Chapter 8Value Creation

with Information SystemsWhat theoretical and analytical models help managers identify

opportunities to create added value with IT

Chapter 8

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Course Roadmap

• Part I: Foundations• Part II: Competing in the Internet Age• Part III: The Strategic use of Information Systems

– Chapter 6: Strategic Information Systems Planning– Chapter 7: Value Creation and Strategic Information

Systems– Chapter 8: Value Creation with Information Systems– Chapter 9: Appropriating IT-Enabled Value over Time

• Part IV: Getting IT Done

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Learning Objectives

1. How to think in a disciplined fashion about the question of value creation with information systems resources.

2. How to use traditional models of value creation with information systems and information technology to identify and craft IT-dependent strategic initiatives, including industry analysis, value chain analysis, and the customer service life cycle framework.

3. How to incorporate information resources in your search for opportunities for value creation using emerging frameworks, including the virtual value chain and the customer data strategies framework.

4. How to devise and select initiatives that create value using organizational data.

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Introduction

• Chapter 6 showed you how the strategic information systems planning process is designed to create an overall context for information systems decision making

• Chapter 7 laid the foundation by explaining how you can analyze the impact of such initiatives

• Now, we get to the heart of the matter by introducing frameworks and analytical models use to identify opportunities, and to design and evaluate IT-dependent strategic initiatives

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Traditional Frameworks

• Mid-1980s IS research - systematically explore and document the role of information systems and IT beyond automation of work and the creation of efficiencies

• Result: strategic models focusing on competitive positioning and competitive advantage1. Industry analysis2. Value chain analysis3. Customer service life cycle analysis

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Industry AnalysisThe 5-Forces Framework

• Grounded in the basic notion that different industries offer different potential for profitability.

• Suggests that industry differences can be analyzed a priori by managers using an analytical framework • five forces model

• Executives can decide whether to enter an industry or forgo investment

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Threat of New Entrants

• How easily can competitors enter the market?

• Are the barriers significant enough?

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The Threat of Substitutes

• How easily can the product or service be replicated in a way that meets the same customer needs?

VS.

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Bargaining Power of Buyers

• How easily can customers influence the price of the product or service?

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Bargaining Power of Suppliers

• How easily can individuals and firms sell their products and services at high prices?

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Rivalry Among Existing Competitors

• How fierce is the battling for position and how aggressive is competition in the industry?

• Hyper competition – fierce rivalry among existing firms and a very rapid rate of innovation leading to fast obsolescence of any competitive advantage

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Industry Analysis and the Role of Information Systems

• Investing in IS may:– Can the use of IT raise or increase barriers to entry

in the industry?– Can the use of IT decrease suppliers’ bargaining

power?– Can the use of IT decrease buyers’ bargaining

power?– Can the use of IT change the basis of industry

competition?

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Value Chain• As managers – you will analyze opportunities

to use strategic IS to create added value.• The value chain model identifies:

– Primary activities– Support activities

Firm Infrastructure

HR Management

Technology development

Procurement

Support Activities

Inbound logistics Operations Outbound logistics Marketing and sales Service

Primary Activities Margin

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Primary Activities

• Those directly related to value creation• They are:

– Inbound logistics– Operations– Outbound logistics– Marketing and Sales– Service

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Support Activities

• Those not directly related to the transformation process

• They are necessary to enable it.• They are:

– Firm infrastructure– HR management– Technology development– Procurement

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Value Chain and Role of Information Systems• Managers need to identify, understand, and analyze the

activities of the firm• The objective is to enhance or transform them using

Information Systems• Careful! Map a representative value chain

Marketing& Sales

Procurement Production

Guest StayAfter Stay

Service

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Value Network• Firms interact with one another in the value network• Individual value chains are therefore linked to those of

suppliers (upstream) and customers (downstream)• These linkages offer opportunities for value creation with

Information Systems

Suppliers Firm Customers

Linkages

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The Customer Service Life Cycle (CSLC)

• Objective:– To map the relationship between a firm and its

customers– To identify the stages where customers:

• Are unsatisfied or• Receive substandard service

– Provide ideas as to how:• To improve customer service through the use of the

advanced IT • or the deployment of IT-dependent strategic initiatives.

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The Four Phases of the CSLC• The CSLC identifies four major phases mapping

the relationship between the firm and its customers

• Stepping through the relationship in the customer’s shoes

• Helps managers address these needs from the customers’ point of view

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The 13 Stages of the CSLC

• Each of the four phases is further subdivided into stages

• These represent typical needs the customer has when:– Purchasing– Using and– Retiring a product or service.

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CSLC: Thirteen StagesRequirements Establish requirements Establish a need for the product or service Specify Determine the product or service attributes Acquisition Select Source Determine where to obtain the product or service Order Order the product or service from a supplier Authorize and pay for Transfer funds or extend credit Acquire Take possession of the product or receive service Evaluate and accept Ensure that the product or service meets specifications Ownership Integrate Add to an existing inventory or integrate with existing internal business processes Monitor Control access and use of the product or service Upgrade Upgrade the product or service if conditions change Maintain Repair the product as necessary Retirement Transfer or dispose Move, return, or dispose of product or service Account for Monitor expenses related to the product or service

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Phase 1: Requirements

• Establish requirements: – Customer identifies a

need for a firm’s product/service

• Specify: – Customer details the

characteristics of product or service of interest

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Phase 2: Acquisition• Select a source:

– The customer identifies where to acquire the product or service from

– Internet is a new source that reduces vendor’s distribution costs

• Ordering:– The customer requests the product or

service

• Authorize and pay for:– The customer issues payment

• Acquire: – The customer begins using the product

or service

• Evaluate and accept:– The customer ensures that the product

or service meets specifications and the stated objectives of use

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Stage 3: Ownership• Integrate:

– The customer adds the product or service to the existing inventory of resources

• Monitor use and behavior: – The customer ensures that the

product or service remains in working order

• Upgrade:– The customer modifies or

improves the product or service as needed

• Maintain: – The customer services the

product or service as needed– The firm can use such

opportunities to avoid dissatisfaction and provide outstanding service 24

Stage 4: Retirement

• Transfer or dispose:– The customer will needs to transfer, resell, return,

or dispose of the product or service

• Account for: – The customer needs to evaluate the experience

provided by the product or service– The customer needs to measure the costs

associate with ownership of the product or service

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Virtual Value Chain(VVC)• Designed to map the set of

sequential activities that enable a firm to transform:– Raw data in input into– Higher value information in

output

• Adopts the same logic as the physical value chain

• VVC recognizes info as the entity being transformed (the value of which is being enhanced) through the chain of activities

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Gather Organize Synthesize DistributeSelect

Five Activities• Gather:

– Collecting and accumulating information• Organize:

– Storing the gathered data in a way that makes later retrieval and analysis simple and effective.

• Select:– Identifying and extracting the needed data from the data repository

• Synthesize:– Packaging information so that it can be readily used by the intended

consumer for the specific purpose to which it is directed• Distribute:

– Transmitting the appropriately packaged information to its intended user or customer.

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Three Classes of Strategic Initiatives

• Visibility:– The ability to “see

through” organizational processes previously treated as black box

• Mirroring Capabilities:– The ability of

transforming physical activities into information-based ones

• Efficiency• Effectiveness• Performance

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Three Classes of Strategic Initiatives

• New Digital Value:– Creating relationship with the customer– Increasing Customer willingness to pay – Creating new value in the form of new

information enabled products or services.

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New Frontier: Value Matrix

Capture

Store

Select

Synthesize

Distribute

Marketing& Sales

Procurement Production

Guest Stay After StayService

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Creating Value with DataPurpose of data:

Do something of value for customers

increase their customer willingness to pay

Value

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Ability for data to create value depends on two factors:1.Theoretical Repurchase Frequency of product or service2.Degree of Customizability of product or service

Theoretical Repurchase Frequency

How often the customer repurchases the goods/services

It is a function of the industry the firm is in and the characteristics of the

value proposition it offers

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Degree Of Customizability

How much the product or service can be tailored to the specific needs and requirements of individual customers

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Customer Data Strategies

Low

Low

High

High

Theoretical Repurchase Rate

Degree of Customizability

Low Payoff

Acquisition Strategy

Rewards Strategy Personalization

- Analytics- New Prospects

- Operations- Differentiation

- Loyalty Rewards- Reporting

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Personalization Strategy

• Repeated interactions• Returning customers

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Rewards Strategy

• Product and service purchased frequently.

• Products are fairly standardized

• Difficult to tailor them to specific customer requests

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Acquisition Strategy

• Low theoretical repurchase frequency

• High degree of customization

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Low Payoff

• Low theoretical repurchase frequency

• Relatively low degree of customizability

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The Third Dimension

Unobtrusive Data Capture

The extent to which – during the normal business cycle – data is collected and stored in a readily usable format

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Data-Driven Strategic Initiatives

• Identify relevant Transaction Processing Systems (TPS)– Narrow the scope of the analysis and focus on the systems

that hold relevant data• Inventory currently available data

– Identify the underlying data tracked in the natural course of business

– Talk to power users • Conceptualize initiatives

– Generate and brainstorm ideas – Don’t evaluate feasibility or financial viability yet

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Prioritize Initiatives• Evaluate actual feasibility – make pragmatic

decisions about these initiatives• Upside potential

– Time sensitivity- Impact immediacy- Aggregation requirements- Trending requirements

• Data availability– Accuracy– Comprehensiveness

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Prioritize Initiatives

Imperatives:- Projects with significant

upside potential that rely on readily available information

Quick wins:- Projects without much

upside potential - Can be readily implemented

based on immediately available information

- Help gain momentum and build credibility

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Prioritize InitiativesTradeoffs:- Projects that rely on

information not readily available that tends to be costly

Losing causes:- Projects with little

upside potential that rely on information that is not readily available

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The Recap• Industry analysis, seeks to help you identify opportunities to deploy

information systems to improve the profitability of the industry• Value chain analysis seeks to spur your thinking about how

information systems and technology can be used to introduce new activities and/or change the way the firm’s activities are currently performed

• The customer service life cycle (CSLC) suggests that there is ample opportunity to create value by using information systems and technology to enhance the relationship with customers and enable superior customer service

• CSLC identifies four major phases and thirteen stages that offers opportunities for value creation per the relationship between the firm and its customer

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The Recap• Virtual value chain (VVC) recognizes the importance of the wealth

of information available to today’s organizations in the search for value creation

• VVC identifies five sequential activities & three classes of strategic initiatives that a firm can use to transform raw data input into information outputs that have more value than the inputs

• Customer data offer the potential to create value with different strategies best fitting different organizations

• The viability of the chosen strategy depends also on the degree of difficulty the firm encounters in collecting and using the needed customer data

• Once the firm identifies a potentially value adding strategy, it must ensure that it can appropriate the value created over time

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What We Learned

1. How to think in a disciplined fashion about the question of value creation with information systems resources

2. How to use traditional models of value creation with information systems and information technology to identify and craft IT-dependent strategic initiatives, including industry analysis, value chain analysis, and the customer service life cycle framework

3. How to incorporate information resources in your search for opportunities for value creation using emerging frameworks, including the virtual value chain and the customer data strategies framework

4. How to devise and select initiatives that create value using organizational data

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