Chapter 2

Strategic Uses of
Information Systems

 When you finish this chapter, you will:

Understand business strategy and

strategic moves.
Learning Recognize how information systems
can give business a competitive
Objectives advantage.
Understand basic initiatives for
gaining a competitive advantage.

Know what makes an information

system a strategic information
system.
Understand the fundamental
Learning requirements for developing
strategic information systems.
Objectives Recognize circumstances and
initiatives that make one SIS succeed
and another fail

 Strategy and Strategic

Moves
Strategy
- A plan designed to help an organization
outperform its competitors.
Strategic Information Systems
-Information systems that help seize opportunities.
-Can be developed from scratch, or they can evolve
from existing ISs.
 Profits increase significantly
through increased market
share.

Achieving a The essence of strategy is innovation,

so competitive advantage often occurs
Competitive when an organization tries a strategy
that no one has tried before.
Advantage
Dell was the first PC
manufacturer to use the Web to
take customer orders.
Achieving a
Competitive
Advantage
Figure 2.1
Eight basic ways to gain advantage
Achieving a
Competitive
Advantage
 Achieving a
Competitive Advantage
Initiative #1: Reduce Costs
-Lower Costs
-Lower Price
-Bigger Market Share
 Achieving a
Competitive Advantage
Initiative #2: Raise Barriers to Entrants
-Patenting and Copyrights of proprietary software
-High expense of entering industry
State Street, Inc. (Pension fund management business)
invested huge amount of capital on developing an IS for
Pension fund management, thereby making it difficult for
new entrants in this business area. Similar organizations
start to rent services from the new IS of State Street, Inc.
 Achieving a
Competitive Advantage
Initiative #3: Establish High Switching Costs
-Explicit Switching Costs
Fixed and nonrecurring
-Implicit Switching Costs
Indirect costs in time and money of adjusting to a new product
-Good example is an ERP system such as SAP or
Oracle ERP
 Achieving a
Competitive Advantage
Initiative #4: Create New Products and Services
-Dynamic
The advantage lasts only until other organizations in the
industry start offering an identical or similar product or service for a
comparable or lower price.
Businesses have to improve services to retain competitive
advantages (FedEx has add tracking IS to it postal services to regain
competitive advantage)

 Achieving a
Competitive Advantage
Initiative #5: Differentiate Products and Services
-Product differentiation – usually achieved through advertising
Brand recognition
Examples of brand name success
Levi’s jeans, Chanel perfumes, Calvin Klein clothing
- The Internet as a business tool used businesses to add more services
to existing offerings to make its businesses more recognized by customers.
Amazon.com is a good example.
 Achieving a
Competitive Advantage
Initiative #6: Enhance Products and Services
- Instead of differentiating a product or service, add to it in
order to enhance its value
Examples
Auto manufacturers enticing customers with a longer warranty
Real estate agents providing useful financing information to potential buyers
Charles Schwab moving stock trading services on-line before Merrill Lynch
 Achieving a
Competitive Advantage
Initiative #7: Establish Alliances
-Combined service may attract customers
Lower cost
Convenience
-Examples
Travel industry
HP and FedEx
Achieving a
Competitive
Advantage
 Achieving a
Competitive Advantage
Initiative #8: Lock in Suppliers or Buyers
-Bargaining Power
-Purchase volume
-Create a standard
 Strategic Information Systems (SIS)
-Any IS that can help an organization
achieve a long-term competitive
Strategic advantage

Information as a -SIS embodies two types of ideas

Potentially-winning business move

Competitive
How to harness IT to implement that
move

Weapon -Two conditions for SIS

IS must be serving an organizational goal
IS unit must be working with the
managers of the other functional units
 Creating an SIS

Strategic -Top management must be involved

from initial consideration through
Information development and implementation.
as a
Competitive -SIS must be a part of the
Weapon overall organizational strategic
plan.
 Strategic
Information as a
Competitive
Weapon
 Strategic
Information as a
Competitive
Weapon

 Strategic Information as a
Competitive Weapon
-Re-engineering and Organizational Change
-To implement an SIS and achieve a competitive
advantage, organization must rethink the entire way in
which it operates.
-Goal of re-engineering is to achieve efficiency leaps
of 100 percent or even higher.
 Strategic Information as a
Competitive Weapon
-Competitive Advantage as Moving Target
-SISs developed as strategic advantages quickly
become standard business.
> Banking industry (ATMs and banking by phone)
-Companies must continuously contemplate new
ways of utilizing information technology to their
advantage.
>SABRE, American Airlines’ reservation system
 Strategic Information as a
Competitive Weapon
-Sources of Strategic Information Systems
>Existing System
>New Service
>New Technology
>Excess Information
>Vertical Information
 Strategic Information as a
Competitive Weapon

-From Automation to SIS

>An organization can gain a competitive advantage
through automation of a manual process.
>American Hospital Supply automated manual orders
and improved services, resulting in a seventeen percent (17%)
compound annual growth rate in sales.
 Strategic Information as a
Competitive Weapons
-SIS from a New Service
>A company may gain competitive advantage by providing a
new service using IT.
>Merrill Lynch was the first to use IT to provide a cash-on-
demand service for their investors and captured a lion’s share of
the market.
 Strategic Information as a
Competitive Weapon
-SIS from New Technology
>Often, technology involved in an SIS has been around for
some time
Just waiting to be sued strategically
>Sometimes, new technology sparks major change in the way
a firm does business
>A company that figures out how to use a new technology
can gain a competitive advantage.
 Strategic Information as a
Competitive Weapon
-SISs from Excess Information
>An organization can gain an advantage by putting excess
information toward a new product or service.
>A company can look for strategic use of its information
What information do we have that another company could use?
What information do we have that could be used to start a new business?
Can we produce information to assist in creation of new products or
services for ourselves to other companies?
 Strategic Information as a
Competitive Weapon
-SISs from Vertical Information
> Organizations use ISs to augment their businesses
vertically by offering related services.
> Realtors offer financing and relocation
information in addition to information about houses for
sale
 -Good SIS ideas must be carefully
executed if a company is to seize
opportunities.
> McKesson Drugs, Inc.,
automated its operations and
Acumax Plus: gained a competitive advantage.
-Enhanced existing services
An SIS Success -Provided new services
-Cut costs
-Created high switching costs for
clients
 Improving Existing Services
-McKesson devised a new
information system to automate order
entry and order processing

Acumax Plus:
>Implementation of a wearable computer
and scanner called Acumax to automate
collection and fulfillment of orders

An SIS Success -Business Process Redesign

> Acumax and its successor, Acumax Plus,
contributed to significant cost cutting and
increased market share at McKesson
Corporation.
 Providing New Services
-McKesson delivers about ninety-
three percent of its over-the-counter
Acumax items and ninety-nine percent of
Plus: An SIS prescribed drugs the next day.
cycle.
>This creates an almost just-in-time supply

Success -McKesson succeeded in forming an

alliance with drugstores, thereby
helping drugstores save time
Mortgagepower Plus: An SIS Failure

Identifying the Competitive Advantage

-Citicorp had all the ingredients necessary for
successful implementation of new ideas using IT
In 1987 a great new idea was conceived: a 15-minute
mortgage approval process
-Equivalent to a 10-minute oil change or one-hour
photo processing.
 Mortgagepower Plus: An SIS Failure

SIS Plan
- Citicorp removed the requirement for mortgage insurance
> Did not compensate by increasing its reserve for potential losses
-Low-document and non-document loans
> Checked borrowers’ credit reports and abridged employment histories
but not their assets or incomes
- At worst, the executives believed, the bank could profit by
selling a foreclosed house and recoup the loan
 Mortgagepower Plus: An SIS Failure
How the SIS Failed
-Failed strategically due to unwise business shortcuts.
-Failed operationally due to poor technical implementation.
Losing Ground
-Mortgagepower Plus rejected seventy percent of all
applicants (twice the bank’s normal rate of thirty-five percent)
-Citicorp’s management reduced size of mortgage unit and
removed its responsibility for originating loans for later sale
 Just being first on the Web is not enough to be
successful; business ideas must be sound.
-An organization must carefully define what
Success and buyers want.
-Establishing a recognizable brand name is
Failure on important but does not guarantee success;
satisfying needs is more important.
the Web

To succeed, Web business must offer a new

product or service others are willing to pay
for.
 The Bleeding Edge

-Business owners must develop new features to keep the

system on the leading edge.
-Adopting a new technology involves great risk.
>No experience from which to learn
>No guarantee technology will work or customers and
employees will welcome it
 The Bleeding Edge
-The bleeding edge: failure in an organization’s effort to
be on the technological leading edge.
-Some organizations let competitors assume the risk
associated with being on the leading edge.
>Risk losing initial rewards.
>Can quickly adopt and even improve pioneer organization’s
successful technology.
 -At what point is a
successful strategy
considered as a
Ethical and predatory, unfair business
Societal Issues practice?
The Power of Information >Court cases against
Microsoft have focused on
questions such as these.
Thank You!