IT as a Competitive Advantage

IT as a Competitive Advantage
Presented by: Grant Epstein Erin Miltenberger Darren Van Booven

The Importance of IT in an Organization
Understanding IT and its Role can… Gain a competitive advantage Improve efficiency of business processes Expand/revolutionize markets Not Understanding IT and its Role can… Lead to Wasted IT budget Lead to Business Failure

“the ability to maintain an initial gain in business performance from strategic IT” Concept that has grown in importance and acceptance. Kettinger, Grover, Guha, and Segars. Strategic Information Systems Revisted: A Study in Sustainability and Performance – MIS Quarterly 1994, page 32

Systems that can lead to a competitive advantage in the short or long run have a high value to the initiating company Systems that cannot maintain the advantage will lead to the initiating company being surpassed by the competition. Kettinger, Grover, Guha, and Segars. Strategic Information Systems Revisted: A Study in Sustainability and Performance – MIS Quarterly 1994, page 32

Federal Express: Package tracking system Mitek: Computerized roofing design system Baxter Healthcare: Hospital supply ordering system Firms That Have Made it Work

Aligning IT Strategy with Business Strategy
Contributions Commodity Differentiator Critical Aircraft maint. software Baxter Healthcare ordering software Useful Personal productivity software ICI Paints

IT as a Competitive Advantage - Framework
Three Pillars of Sustainable Competitive Advantage Project Life Cycle Analysis – How long until a response? Competitor Analysis – Who can respond? Supply Chain Analysis – How effective will response be? Feeny, David & Ives, Blake, “IT as a basis for sustainable competitive advantage” in Managing IT as a Strategic Resource, Willcocks, Leslie, Feeny, David. McGraw-Hill Education-Europe, 1997, pp

Pillar 1: Project Life Cycle
Focuses on the idea that when a company uses IT to gain a competitive advantage, it can expect competitors to respond. Project life cycle is the time between release of the new system and competitor response. Awakening Win approval Project Build Project Launch Feeny, David & Ives, Blake, “IT as a basis for sustainable competitive advantage” in Managing IT as a Strategic Resource, Willcocks, Leslie, Feeny, David. McGraw-Hill Education-Europe, 1997, pp

Pillar 2: Competitor Response
What Competitors Can Respond? Three Components Competitive Scope Geographic, Segment, Vertical, Industry Organizational Base Structure, Culture, and Physical Assets Information Resources Technology Infrastructure, Application Inventory, Data bases, Knowledge bases Feeny, David & Ives, Blake, “IT as a basis for sustainable competitive advantage” in Managing IT as a Strategic Resource, Willcocks, Leslie, Feeny, David. McGraw-Hill Education-Europe, 1997, pp

Pillar 3: Supply Chain Analysis Will a Response Work?
Steps to Insure a Response Will Not be Effective. Find exploitable link – Find a point in the supply chain where resources are limited and few participants control the link. Secure the “pole position” – Create a unique relationship with the market. Increased value will result in a more secure relationship and prevent loss to competition. Feeny, David & Ives, Blake, “IT as a basis for sustainable competitive advantage” in Managing IT as a Strategic Resource, Willcocks, Leslie, Feeny, David. McGraw-Hill Education-Europe, 1997, pp

Pillar 3: Supply Chain Analysis
Keep the Gate Closed – Create a perception amongst users of tangible and intangible switching costs. This is the basis for maintaining a competitive advantage. Applications – Users will have to learn a new system Database – Loss of stored information during a switch Community – Switching may have an adverse effect on the way the user does business – IT has become a part of its infrastructure.

Case Study Analysis Progressive Sabre Celera Genomics

Progressive

Why Choose Progressive?
Pioneering efforts in the use of IT in the auto insurance industry Leading the way in the use of the Internet to improve communication with customers, independent agents, and prospects.

History and Background
Founded in 1937 by Jack Lewis and Joseph Green. viewed February 9, 2003

History and Background
Early innovations 1990 – first insurance provider to provide 24 hour claims service at the accident site 1992 – first insurance provider to offer competitor quotes as well as its own. 1994 – launched Immediate Response Vehicles (IRVs) allowing claims agents to settle many claims at the accident site. 1995 – first major insurance provider with a presence on the Internet viewed February 9, 2003

History on the Internet
Prior to 1995, no major insurance providers were on the Internet. Progressive launched its site in 1995. Site had mostly a brochure look “It was a matter of getting to know the technology… to get something up and see what we can do.” – CEO Glenn Renwick (Glenn Renwick, CEO of Progressive, interviewed by phone by Grant Epstein, March 14, 2003) In 1996, Progressive allowed customers to get competitive bids online. viewed February 9, 2003

History on the Internet
First insurance company to let customers buy online (1997) “We see the trend moving more and more to online buying” (Glenn Renwick, CEO oof Progressive, interviewed by phone by Grant Epstein, March 14, 2003) First insurance company to let customers access their account online in 1998. Launched agent site, ForAgentsOnly.com in 1998. viewed February 9, and information provided by Progressive’s PR Department

Insurance Products Auto, commercial vehicle, motorcycle, personal watercraft, ATV, and RV insurance. Primary target range is drivers aged 18 – 34. Also provide information about insurance to teens and driving issues they face on progressive.com Progressive Facts, provided by Progressive’s PR Department, February 2003

Insurance Products Progressive writes insurance in 48 states and the District of Columbia. Currently not doing business in MA or NJ. Drivers can buy over the phone, online, or from one of Progressive’s 30,000 agents. Progressive Facts, provided by Progressive’s PR Department, February 2003

IT’s Importance at Progressive
CEO Glenn Renwick believes in the philosophy that “technology and business alignment are key.” “…Ray (Voelker) is an integral part of the decision process. The organization builds technology into the business decision process.” “Our business plan and IT are inextricably linked because their job objectives are.” Glenn Renwick, CEO of Progressive, interviewed by phone by Grant Epstein, March 14, 2003 Gallagher, Julie, “Business-savvy CIO turns tech-savvy CEO” Insurance and Technology, July 2001.

Importance of IT Information on Progressive’s employee count in the IT Department not currently available. Has averaged around 2000 over the last five years Information on Progressive’s IT annual budget also not available. Information Week.com, 2000. Gallagher, Julie, “Business-savvy CIO turns tech-savvy CEO” Insurance and Technology, July 2001.

Progressive’s Growth and Market Share
Since 1993, growth rate has far exceeded that of the industry Growth rate has ranged between 13.6% and 36%. Industry growth rate has ranged between 2.6% and 5.9% Exception is 2000, when the entire industry experienced minimal growth. Progressive Facts, Provided by Progressive’s PR Department, February 2003

Progressive’s Growth and Market Share
Industry rank has increase from No. 34 to No. 3 in the last 20 years Rank has gone from No. 15 to No. 3 since it began offering competitor rates and developed a web presence. State Farm and Allstate are #1 and #2 respectively. Market share Increased 1% over the last three years (2000 – 2002). Progressive Facts, Provided by Progressive’s PR Department, February 2003

Progressive’s Critical Differentiator
The insurance companies that are most likely to develop a competitive advantage in the industry are those that employ technology in a manner that more effectively delivers their business model. -Ted Devine, Principal of McKinsey and Company Erlanger, “Enhance web site value, carriers told” National Underwriter Vol 16 July Pp – 15-16

Progressive’s critical differentiator is not that it allows customers to shop and buy online. “Now we don’t think, ‘Boy, we’re the only one that allows customers to buy policies online.’ It’s just part and parcel of our entire strategy that focuses on the Internet and putting the information back into the client’s hands.” MacSweeney, Greg “Progressive, inside and out” Insurance and Technology, Vol 24 Sept. 30, Pp

This attitude carries on down the line of Renwick’s management team. “Our guiding principal is to provide customers with a well-developed, easy-to-use Web-site that meets the spectrum of their needs.” – Toby Alfred, Internet Site Manager MacSweeney, Greg “Progressive, inside and out” Insurance and Technology, Vol 24 Sept. 30, Pp

Critical Differentiator – Where it all began
Progressive’s critical differentiator is that it has fully integrated technology into it business process decisions and its interaction with prospects, customers, and agents

Critical Differentiator Where it all Began
Began in 1990 with the launch of Immediate Response and continued in 1994 with its IRVs and in 1997 with it’s Claims Workbench software. Allows claims agents to cut checks for policy holders at the site of the accident. Former CEO Peter Lewis… Progressive is “leading a wave of change.” Salter, Chuck, “Progressive Makes Big Claims” Fast Company Issue 19, Nov pp 176.

History of Progressive’s Internet and IT Advantage
At the time progressive.com was launched, no other major providers had an online presence. Progressive was not even sure what the reaction in the market would be. “…we figured the Internet would be a good thing for us to get into… we wanted to get out there and see how people would respond.” Alan Bauer, President of Direct Group Alan Bauer, President – Direct Group of Progressive, interviewed by phone by Grant Epstein, March 3, 2003

History of Progressive’s Internet and IT Advantage
After strong initial response, Progressive decided to take its website from informational to functional. “There are people who like to buy online and we are an option for them.” - Alan Bauer. Progressive was in a great position to take its website to a more functional level and allow customers to buy online. Call center already set up to sell directly Automated approval process(no need to interact with an agent) Necessary technology was already in place. Alan Bauer, President – Direct Group of Progressive, interviewed by phone by Grant Epstein, March 3, 2003

What does the future hold?
CIO Ray Voelker says his vision is to see the true, Internet-only insurance policy. “If you buy a policy today, you’re still going to get a paper policy in the mail. It’s rare, if it is happening at all, for a completely paperless process.” Hulme, George, “Premium Put on Web Initiatives” Information Week, September 11, 2000

Does Progressive Have a Sustainable Competitive Advantage?
Pillar 1: Life Cycle analysis: Time to competitor response Awakening, Approval, Building the System, Product Launch While it would not take substantial time to build a “brochure” website, most competitors did not see the web as a viable channel for communicating with the market. Unlike its competitors, Progressive’s business model made the transition very easy and logical.

Pillar 2: Competitor analysis: Who can respond? Competitive Scope Organizational Base Information Resources Could competition respond? Limited website content Increased fucntionality required changes in competitor business process. By the time competitors reached Progressive’s benchmark, it had already moved it further out.

Pillar 3: Supply Chain Analysis: Will Copying Help? Find Exploitable Link Capture Pole Position Keep the Gate Closed Competitors have followed suit in part or whole. Though churn is an issue in the industry, whether or not competitors following suit will erode its competitive advantage remains to be seen. Progressive has maintained its lead through continued innovation. Progressive displays continued growth that far exceeds that of the industry and continues to climb the market share ladder.

Conclusion Progressive’s self-assumed role of
innovator and change agent in the auto insurance industry has led to a distinct competitive advantage and has maintained that advantage through continued innovation.

Sabre Company Background
Provider of technology and distribution and marketing services for travel industry Leadership position in every travel marketing and distribution channel Travel Agency Online Consumer Online Corporations Known for its notable “firsts” and “bests” Sabre Annual Report Pg 2

Sabre Company Background
Headquarters: South Lake, Texas 6,500 employees located in 45 countries Carol Kelly – Senior Vice President and CIO Reports to CEO viewed on March 5, 2003

Sabre Customers Airlines Car Rental Agencies Corporate Travel
Cruise Lines Hotels Tour Operators Travel Agents On Line Travel Consumers viewed March 12, 2003

Sabre Financials Total 2001 Revenue
$2.1 billion, 8% increase from 2000 Get There – 2% Airline Solutions – 9% Travelocity – 11% Travel Marketing and Distribution – 78% Sabre Annual Report Summary Page

Sabre Financials 2001 was a difficult year due to Sep 11 but Sabre has seen a gradual improvement. Sabre Annual Report Pg 16

Sabre Bookings Share Sabre’s global booking share is 38%. Sabre has the number one booking share in 3 regions. Sabre Annual Report Summary Page

History of Sabre System
1960 – IBM and American Airlines had a plan to automate the process of reserving airline seats. Booking process involved 12 people, 15 procedural steps and up to 3 hours. Created Sabre – Semi-Automatic Business Research Environment Processed 84,000 telephone calls per day Development cost was almost $40 million viewed on March 6, 2003; Scheier, Robert, “35 years of IT Leadership: Technology takes Flight” Computerworld, Vol 36, 40, 2002, pp

1964 – Final Sabre system cutover is complete Network extends coast to coast Largest, private real-time data processing system Internal inventory system owned by airline Installed only at airports and airline ticket offices Used to track airline’s seats, flights and operational information viewed on March 6, 2003; Scheier, Robert, “35 years of IT Leadership: Technology takes Flight” Computerworld, Vol 36, 40, 2002, pp

Benefits of Sabre Manage inventory and seats faster and more accurately Get paid quicker for tickets purchased Saves American 30% on investments in staff alone Error rate of less than 1% viewed on March 6, 2003

Competition Competitive Edge lasts for 5 to 7 years
United’s Apollo System Amadeus – European Airlines viewed on March 6, 2003

Sabre – The Next Step 1976 – Sabre moves to travel agencies
By the end of the year it is installed in 130 locations. 86% of top agencies in competitive markets use Sabre. American began to “co-host” other airlines on Sabre for a fee Helped airlines compete against United where American had no routes Gave Sabre competitive edge with travel agencies One stop shopping Evolved into Global Distribution System (GDS) viewed on March 6, 2003; Scheier, Robert, “35 years of IT Leadership: Technology takes Flight” Computerworld, Vol 36, 40, 2002, pp

Sabre – 1980s 1986 – Sabre installs first automated yield management system Prices airline seats to yield maximum revenue for each flight 1988 – Sabre stores 36 million fares which can be combined to create over 1 billion fare options viewed on March 25, 2003

Is the competitive advantage to great?
November 1984 – 11 airlines file an anti-trust suit against Sabre Claimed reservation system restraining competition American had advantage because their system was on travel agents desks and their flights were shown first American decided to end preferential treatment for their own flights. , viewed on March 25, 2003

Sabre GDS Today Connects over 60,000 travel agencies with…
400 airlines 58,000 hotel properties 53 car rental companies 9 cruise lines 33 railroads 232 travel operators viewed March 25, 2003

The Web – A New Threat How can Sabre compete?
The web bypasses GDS – directly links customer to airline Self service web-based sites allow travel industry to take advantage of less costly systems. Offers ease of use and ease of operations How can Sabre compete? Scheier, Robert, “35 years of IT Leadership: Technology takes Flight” Computerworld, Vol 36, 40, 2002, pp ; McCarthy, Jack, “Troubled Travels” InfoWorld, Vol 24, 35, 2002, pp

New Innovations for Sabre
First site to offer travel reservations and comprehensive destination and event information on the Internet Leading on-line consumer travel website viewed on March 6, 2003; Sabre Annual Report Pg 3

Get There Leading provider of web-based corporate travel procurement Helps companies to track and control travel costs Signed up two largest travel agencies Customers build own travel booking sites Privately negotiated fares Travel policies Preferred suppliers Solidified position in business to business market Sabre Annual Report Pg 3; Rosen, Cheryl, “Sabre thinks big for booking and reporting system” Informationweek, Issue 808, 2000, pp 172.

Sabre Pass Touch Self service kiosk to check in using credit card or frequent flyer card Sabre Wireless Check in System Allows travelers to check in using wireless phone Receive automatic flight notification Sabre Roving Agent Hand held device to make seat assignments, print boarding passes and bag tags and issue vouchers viewed on March 6, 2003; Sabre Annual Report Pg 3; Meehan, Michael, “Sabre launches wireless flight check-in” Computerworld, Vol 34, 44, 2000, pg 72.

Changes for Sabre Transition from GDS to open platform
Allows for greater access, availability, content Greater integration and increased speed to market Only non-stop capability in industry For pricing, reservations and ticketing Outsourcing to EDS Sold airline infrastructure technology business to EDS Sabre will focus on its core areas and higher margin, faster growing business EDS will manage Sabre information systems EDS will contribute $20 million for Sabre product development Sabre Annual Report Pg 12; Hickey, Kathleen, “Outsourcing in a big way” Traffic World, Vol 265, 13, pp 40.

Does Sabre Have a Sustainable Competitive Advantage?
Pillar 1: Project Life Cycle Analysis - How long until a response? Awakening Approval Building the System Project Launch The original Sabre system had a competitive advantage for 5 to 7 years. Other airlines were able to create similar systems, however… Sabre has continued to keep a competitive advantage by using information technology to create new products.

Pillar 2: Competitor Analysis: Who can respond? Competitive Scope Organizational Base Information Resources Sabre products face competition from many different sources… they have to be continuously updating and creating new value for their products… For example, they were the first to “co-host” on their system so they became the preferred provider for travel agents.

Pillar 3: Supply Chain Analysis: Will Copying Help? Find Exploitable Link Capture Pole Position Keep the Gate Closed Other companies have been able to copy Sabre’s systems… The key has been to be first to market and to continuously innovate

Sabre Conclusion Sabre has maintained a competitive advantage in its industry by continuously working to create the next best thing… It may not be possible to maintain a competitive advantage over a long period of time for one product but it is possible to by continuously improving your products.

Discovery Can’t WaitTM
Celera Genomics, Inc. Discovery Can’t WaitTM

Human Genome Project – Cracking the Code
Begun in 1990, the Human Genome Project (HGP) is an effort by the DOE and NIH with the primary goal of discovering all of the 80,000+ human genes and rendering for study. Originally planned to last 15 years, but Celera said in 1998 it could finish the job in a third of the time, and announced April 4, 2000 that it had indeed finished. Bicycle Example (billions of parts). viewed March 01, viewed March 20, 2003.

Celera - Origins Dr. Craig Venter began working on the human genome at the NIH, a major backer of the project, with Dr. Francis Collins, Director of the NIH. Frustrated with Collins and his slow pace, Venter left and started his own team. Heavily criticized and doubted by other scientists about his claim. “We knew it would either work spectacularly or be the biggest flameout in history.” – Craig Venter Craig Venter, Ph.D Francis Collins, Ph.D viewed March 01, 2003

Celera - Background Established in 1998 by Applera Inc., and Craig Venter. Main offices in Rockville, MD and San Francisco, CA. Celera is engaged principally in integrating advanced technologies to discover and develop new therapeutics by leveraging capabilities in bioinformatics and genomics. Celera Genomics and the Applied Biosystems Group are the two operating groups that comprise Applera Corporation. viewed March 05, 2003.

Celera – Executive Management
David S. Block, M.D VP - Celera Genomics Robert F.G. Booth, Ph.D. VP - Celera Genomics Samuel E. Broder, M.D. VP - Celera Genomics Applera Corporation 2002 Annual Report

Size of Celera Genomics Financial Overview - 2002
(Amounts in Millions $) % Increase/(Decrease) Revenues: $ $ % Cost of Sales: % R&D: (19.4%) Net Loss: (186.2) (211.8) % Cash & Cash Equivalents: (10.7%) Total Debt: Applera Corporation 2002 Annual Report

Celera - Stock Price History
Celera Five-year Stock Price (NYSE:CRA) Yahoo! Inc., viewed March 16, 2003.

Celera – Primary Products
Revenues come from two primary sources: An online information and discovery system through which users can access Celera’s genomic and related biological and medical information. Customers pay for subscription access to CDS. Service Revenues Customized datasets and proprietary mapping. Customized analysis and algorithm development. Database design and implementation. viewed March 01, 2003. viewed March 28, 2003.

Celera - Customers Sample of Commercial Customers:
Users: Commercial, Academic & Institutional Organizations Sample of Commercial Customers: Sample of Academic/Institutional Customers: - Harvard University - Oxford University - California Institute of Technology - National Cancer Institute Viewed March 03, 2003. Viewed March 28, 2003.

Celera - Annual IT Budget
IT budget is not disclosed. Celera IT department contains roughly 50 employees. R&D spending was $132 million in 2002. This is 20 servers per person! Jamie Lacey, Celera Communications, to Darren Van Booven, March 03, 2003. Applera Corporation 2002 Annual Report Viewed March 03, 2003

Celera - Annual IT Budget
Celera has built one of the most powerful non-government supercomputing facilities in the world with 800+ interconnected computers. Celera’s Main Data Center: This is 20 servers per person! Applera Corporation 2002 Annual Report Viewed March 03, 2003

Origins of Celera Systems
Systems originate with the formation of the company. Venter claimed in 1998 he could beat NIH by by relying heavily on robots and computers. Venter and Applied Biosystems, Inc. built the first commercial-grade DNA sequencing robots. Celera now has over 200 ABI PRISM® 3700 DNA Analyzers (shown). The PRISM 3700 is the first DNA sequencer designed for production-scale sequencing. viewed March 01, 2003

Critical Differentiator
The key to Celera's unprecedented sequencing speed and productivity is its whole genome "shotgun" sequencing approach and sequencing them with brute force. Billions of base pairs to sequence! Celera’s approach is much faster than previous mapping methods and dramatically increases the amount of genomic and data available to researchers. Base Pairs: Viewed March 03, 2003.

Critical Differentiator
Celera developed supercomputing facility for processing DNA sequencing data produced by its Celera’s robots. With its robots and supercomputers, Celera was able to sequence and assemble the human genome in just nine months. Celera Discovery System was initialized and embodied Celera’s Competitive Advantage. Viewed March 03, 2003.

How CDS is Used The graphic above is color coded to show how the Celera Discovery System can save you time and money in each step of your research: · Secure Supercomputing Infrastructure: CDS provides a complete, secure infrastructure to support your research. You don't have to build or maintain anything. - High Quality Data: CDS provides the most up-to-date, complete and curated biological information so you can focus on your research instead of gathering or purchasing data from disparate sources. · High Quality Annotation and Tools: CDS provides analysis done by bioinformaticians and Celera has teamed with Applied Biosystems, Invitrogen and others to offer validated assays seamlessly integrated with Celera annotation so you can easily purchase reagents to extend your research into the wet-lab. CDS also provides easy-to-use analysis and visualization tools to streamline your discovery process. · New possibilities: CDS enables you to perform new research that may not be possible or feasible in a wet-lab setting. viewed March 01, 2003.

Online Demo

Does Celera Have a Sustainable Competitive Advantage?
Pillar 1: Project Life Cycle Analysis - How long until a response? Awakening Approval Building the System Project Launch Celera’s information delivery system and data are patented and trademarked. Significant technology start-up cost in a low-margin industry and rough economy. Celera’s competitive advantage is supported by the first pillar. Applera Corporation 2002 Annual Report

Pillar 2: Competitor Analysis: Who can respond? Competitive Scope Organizational Base Information Resources Only large international governments are capable of duplicating Celera’s supercomputing platform, but they have no competitive need to do so. Content and delivery system pioneered by Celera. Access to cheap industrial-grade equipment via Applied Biosystems Well-skilled experts in bioinformatics. Celera’s competitive advantage is supported by the second pillar. Applera Corporation 2002 Annual Report

Pillar 3: Supply Chain Analysis: Will Copying Help? Find Exploitable Link Capture Pole Position Keep the Gate Closed Most powerful gene sequencing center in the world. Celera’s information delivery system and data are patented and trademarked. Brand recognition. Celera’s competitive advantage is supported by the third pillar. Applera Corporation 2002 Annual Report

Celera - Conclusion Celera’s systems provide a sustainable competitive advantage that is supported by the three pillar model. -but- Sometimes it isn’t enough. “There is a high degree of uncertainty that the Celera Genomics group will be able to achieve profitable operations” – Celera Executive Management Applera Corporation 2002 Annual Report

Overall Summary

Overall Summary – Cont’d.
Obstacles to competitive advantage: - Capital Costs - Intellectual Property Rights - Switching Costs - Skills - Management Buy-In MIS Quarterly, 1995 “IT and sustained competitive advantage” by Francisco Mata

Conclusion IT can be used to create a sustainable competitive advantage for the business! A competitive advantage leads to a significant edge over rivals, which usually leads to greater market share and profits. Some competitive advantages are sustainable, while others are not.

Lessons for the CIO Must do things better, more efficiently, or special in the eyes of your customers. Patent methodologies and innovation so that competitors cannot use them. A system can be the best, but without coupling it to business strategy it may not offer any benefit to the bottom line. Continuous innovation is needed to remain competitive.

IT as Competitive Advantage
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