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Chapter 2
Information Technologys Strategic
Importance
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The Current Challenge
Walter Wriston, former Chairman of Citicorp,The essence of an information strategy isto turn the burden of burgeoning business
data into a bounty of business opportunity.The business organiation has to be rebuiltaround the goal of managing information
producti!ely. The ob"ect of the game is toget information to the person or companythat needs and can use it in a timely #ay.$
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Strategic Issues for Senior%&ecuti!es
'. (btain or maintain competiti!e ad!antage
2. )se the Web to facilitate intra* and inter*organiational lin+ing
. %nable decentralied operations #ith effecti!ecentral coordination
-. e!elop fle&ible and responsi!e infrastructures
for the firm/. Capitalie on fleeting but critical business
information
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Time Criticality of Information
0odern IT enables the creation of highlydecentralied operations that can rapidlyrespond and e&ploit high !alue information that
is short li!ed These decentralied structures must be 1uic+ly
adaptable to shifting opportunities in a highlycompetiti!e en!ironment
y enabling these agile operations, IT can bee&pected to directly contribute to the bottom line
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Strategic Information Systems
These are information systems #hoseuni1ue functions or specific applicationsshape an organiations competiti!e
strategy and pro!ide it #ith competiti!ead!antage3 These are internal or e&ternal systems
3 These systems pro!ide a firm #ith competiti!ead!antage
3 Systems range from transaction processingsystems to decision*support systems
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IS4IT for Competiti!e 5d!antage
Competiti!e 5d!antage
3 That !alue percei!ed by the customer thatma+es the customer purchase your product
instead of your competitors
Interorganiational systems
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6isualiing Competiti!e 7orces
0ichael 8orter de!eloped a model to help!isualie competition
To gain a competiti!e edge #ithin ane&isting industry competitors must9
3 iminish customer and supplier le!erage
3 :o#er the possibility of substitute productsentering the mar+etplace
3 iscourage ne# mar+et entrants
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Porters Model of Industry
Competitive Forces
Your
Firm
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Porters Model of Industry
Competitive Forces
Your
Firm
Threat of
New Entrants
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Porters Model of Industry
Competitive Forces
Your
Firm
Threat of
New Entrants
Bargaining Power
of Suppliers
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Porters Model of Industry
Competitive Forces
Threat of
Substitute Products
or Services
Your
Firm
Threat of
New Entrants
Bargaining Power
of Suppliers
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Porters Model of Industry
Competitive Forces
Threat of
Substitute Products
or Services
Your
Firm
Threat of
New Entrants
Bargaining Power
of CustomersBargaining Power
of Suppliers
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Porters Model of Industry
Competitive Forces
Threat of
Substitute Products
or Services
Your
Firm
Threat of
New Entrants
Bargaining Power
of Customers
Level of
Industry Rivalry
Bargaining Power
of Suppliers
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Porters Model of Competitive
Advantage StrategiesLow cost/price efficiency
Differentiation
Special market niche/Innovation
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Strategic Thrusts
In ';
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Strategic Roles of Information
SystemsImprove Operational Efficiency
Promote Business Innovation
Build Strategic IT Resources ?????????
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Strategic Roles for Information
SystemsCreate barriers to entry
Impacts new entrants
Lock In customersImpacts bargaining power of customers
Lock in suppliers
Impacts bargaining power of customersCreate switching costs
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Electronic Data
InterchangeSupplier
Decreases bargaining power of customers
Makes it difficult for competitors
Makes it more difficult to enter industry
Customer
3 ecreases bargaining po#er of suppliers
3 Impro!es efficiency * lo#ers cost
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ifferentiation
The firms products or ser!ices aredistinguished from competitors productsor ser!ices, or con!ersely a ri!als
differentiation is reduced3 7or e&le, 5utomated Teller 0achines
>5T0s? distinguish the ser!ices of some
financial institutions from others
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Cost
5d!antage is attained either by reducingcosts to the firm, to its suppliers, orcustomers, or by increasing costs incurred
by competing firms3 7or e&le, ad!anced order*entry systems
or business*to*business e*commerce systems
reduce both suppliers and customersbusiness costs
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Inno!ation
Introducing changes to the product orprocess causes fundamental shifts in the#ay the industry conducts its business
3 Web*based trading #as introduced by somebro+erage firms, and became #idely offeredby others as the standard le!el of ser!ice
e&pected by customers began to includeWeb*based access
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=ro#th
5d!antage is secured by e&pansion,for#ard or bac+#ard inno!ation, or bydi!ersification in product or ser!ices
3 The Wall Street @ournal and other nationalne#spapers used electronic transmission andremote printing facilities to create a national
distribution, thus e&panding the potentialmar+et
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5lliance
7irms achie!e ad!antage by establishingagreements, forming "oint !entures, orma+ing ac1uisitions
3 0any national companies use "oint !enturesfor strategic thrusts. %!en ri!als "oin togethersuch as 0icrosoft and I0 #hen it ser!es a
mutual purpose
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Time 3 a si&th strategy4thrust
Competiti!e ad!antage is secured by rapidresponse to changing mar+et conditions orby supplying a more timely flo# of
products or ser!ices3 %lectronic design automation tools, C54C50
systems, and production logistics systems are
thrusts that increase manufacturingsresponse to the mar+etplace
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Ae# %conomy 8aradigms
The Internet and the World Wide Webha!e enabled firms to capture thead!antages of all si& thrusts 1uic+ly
The Internet has reshaped the competiti!elandscape for business and industry
The Internet has created a globalmar+etplace #ith increasing internationaltrade
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Strategic Systems in 5ction
(!er the past t#o decades, information systemsha!e been used to create !alue in business.T#o industries, airlines and financial ser!ices,
created systems that ha!e resulted in significantcompetiti!e ad!antage to their o#ners.
These systems ha!e not been static, and theire!olution is impressi!e gi!en the dramatic
changes in technology and the businessen!ironment o!er time.
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5irline Beser!ation Systems
In the ';Ds, 5merican 5irlines createdS5B% >Semi*5utomated usinessBesearch %n!ironment?
Initially in!ested E/D million to create thesystem
3 8ro!ides reser!ation ser!ices for airlines,
hotels, and rental cars3 :in+s tra!el agencies, pri!ate or corporate
tra!el systems, and Internet customers
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S5B% %!olution
55 continued to e&pand the system andpro!ide outsourcing reser!ation ser!icesto competitors
3 Integrated bac+ office management for tra!elagencies
35dded a yield*management system tooptimie fare structure and load factors
35n upgraded yield*management system in';;F increased corporate profits by E2DDmillion
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Competitors
)nited 5irlines created 5pollo$ in the';FDs to compete #ith S5B%3 Initial cost of E2/D million
3 ';renamed =alileo?
3 =alileos I8( in ';;F !alued the company atE2./ billion
3 In ';;;, =alileo earned E2'< million onre!enues of E'./ billion
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Internet*ased Systems
5las+a 5ir =roup created IT0s >Instant Tra!el0achines?3 These machines use a +ios+ type interface to create
tra!el reser!ations in hotels, airports, and businesslocations
3 They bring the po#er of ad!anced reser!ationssystems to busy tra!elers in a con!enient location
3 Coupled #ith paperless tic+eting >e*tic+ets?, thesetechnologies are reducing business cost andincreasing customer access
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Stoc+ ro+erage Systems
In ';FF, 0errill :ynch introduced the C05>Cash 0anagement 5ccount?3 Combined chec+ing accounts, debit cards,
and margin*based bro+erage accounts into asingle entity
3 Customers recei!ed a consolidated accountstatement at the end of the month
3 Cash #as automatically s#ept into a moneymar+et account
3 y ';
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C05 %!olution
';
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C05 Intellectual 8roperty
0errill #as granted )S patent ----2 in5ugust ';
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Internet*ased Competitors
The bro+erage industry under#entdramatic changes #ith #idespreadInternet use
3 arriers to entry #ere remo!ed as local officeinfrastructure became less important toin!estors
3 Charles Sch#ab, %*Trade, 7idelity, and othersembraced Internet transactions to e&pand andincrease mar+et share
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Sch#ab.com 7eatures
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Strategic %*usiness Systems
Internet*based technologies can radicallyreshape mar+ets resulting in massi!erealignment of customer and partner
relationships35irlines pre!iously !ie#ed tra!el agents as
their customers. ue to Web portals, they
increasingly !ie# indi!idual tra!elers ascustomers, no# that they ha!e been gi!endirect access to boo+ing and flight information
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Where are the (pportunities
0ost commonly, opportunities presentthemsel!es asproduct or serviceofferingsthat differentiate themsel!es
from others through the application of IT Inno!ati!e use of technology in the right
application
3 :o#ers business costs
3 Beduces time barriers
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Importance of Technology
5d!anced technology shapes the productsand ser!ices of the future
IT offers opportunities for inno!ati!e
organiations to increase their !alue Information is so fundamental to business
today, that small ad!ances in information
management are magnified as theseincreases are amplified across businessprocesses
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The Time imension
Time is an irreplaceable asset and sourceof competiti!e ad!antage
Information Technology and moderntelecommunications systems are #ellsuited to le!eraging time as a strategicthrust
@ust*in*time manufacturing >@IT? is acommon e&le
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0connell ouglas Corp
Implemented a @IT system for coordinationof #or+ flo#. The resulting systemre1uired9
3 ''' ne# programs
3 0odifications to ;F other programs
3 ';DD person hours of programming labor
3 0eetings for pro"ect planning and e&ecution
f
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@IT enefits at 0connellouglas
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0edia rea+s
0edia brea+s occur #hen informationgoes from !oice to paper, paper to digitalor other li+e transitions
3 0edia brea+s re1uire human inter!ention,incur costs, ris+ errors, and ta+e time
3 )nified information systems eliminate media
brea+s, decreasing cost in time and money
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Strategic 6alue of Aet#or+s
(ffers significant reductions in time anddistance barriers
%nhances business processes and
impro!e business efficiency igital business information reduces
errors, lo#ers costs, and impro!es control
Inno!ati!e applications of telecom and ITcan create ne# mar+ets and e&pandcustomer demand
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Aet#or+ings Strategic 6alue
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The Strategist :oo+s In#ard
Strategic systems are concei!ed by firstanalying the firms internal functions3
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%&ternal Strategic Thrusts
Ho# e&ternal factors create strategicopportunities
5 more complicated set of 1uestions
3 Be1uires a more global !ie# of the companyand its place in the industry >uppermanagement?
3 Be1uires a #ell*grounded understanding oftechnology and its strengths and limitations
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Integrating the Strategic 6ision
)sing a three dimensional model, all threegroups of strategic influences can berepresented
3 Strategic Thrusts >ifferentiation, Cost,Inno!ation, =ro#th, 5lliance, and Time?
3 Competiti!e =roups >Suppliers, Competitors,
and Customers?3 Strategic 7ocus >Internal and %&ternal?
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Integrated 0odel of Strategic Influences
Competitive ForcesNew
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C
ompetitiveS
trategies
Differentiation
Cost
Innovation
Growth
Alliance
Other
Strategies
Supplier Customer Competitor NewEntrant Substitute
O DU
!S
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O= Offensive U= Use P= ProcessingD= Defensive P= Provision S= Storage
T =Transmission
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6alue Chains for %*usiness
0odern e*business models operate innearly all the dimensions of the figure
3 )se internal >e&le %B8? and e&ternal
>Web*based 2C and 2?3 %&ploit the si& strategic thrusts
7irms adopting e*business models
reconstruct their !alue chains aroundpo#erful ne# information technology
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(ther Considerations
Strategic information systems ha!ese!eral common characteristics #orthnoting9
3 (rganiation and %n!ironment
3 7inancial Implications
3 :egal Considerations
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(rganiation and %n!ironment
Strategic information systems alter themar+et en!ironment and createfundamental changes in the field of
competition Competitors must adapt to the ne#
landscape or face disad!antage
Sur!i!ors of this process re*establish ane1uilibrium
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7inancial Implications
Strategic information systems re1uirecontinued in!estments to sustain theirad!antages
7irst mo!ers capture time at e&pense ofcost and potential failure
%!en established firms can be beaten
#hen technology appears that is sodisrupti!e, li+e the Internet, that noad!antage e&ists for the incumbents
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:egal Considerations
Besort to the courts can be a tool forcompetitors to blunt the ad!antagesgained by technology
8rotection of intellectual property bypatents can also be a po#erful tool tofurther the ad!antages of an inno!ator by
denying the competition access to a ne#lycreated mar+et
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Cautions
0ost strategic information systems aree!olutionary. They are based on pre*e&istingsystems #ithin the firm
Successful firms focus on the details of successinstead of a grand scheme. :asting competiti!ead!antage is not found in a fe# grand stro+es
The entire firm must be competiti!e across allareas. IS alone can not deli!er a +iller app$ thateliminates the competition
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Summary
Information technology is !ital to thecontinued success of modern firms
Senior leadership understands that IT is apotent source of competiti!e ad!antage
They are prepared to in!est in neededapplications and hard#are, but e&pect a
substantial return on that in!estment