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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