Introduction to Information Systems Lecture 02 Competing with IT How can a business use IT to compete? Jaeki Song

Learning Objectives Identify basic competitive strategies and explain how a business can use IT to confront the competitive forces it faces. Identify several strategic uses of IT and give examples of how they give competitive advantages to a business. Identify the business value of using Internet technologies to become an agile competitor or to form a virtual company. Explain how knowledge management systems can help a business gain strategic advantages.

Today’s Business Environment Increased globalization Increased competitive pressure Frequent mergers Rapidly changing technology Evolving patterns of consumer demand

Strategy “the art of the general” What its business is, its objectives, how it defines and measures results, who its customers are, and what its customers value Converts business into action by enabling an organization to achieve its goals in an increasingly unpredictable business environment Strategy is about making choices that include: The selection of business goals The choice of products and services offer The design and configuration of policies that determine how the firm positions itself to compete in its markets The appropriate level of scope and diversity The design of organization structure, administrative systems, and policies used to define and coordinate work

Formulation of Strategy Analysis Implementation Vision (where) Objectives With plans Strategy (how) Mission (What)

Vision Creation of a vision Where the company wants to go What the company aspires to be To be clear, imaginable/compelling, exciting/desirable Focused: Is clear enough to provide guidance in decision making Feasible: comprises realistic Flexible: Communicable Measurable: Stake holders will clearly see that they have attained the goal

Strategy How the vision will be accomplished over specified time period Benchmarks to check strategy effectiveness Aligned with company mission and core values Provides architectural bridge between mission and vision

Mission What are we? Mission statement Reasons the IT function exists Concise statement of what business the group is in Purpose and function of IT Review to identify for themes and ideas Identify core values

Competitive Forces New Entrants Industry Competitors Customers Threat of .. Industry Competitors Bargaining Power of Channel/Suppliers Bargaining Power of Channel/Buyers Suppliers Customers Rivalry Among Existing Firms Threat of .. Substitute Products

New Entrants Industry Competitors Substitute Products Rivalry Determinants: Industry growth rate Intermittent over-capacity Fixed costs/value added Product differences Brand identity Exit barriers .. sunk costs Informational complexity Switching costs Diversity of competition Determinants of entry Barriers: Economies of scale Brand identity Proprietary product differences Switching costs Absolute cost advantages (proprietary learning curve, low-cost prod design, etc.) Government policies Expected retaliation Capital requirements Access to distribution channels New Entrants Threat of .. Industry Competitors Suppliers Bargaining Power Bargaining Power Customers Determinants of Supplier Power Supplier concentration Importance of Volume to supplier Relative switching costs Impact of inputs on cost or differentiation Costs relative to total industry-purchases Differentiation of inputs Substitute inputs availability Rivalry Among Existing Firms Determinants of Customer Power Buyer Vs. Firm concentration Dependence .. Buyer Volume Relative switching costs Buyer information Substitute products availability Threat of .. Substitute Products Determinants of Threat of Substitution Relative price/performance of substitutes Buyer propensity to substitute Switching costs

Competitive Forces If a business wants to succeed must develop strategies to counter these forces: Rivalry of competitors within its industry Threat of new entrants into an industry and its markets Threat posed by substitute products which might capture market share Bargaining power of customers Bargaining power of suppliers According to Michael Porter’s classic model of competition, any business that wants to succeed must develop strategies to counter these 5 forces

Five Competitive Strategies Cost Leadership Become low-cost producers Help suppliers or customers reduce costs Increase cost to competitors Example, Priceline uses online seller bidding so buyer sets the price Differentiation Strategy Develop ways to differentiate a firm’s products from its competitors Can focus on particular segment or niche of market Example, Moen uses online customer design To counter the threats of competitive forces

Competitive Strategies (cont.) Innovation Strategy Find new ways of doing business Unique products or services Or unique markets Radical changes to business processes to alter the fundamental structure of an industry Example, Amazon uses online full-service customer systems Growth Strategy Expand company’s capacity to produce Expand into global markets Diversify into new products or services Example, Wal-Mart uses merchandise ordering by global satellite tracking

Competitive strategies (cont.) Alliance Strategy Establish linkages and alliances with Customers, suppliers, competitors, consultants and other companies Includes mergers, acquisitions, joint ventures, virtual companies Example, Wal-Mart uses automatic inventory replenishment by supplier

Other competitive strategies Lock in customers and suppliers And lock out competitors Deter them from switching to competitors Build in switching costs Make customers and suppliers dependent on the use of innovative IS Barriers to entry Discourage or delay other companies from entering market Increase the technology or investment needed to enter Include IT components in products Makes substituting competing products more difficult Leverage investment in IT Develop new products or services not possible without IT

Using IT for these strategies Often use the Internet as the foundation for such strategies

Strategic IT Technology is no longer an afterthought in forming business strategy, but the actual cause and driver. IT can change the way businesses compete. A strategic information system is Any kind of information system That uses IT to help an organization Gain a competitive advantage Reduce a competitive disadvantage Or meet other strategic enterprise objectives

Strategic IT IT managers need to know Knowledgeable about new technologies Privy to tactical and strategic plans Be present in corporate strategy discussions Understand technology’s strengths and weaknesses

IT Strategy Set of decisions made by IT and senior management Leads to develop technology infrastructures and human competencies Relationship of technology choices to business choices Technology scope The important information applications and technologies Systematic competencies Those capabilities that distinguishes the IT services IT governance How the authority for resources, risk, conflict resolutions, and responsibility for IT is hared among business partners, IT management, and service providers

IT Infrastructure and Processes Architecture The technology priorities, policies, and choices that allow applications, S/W, H/W, and data management to be integrated into a cohesive platform Processes Those practices and activities carried out to develop and maintain applications and manage IT infrastructure Skills IT human resource considerations

Planning IT Strategy Sequence of activities that transforms current alignment state to future alignment state to enable sustainable CA Actively involve IT (& business) management in development of vision and strategies Strengthen degree of strategic alignment

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 primary determinant of value For classroom discussion: Do you agree that quality and not price is the customer’s primary determinant of value? Are there limits? Is it always quality rather than price?

How can we provide customer value? Track individual preferences Keep up with market trends Supply products, services and information anytime, anywhere Provide customer services tailored to individual needs Use Customer Relationship Management (CRM) systems to focus on customer

Value Chain View the firm as a chain of basic activities that add value to its products and services Activities are either Primary processes directly related 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 can best be applied to add the most value

Porter’s Value Chain Model Firm Infrastructure (Coordination & Support Services) Automated Office Systems; Electronic Scheduling/ messaging systems; Scanning/Planning Systems Human Resource Management Employee Skills Database; Workforce planning systems CAD Systems Technology Development Procurement of Resources EDI with Suppliers; Centralized purchase via On-Line Electronic Bulletin Board On-Line Data Entry system; Automated Warehousing system CAM / CNC Systems On-Line Product/ Services Delivery; Automated Shipment Scheduling Systems Market Analysis Systems; Computerized ordering systems Equpt. Diagnosis & Maintenance System Inbound Logistics Operations Outbound Marketing & Sales After Sales Service CA

Business Process Reengineering Called BPR or Reengineering Fundamental rethinking and radical redesign Of business processes To achieve improvements in cost, quality, speed and service Potential payback high Risk of failure is also high

Agility Agility is the ability of a company to prosper In a rapidly changing, continually fragmenting Global market for high-quality, high-performance, customer-configured products and services An agile company can make a profit with Broad product ranges Short model lifetimes Mass customization Individual products in large volumes An agile company often uses the Internet to integrate and manage business processes while providing the processing power to treat masses of customers as individuals

Four strategies for agility An agile company: Provides products as solutions to their customers’ individual problems Cooperates with customers, suppliers and competitors to bring products to market as quickly and cost-effectively as possible Organizes so that it thrives on change and uncertainty Leverages the impact of its people and the knowledge they possess

Virtual Company A virtual company uses IT to link People, Organizations, Assets, And ideas Creates interenterprise information systems to link customers, suppliers, subcontractors and competitors

Knowledge Creation Knowledge-creating company or learning organization Consistently creates new business knowledge Disseminates it throughout the company And builds in the new knowledge into its products and services Explicit knowledge Data, documents and things written down or stored on computers Tacit knowledge The “how-to” knowledge which reside in workers’ minds A knowledge-creating company makes such tacit knowledge available to others To have lasting competitive advantage, a company must be a knowledge creating company or learning organization

Knowledge issues What is the problem with organizational knowledge being tacit? Why are incentives to share this knowledge needed? Issues: What if the person who has the knowledge leaves the company? What if someone in another part of the company could use the expertise? How do you know who knows what you need to know? How do you find what you need to know Company wastes money “re-inventing the wheel” Unless people are given incentive to share the knowledge, They won’t want to spend time doing something that they are not rewarded for They will worry about losing their status of having the expertise

Knowledge management techniques Three levels of techniques, technologies, and systems that promote the collection, organization, access, sharing and use of workplace and enterprise knowledge Create techniques, technologies, systems and rewards for getting employees to share what they know. Source: Adapted from Marc Rosenberg, e-Learning: Strategies for Delivering Knowledge in the Digital Age (New York: McGraw-Hill, 2001), p.70.

Knowledge management systems (KMS) KMS manage organizational learning and business know-how Goal: Help knowledge workers to create, organize, and make available knowledge Whenever and wherever it’s needed in an organization