Chapter 3 Strategy and Information Systems

1. Chapter 3Strategy and Information Systems Jason C. H. Chen, Ph.D. Professor of MIS School of Business Administration Gonzaga University Spokane, WA 99258 chen@jepson.gonzaga.edu

2. Chapter Opening Scenario:“Where’s the Data?” Buyers don’t communicate with operations when negotiating with vendors Buyers need data to look at prices and costs of dealing with individual vendors Need more data and people involved in making negotiating deals What are missing and needed in this scenario? Strategy and Information Systems

3. Chapter Preview Recall from Chapter 1 that MIS is the development and use of information systems that enable organizations to achieve their goals and objectives. In Chapter 2, you learned how information systems can help people collaborate. This chapter focuses on how information systems support competitive strategy and how IS can create competitive advantages. As you will learn in your organizational behavior classes, a body of knowledge exists to help organizations analyze their industry, select a competitive strategy, and develop business processes. In the first part of this chapter, we will survey that knowledge and show how to use it, via several steps, to structure information systems. Then, in the last section, we will discuss how companies use information systems to gain a competitive advantage.

4. IS/E-BUSINESS Demands Products What they need/want? How many they need/want? When they need/want? How to reach them? BUSINESS VALUE & FOCUS –IS Perspective Customer centric • SCM • CRM • BPR • ERP Value Who are the customers? Where are the customers? Their purchasing habits How to reach them? SCM: Supply Chain Mgt. CRM: Customer Relationship Mgt. BPR: Business Process Reengineering ERP: Enterprise Resource Planning Business Models & Strategies

5. What is Business Model? • A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace. • The business model is at the center of the business plan. • An e-commerce business model aims to use and leverage the unique qualities of the Internet and the www. Why New Models? • Profitability (making money) N Source: E-Commerce: business, technology, society, Laudon and Traver, A/W

6. Study Questions Q1 How does organizational strategy determine information systems structure? Q2 What five forces determine industry structure? Q3 How does analysis of industry structure determine competitive strategy? Q4 How does competitive strategy determine value chain structure? Q5 How do business processes generate value? Q6 How does competitive strategy determine business processes and the structure of information systems? Q7 How do information systems provide competitive advantages? Q8 2022?

7. develop Mission guide Strategy create Tactic Planning is everything ...What are Two Major Outputs for an organization? Vision Customers, market, competition determined by determines Goals/ Objectives Products, Services N

8. Q1: How Does Organizational Strategy Determine Information Systems Structure? • An organization’s goals and objectives determine its competitive strategy. • Ultimately, an organization’s competitive strategy determines its information system’s • Structures • Features • Functions Fig 3-1 Organizational Strategy Determines Information Systems

9. Organizational Strategy Determines Information Systems Fig 3-1 Organizational Strategy Determines Information Systems

10. Study Questions Q1 How does organizational strategy determine information systems structure? Q2 What five forces determine industry structure? Q3 How does analysis of industry structure determine competitive strategy? Q4 How does competitive strategy determine value chain structure? Q5 How do business processes generate value? Q6 How does competitive strategy determine business processes and the structure of information systems? Q7 How do information systems provide competitive advantages? Q82022?

11. Striving for Competitive Advantage • Firm level: Industry & Competitive Analysis • Competitive Forces Model • Competitive Strategy • Business level • Value-Chain Analysis

12. Five Forces Model • Five competitive forces determine industry profitability: bargaining power of customers, threat of substitutions, bargaining power of suppliers, threat of new entrants, and rivalry among existing firms (video). • Intensity of each force determines characteristics of the industry, how profitable it is, and how sustainable that profitability will be. • Assessing an industry structure based on five questions: • How much bargaining power do customers have? • How much of a threat do substitution products or services pose? • How much bargaining power do suppliers have? • How great is the threat of new competitors entering the marketplace? • How great is the rivalry among existing firms?

13. Porter’s Five Forces Model and Value Chain • According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force. • Under the perspective of market structure, Porter’s competitive forces model has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats.

14. NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES • Switching cost • Access to distribution channels • Economies of scale • Redefine products and services • Improve price/performance INDUSTRY COMPETITORS THE FIRM • Cost-effectiveness • Market access • Differentiation of product or service • Buyer selection • Switching costs • Differentiation • Selection of suppler • Threat of backward integration SUPPLIERS CUSTOMERS PORTER’S FIVE COMPETITIVE FORCES MODEL Threats Bargaining power N Dr. Chen,The Trends of the Information Systems Technology

15. Fig 3-2 Porter’s Five Forces Model of Industry Structure

16. Q/A - Enhancing your Analytic Skill Linda is in the computer repair businesses. Mark and Jill, two recent university graduates are unemployed, but are thinking of doing computer repairs at their homes. This is an example of which of the five forces? • bargaining power of customers • bargaining power of suppliers • threat of new entrants • threat of substitution • rivalry among existing firms … and the answer is: • Answer (c)

17. Fig 3-3 Examples of Five Forces

18. GearUp’s Competitive Strategy Low Cost/Focused • Do everything to keep costs down • GearUp’s response the customer force is to provide the lowest prices for goods to be found, anywhere • The response to the rivalry threat is to keep its customers’ attention focused on GearUp via compelling emails. • Focus within sporting goods category • Focus on buyers interested in special, short-term sales

19. Fig 3-4: Five Forces at GearUp Medium GearUp, organizations examine these five forces and determine how they intend to respond to them. That examination leads to competitive strategy.

20. Study Questions Q1 How does organizational strategy determine information systems structure? Q2 What five forces determine industry structure? Q3 How does analysis of industry structure determine competitive strategy? Q4 How does competitive strategy determine value chain structure? Q5 How do business processes generate value? Q6 How does competitive strategy determine business processes and the structure of information systems? Q7 How do information systems provide competitive advantages? Q82022?

21. Porter’s Competitive Advantage Strategies • Cost leadership: be the cheapest • Differentiation: focus on making your product and/or service stand out for non-cost reasons • Focus: occupy narrow market niche where the products/services can stand out by virtue of their cost leadership or differentiation.

22. Porter’s Competitive Strategy Model • Firms engage in one of four competitive strategies: (video) • Be the cost leader across a wide industry – Wal-Mart is the lowest cost leader in the retail industry. • Differentiate its products across a wide industry – Apple Computer competes on how much better its computers are than PCs. • Be the cost leader in a focused industry segment – Southwest Airlines is the cost leader in certain portions of the airline industry. • Differentiate its product in a focused industry segment – Apple’s iPhone competes by being different than other cell phones.

23. Figure 3 (Extra): Porter’s Generic Strategy Framework – 3 Strategies for achieving Competitive Advantage Competitive Advantage Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Overall Cost Leadership Differentiation Competitive Scope Particular Segment only (Narrow Target) Focus Competitive Mechanism N Dr. Chen,The Trends of the Information Systems Technology TM -23

24. Q3: How Does Analysis of Industry Structure Determine Competitive Strategy? Fig 3-4: Porter’s Four Competitive Strategies To be effective, organization goals, objectives, culture, and activities must be consistent with organization strategy.

25. What are thExamples on Porter’s Strategy? Fig 3-4: Porter’s Four Competitive Strategies Wal-Mart Apple’s PC Apple’s iPhone SouthWest Airlines To be effective, organization goals, objectives, culture, and activities must be consistent with organization strategy.

26. GearUp’s Competitive Strategy Low Cost/Focused • Do everything to keep costs down • Focus within sporting goods category • Focus on buyers interested in special, short-term sales

27. In-Class-Group WorkDiscussion Question • Using the five competitive forces model as described in this chapter to describe how (and what) IT might be used to provide a winning position for: • A global airline • Use UA as an example (Group work together)

28. Use the five competitive forces model as described in this chapter to describe how information technology might be used to provide a winning position for each of these businesses • Ans: The five forces are substitutes, supplier, buyer, new entrants, and inter-industry. The question asks the student to pick a force and describe how each of these 5 types of business might use information resources to reduce the threat of that force. An example of analyzing the substitute force is given below: • Global airline-it is difficult to think of what might be a substitute threat for a global airline. Perhaps it might be a cruise ship offering "offices at sea". In that case the global airline might use information resources to offer "offices in the air".

29. NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES INDUSTRY COMPETITORS THE FIRM SUPPLIERS CUSTOMERS PORTER’S FIVE COMPETITIVE FORCES MODEL Threats Other forces should be considered in the e-Age: 1. Digitalization 2. Globalization 3. Deregulation Internal Forces: 1.customer focus 2.communication 3.core competencies 4.complexity 5.Quality • Cost-effectiveness • Market access • Differentiation of product or service Bargaining power N TM -29 Dr. Chen, The Trends of the Information Systems Technology

30. Business Strategies and its Competitive Advantage Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Cost Leadership Differentiation Alliance Innovation Growth Competitive Scope Particular Segment only (Narrow Target) Cost Focus Differentiation Focus Knowledge-based economy Industrial economy Competitive Mechanism Dr. Chen,The Trends of the Information Systems Technology TM -30

31. PART II

32. Study Questions Q1 How does organizational strategy determine information systems structure? Q2 What five forces determine industry structure? Q3 How does analysis of industry structure determine competitive strategy? Q4 How does competitive strategy determine value chain structure? Q5 How do business processes generate value? Q6 How does competitive strategy determine business processes and the structure of information systems? Q7 How do information systems provide competitive advantages? Q82022?

33. Striving for Competitive Advantage • : Industry & Competitive Analysis • Competitive Forces Model • Competitive Strategy • Value-Chain Analysis Firm level Business level

34. Competitive (Value) Advantage Q4: How Does Competitive StrategyDetermine Value Chain Structure? Business Level: The Value Chain Porter’s Value Chain Model N

35. Fig 3-7: Task Descriptions for Primary Activities of the Value Chain

36. Primary Activities in the Value Chain • Inbound logistics—receiving, handling raw materials and other inputs • Value in parts, time required to contact vendors, maintaining relationships with vendors, ordering parts, receiving shipment, and so forth • Operations—transform or assemble materials into finished products • Outbound logistics—deliver finished products to customers • Marketing and sales—create marketing strategies and sell products or services to customers • Services—after-sale customer support

37. Support Activities in the Value Chain performance measurement IS • Contribute indirectly to production, sale, and service of product • Procurement—finding vendors, setting up contractual arrangements, and negotiating prices • Technology development—research and development, developing new techniques, methods, and procedures • Human resources—recruiting, compensation, evaluation, and training of full-time and part-time employees • Example: ____________________________ • Firm infrastructure—general management, finance, accounting, legal, and government affairs

38. Value Chain • Rather than automating or improving existing functional systems, Porter contends companies should create new, more efficient business processes that integrate the activities of the entire value chain. • Competitive strategy implemented by creating value • Value—amount of money a customer is willing to pay for a resource, product, or service • Margin—difference between value an activity generates and cost of activity • Value chain—a network of value-creating activities • Primary activities • Support activities

39. Production and Manufacturing Distribution/ Logistics Accounting Service Value Chain in Order Management An Existing Product Support Activities Administrative and Other Indirect Value Added Primary Activities Sales D.B. N

40. Production and Manufacturing Distribution/ Logistics Finance Marketing Service Value Chain in Order Management A New Product Support Activities Administrative and Other Indirect Value Added Primary Activities Sales D.B.

41. Fig 3-6: Bicycle Maker’s Value Chain

42. Support Activities in the Value Chain

43. Value Chain Linkages • Linkages are the interactions across the value activities. • Ex: Manufacturing systems use linkages to reduce inventory costs, sales forecasts to plan production; production plan to determine raw materials needs; material needs to schedule purchases. End result is just-in-time inventory, which reduces inventory sizes and costs. • Business process design • Organizations should not automate or improve existing functional systems. Rather, they should create new, more efficient business processes that integrate activities of all departments involved in a value chain.

44. Study Questions Q1 How does organizational strategy determine information systems structure? Q2 What five forces determine industry structure? Q3 How does analysis of industry structure determine competitive strategy? Q4 How does competitive strategy determine value chain structure? Q5 How do business processes generate value? Q6 How does competitive strategy determine business processes and the structure of information systems? Q7 How do information systems provide competitive advantages? Q82022?

45. How Do Business Processes Generate Value? Business process—network of activities that generate value by transforming inputs into outputs. Cost of a business process is cost of inputs plus the cost of activities. Margin of the business process equals the value of the outputs minus the cost(margin = value – cost) Activity transforms input resources into output resources. Resources flow between or among activities. Facilities store resources; some facilities, such as inventories, store physical items.

46. How Do Business Processes Generate Value? Each company has many business processes which are networks of activities that generate value by transforming inputs into outputs. You determine the cost of each business process by adding the cost of inputs plus the cost of activities used in the process. You determine the margin of each business process by subtracting the cost of the activity from the value of the output. 3-46

47. An Alternate Process for Bicycle Manufacturer Fig 3-8 Three Examples of Business Processes

48. Compare Three Business Processes For Bicycle Manufacturer • Notice that activities get data resources from databases and put data into databases • Business processes vary in cost and effectiveness. In fact, the streamlining of business processes to increase margin (add value, reduce costs, or both) is key to competitive advantage. • Example of using a linkage across business processes to improve process margin: • Querying both databases allows purchasing department to make decisions on raw materials quantities and customer demand. • By using this data, purchasing can reduce size of raw materials inventory, reducing production costs and thus adding margin to the value chain.

49. Fig 3-9: Improved Material Ordering Process

50. Business Process Summary Key to a company’s competitive advantage is to increase the margin of its products by adding value, reducing costs, or both. Business process redesign helps a business streamline its activities in order to increase its margins. Most difficult part of process redesign is associated with employee resistance.