continuouso New technologies are constantly being developed.
4-58Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Learning Objectives
1. Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.
2. Describe how to formulate and present the business case for an information system.
3. Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.
4. Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.
4-59Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Freeconomics• FREECONOMICS—The leveraging of
digital technologies to provide free goods and services to customers as a business strategy for gaining competitive advantage
4-60Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
How Does Freeconomics Work (for Yahoo!)
• From Yahoo! free e-mail service
4-61Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
The Freeconomic Value Proposition• What a business
provides to a customer and what that customer is willing to pay for that product or service
4-62Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
A broad ecosystem of many participants
Approaches for Applying Freeconomics
• Advertising
• Freemium
• Cross-Subsidies
• Zero Marginal Cost
• Labor Exchange
• Gift Economy
4-63Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
END OF CHAPTER CONTENT
3-64Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Opening Case: Managing in the Digital World: TiVo
• Unprecedented control over television viewingo Automatic recording of
favorite showso Scheduling using the Webo Pause a show and
resume it latero Search by actors or a type
of a showo View photos on your TVo Burn DVDs
4-65Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
The IT Department Often Knows
• Strategies to grapple with ethical decisionso IT equipment and data use policy
•Whistle-blower provision
oReport violations, then let company handle ito IT professionals should develop “Code of
Ethics”
4-66Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Rootkits: Sony’s Secret
• Sony BMG Music Entertainment was using “rootkit” to copyright protect CDsoRootkit was installed on users’ hard drives
without their knowledgeoLeft computers vulnerable to malicious
intruders—Trojan horses usedoRootkit was discontinued and uninstall
instructions were given to affected customers
4-67Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Microsoft’s Bill Gates and Paul Allen
• Both dropped out of college to run Micro-Soft in 1975
• Partnership with IBM to install MS-DOS on all PCs set the stage
• Gates’ worth—$58 Billion
• Allen’s worth—$16.8 Billion
4-68Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Who Is Sharing Files?
Active consumersAccustomed to on-demand lifestyle
Informed about current eventsInternet is primary source
Conversations focused on tech gadgets, car accessories, home theater setups
Many were Mac usersGamersFrustrated with music and entertainment
industries for punishing them
4-69Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
For Sale by Owner: Your Company’s Name.com
• Domainers—buy and sell domain nameso 2006—$9 billion businesso 2009—projected to be worth $23 billion
• Ad space rentingo Domainer registers URL such as Amazon.como Webpage with advertisements is displayedo Search engine owner pays money to the domainer
for each click on an ad
4-70Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
What Were You Thinking? Brain Sensor Research for Market Research
• EmSenseoEEG sensor headsetoData on EEG, monitors breathing and heart
rate, head motion, blink rate, and skin temperature. Moreover, the company has also devised algorithms that translate physiological data from the sensors into information about emotions that marketers can use.
• Game designers can tell when players are involved or bored
• Scientists argue that EEG is not as reliable as MRI
4-71Dr. Ali Zolait - Information Systems Today: Managing in the Digital World
Photo Industry
• In only four years (2002-2006) photography moved from film to digitalo Canon, Konica Minolta no longer make film modelso Nikon makes two film models:
•One for professional photographers
•One for beginners
• Business models changed rapidlyo Digital technology was a disruptive innovation for
the photo industry
4-72Dr. Ali Zolait - Information Systems Today: Managing in the Digital World