Strategy and Technology CIS 2200 Kannan Mohan Department of CIS Zicklin School of Business, Baruch College

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Learning Objectives Examine the relationship between Information Technology and: Competitive advantage Resource-based view Value chain Porter’s five forces Examine the different IT asset classes and the IT portfolio approach

IT and Competitive Advantage Sustaining? Does IT matter? Commoditization of IT Innovation Strategic use of IT Replication of business models, processes, technologies Operational effectiveness vs. strategic positioning Loss of uniqueness First mover vs. Fast Follower

FreshDirect Using technology to craft an efficient model that makes an end-run around stores Worker shifts are highly efficient The firm buys and prepares what it sells, leading to less waste Higher inventory turns Use of artificial intelligence software Use of climate controlled cold rooms to save energy Use of recycled bio-diesel fuel to cut down on delivery costs

FreshDirect Relationship with suppliers Offering to carry a greater selection of supplier products by eliminating “slotting fees” Co-branding products Paying in days rather than in weeks Sharing data to improve supplier sales and operations

Resource-based view of competitive advantage How can you recognize whether your firm’s differences are special enough to yield sustainable competitive advantage? Four critical characteristics of resources that lead to sustainable competitive advantage: Valuable Rare Imperfectly imitable Non-substitutable

The Value Chain Value chain: Set of interrelated activities that bring products or services to market

The Value Chain Imitation-resistant value chains A way of doing business that competitors struggle to replicate and that frequently involves technology in a key enabling role FreshDirect Incumbents straddled between two business models, unable to reap the full advantages of either Straddling: When a firm attempts to match the benefits of a successful position while maintaining its existing position Late-moving pure-play rivals will struggle, as FreshDirect’s lead time allows it to develop brand, scale, data, and other advantages that newcomers lack

Can be purchased by competitors too The Value Chain Firms can buy software and tools Supply chain management (SCM) Customer relationship management (CRM) Enterprise resource planning software (ERP) Potential danger Adopting software that changes a unique process into a generic one - co-opting a key source of competitive advantage Can be purchased by competitors too

The Value Chain Packaged ERP implementation — software would require the firm to make changes to its unique and highly successful operating model? Horizontal vs. Vertical vs. Virtual integration Disintermediation Information asymmetry Visibility across the supply chain Apple vs. Dell and choice of software to manage value chain – Competing on product uniqueness vs. operational differences

Switching costs and Data Switching costs: Exist when consumers incur an expense to move from one product or service to another Sources of switching costs: Learning costs Information and data Financial commitment Contractual commitments Search costs Loyalty programs Data can be a particularly strong switching cost for firms leveraging technology

Strategies Differentiation: Commodities vs. differentiated goods and services Low-cost leadership: Use information systems to achieve the lowest operational costs and the lowest prices (E.g. Wal- Mart) Network effects: When the value of a product or service increases as its number of users expands Managing various distribution channels: The path through which products or services get to customers Patents: Intellectual property protection for those innovations deemed to be useful, novel, and non-obvious Entry barriers

Porter’s Five Forces Model

Organizational Ambidexterity Balancing exploitation and exploration Streamlining existing processes/products vs. new markets and innovation Managing IT investments with this in mind Structural vs. contextual ambidexterity Traditional channel vs. Internet channel (USAToday.com)

IT Porfolio (Weill and Aral, 2004)

Monday Morning Mandate for the CIO What percentage of our key business processes are digitized? Percentage of sales? Percentage of purchases? What degree of cross-business unit linking is needed? What is our IT savvy by business unit? Should our IT investment allocations vary by business unit to reflect the differences? How do I work with my senior management colleagues to increase IT savvy? What is our current IT portfolio allocation by asset class? How did it get that way? What have been our historical returns by asset class and by business unit? What changes to IT governance do I need to make to address the answers to the questions above?

Summary How are IT and competitive advantage related? Relate IT to the five forces model to assess how IT can be leveraged by organizations in an industry How can you use the resource-based view to examine IT’s role in business? How is IT related to organizational ambidexterity? What do we need to do to consider IT investments as a portfolio?