Dr. Kenneth Cosh Lecture 2 261446 Information Systems Dr. Kenneth Cosh Lecture 2

Review What is MIS? What types of information system are we dealing with? How has the role of information systems changed? Business Pull factors Technology Push factors What distinct era’s has IS been through?

Today’s Topic Strategic Information Systems Five Forces How IS drives alternative strategies The Value Chain Using IT for Strategic Advantage

Strategic Information Systems No longer is IS an afterthought when considering corporate strategy, now it is often either the ‘cause’ or the ‘driver’ of strategy. Cause; Taking advantage of some core competency within the organisation’s IT. Driver; Using IT to realise the organisation’s strategy.

Strategic Information Systems A strategic information system is any information system which helps an organisation gain any kind of competitive advantage. Michael Porter’s model of competitive strategy suggests that any business which wants to survive and succeed has to develop strategies to counter 5 key forces. Rivalry of Competitors Threat of New Entrants Threat of Substitutes Bargaining power of Customers Bargaining power of Suppliers

Porter’s 5 Forces Threat of New Entries Intensity Bargaining Power Rivalry Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes

Bargaining Power of Customers Buyer concentration vs Firm Concentration Buyer Volume Buyer switching costs Ability to backward integrate Price Sensitivity Product Differences Brand Identity Impact of quality / performance Buyer Profits

Bargaining Power of Suppliers Differentiation of Inputs Switching costs of suppliers Supplier Concentration Ability to forward integrate

Threat of Substitutes Impact on Supplier & Buyer Power

Threat of New Entries Economies of Scale Brand Identity Switching costs Capital Requirements Access to Distribution Cost Advantages Government Policy Expected Retaliation

Intensity of Rivalry Industry Growth Product Differences Brand Identity Switching Costs Diversity of Competitors Exit Barriers

Determining Strategy Combine Porter’s Analysis with SWOT Reduce Costs Raise Barriers to Market Entrants Establish High Switching Costs Create New Products or Services Differentiate Products or Services Enhance Products or Services Establish Alliances Lock-in Suppliers or Buyers

Reduce Costs Gain advantage by selling more units at a lower price while maintaining/increasing it’s profit margin Automation Production using robots Web based customer service FAQs Convert task from being labour intensive to being technology intensive.

Raise Barriers to Market Entrants Deters competition, thus increasing market potential Gaining legal protection Intellectual Property Amazon.com owns a patent for one-click online purchasing until 2017 It also owns a patent for techniques to predict what the customer may buy in the future. Expense of entering market Essential, but bespoke software.

Establish High Switching Costs Economically infeasible for customers to switch to a new supplier Direct Contracts which are expensive to break (e.g. mobile phone contract). Indirect Time and money expense of learning how to use Open Office. Consider printers! Cheap printer, but expensive ink catridges.

Create New Products / Services Gain first mover advantage Be the first to deliver a new product (that the customers want) Lotus 1-2-3 Spreadsheet program But how long did this advantage last? E-Bay – the first online auction But how long will it last? Netscape?

Differentiate Products or Services Persuading customers my product is better than anyone elses. Skype Not the first internet telephone service, but better than competitors Differentiated by adding video and other features such as mobile…

Enhance Products / Services Add value to existing products / services Perhaps by adding information / help to a web portal Offering traditionally physical transactions via the internet

Establish Alliances Focus on our core competency, but work closely with experts in symbiotic markets. Strategic Alliances allow the tourism industry to offer complete vacation packages; Combining flights, hotels, car rental, restaurant, mobile phones etc. Affiliate programs? The web allows anyone to create an alliance with another service provider or retailer.

Lock-in Suppliers / Buyers Depends entirely on bargaining power. Walmart has power to influence its suppliers, such that they are locked in to them Software industry often customers fear high switching costs, and if the software provider continues to improve their product… Flash Free to download, but buy the development tool. The more people who download the player, the more companies are willing to invest in the development kit – and the more companies who invest, the more people download…

Competitive Strategies 5 key strategies (and some others) have been developed to counter the threats of competitive forces. Cost Leadership Differentiation Innovation Growth Alliance

Cost Leadership Become the low-cost producer of products, by finding ways to lower our costs, lower our customers and suppliers costs or increase our competitors costs. IT can drive cost reduction, such as reducing labour costs. SCM systems can assist reducing suppliers costs (Walmart). Online Price adjustment, to match best match competitors prices.

Differentiation Develop ways to make our product different from our competitors (or reduce our competitors differentiation). Focus on a niche or market segment. IT can assist by introducing IT features to a product such as a camera on a phone. Reduce competitors by integrating their differentiated ideas (adding a camera to our phone too!) Ross Operating Valves, allows customers to design their desired valves online.

Innovation Find new ways of doing business, developing new markets or unique products. Making changes to business processes to change the way business is done within the industry. Create new products which include IT, e.g. online stock trading Amazon constantly innovates introducing new products / services Paypal introducing a system for making payments online.

Growth Increasing capacity to produce more goods and services, expanding into global markets or diversifying into new products. Using IT to manage global business, such as by using a global intranet Using technology to increase capacity, through automating processes.

Alliance Building alliances with suppliers, customers, competitors, consultants etc. Creating links through mergers, acquisitions or joint ventures. Creating ‘virtual’ organisations Use technology to improve communication channels between alliance partners Walmart links with supplier to enable automatic inventory replenishment – a win win alliance. Online inventory management for supplier, with shipment tracking for customer.

The Traditional Value Chain Core Operating Activities Inbound Logistics Operations Outbound Marketing & Sales Services Support Activities Human Resource Management, Infrastructure, Information Technology

The Value Chain Information Core Operating Activities Infrastructure Data Information Knowledge Core Operating Activities R & D Procurement Production Marketing & Sales After Sales Services Infrastructure Facilities & Equipment Technology People

Adding Value Companies make their profits by adding value at some stage in the value chain. Gaining Economies of Scale Gaining Economies of Scope

Economies of Scale Occur when mass producing a product, a lower average cost is attained. Technical Managerial Financial Marketing Commercial R & D Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively. Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc. Financial economies made by borrowing money at lower rates of interest than smaller firms. Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output. Commercial economies made when buying supplies in bulk and therefore gaining a larger discount. Research and development economies made when developing new and better products

Network Economies of Scale A “Community” of firms share infrastructure, capabilities, customer base etc. to produce and distribute products faster and cheaper etc.

Economies of Scope The average total cost of production decreases as a result of increasing the number of different goods produced. For Example, McDonalds can produce Hamburgers & Fries cheaper than other companies could produce either individually.

Network Economies of Scope The “Community” shares infrastructure to produce and distribute new products and services, enter new markets etc. quicker and cheaper etc.

Further ways IS can impact on Strategy Building a Customer-Focused Business Business Process Re-engineering Improving Business Quality Becoming an ‘Agile’ company Creating a Virtual Company Building a Knowledge Creating Company

Building a Customer Focused Business Let customers Place orders Through Partners Allow Customers to Place orders directly Internet Internet, Extranet Transaction Database Customer Database Link employees And partners With databases And customers Website Intranet, Extranet Give all employees a complete view of each customer Let customers Check order History and Delivery status Build a Community of Customers, Employees & Partners Make Customers Special with Personalisation Intranet Internet

Business Process Reengineering (BPR) Improving Business typically offers small increments in performance, Re-engineering involves complete, radical redesign of business processes. As process is often an alternative word for system (a process is comprised of hardware, software, people, communication & data), so Systems Analysts often play a key role in re-engineering. Normally the re-engineered business will include new computer based information systems. Most processes include multiple business functions, so for effective re-engineering multiple functions need to be included – IS plays a major role in co-ordinating BPR.

Improving Business Quality IT can be used in many ways to improve quality; Statistical Quality Control Machine Calibration Extranet Customer Complaint Reporting Tools

Becoming an ‘Agile’ Company Agile companies are able to react quickly to changes. Typically Large organisations have rigid structures and long communication channels Entrepreneurial organisations have shorter communication channels and empowered employees. Over the last decades large organisations have tried many ways to improve their agility – downsizing, rightsizing, outsourcing etc. Recently improvements within networked communication technologies have enabled organisations to introduce novel organisational structures to improve communications, making them more ‘agile’.

Creating a Virtual Company Virtual Companies are where interenterprise alliances are formed electronically linking distinct organisations to achieve common goals. Business functions can be further broken down, outsourced with shared infrastructure, systems and technologies. The Cunningham car company manufactures and retails cars (sporty type cars), but they don’t actually do any of the work themselves, the entire supply chain is outsourced.

Building a Knowledge Creating Company Knowledge Management Systems (KMS) are now commonly being built to generate and share organisational knowledge. A learning organisation rewards employees who contribute to systems their knowledge about their business and industry.