Chapter 8 Value Creation with Information Systems

1. Chapter 8 Chapter 8Value Creationwith Information Systems What theoretical and analytical models help managers identify opportunities to create added value with IT

2. Course Roadmap • Part I: Foundations • Part II: Competing in the Internet Age • Part III: The Strategic use of Information Systems • Chapter 6: Strategic Information Systems Planning • Chapter 7: Value Creation and Strategic Information Systems • Chapter 8: Value Creation with Information Systems • Chapter 9: Appropriating IT-Enabled Value over Time • Part IV: Getting IT Done

3. Learning Objectives • How to think in a disciplined fashion about the question of value creation with information systems resources. • How to use traditional models of value creation with information systems and information technology to identify and craft IT-dependent strategic initiatives, including industry analysis, value chain analysis, and the customer service life cycle framework. • How to incorporate information resources in your search for opportunities for value creation using emerging frameworks, including the virtual value chain and the customer data strategies framework. • How to devise and select initiatives that create value using organizational data.

4. Introduction • Chapter 6 showed you how the strategic information systems planning process is designed to create an overall context for information systems decision making • Chapter 7 laid the foundation by explaining how you can analyze the impact of such initiatives • Now, we get to the heart of the matter by introducing frameworks and analytical models use to identify opportunities, and to design and evaluate IT-dependent strategic initiatives

5. Traditional Frameworks • Mid-1980s IS research - systematically explore and document the role of information systems and IT beyond automation of work and the creation of efficiencies • Result: strategic models focusing on competitive positioning and competitive advantage • Industry analysis • Value chain analysis • Customer service life cycle analysis

6. Industry AnalysisThe 5-Forces Framework • Grounded in the basic notion that different industries offer different potential for profitability. • Suggests that industry differences can be analyzed a prioriby managers using an analytical framework • five forces model • Executives can decide whether to enteran industry or forgo investment

7. Threat of New Entrants • How easily can competitors enter the market? • Are the barriers significant enough?

8. The Threat of Substitutes • How easily can the product or service be replicated in a way that meets the same customer needs? VS.

9. Bargaining Power of Buyers • How easily can customers influence the price of the product or service?

10. Bargaining Power of Suppliers • How easily can individuals and firms sell their products and services at high prices?

11. Rivalry Among Existing Competitors • How fierce is the battling for position and how aggressive is competition in the industry? • Hyper competition – fierce rivalry among existing firms and a very rapid rate of innovation leading to fast obsolescence of any competitive advantage

12. Industry Analysis and the Role of Information Systems • Investing in IS may: • Can the use of IT raise or increase barriers to entry in the industry? • Can the use of IT decrease suppliers’ bargaining power? • Can the use of IT decrease buyers’ bargaining power? • Can the use of IT change the basis of industry competition?

13. Firm Infrastructure Support Activities HR Management Technology development Procurement Inbound logistics Outbound logistics Operations Marketing and sales Service Primary Activities Margin Value Chain • As managers – you will analyze opportunities to use strategic IS to create added value. • The value chain model identifies: • Primary activities • Support activities

14. Primary Activities • Those directly related to value creation • They are: • Inbound logistics • Operations • Outbound logistics • Marketing and Sales • Service

15. Support Activities • Those not directly related to the transformation process • They are necessary to enable it. • They are: • Firm infrastructure • HR management • Technology development • Procurement

16. Marketing & Sales Guest Stay After Stay Service Procurement Production Value Chain and Role of Information Systems • Managers need to identify, understand, and analyze the activities of the firm • The objective is to enhance or transform them using Information Systems • Careful! Map a representative value chain

17. Linkages Suppliers Firm Customers Value Network • Firms interact with one another in the value network • Individual value chains are therefore linked to those of suppliers (upstream) and customers (downstream) • These linkages offer opportunities for value creation with Information Systems

18. The Customer Service Life Cycle (CSLC) • Objective: • To map the relationship between a firm and its customers • To identify the stages where customers: • Are unsatisfied or • Receive substandard service • Provide ideas as to how: • To improve customer service through the use of the advanced IT • or the deployment of IT-dependent strategic initiatives.

19. The Four Phases of the CSLC • The CSLC identifies four major phases mapping the relationship between the firm and its customers • Stepping through the relationship in the customer’s shoes • Helps managers address these needs from the customers’ point of view

20. The 13 Stages of the CSLC • Each of the four phases is further subdivided into stages • These represent typical needs the customer has when: • Purchasing • Using and • Retiring a product or service.

21. CSLC: Thirteen Stages

22. Phase 1: Requirements • Establish requirements: • Customer identifies a need for a firm’s product/service • Specify: • Customer details the characteristics of product or service of interest

23. Phase 2: Acquisition • Select a source: • The customer identifies where to acquire the product or service from • Internet is a new source that reduces vendor’s distribution costs • Ordering: • The customer requests the product or service • Authorize and pay for: • The customer issues payment • Acquire: • The customer begins using the product or service • Evaluate and accept: • The customer ensures that the product or service meets specifications and the stated objectives of use

24. Stage 3: Ownership • Integrate: • The customer adds the product or service to the existing inventory of resources • Monitor use and behavior: • The customer ensures that the product or service remains in working order • Upgrade: • The customer modifies or improves the product or service as needed • Maintain: • The customer services the product or service as needed • The firm can use such opportunities to avoid dissatisfaction and provide outstanding service

25. Stage 4: Retirement • Transfer or dispose: • The customer will needs to transfer, resell, return, or dispose of the product or service • Account for: • The customer needs to evaluate the experience provided by the product or service • The customer needs to measure the costs associate with ownership of the product or service

26. Organize Gather Synthesize Distribute Select Virtual Value Chain(VVC) • Designed to map the set of sequential activities that enable a firm to transform: • Raw data in input into • Higher value information in output • Adopts the same logic as the physical value chain • VVC recognizes info as the entity being transformed (the value of which is being enhanced) through the chain of activities

27. Five Activities • Gather: • Collecting and accumulating information • Organize: • Storing the gathered data in a way that makes later retrieval and analysis simple and effective. • Select: • Identifying and extracting the needed data from the data repository • Synthesize: • Packaging information so that it can be readily used by the intended consumer for the specific purpose to which it is directed • Distribute: • Transmitting the appropriately packaged information to its intended user or customer.

28. Three Classes of Strategic Initiatives • Visibility: • The ability to “see through” organizational processes previously treated as black box • Mirroring Capabilities: • The ability of transforming physical activities into information-based ones • Efficiency • Effectiveness • Performance

29. Three Classes of Strategic Initiatives • New Digital Value: • Creating relationship with the customer • Increasing Customer willingness to pay • Creating new value in the form of new information enabled products or services.

30. Marketing & Sales Guest Stay After Stay Service Procurement Production New Frontier: Value Matrix Capture Store Select Synthesize Distribute

31. Creating Value with Data Purpose of data: Do something of value for customers  increase their customer willingness to pay Value • Ability for data to create value depends on two factors: • Theoretical Repurchase Frequency of product or service • Degree of Customizability of product or service

32. Theoretical Repurchase Frequency How often the customer repurchases the goods/services It is a function of the industry the firm is in and the characteristics of the value proposition it offers

33. Degree Of Customizability How much the product or service can be tailored to the specific needs and requirements of individual customers

34. Customer Data Strategies High Rewards Strategy Personalization - Loyalty Rewards - Reporting - Operations - Differentiation Theoretical Repurchase Rate Acquisition Strategy Low Payoff - Analytics - New Prospects Low Low High Degree of Customizability

35. Personalization Strategy • Repeated interactions • Returning customers

36. Rewards Strategy • Product and service purchased frequently. • Products are fairly standardized • Difficult to tailor them to specific customer requests

37. Acquisition Strategy • Low theoretical repurchase frequency • High degree of customization

38. Low Payoff • Low theoretical repurchase frequency • Relatively low degree of customizability

39. The Third Dimension Unobtrusive Data Capture The extent to which – during the normal business cycle – data is collected and stored in a readily usable format

40. Data-Driven Strategic Initiatives • Identify relevant Transaction Processing Systems (TPS) • Narrow the scope of the analysis and focus on the systems that hold relevant data • Inventory currently available data • Identify the underlying data tracked in the natural course of business • Talk to power users • Conceptualize initiatives • Generate and brainstorm ideas • Don’t evaluate feasibility or financial viability yet

41. Prioritize Initiatives • Evaluate actual feasibility – make pragmatic decisions about these initiatives • Upside potential • Time sensitivity • Impact immediacy • Aggregation requirements • Trending requirements • Data availability • Accuracy • Comprehensiveness

42. Prioritize Initiatives Imperatives: • Projects with significant upside potential that rely on readily available information Quick wins: • Projects without much upside potential • Can be readily implemented based on immediately available information • Help gain momentum and build credibility

43. Prioritize Initiatives Tradeoffs: • Projects that rely on information not readily available that tends to be costly Losing causes: • Projects with little upside potential that rely on information that is not readily available

44. The Recap • Industry analysis, seeks to help you identify opportunities to deploy information systems to improve the profitability of the industry • Value chain analysis seeks to spur your thinking about how information systems and technology can be used to introduce new activities and/or change the way the firm’s activities are currently performed • The customer service life cycle (CSLC) suggests that there is ample opportunity to create value by using information systems and technology to enhance the relationship with customers and enable superior customer service • CSLCidentifies four major phases and thirteen stages that offers opportunities for value creation per the relationship between the firm and its customer

45. The Recap • Virtual value chain (VVC) recognizes the importance of the wealth of information available to today’s organizations in the search for value creation • VVC identifies five sequential activities & three classes of strategic initiatives that a firm can use to transform raw data input into information outputs that have more value than the inputs • Customer data offer the potential to create value with different strategies best fitting different organizations • The viability of the chosen strategy depends also on the degree of difficulty the firm encounters in collecting and using the needed customer data • Once the firm identifies a potentially value adding strategy, it must ensure that it can appropriate the value created over time

46. What We Learned • How to think in a disciplined fashion about the question of value creation with information systems resources • How to use traditional models of value creation with information systems and information technology to identify and craft IT-dependent strategic initiatives, including industry analysis, value chain analysis, and the customer service life cycle framework • How to incorporate information resources in your search for opportunities for value creation using emerging frameworks, including the virtual value chain and the customer data strategies framework • How to devise and select initiatives that create value using organizational data