Competing with Information Technology Chapter 2 Competing with Information Technology McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives Identify several basic competitive strategies and explain how they use information technologies to confront the competitive forces faced by a business Identify several strategic uses of Internet technologies and give examples of how they help a business to gain competitive advantages Give examples of how business process reengineering frequently involves the strategic use of IT

Learning Objectives Identify the business value of using Internet technologies to become an agile competitor or form a virtual company Explain how knowledge management systems can help a business gain strategic advantages

Competitive Strategy Concepts A strategic information system uses IT to help an organization… Gain a competitive advantage Reduce a competitive disadvantage Meet other strategic enterprise objectives What is Competitive Advantage? Capability for advantage over competitive forces Leading the industry in some identifiable way Sustains profits above the industry average Hard to maintain over a long period of time What do we know about Competitive Advantage? Leading the industry in some identifiable way, such as Sales, Revenues or New Product Must continually look for that new niche, product, service, etc. WSJ

Competitive Forces and Strategies

Porter’s Five Forces of Competition Rivalry of Competitors Positive, natural, healthy Threat of new entrants Apple, TRS 80, Commodore, IBM, HP, Compaq, Gateway, Dell, Acer Threat of substitutes Salon shampoo vs Wal-Mart brand VCR vs DVD vs BluRay Customer bargaining power Buy from competitors or don’t buy Suppliers bargaining power Your competitor pays in days not weeks Five Competitive Forces = Porter’s Five Forces of Competiton Competition is positive, why? Discuss emergence of computer manufacturers - Apple, etc. Salon shampoo copied and sold to Wal-Mart – is one better? Choice of buying from competitors or don’t buy at all - drives price down Suppliers charge more causes manufacturers prices to go up.

Five Competitive Strategies Cost Leadership Become low-cost producers Help suppliers or customers reduce costs Increase cost to competitors Example: Priceline Differentiation Strategy Set a firm’s products apart from competitors’ Focus on a particular segment or niche market Example: Dell Increase cost to competitors Example: Priceline uses online seller bidding so the buyer sets the price Focus on a particular segment or niche of market Example: Dell first to offer customer choice Larger hard drive, faster graphics card

Competitive Strategies (continued) Innovation Strategy Unique products, services, or markets Radical changes to business processes Example: Dell Growth Strategy Expand company’s capacity to produce Expand into global markets Diversify into new products or services Example: Wal-Mart Radical changes to business processes Example: Dell sold direct to consumer Cheaper - cut out middle man Difficult to imitate Diversify into new products or services Example: Wal-Mart’s merchandise ordering via global satellite tracking

Competitive Strategies (continued) Alliance Strategy Includes mergers, acquisitions, joint ventures, virtual companies Customers, suppliers, competitors, consultants, and other companies Example: Wal-Mart uses automatic inventory replenishment by supplier

Using Competitive Strategies Not mutually exclusive One alone won’t usually fix the problem Generally need a combination Innovation not necessarily differentiated Kindle v. iPad MP3 players vs iPod Gateway made in US, relaxed office Differentiation not necessarily innovative Shipping more efficient but not different Telecom companies compete Multiple telecom companies laid fiber optic cable without knowing others were, not enough business to support the investment

Other Competitive Strategies

Other Competitive Strategies Lock in Customers and Suppliers Deter them from switching to competitors Create Switching Costs Time, money, effort or inconvenience needed to switch to a competitor Raise Barriers to Entry Discourage or delay other companies from entering the market Increase the technology or investment needed to enter How can you do that? Provide software and support Fed Ex provides its customers with package tracking information. Medical supply companies provide hospitals with inventory management and re-ordering systems Offer discounts/bonuses for long term contracts Propane supplier – low introductory rate but must commit for 3 years Bundle services Telephone, cable, internet Windows and Internet Explorer Computer with Windows and Microsoft Office

Other Competitive Strategies Build a strong IT department Use IT to: Take advantage of strategic opportunities Improve efficiency of business practices Develop products and services that would not be possible without a strong IT capability Use IT to do more than automate a system, be creative

Customer-Focused Business What is the business value in being customer-focused? Keep customers loyal Anticipate their future needs Respond to customer concerns Provide top-quality customer service Focus on customer value Quality, not price, has become the primary determinant of value Consistently

Providing Customer Value Companies that consistently offer the best value from the customer’s perspective… Track individual preferences Keep up with market trends Supply products, services, and information anytime, anywhere Tailor customer services to the individual Use Customer Relationship Management (CRM) systems to focus on the customer

The Value Chain and Strategic IS View the firm as a chain of basic activities that add value to its products and services Primary processes directly relate to manufacturing or delivering products Support processes help support the day-to-day running of the firm and indirectly contribute to products or services Use the value chain to highlight where competitive strategies will add the most value

Strategic Uses of IT A company that emphasizes strategic business use of IT would use it to gain a competitive differentiation Products Services Capabilities

Business Process Reengineering Called BPR or simply Reengineering Radical Seeks improvements High potential High risk Important enabler of reengineering IT Process teams Case managers Called BPR or simply Reengineering Fundamental rethinking and radical redesign of business processes Seeks to achieve improvements in cost, quality, speed, and service Potential payback is high, but so is risk of disruption and failure Organizational redesign approaches are an important enabler of reengineering Includes use of IT, process teams, case managers

Becoming an Agile Company Agility is the ability to prosper In rapidly changing, continually fragmenting global markets By selling high-quality, high-performance, customer-configured products and services By using Internet technologies An agile company profits in spite of Broad product ranges Short model lifetimes Individualized products Arbitrary lot sizes

Strategies for Agility An agile company… Presents products as solutions to customers’ problems Cooperates with customers, suppliers and competitors Brings products to market as quickly and cost-effectively as possible Organizes to thrive on change and uncertainty Leverages the impact of its people and the knowledge they possess

Creating a Virtual Company A virtual company uses IT to link… People Organizations Assets Ideas Inter-enterprise information systems link… Customers Suppliers Subcontractors Competitors

Virtual Company Strategies Basic business strategies Share information and risk with alliance partners Link complimentary core competencies Reduce concept-to-cash time through sharing Increase facilities and market coverage Gain access to new markets and share market or customer loyalty Migrate from selling products to selling solutions

Building a Knowledge-Creating Company A knowledge-creating company or learning organization… Consistently creates new business knowledge Disseminates it throughout the company Builds it into its products and services

Two Kinds of Knowledge Explicit Knowledge Tacit Knowledge Data, documents, and things written down or stored in computers Tacit Knowledge The “how-to” knowledge in workers’ minds Represents some of the most important information within an organization A knowledge-creating company makes such tacit knowledge available to others

Knowledge Management Successful knowledge management Creates techniques, technologies, systems, and rewards for getting employees to share what they know Makes better use of accumulated workplace and enterprise knowledge

Knowledge Management Techniques

Knowledge Management Systems (KMS) A major strategic use of IT Manages organizational learning and know-how Helps knowledge workers create, organize, and make available important knowledge Makes this knowledge available wherever and whenever it is needed Knowledge includes Processes, procedures, patents, reference works, formulas, best practices, forecasts, and fixes