McNurlin_03

Strategic Uses of Information Technology

Chapter 3

Information Systems Management In Practice 7E

McNurlin & Sprague

PowerPoints prepared by Michael MatthewVisiting Lecturer, GACC, Macquarie University – Sydney Australia

©2006 Barbara C. McNurlin. Published by Pearson Education.

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Chapter 3

• Use of the Internet by businesses set off a revolution in the use of IT, so that utilizing the Internet to conduct business became the strategic use of information technology.

• The questions that remain are: – Has the revolution ended, or – Does an even larger revolution loom?– Does IT still matter?, and– What sorts of strategic uses are companies making?


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Chapter 3 cont.

• Strategic roles of IT fall into one of three categories: 1. “working inward” (improving a firm’s internal processes and structure)2. “working outward” (improving the firm’s products and relationships

with customers) and3. “working across” (improving its processes and relationships with its

business partners)

• Grainger, GE Power Systems, Wire Nova Scotia, The Shipping Industry, Cisco Systems and UPS Supply Chain Solutions, Semco, S. A., A Day in the Life of an E-lancer, General Mills and Land O’ Lakes, Sara Lee Bakery Group, and Dell Computer serve as examples of how companies are using information systems in strategic roles


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Today’s Lecture• Introduction

– History of Strategic Uses of IT– Whither the Internet Revolution?– The Cheap Revolution– Episode Two: Profitability Strikes Back– Does IT Still Matter?

• Working Inward: Business-to-Employee– Building an Intranet– Fostering a Sense of Belonging


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Today’s Lecture cont.

• Working Outward: Business-to-Consumer– Jumping to a New Experience Curve– The Emergence of Electronic Tenders– Getting Closer to Customers– Being an Online Customer

• Working Across: Business-to-Business– Coordinating with Co-suppliers– Establishing Close and Tight Relationships– Becoming a Customer-Centric Value Chain– Getting Back-End Systems into Shape


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Introduction

• Use of the Internet by businesses in mid/late ’90s set off a revolution in the use of IT– Utilizing the Internet to conduct business became

the strategic use of IT• Strategic = having a significant, long-term impact on a

firm’s growth, industry and $$

• What now?– Dot-com crash– A larger revolution to come?– Does IT still matter?– What strategic uses are companies making of IT

(esp. the Internet)


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Introduction

Figure 3-1 Strategic Uses of Information Systems


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IntroductionLast 20 Years – Strategic Uses of IT

• 1st edition– Mid 1980s, hot topic = end user computing

(working inward)• Help employees learn about PCs

• 2nd edition– Late ’80s strategic use focused outward to

gain competitive advantage• e.g. Merrill Lynch cash management account

– Now considered ‘normal’ = competitive necessity Vs. competitive advantage


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IntroductionLast 20 Years – Strategic Uses of IT cont.

• 3rd & 4th editions (1990s)– Strategic use attention turned inward to

reengineering business processes• Intent = not to automate existing processes but

to totally redesign how the enterprise operated– Good idea but many failed as they were ‘lay-off’

plans

• Introduction of ERP systems was also aimed at internal operations, specifically providing single sources of data enterprise-wide


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• 3rd & 4th editions (1990s) cont.

– Internet’s potential becoming evident• Dot-coms = looked at its outward use to gain a

competitive advantage

• Most established firms initially used the Internet technology internally, building intranets to improve company processes

– Publishing e-forms– Accompanying workflow processes


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• 5th edition (late ’90s)– Use of the Internet for business underway

• Bursting of the dot com bubble• E-Business has become more reality based• Integration of the Internet into how companies work has

proceeded

• 6th edition (early ’00s)– Theme = leveraging traditional operations by using

the Internet to work more closely with others• Innovations of the dot-coms created competitive

challenges for ‘bricks and mortar’ firms– Their ‘strike back’ is essentially the theme for this 6th

edition


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• 7th edition (2005)– “Something has changed”

• Especially with regards to the use of IT for competitive advantage

– Some may question IT’s ability to give companies a competitive edge but it is absolutely necessary for competitive parity (necessity?)

• Being used strategically:– Inward

– Outward

– Across


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IntroductionWhither the Internet Revolution?

• Internet frenzy peaked in 2000

• Is the Information Revolution dead?– Not if history is any guide

British Railway Revolution – mid 1800s 10 fold increase after the boom

– During boom = great excitement and small companies flourished

– After = glamour gone. Business became serious and full of hard work

– Industry became orderly and profits began to reflect real returns

Connecting industries– Race for space followed by the ‘real deal’


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IntroductionWhither the Internet Revolution? cont.

• We are now in a period where organizations are re-architecting themselves around Internet technologies– Tearing down old structures as they go

• Real gains will come when Internet technology adapts to organizations and people– When the technology disappears and becomes

part of life• It will be ‘quiet’ compared to frenzy of ’99/00

but many think it will be a giant revolution


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IntroductionThe Cheap Revolution

• CIOs are shifting from buying expensive proprietary products to buying cheap generic products– “Cheap Tech”

• Cost savings are compelling– Google = runs on 100,000 cheap servers

• One breaks = discards– Avoids expensive service contracts and in-house staff

– “Dellification”• Moved from selling PCs to also selling servers, printers, storage

devices….

– “Cheap” is occurring elsewhere:• Labor – outsourcing to other countries• Film production – camcorders etc.• Software – Linux Vs. Microsoft• Telecommunications – Voice-over-IP…


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IntroductionEpisode Two: Profitability Strikes Back

• Dot-coms became dot-bombs (dot-cons?) because they couldn’t generate profits

• Episode One: The Dot-Com Menace• Episode Two: Profitability Strikes Back

– Whilst it has taken these so-called “old economy firms” longer to utilize the Web they realize that they must do so in a profit-making manner

• Use the Internet to complement your strategy, not replace your past way of serving customers nor disintermediate your channels– Michael Porter, Harvard Business School


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GRAINGERCase example: Using the Internet to complement your strategy

• Distributes non-production products to companies through stocking locations all over the U.S.– Customers who purchase on their website also

purchase through traditional channels• Physical sites make its online presence more valuable

– Customers who want fast delivery

• Ordering is less expensive and shipping is cheaper in bulk to stocking locations Vs. individual small shipments

– Continue publishing its paper catalogs• It receives a surge of online orders every time it issues

its paper catalog


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IntroductionDefinitions

• ‘e’ = electronic• e-business

– Conducting business using telecommunications networks esp. Internet

– Involves more than buying and selling

• e-commerce– Conducting commerce (buying and selling)

electronically using the Internet

• Note: IT definitions ‘evolve’


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E-Business Drivers• Key Components that have accelerated the rapid growth

and acceptance of e-business:

– Wide access to a public network– Standard communication protocol– Standard user interface

• E-business applications run over the Internet, drastically reducing access and communications costs– Pre Internet – 95% of Fortune 500 used EDI Vs. 2% of all U.S.

companies

• With standardized communication protocols and user interfaces, implementation and training costs are far lower

• As a result, a much broader set of users and firms has access to the systems, allowing rapid growth


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Does IT Still Matter?

• “IT Doesn’t Matter” – article by Nicholas Carr in Harvard Business Review May 2003– Controversial and now a book– Bottom line = IT doesn’t matter anymore, at least

not strategically• IT is an infrastructure technology, like rail, electricity,

telephone etc.– Such technology can create a strategic advantage for an

individual firm at the beginning of its life cycle when it is expensive and risky

• Carr = IT is now at the end of buildout and is neither proprietary or expensive

– = A commodity which is available to anyone and won’t give any individual firm a competitive advantage


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Does IT Still Matter? cont.

• Reached the end of its buildout:1. Power of IT now outstrips the needs of business2. IT prices have dropped = now affordable3. Capacity of Internet has caught up with demand (fibre

surplus)4. Many vendors want to be seen as utilities5. Investment bubble has burst

• When an infrastructure technology reaches the end of its buildout, it simply becomes a cost of doing business

• Although IT is necessary for competitiveness, Competitive advantage comes from the firm’s business model


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• Management of IT should become “boring” focussing on:

1. Manage the risks– Focus on vulnerabilities (which are more common with

open systems) rather than opportunities

2. Keep costs down– Greatest risk = overspending, so only pay for use and

limit upgrading• Don’t update PCs when not needed

3. Stay behind the technology leaders– But not too far behind!

• Delay investments until there are standards and best practices and prices drop

• Only innovate when risks are low


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• This ‘negative’ view deals with individual firms = losing competitive advantage

• Infrastructure technology brings its greatest economic and social benefits to all once it has become a shared infrastructure

– = what IT is becoming

• The debate is on– Many other views– Is he right? Regardless = has prompted some important

discussions in Board Rooms etc. because executives need to understand the underpinnings of IT to know how to guide it

• IT is one of their strategic resources, besides people and $ for working inward, outward and across


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Working Inward: Business-to-EmployeeBuilding an Intranet

• The primary e-business way to reach employees is via ‘Intranets’– Intranets are private company networks that use Internet

technologies and protocols, and possibly the Internet itself

• Benefits of using intranets:– Wider access to company information– More efficient and less expensive systems development – Decreased training (due to browser interface)– By using an intranet’s open-system architecture, companies

can significantly decrease the cost of providing companywide information and connectivity


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Working Inward: Business-to-EmployeeBuilding an Intranet cont.

• Benefits cont.– Investments in a intranet (open) = significantly less $$ than a

proprietary network– The link to the Internet allows companies to expand intranets

worldwide easily and cheaply Significant Benefit = unthinkable before the Internet!

– Because an intranet uses the browser interface (and internet ‘protocols’ /technology) = users do not need extensive training on different products To a certain extent = applies to ‘all’ products today

– Companies only need to record information in one place, where it can be kept up-to-date for access by all employees no matter where in the world they are located


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WORKING INWARD: Business to Employee


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Working Inward: Business-to-EmployeeBuilding an Intranet

• Due to the ease with which Web sites can be created, many employees have (did?) build their own, leading to a proliferation of sites with company information– Deciding how much control of the systems should be

decentralized

• Proposed solutions– Create a corporate portal to act as the gateway to the firm’s

internal resources, information, and Internet services Microsoft, KPMG, Dell etc.

– Develop separate departmental or divisional portals, such as sales, HR, operations, and finance portals which are linked to form a corporate portal


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GE POWER SYSTEMSCase example: Building an Intranet

• Chairman surveyed sales force (2001)– Found they were spending more time in the office

searching for information than they were out with their customers

• GE Power Systems answered the challenge by building a Web-based sales portal for its sales-people– Main data feeds from existing Oracle etc. systems

• Sales, parts, pricing, inventory, customers etc.– Also had a news feed from outside– Flexible to include more types of information and

access to more applications• Single point of entry


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Working Inward: Business-to-EmployeeFostering a Sense of Belonging

• Intranets are evolving into very important enterprise structures– In some enterprises, the intranet is seen as the

enterprise Videos of executives – vision and mission Internal forms, rules and processes Need to file an expense report?

• Can also be seen as ‘cold’• Can provide the foundation for creating a

sense of belonging by giving a means of communicating and creating communities– Care of employees = one of the most important

things enterprises do!


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• Use of Internet to help an impoverished province of Canada

– Traditional industries ‘gone’

• The Challenge

• The Solution

– Wire Nova Scotia (WiNS)

Co-ordinate 67 community access sites

• Building an Online Community– General Conferences– Personal Conferences– Regional Conferences– Coordinator Conferences

WIRE NOVA SCOTIACase example: Fostering a Sense of Belonging


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Working Outward: Business-to-Customer

• In most industries companies need sophisticated computer systems to compete– Airlines, hotels, rental car companies = a sophisticated

reservation system (theirs or someone else’s) is a must– Similar ‘musts’ in other industries

• Wholesale = automated order entry and distribution• Finance = ATMs., trading and settlement…

• As industry leaders increase the sophistication of their systems to improve– Quality, service innovation and speed

• Competitors must do the same or find themselves at a disadvantage


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Working Outward: Business-to-CustomerJumping to a New Experience Curve

• Using IT (or any technology) as the basis for a product or service can, in some cases, be viewed as moving up a series of experience curves

• More experience leads to a set of connected curves Vs. one continuous learning curve

• Each curve represents a new technology or combination thereof in a product or service as well as in its manufacture and/or support

• Moving to a new curve requires substantial investment in a new technology


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THE SHIPPING INDUSTRYCase Example: Jumping to a New Experience Curve


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CISCO SYSTEMS and UPSCase Example: Jumping to a New Experience Curve

• In the late 1990s Cisco committed itself to manufacturing products within 2 weeks of order– BUT = could not guarantee delivery

• Turned over its European supply chain to UPS Supply Chain Solutions (UPS SCS)– Uses UPS system to find the best shipper to move the

package from the Netherlands centre to the customer– The systems of the two companies have become

increasingly linked• Each movement of product is recorded in both systems

• Handles over 1m boxes a year– Because UPS can ensure reliable transit times, Cisco is able

to now promise delivery times for its European customers


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Working Outward: Business-to-CustomerThe Emergence of “Electronic Tenders”

• Initially IT has been embedded in products and services for its computational capabilities– e.g. in cars and elevators to make them operate more

efficiently

• Now = allows product/service to be “tended” i.e. cared for, attended to, or kept track of by another computer– e.g. vehicle diagnostics monitored by car dealer– Packages / luggage etc. with bar codes = able to be tracked– Potential uses are endless and we are just at the beginning

• Options are endless but the goal is still to get closer to the customer


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Working Outward: Business-to-CustomerGetting Closer to Customers

• Business-to-consumer e-business is the most widely reported form of e-business.

• Nearly every type of product can now be purchased online: books, CDs, flowers etc.– Many success stories – Dell, Cheap Tickets, ETrade ….

• Success is not easily achieved:– Amazon.com had its business viability questioned for a long time– Levi Strauss, despite encouraging figures, quit selling jeans over

the Internet “…complex proposition and management had better uses for company funds”

• Advantages are numerous and seem obvious (Figure 3-4)

• Potential problems are also numerous but not so obvious (Figure 3-5)


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WORKING OUTWARD: Business to Customer


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WORKING OUTWARD: Business to Customer


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Working Outward: Business-to-CustomerGetting Closer to Customers cont.

• Use of the Internet has grown more sophisticated

• Customer Relationship Management (CRM)– Involves using IT to know more about customers

(and non-customers?) Whether you visit their website, call them (home, office,

mobile) or buy something – the firm is often keeping track and combining that information to create a profile of you

Followed on from ERP ERP focussed on internal data CRM focuses on customer data

– Boon or bane = depends on how intrusive you think they are Great useful information Vs. Invasion of privacy

– Privacy – protection laws in many countries


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• Successful selling over the Internet entails much more than just setting up a Web site and taking orders– It involves organizing the entire value chain around the

Internet

• The E-Business Model– Redefining Customer Value

“On-demand”: reduces the time it takes to respond to customer requests

Convenience: one stop shopping plus single point of contact. Online business allows gathering and managing customer information (to serve the customer)

Access to a wide range of competitive prices and sellers for products

Note: as in the ‘real world’; the highest volume sellers do not always have the lowest price:

• Prices are offset by branding, awareness and customer trust


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• The Internet is not only used to sell to customers online. It is also used to provide services to companies– Sometimes it is can be difficult to know which is

more valuable – the product or the service

• The current focus is on staying in closer contact with customers, understanding them better, and eventually, becoming customer driven by delivering personalized products and service


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SEMCOCase Example – Using the Internet to get Closer to Customers

• Brazilian heavy equipment manufacturer with an ‘interesting’ management attitude/structure– Letting employees ‘self manage’ and following their ideas with $

• First = moved into services and more recently into the marketspace of e-business services over the Internet– Now = even teaming with a virtual trade show company to host

virtual trade fairs for companies too small to have one on their own• All of this change has occurred by following the employees

– When they have a good idea = Semco management is likely to provide the funding to test it out

• Unusual company, however its forays into using the Internet to expand its business provide lessons for others


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Working Outward: Business-to-CustomerBeing an Online Customer

• Companies large and small are transacting business via the Internet

• Some (still?) use it as their main means of business, even after the dot-com crash


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TerenceNetCase Example – A Day in the Life of an E-Lancer

• E-business consulting, development, and research firm for small/medium businesses

• Much of its work is procured from www.elance.com– Website that puts e-business freelancers in contact

with clients Charges 10% commission Bid on projects Have private conversations with potential clients Even able to sub-contract to others (become a client!)

– Trust involved on both sides

• When you sign up on Elance, it’s like joining a community

http://www.elance.com/


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Working Across: Business-to-Business

• Streamlining processes that cross company boundaries is the next big management challenge

– Companies have spent a lot of time and effort streamlining their internal processes, but their efficiencies often stop at their corporate walls

• Working across business takes many forms including:

1. Working with ‘co-suppliers’2. Working with customers in a close mutually

dependent relationship3. Building a virtual enterprise, in fact, one that

might evolve into an e-marketplace


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Working Across: Business-to-Business

• Businesses have long used IT to reduce costs and time of inter-organizational transactions, for example:

– Inter-organizational Systems (IOS) Reservation systems

• Sabre (AA)

Electronic funds transfer systems• Cirrus (Green Machine)

– Electronic Data Interchange Systems (EDI) Transmission, in standard syntax, of data for business

transactions between computers of independent organizations


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Working Across: Business-to-BusinessCoordinating with Co-suppliers

• Collaborating with non-competitors is a type of working across

• Example – two food manufacturers might have the same customers (supermarkets and other retailers) but do not compete with each other

• Lack of convenient ways to share information quickly and easily has deterred co-suppliers from working together

– Internet takes away this deterrent


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GENERAL MILLS & LAND OF LAKESCase Example – Coordinating with Co-suppliers

• Seven largest US food companies supply about 40% of supermarket shelf space for dry goods– Use own trucks etc.

• Only supply 15% of refrigerated– One truck for several supermarkets

Less efficient, delays etc. = unhappy clients

• Combine their deliveries on General Mills trucks– Now = looking into integrating their order taking

and billing processes


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Working Across: Business-to-BusinessEstablishing Close and Tight Relationships

• Strategic use of IT and the Internet has moved to the most difficult area = working across companies

– Having relationships with various players in one’s business ecosystem• Banks, advertising agencies, suppliers,

distributors, retailers, even competitors• Such relationships often have

accompanying linking information systems


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Working Across: Business-to-BusinessEstablishing Close and Tight Relationships cont.

• Need to determine what level of systems integration they want:

– Loose = provide ad hoc access to internal information• Business processes remain distinct• Such limited integration requires little risk or cost

– Close = two parties exchange information in a formal manner• Leads to greater benefits, so there is greater impetus to make

the relationship work• Risks increase because confidentialities are shared• Costs are also higher

– Tight = two parties share at least one business process• Most risky – business critical and the most costly to integrate

– Due to high costs and risks = can only have a few!!• Where does one organizational boundary begin and the other

end? = Intermeshed!


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WORKING OUTWARD: Business to Business


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SARA LEECase Example: Close relationship becoming a tight one

• Sara Lee was one of the first to initiate scan-based trading with large retailers that sell its baked goods

• Using this technology, Sara Lee does not get paid until a loaf of bread is sold and passes through the point-of-sale scanner

• The technology requires drawing from a single database hosted by a third party

• Its use has improved the quality of delivery people, lowered costs, and increased revenues

• Note: Sara Lee requires retailers to adhere to a number of prerequisites – to demonstrate that they are good trading partners

• Look at how it is administered:– ‘Seven prerequisites for SBT’– Management structure to support


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Working Across: Business-to-BusinessBecoming a Customer-Centric Value Chain

• A company’s value chain consists of:– Upstream supply chain

Working with its suppliers of raw materials and parts

– Downstream demand chain Working with its distributors and retailers to sell its products

and services to end customers

• Traditionally most companies make-to-stock = build products / create services and then “push” them to customers

– Supply-Push world

• Today, we are seeing the rise of the reverse – a demand-pull world where a customer’s order triggers the creation of a customized product or service the customer has defined


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DELL COMPUTERCase Example: Demand - Pull

• Dell is the foremost example of the demand-pull business model

• Customers configure their on PCs on Dell’s Website, and once an order is initiated, Dell’s suppliers can see the ordering information and production schedule on Dell’s extranet

• In fact, their production systems grab this information automatically; as a result, Dell’s extranet has become a private exchange

• Dell is even working to give suppliers two tiers down access to customer order information, so they can react to changes even faster


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Working Across: Business-to-BusinessBecoming a Customer-Centric Value Chain cont.

• Pros and Cons of Demand-Pull– Value-chain transparency = should reduce the number of

duplicate orders 10,000 memory chips Vs. 30,000 ‘ordered’ due to shortage

– Creating private exchanges such as Dell changes the level of co-operation among firms

– Con = infrastructure Manufacturer’s becomes its suppliers – binding them even

tighter Requires TRUST

– Becoming customer centric is not easy, especially for supply-push companies

• The promise of CRM is alluring– Aims to help companies shift their attention from

managing their operations to satisfying their customers


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Working Across: Business-to-Business Getting Back-End Systems in Shape

• Most, if not all, B2B systems must integrate with existing back-end systems which has proved to be particularly difficult

• Challenge– Variety of platforms

– Incompatible

• Approach– Purchase ‘new’ systems

Database Management Systems (DBMS) ERP Systems

– Extranet = securely share with suppliers, partners etc.

• Goal = extend the company’s back-end systems to reengineer business processes external to the company


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Conclusion

• Over the years a few innovative companies have used IT for strategic advantage

– ‘Models’ but many companies did not have the resources or skills to follow their example

– With the growth of the Internet and development of e-business, IT has become a strategic tool in every industry

• Looking for cohesion of often dispersed employees?

– Intranets and Portals

• Increasingly customer centric view has many using IT in working across

– Value chains are looking to shift from supply-push to demand-pull

• As IT continues to evolve, so do its strategic uses

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