INFORMATION SYSTEMS IN BUSINESS

INFORMATION SYSTEMS IN BUSINESS
CHAPTER 1 INFORMATION SYSTEMS IN BUSINESS CLASSROOM OPENER GREAT BUSINESS DECISIONS – Apple’s Decision to Develop the First Saleable Personal Computer (PC) Like all great computer companies, Apple began its life in a garage. In 1977, Steve Jobs and Steve Wozniak built the Apple 1, regarded by many as the first real personal computer. This founded the Apple Company and the invention of the Apple 2 and the Apple Macintosh. Apple’s key goal was to make computers accessible to ordinary people. Jobs and Wozniak captured an opportunity and changed the world through a combination of good fortune and technical and marketing brilliance. Instead of writing commands in computer code, Apple owners invented a mouse to click on easily recognizable icons – for example, a trash can and file folders. Other companies were quick to copy Apple’s competitive advantage, including Microsoft. The two founders eventually parted, with Wozniak leaving the company to become a teacher and Jobs continuing with the launch of the Apple Macintosh. Unfortunately, Macintosh captured only 20 percent of the desktop market, while Microsoft captured 80 percent of the desktop market with its MS-DOS operating system. One newspaper described Jobs as a “corporate Huckleberry Finn” and said his early business exploits had already made him part of American folk history. John Sculley, former Pepsi chairman, removed Jobs from Apple in Sculley was removed from Apple in Eventually, after a 13-year exile, Jobs returned to Apple in The man who founded the company had come full circle and was now its only hope for survival. Jobs’ return brought the creation of the iMac and Apple rediscovered its inventive originality. The iMac sold 278,000 units in the first six weeks and was described by Fortune as “one of the hottest computer launches ever.” The iMac and Jobs’ return contributed to doubling Apple’s share prices in less than a year.

INFORMATION TECHNOLOGY’S ROLE IN BUSINESS
Information technology is everywhere in business Anyone involved in business must understand technology Why do you think you need to study information technology? The picture above says it all – technology is everywhere in business Be sure to point-out that these are business magazines, not technology magazines, and yet they are filled with technology CLASSROOM EXERCISE Understanding the Relevance of Technology In Business This is a great exercise to begin the course. It clearly demonstrates why anyone involved in business must understand technology. It can be a real revelation for students who do not see the need for taking an IT course. Bring in several copies of BusinessWeek, Fortune, Fast Company, or any popular business magazine. The magazines do not have to be current. Provide a marking tool such as a small set of Post-It Notes. Ask for a few volunteers and have the students review the magazine and stick a Post-It Note on each technology-related article, advertisement, etc. When the student has completed this task, the magazine will be covered in Post-it Notes, clearly demonstrating that technology is everywhere in business, even in the popular business magazines such as BusinessWeek. Since this task can be time consuming, you can put in the Post-It Notes prior to class and simply show your students the completed magazine. You can have one student sit in the front of the class and begin the exercise, placing Post-It Notes on a copy of BusinessWeek. After they have completed several pages on their own, you can produce the same “completed” magazine with all of the Post-It Notes. This saves classroom time and still reinforces the point that technology is everywhere in business. Be sure to reinforce that these are business magazines, not technology magazines. Yet they are completely filled with technology – which is clearly demonstrated by the Post-It Notes. How can any business student today possibly argue that they do not need to know or understand technology when faced with a magazine, such as BusinessWeek, that is filled with technology? Read a few of the articles or advertisements. Ask how many of your students are familiar with Siebel, Oracle, or PeopleSoft and can articulate what they can do for a company? The goal of this course is to help your students understand the business side of technology. Being able to understand all of the technology articles in BusinessWeek is one of the benefits your students will receive upon completion of the course.

Information Technology’s Impact on Business Operations
Describe a few of the types of IT services each business function might be receiving from IT Customer service: click-to-talk, call scripting, auto answering, call centers Finance: accounting packages, Sarbanes Oxley Sales and marketing: campaign management, customer relationship management Operations: supply chain management Human resources: software to track employees at risk of leaving Customer service: click-to-talk, call scripting, auto answering, call centers Finance: accounting packages, Sarbanes Oxley Sales and marketing: campaign management, customer relationship management Operations: supply chain management Human resources: software to track employees at risk of leaving

Which types of IT services can be used to meet these types of goals? Reduce costs/ improve productivity: supply chain management, enterprise resource planning Improve customer satisfaction/loyalty: customer relationship management, loyalty programs Create competitive advantage: business intelligence/data warehousing Generate growth: sales management systems Streamline supply chain: demand planning software Global expansion: e-business

Which types of IT services can be used to meet these types of goals? Reduce costs/ improve productivity: supply chain management, enterprise resource planning Improve customer satisfaction/loyalty: customer relationship management, loyalty programs Create competitive advantage: business intelligence/data warehousing Generate growth: sales management systems Streamline supply chain: demand planning software Global expansion: e-business Which types of IT services can be used to meet these types of goals? Reduce costs/ improve productivity: supply chain management, enterprise resource planning Improve customer satisfaction/loyalty: customer relationship management, loyalty programs Create competitive advantage: business intelligence/data warehousing Generate growth: sales management systems Streamline supply chain: demand planning software Global expansion: e-business

This is an excellent opportunity to discuss each business area and ensure your students have a solid understanding of business in general: Accounting provides quantitative information about the finances of the business including recording, measuring, and describing financial information Finance deals with the strategic financial issues associated with increasing the value of the business, while observing applicable laws and social responsibilities Human resources includes the policies, plans, and procedures for the effective management of employees (human resources) Sales is the function of selling a good or service and focuses on increasing customer sales, which increases company revenues Marketing is the process associated with promoting the sale of goods or services. The marketing department supports the sales department by creating promotions that help sell the company’s products Operations management (also called production management ) includes the methods, tasks, and techniques organizations use to produce goods and services. Transportation (also called logistics) is part of operations management. Management information systems (MIS) is the function that plans for, develops, implements, and maintains IT hardware, software, and the portfolio of applications that people use to support the goals of an organization If any of your students are unfamiliar with these business areas recommend Plug-In T11 – Business Basics, which offers a detailed introduction to business and discusses each functional area highlighted above

Organizations typically operate by functional areas or functional silos Functional areas are interdependent they require information from around the organization to operate Each functional area undertakes a specific core business function Sales and Marketing – forecasting, segmentation, advertising, promotions Operations and Logistics – purchasing, supplying, receiving, transportation Accounting and finance – accounting, planning, budgeting, tax, costs Human resources – hiring, training, benefits, and payroll It is important for your students to understand that functional areas are anything but independent, in fact, they are interdependent Why are functional areas interdependent? Departments cannot operate in isolation, they require information from around the organization to operate Why must sales and marketing work with operations? To know what is available for sale including overstocked items and understocked items

INFORMATION TECHNOLOGY BASICS
Information technology (IT) – any computer-based tool that people use to work with information and support the information and information-processing needs of an organization Information technology is an important enabler of business success and innovation. IT does not guarantee success! IT does not equal or represent business success and innovation, it is simply an enabler of business success and innovation Will spending large amounts of money on IT guarantee automatic success? Spending large amounts of money on IT will not guarantee an organization automatic success Organizations need to allocate resources on the right types of IT that correctly support their business operations to be successful

Management information systems (MIS) – the business function that plans for, develops, implements, and maintains IT hardware, software, and applications that people use to support the goals of an organization MIS is a business function, similar to Accounting, Finance, Operations, and Human Resources MIS is not technology MIS is a business function Most organizations have an IT department that is responsible for performing the MIS function This is similar to an organization having an Accounting department that is responsible for performing the accounts payable and accounts receivable functions

When beginning to learn about information technology it is important to understand the following: Information IT resources IT cultures Understanding these three critical areas will help you begin to understand IT After reading this Chapter students should begin to understand that technology is everywhere in business and if they are pursuing a career in business they need to understand technology

Information Data - raw facts that describe the characteristic of an event Information - data converted into a meaningful and useful context If you were building a system to track students: Data might include height, name, and hair color Information might include student to professor ratio, percentage of marketing majors who are female, number of students who pass the course. If you were building a system to track inventory: Data might include chair manufacturer, chair color, and chair size Information might include number of chairs required for students in each class, average number of chairs needed to be replaced each semester. When discussing Information Technology it is important to understand what information is Ask your students to look around the classroom and identify 3 pieces of data and 3 pieces of information This is a bit of a trick question, unless you know the system you are building or the problem you are trying to solve it is impossible to know what is data and what is information For example, if you were building a system to track students: Data might include height, name, and hair color Information might include student to professor ratio, percentage of marketing majors who are female, number of students who pass the course. If you were building a system to track inventory: Data might include chair manufacturer, chair color, and chair size Information might include number of chairs required for students in each class, average number of chairs needed to be replaced each semester.

IT Resources People use Information technology to work with
IT in and of itself is not useful unless the right people know how to use and manage it efficiently and effectively People, information, and information technology (in that order of priority) are inextricably linked If one fails, they all fail What is one of the most important assets in an organization? Information is one of the most important assets in an organization, and the primary way that people get information is through information technology Without databases and spreadsheets how would managers gather, correlate, and analyze information? Manually Performing these tasks manually, or by hand, is extremely time consuming

IT Cultures Information-Functional Culture Information-Sharing Culture
Employees use information as a means of exercising influence or power over others. For example, a manager in sales refuses to share information with marketing. This causes marketing to need the sales manager’s input each time a new sales strategy is developed. Information-Sharing Culture Employees across departments trust each other to use information (especially about problems and failures) to improve performance. Information-Inquiring Culture Employees across departments search for information to better understand the future and align themselves with current trends and new directions. Information-Discovery Culture Employees across departments are open to new insights about crisis and radical changes and seek ways to create competitive advantages. Information-Functional Culture - Employees use information as a means of exercising influence or power over others. For example, a manager in sales refuses to share information with marketing. This causes marketing to need the sales manager’s input each time a new sales strategy is developed. Information-Sharing Culture - Employees across departments trust each other to use information (especially about problems and failures) to improve performance. Information-Inquiring Culture - Employees across departments search for information to better understand the future and align themselves with current trends and new directions. Information-Discovery Culture - Employees across departments are open to new insights about crisis and radical changes and seek ways to create competitive advantages. Which type of information culture will help an organization achieve the greatest success? Information-discovery culture Which type of information culture would hurt an organization? Information-functional culture Organizations that encourage their employees to share ideas and openly discuss challenges and opportunities on an enterprisewide level have a competitive advantage over organizations that operate in functional silos This point is easily demonstrated by looking back at the Apple case and how many different people from different areas needed to be involved in the iPod creation Apple even purchased an outside company, SoundStep, to help bring the iPod to life.

ROLES AND RESPONSIBILITIES IN IT
Information technology is a relatively new functional area, having only been around formally for around 40 years Recent IT strategic positions include: Chief Information Officer (CIO) Chief Technology Officer (CTO) Chief Security Officer (CSO) Chief Privacy Officer (CPO) Chief Knowledge Office (CKO) Explain to your students that job titles, roles, and responsibilities often differ dramatically from organization to organization Excellent resource on how people are Microsoft’s greatest assets

Chief Information Officer (CIO) – oversees all uses of IT and ensures the strategic alignment of IT with business goals and objectives Broad CIO functions include: Manager – ensuring the delivery of all IT projects, on time and within budget Leader – ensuring the strategic vision of IT is in line with the strategic vision of the organization Communicator – building and maintaining strong executive relationships The CIO typically reports directly to the Chief Executive Officer (CEO) CIOs must possess a solid and detailed understanding of every aspect of an organization coupled with tremendous insight into the capability of IT CIOs must have strong business skills and strong IT skills Can you name any famous CEOs? Jack Welch, General Electric (retired) Jeff Bezos, Amazon.com Bill Gates, Microsoft Michael Dell, Dell computers Can you name any famous CIOs? Most students will be familiar with many famous CEOs but not CIOs, CPOs, CSOs, CKOs, or CTOs

Average CIO compensation by industry Is this more or less than you thought a CIO would make? Do you think these salaries will increase or decrease in the future? Be sure to have your students research current IT salaries. In 2006, they are on the rise and can open your student’s eyes to IT opportunities. CLASSROOM OPENER GREAT BUSINESS DECISIONS – Sam Walton’s Discounting of America Wal-Mart is one of the largest corporations in the United States. Wal-Mart does not produce a single item, the company uses strategic supply chain management to disrupt the retail industry. Wal-Mart’s generic strategy of low cost provider is paying-off big time. Any organization wanting to compete in the 21st century must study Wal-Mart and learn how to compete in new and different ways. Samuel Moore Walton lived in the same neighborhood in Bentonville, Arkansas, for forty years. Walton was the sort of man that would rather borrow a newspaper than pay a quarter for a new one. He was also the sort of man that would invite a struggling young family out to lunch with his family every Sunday. Sam Walton controlled over 20 percent of Wal-Mart’s stock, and Sam Walton appeared on Forbes 400 with a net worth of $2.8 billion in 1985 (the holdings are now worth $28 billion). Of all the inventions that helped Sam Walton achieve success and billionaire status, his greatest invention as a CEO was that he himself did not change. Sam managed his 40,000 employees as equal associates, and it was said that only his family meant more to him than his beloved associates. One manufacturer who worked for Sam for decades stated “One of Sam’s greatest contributions to Wal-Mart was his attitude toward experimentation. He constantly encouraged us to experiment on a small basis and if the idea worked, roll it out. If it failed, try something else. It was his attitude of keep trying, and don’t be afraid of failure that made us all so successful.” Sam Walton succumbed to cancer in 1992, and the news was sent via satellite directly to the company’s 1,960 stores; when the announcement played at some stores, clerks started crying. The New York Times obituary estimated Sam’s fortune at the time of his death at $28 billion. However, this fortune didn’t mean as much to Sam Walton as the news that one of his beloved Wal-Mart associates, a cashier, had $262,000 in her retirement account after working for Wal-Mart for twenty-four years.

What concerns CIOs the most Enhancing customer satisfaction is the number one concern for many CIOs This will be surprising to most students since they expect the CIO to be primarily concerned with technology Why CIOs are concerned with customer satisfaction? How does customer satisfaction affect the IT department? Rank the CIO Concerns in the right side of the figure and see if they agree with the CIOs?

Chief Technology Officer (CTO) – responsible for ensuring the throughput, speed, accuracy, availability, and reliability of IT Chief Security Officer (CSO) – responsible for ensuring the security of IT systems Chief Privacy Officer (CPO) – responsible for ensuring the ethical and legal use of information Chief Knowledge Office (CKO) - responsible for collecting, maintaining, and distributing the organization’s knowledge Define the difference between the CIO, CTO, CSO, CPO, and CKO CIO oversees all uses of IT and ensures the strategic alignment of IT with business goals and objectives CTOs are similar to CIOs, except CIOs take on the additional responsibility for effectiveness of ensuring that IT is aligned with the organization's strategic initiatives CTOs ensure the efficiency of IT CPOs are the newest senior executive position, and many CPOs are lawyers by training CKO is one of the most recent positions added to the executive leadership team Define the general organizational structure between CIO, CTO, CSO, CPO, and CKO? This structure will vary from organization to organization A great debate is to have the entire class decide on an organizational structure, including the CFO and CEO for a fictitious company

Skills pivotal for success in executive IT roles CLASSROOM EXERCISE Reorganizing an Organization The AAA Management Company specializes in the management of rental properties and generates over $20 million in revenues each year and has over 2,000 employees throughout the United States, Canada, and Mexico. The company has just hired a new CEO, David Paul. David is planning to reorganize the company so that it operates more efficiently and effectively. Below is the new organizational structure that he plans to present to the board of directors on Monday. Break your students into groups and ask them to explain the advantages and disadvantages of such a reporting structure. Ask them to reorganize the reporting structure in the way they feel will be most beneficial to the operations of the company, being sure to give their justifications for the new structure. Student answers to this exercise will vary. See IM for Org Chart Part Two Will your proposed structure work for a video distribution company or will you need to revamp your structure?

The Gap Between Business Personnel and IT Personnel
Business personnel possess expertise in functional areas such as marketing, accounting, and sales IT personnel have the technological expertise This typically causes a communications gap between the business personnel and IT personnel IT personnel have their own vocabularies consisting of acronyms and technical terms Business personnel have their own vocabularies based on their experience and expertise For both sides to have effective communications, the business personnel must seek to achieve an increased level of understanding of IT, and the IT personnel must seek to achieve an increased level of understanding of the business

Improving Communications
Business personnel must seek to increase their understanding of IT IT personnel must seek to increase their understanding of the business It is the responsibility of the CIO to ensure effective communication between business personnel and IT personnel Ask your students what might happen at an SCM planning meeting that involved sales, marketing, productions, and operations and not IT How would the other departments know the current IT infrastructure and which SCM systems are compatible? How would the other departments know the functionality involved in an SCM system? Working together, business and IT personnel have the potential to create customer-service competitive advantages Let your students know about magazines such as InformationWeek and CIO that business managers and leaders can read to increase their IT knowledge

MEASURING INFORMATION TECHNOLOGY’S SUCCESS
Key performance indicator (KPI) – measures that are tied to business drivers Metrics are detailed measures that feed KPIs Performance metrics fall into the nebulous area of business intelligence that is neither technology, nor business centered, but requires input from both IT and business professionals How would you define success in relation to an IT system? Is it more important to have IT professionals or business professional define success for an IT system? What happens if only one group defines success? IT professionals know how to install and maintain information systems. Business professionals know how to run a successful business. But how does a company decide if an information system helps make a business successful?

Efficiency and Effectiveness Metrics
Efficiency IT metric – measures the performance of the IT system itself including throughput, speed, and availability Efficiency focuses on the extent to which an organization is using its resources in an optimal way, “Doing things right” Effectiveness IT metric – measures the impact IT has on business processes and activities including customer satisfaction, conversion rates, and sell-through increases Effectiveness focuses on how well an organization is achieving its goals and objectives, “Doing the right things” Efficiency focuses on the extent to which an organization is using its resources in an optimal way, “Doing things right” Effectiveness focuses on how well an organization is achieving its goals and objectives, “Doing the right things” It is important that your students understand the differences between efficiency and effectiveness if you are going to cover the Supply Chain Management chapter.

Benchmarking – Baselining Metrics
Regardless of what is measured, how it is measured, and whether it is for the sake of efficiency or effectiveness, there must be benchmarks – baseline values the system seeks to attain Benchmarking – a process of continuously measuring system results, comparing those results to optimal system performance (benchmark values), and identifying steps and procedures to improve system performance How would you determine if the system was performing faster or slower than expected if there were not any benchmarks? They could not, it would impossible to determine

Benchmarking – Baselining Metrics
E-governement benchmarks What types of things might e-governement efficiency and effectiveness measure? E-government efficiency metrics includes the number of computers per 100 citizens, the number of Internet hosts per 10,000 citizens, the percentage of the citizen population online The United States ranks first in terms of e-government efficiency E-government effectiveness metrics include CRM practices, customer-service vision, approaches to offering e-government services through multiple-service delivery channels, and initiatives for identifying services for individual citizen segments Canada ranks number one in terms of e-governement satisfaction of its citizens Governments wanting to increase efficiency and effectiveness would benchmark themselves against these sorts of metrics

E-governement benchmarks
E-government efficiency metrics includes the number of computers per 100 citizens, the number of Internet hosts per 10,000 citizens, the percentage of the citizen population online E-government effectiveness metrics include CRM practices, customer-service vision, approaches to offering e-government services through multiple-service delivery channels, and initiatives for identifying services for individual citizen segments What types of things might e-governement efficiency and effectiveness measure? E-government efficiency metrics includes the number of computers per 100 citizens, the number of Internet hosts per 10,000 citizens, the percentage of the citizen population online The United States ranks first in terms of e-government efficiency E-government effectiveness metrics include CRM practices, customer-service vision, approaches to offering e-government services through multiple-service delivery channels, and initiatives for identifying services for individual citizen segments Canada ranks number one in terms of e-governement satisfaction of its citizens Governments wanting to increase efficiency and effectiveness would benchmark themselves against these sorts of metrics

The Interrelationships of Efficiency and Effectiveness IT Metrics
Efficiency IT metrics focus on technology and include: Throughput Transaction speed System availability Information accuracy Web traffic Response time Efficiency metrics monitor technology Efficiency metrics are easier to measure and monitor than effectiveness metrics Throughput - the amount of information that can travel through a system at any point Transaction speed - the amount of time a system takes to perform a transaction System availability - the number of hours a system is available for users Information accuracy - the extent to which a system generates the correct results when executing the same transaction numerous times Web traffic - includes a host of benchmarks such as the number of page views, the number of unique visitors, and the average time spent viewing a Web page Response time - the time it takes to respond to user interactions such as a mouse click

Effectiveness IT metrics focus on an organization’s goals, strategies, and objectives and include: Usability Customer satisfaction Conversion rates Financial Effectiveness metrics are more difficult to measure and monitor, for example, how do you measure customer satisfaction? Which metrics are more important to a company like eBay – efficiency or effectiveness? Both - eBay continuously measures both efficiency and effectiveness The company must ensure constant availability and reliability of its systems Usability - The ease with which people perform transactions and/or find information. A popular usability metric on the Internet is degrees of freedom, which measures the number of clicks required to find desired information. Customer satisfaction - Measured by such benchmarks as satisfaction surveys, percentage of existing customers retained, and increases in revenue dollars per customer. Conversion rates - The number of customers an organization “touches” for the first time and persuades to purchase its products or services. This is a popular metric for evaluating the effectiveness of banner, pop-up,and pop-under ads on the Internet. Financial - Such as return on investment (the earning power of an organization’s assets), cost-benefit analysis (the comparison of projected revenues and costs including development, maintenance, fixed, and variable), and break-even analysis (the point at which constant revenues equal ongoing costs).

Security is an issue for any organization offering products or services over the Internet It is inefficient for an organization to implement Internet security, since it slows down processing However, to be effective it must implement Internet security Secure Internet connections must offer encryption and Secure Sockets Layers (SSL denoted by the lock symbol in the lower right corner of a browser) Purely from an efficiency IT metric point of view, security generates some inefficiencies From an organization’s business strategy point of view, security should lead to increases in effectiveness CLASSROOM EXERCISE Measuring Efficiency and Effectiveness Break your students into groups and ask them to create a plan to measure the efficiency and effectiveness of this course and recommendations on how they would improve the course to make it more efficient and more effective. Student answers to this exercise will vary. They will need to determine ways to benchmark current efficiency and effectiveness and ways to continuously monitor and measure against the benchmarks to determine if the course is becoming more or less efficient and effective (class quizzes and exams are the most obvious benchmarks). Ask your students to present their plan and recommendations to the entire class. Be sure students’ plans and recommendations address the following: Design of the classroom Room temperature Lighting and electronic capabilities of the classroom Technology available in the classroom Length of class and instant messaging Students’ attendance Students’ preparation Students’ arrival time Quizzes and exams (frequency, length, grades)

Ideally, an organization should operate in the upper right-hand corner Operating in the upper left-hand corner or the lower right-hand corner may be in line with an organization's particular strategies No organization would want to operate in the lower left-hand corner

OPENING CASE QUESTIONS Apple - Merging Technology, Business and Entertainment
What might have happened to Apple if its top executives had not supported investment in iPods? Formulate a strategy for how Apple can use efficiency IT metrics to improve its business Formulate a strategy for how Apple can use effectiveness IT metrics to improve its business Why would it be unethical for Apple to sell its iTunes customer information to other businesses? Evaluate the effects on Apple’s business if it failed to secure its customer’s information and it was accidentally posted to an anonymous Web site

IDENTIFYING COMPETITIVE ADVANTAGES
To survive and thrive an organization must create a competitive advantage Competitive advantage – a product or service that an organization’s customers place a greater value on than similar offerings from a competitor First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage Competitive advantages are important for an organization It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages Can you list a few companies that achieved success through competitive advantages? United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary) Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary) Microsoft had a competitive advantage with its unique Windows operating system Does Microsoft still has a competitive advantage with its Windows operating system? Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization. How many students in your class are currently using Windows? What are the competitors to Windows? Linux and Macintosh Why are there only three primary competitors in this large operating system market? What would happen if you had 50 different operating systems to choose from? Issues with interoperability How many different types of Microsoft Office would be required to support all 50 different operating systems? 50

Competitive advantages are important for an organization but it is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary) Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary) Microsoft had a competitive advantage with its unique Windows operating system Does Microsoft still has a competitive advantage with its Windows operating system? Competitive advantages are important for an organization It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages Can you list a few companies that achieved success through competitive advantages? United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary) Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary) Microsoft had a competitive advantage with its unique Windows operating system Does Microsoft still has a competitive advantage with its Windows operating system? Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization. How many students in your class are currently using Windows? What are the competitors to Windows? Linux and Macintosh Why are there only three primary competitors in this large operating system market? What would happen if you had 50 different operating systems to choose from? Issues with interoperability How many different types of Microsoft Office would be required to support all 50 different operating systems? 50

Organizations watch their competition through environmental scanning Environmental scanning – the acquisition and analysis of events and trends in the environment external to an organization Frito-Lay does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. This information is used to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products. Three common tools used in industry to analyze and develop competitive advantages include: Porter’s Five Forces Model Porter’s three generic strategies Value chains Technology has the opportunity to play an important role in environmental scanning For example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products.

THE FIVE FORCES MODEL – EVALUATING BUSINESS SEGMENTS
Porter’s Five Forces Model determines the relative attractiveness of an industry Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent

Buyer Power Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few One way to reduce buyer power is through loyalty programs Loyalty program – rewards customers based on the amount of business they do with a particular organization Buyer power can also be called customer power Calling buyer power customer power sometimes helps students understand the difference between buyer power and supplier power To reduce buyer power (and create a competitive advantage), an organization must make it more attractive for customers to buy from them than from their competition One of the best IT-based examples is the loyalty programs that many organizations offer Which kinds of loyalty programs are you currently using? Frequent-flyer miles Grocery store discounts – “Safeway Card” Restaurant discounts such as Subway’s get your 12th sandwich free Coffee clubs where you get your 10th cup of coffee free

Supplier Power Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many Supply chain – consists of all parties involved in the procurement of a product or raw material Supplier power is the converse of buyer (customer) power A supplier organization in a market will want buyer (customer) power to be low The supplier wants to be able to set any price it wants for its goods, and if buyers (customers) have low power, then they do not have any choice but to pay the high price since there are only one or two suppliers What is an example of an organization with “high” supplier power? Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries How an organization can be both a supplier and a buyer in a supply chain? Discuss how Dell computers is both a buyer and supplier in the supply chain Dell is a buyer (customer) of parts, and a supplier to its customers who buy computers

Supplier Power Organizations that are buying goods and services in the supply chain can create a competitive advantage by locating alternative supply sources (decreasing supplier power) through B2B marketplaces Business-to-Business (B2B) marketplace – an Internet-based service that brings together many buyers and sellers Do you consider eBay to be a B2B marketplace? If the auction is between two businesses then yes If the auction is between a customer and a business, or two customers, then no CLASSROOM OPENER GREAT BUSINESS DECISIONS – Henry Luce Decides to Rank Companies in the Fortune 500 Henry Luce founded Time magazine in 1923 and Fortune magazine in Luce decided to create a ranking of America’s top 500 companies, called The Fortune 500, which has served as the corporate benchmark for the twentieth century – as well as being a clever marketing tactic for the magazine. The Fortune 500 remains a powerful barometer of who’s up and down in the corporate world. It is also a brilliant marketing tool since every single time its name is mentioned, so is the name of the magazine. However, being ranked on the Fortune 500 does not guarantee that the organization will achieve future success, and its measures of current achievement can also be limited and a bit confusing. BusinessWeek magazine created a similar ranking by introducing its biannual ranking of business schools. The issue routinely outsells all other issues of the magazine in the year.

Supplier Power Two types of business-to-business (B2B) marketplaces
Private exchange – a single buyer posts its needs and then opens the bidding to any supplier who would care to bid Reverse auction – an auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or service at an increasingly lower price As the bids in a reverse auction become lower and lower, more and more suppliers drop out of the auction What effect does this have on supplier power? It reduces supplier power and creates a competitive advantage for the buyer organization since it is paying the lowest possible price for its goods and services

Threat of Substitute Products or Services
Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose Switching cost – costs that can make customers reluctant to switch to another product or service Examples?? Ideally, an organization wants to be in a market in which there are few substitutes for its products or services This is difficult to achieve, and most organizations create a competitive advantage through switching costs - the more painful it is for a customer to switch suppliers, the less likely they are to switch If a customer has to experience pain when switching to a different service provider, then they are unlikely to switch For example, switching doctors usually involves sending all medical records and explaining all past medical history to the new doctor. Insurance also has to be transferred, along with detailed forms that the customer will be required to complete (such as family history, personal history, HIPAA, etc.) For these reasons customers have to be extremely dissatisfied with a doctor before they will endure the pain of finding or switching to a new doctor

Threat of New Entrants Threat of new entrants – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Entry barrier – a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive Example of high and low?? What is an industry that has a high entry barrier? Energy – the organization has to have the infrastructure to support energy Telecommunications – the organization has to invest in a telecommunications infrastructure prior to offering services Banking – the bank must offer its customers an array of IT-enabled services including ATMs and online account services What is an industry that has a low entry barrier? Restaurants – simply lease a space, obtain a license, and you can sell food Catering – simply offer food and deliver Movie rental – simply buy the movies, pay the licensing fee, and offer the movies for rental (although if you want to be a Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)

Rivalry Among Existing Competitors
Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry What are a few industries where competition is high? Restaurants, products, telecommunications, banking What are a few industries where competition is low? This is typically highly regulated industries such as energy markets and stock exchanges CLASSROOM EXERCISE Porter’s Five Forces Porter’s Five Forces is an easy framework to understand and offers students a quick way to analyze a business. Porter’s Five Forces is also reinforced throughout the text and it is important that your students have a solid understanding of each force. For this exercise, break your students into groups and ask them to choose two products to perform a Porter’s Five Forces analysis. The two products must compete in the same market. Potential Products Laptop Computer and Desktop Computer PDA and Laptop Computer iPod and Walkman DVD Player and VCR Player Digital camera and Polaroid Camera Cell Phone and Blackberry PDA Coca-Cola Plastic Bottle and Coca-Cola Glass Bottle GPS Device and a Road Atlas Roller skates and Rollerblades Digital Books to Printed Books Digital Paper to Paper

Class Exercise Choose two products to perform a Porter’s Five Forces analysis. The two products must compete in the same market. Potential Products Laptop Computer and Desktop Computer PDA and Laptop Computer iPod and Walkman DVD Player and VCR Player Digital camera and Polaroid Camera Cell Phone and Blackberry PDA Coca-Cola Plastic Bottle and Coca-Cola Glass Bottle GPS Device and a Road Atlas Roller skates and Rollerblades Digital Books to Printed Books Digital Paper to Paper

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS
Organizations typically follow one of Porter’s three generic strategies when entering a new market Broad strategies reach a large market segment Broad cost leadership Broad differentiation Focused strategy Target a niche market Concentrate on either cost leadership or differentiation Broad strategies reach a large market segment Focused strategies target a niche market Focused strategies concentrate on either cost leadership or differentiation

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS
Three generic strategies in the auto industry It is important to explain to your students that organizations are encouraged to follow only one of the three strategies What would happen to Hummer if it wanted to follow a broad cost leadership and a focused strategy? Hummer would find itself facing the dilemma of attempting to market and sell a highly specialized and expensive product at a discounted price. It simply wouldn’t work!

Value Creation Once an organization chooses its strategy, it can use tools such as the value chain to determine the success or failure of its chosen strategy Business process – a standardized set of activities that accomplish a specific task, such as processing a customer’s order Value chain – views an organization as a series of processes, each of which adds value to the product or service for each customer To create a competitive advantage, the value chain must enable the organization to provide unique value to its customers Examining the organization as a value chain determines which activities add value for customers The organization can then focus specifically on those activities

Value Creation Value Chain
Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two

Value Creation Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two

Applying IT to the Value Chain
IT can be applied to add value to both primary and support value activities Marketing campaign management system (primary) Target marketing campaigns more efficiently thereby helping to reduce costs Better pinpoint target market needs to help increase sales HR system (support) More efficiently reward employees based on performance Identify employees at risk of leaving their jobs and find additional challenges or opportunities to help retain the employees and reduce turnover costs Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two

Value Creation Value chains with Porter’s Five Forces
If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service This will increase the switching costs for its customers, thereby decreasing their power (buyer power)

Value Creation If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service This will increase the switching costs for its customers, thereby decreasing their power (buyer power) If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service This will increase the switching costs for its customers, thereby decreasing their power (buyer power)

CLOSING CASE ONE Say “Charge It” with Your Cell Phone
Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology? Using Porter’s Five Forces describe the barriers to entry for this new technology Which of Porter’s three generic strategies is this new technology following? Describe the value chain of using cell phones as a payment method What types of regulatory issues might occur due to this type of technology?

INFORMATION SYSTEMS IN BUSINESS

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