U NIT II

STRATEGIC USES OF INFORMATION

SYSTEMS

OBJECTIVES:

At the end of the unit, the student should be able to:

1) explain what business strategy and strategic moves are;

2) illustrate how information systems can give businesses a competitive

advantage;

3) identify basic initiatives for gaining a competitive advantage;

4) explain what makes information system strategic information systems;

5) identify fundamental requirements for developing strategic information

systems; and

6) explain circumstances and initiatives that make one SIS succeed and
another fail.
 UNIT II
STRATEGIC USES OF INFORMATION SYSTEMS

DURING THE 1970S AND 1980S, CORPORATIONS’ PERCEPTION OF INFORMATION CHANGED. THEY
NO LONGER SAW INFORMATION AS MERELY RESOURCE TO SUPPORT DAY-TO-DAY OPERATIONS.
EXECUTIVES LEARNED THAT INFORMATION CAN SIGNIFICANTLY CHANGE AN ORGANIZATION’S
LONG-TERM STRATEGIC POSITION IN NATIONAL AND GLOBAL MARKETS. OFTEN, APPLYING
INFORMATION SYSTEMS TO LONG-TERM PLANNING COMPLETELY CHANGES THE WAY A FIRM
CONDUCT ITS BUSINESS. SOME SYSTEMS EVEN CHANGE THE PRODUCT OR SERVICE THAT A FIRM
PROVIDES. THIS REALIZATION BECAME EVEN MORE EVIDENT WHEN THE WORLD WIDE WEB
BECAME A MAJOR COMMERCIAL MEDIUM IN THE LATE 1990S.

S T R AT E G Y A N D S T R AT E G I C M O V E S

Although many information systems are built to solve problems, many others are built to seize
opportunities. And, as anyone in business can tell you, identifying a problem is easier than
creating an opportunity. Why? Because a problem already exists; it is an obstacle to a desired
mode of operation and, as such, calls attention to itself. An opportunity, on the other hand, is less
tangible. It takes a certain amount of vision to identify an opportunity, or to create one and seize
it. Information systems that can help seize opportunities are called strategic information
systems (SISs). They can be developed from scratch, or they can evolve from an organization’s
existing ISs.

The word strategy originates from the Greek word “strategos,” meaning “general.” In war, a
strategy is a plan to gain advantage over the enemy. Other disciplines, especially business, have
borrowed the term. As you know from media coverage, corporate executives often discuss actions
in ways that make business competition sound like war. Business people must devise decisive
courses of action to win-just as generals do. In business, a strategy is a plan designed to help
organization outperform its competitors. However, business strategy, unlike battle plans, often
takes the form of creating new opportunities rather than beating rivals.

In a free-market, economy, it is difficult for a business to do will without some strategy.

Although strategies vary, they tend to fall into some basic categories, such as a developing a new
product, identifying an unmet consumer need, changing a service to entice more customers or
retain existing clients, or taking any other action that increases the organization’s value through
improved performance.

Many strategies do not, and cannot, involve information systems. But increasingly,
corporations are able to implement certain strategies-such as maximizing sales and lowering
costs-thanks to the innovative use of information systems. In other words, better information
gives corporations a competitive advantage in the marketplace. A company achieves strategic
advantage by using strategy to maximize its strengths, resulting in a competitive advantage.
When a business uses strategy intending to create a market for new products or services, it does
not aim to compete with other organizations, because that market does not yet exist. Therefore, a
strategic move is not always a competitive move. However, in a free-enterprise society, a market

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rarely remains the domain of one organization for long; thus, competition ensues almost
immediately. So, we often use the term “competitive advantage” and “strategic advantage”
interchangeably.

You may have heard statements about using the World Wide Web (“the web”) strategically.
Business competition is no longer limited to a particular country or even region of the world. To
increase the sale of the goods and services, companies must regard the entire world as their
market. Because thousands of corporations and hundreds of millions of consumers have access to
the web, augmenting business via the web has become strategic: many companies that utilize the
web early on have enjoyed greater market shares, greater experiences, and larger revenues than
latecomers. Some companies developed information systems, or features of information systems,
that are unique, such as “one click” purchase and reverse auctioning. Practically any Web-based
system that give a company competitive advantage is a strategic information system.

A C H I E V I N G C O M P E T I T I V E A D VA N TA G E

Let’s consider competitive advantage in terms of a for-profit company, whose major goal is to
maximize profits by lowering costs and increasing revenue. A for-profit company achieves
competitive advantage when its profits increase significantly, most commonly through increased
market share. It is important to understand that the eight listed are the most common, but not the
only, types of business strategy an organization can pursue. The essence of strategy is
innovation, so competitive advantage often occurs when an organization tries a strategy that no
one has tried before.

For example, dell was the first PC manufacturer to use the web to take customer orders.
Competitors have long imitated the practice, but Dell, first to gain the Web-bound audience,
gained more experience than other PC makers on this e-commerce vehicle and still sees more
computers via the Web than its competitors.

Initiative #1: Reduce Costs

Customers like to pay as little as possible, while still receiving the quality of service or product
they need. One way to increase market share is to lower prices, and the best way to lower prices
is to lower costs. For instance, if carried out successfully, massive automation of any business
process gives an organization competitive advantage. The reason is simple: automation makes an
organization more productive, and any cost savings can be transferred to customers through lower
prices. We saw this happen in the auto industry. In the 1970s, Japanese automakers brought
robots to their production and assembly lines and reduced costs-and subsequently pries-quickly
and dramatically. The robots weld, paint, and assemble parts at a far lower cost than manual
labor. Until their foreign competitors began to employ robots, he Japanese had a clear
competitive advantage because they were able to sell high-quality cars for less than their
competitors.

In the service sector, the Web has created an opportunity to automate hat until recently was
considered a “human-only” activity: customer service. An enormous trend toward automating
online customer service began with companies like FedEx, which initially gave customers an
opportunity to track their parcels’ status by logging on to a dedicated, private network and

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database. The same approach is now implemented through the Web. Many sites today include
answers to FAQs (frequently asked questions). Others have special programs that can actually
respond to question a caller poses. Other Web technologies enable customers to shop, receive
information on products, select items, and pay without any need for human intervention by online
retailers, online service give businesses two major benefits: it turns service from labor-intensive
to technology-intensive, which is less expensive; and it provides customers easy access to a
service seven days a week, twenty-four hours a day. It cut costs not only of expensive human
labor but also of telephone and mailing charges. Companies that are first to adopt advanced
systems reducing labor enjoy competitive advantage for as long as their competitors lag behind.

Initiative #2: Raise Barriers to Entrants

The smaller the number of companies competing within an industry, the better off each company
is. Therefore, an organization may gain competitive advantage by making it difficult, or
impossible, for each organization to produce the product or service it provides. Using expertise
or technology that is unavailable to competitors or prohibitively expensive is one way to bar new
entrants.

Companies raise barriers to entrants in a number of ways. Obtaining legal protection of

intellectual property such an invention or artistic work bars competitors from freely using it.
Microsoft and other software powerhouses have gained tremendous strategic advantages by
copyrighting and patenting software. On the Web, there are numerous examples of such
protection. Consider Amazon.com, probably the largest online retailer. The company secured a
patent for “one click” purchases, which enables customers to enter their details, including credit
information, only once. From that moment on whenever they make a purchase at their site, they
can click only once to buy an item. Amazon successfully sued barnesandNoble.com when B&N
implemented the same technology (name your price) auctioning, which prevented competitors
from entering its business space.

Another barrier to potential new market entrants is the high expense of entering that market.
An example is the pension fund management industry. State Street Corporation’s one of its mos t
successful competitors. In the 1980s, State Street committed massive amounts of money to
developing ISs that helped make the company a leader in managing pension funds and
international banking accounts. The huge capital allocation required to build a system to compete
successfully with State Street’s keeps new entrants out of the market. Instead, other pension
management corporations rent State Street’s technology and expertise. In fact, State Street
derives about 70 percent of its revenues from selling its IS services. This company is an
interesting example of an entire business refocusing around ISs.

Initiative #3 Establish High Switching Costs

Switching costs are expenses incurred when a customer stops buying a product or service from
one business and starts buying it from another. Switching costs can be explicit (such as charges
the seller explicitly levies on a customer for switching) or implicit (such as the indirect costs in
time and money of adjusting to a new product that does the same job as the old).

Often, explicit switching costs are fixed, nonrecurring cost, such as a penalty a buyer must
pay for terminating a deal early. In the cellular telephone service industry, you can usually get an
attractive deal, but if you cancel the service before a full year has passed, you have to pay a hefty
penalty. So although another company’s service may be more attractive, you may decide to wait

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the full year because the penalty outweighs the benefits of the new company’s service. When you
do decide to switch, you will probably discover that the telephone is not suitable for service with
any other telephone company. The cost of the telephone itself, then, is another disincentive to
switch.

A perfect example of indirect switching expenses is those involved in the time and money
required to adjust to new software. Once a company trains its personnel to use one-word
processing or spreadsheet program, a competing software company must offer a very enticing
deal to make switching worthwhile. The same principle holds for many other applications, such
as database management systems a Web browser. Consider Microsoft’s popular Office suite; you
can download free of charge Sun Microsystems’ StarOfffice, a software suite that is as good as
MS Office. Yet, few organizations or consumers, who are so used to MS Office, are willing to
switch to StarOffice.

Initiative #4 Create New Products and Services

Clearly, creating a new and unique product or service that many organizations and individuals
need gives an organization great competitive advantage. Unfortunately, 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.

Examples of this scenario abound in the software industry. For instance, Lotus development
Corporation became the major player in the electronic spreadsheet market after it introduced its
Lotus 1-2-3 program. When two competitors tried to market similar products, Lotus sued for
copyright infringement and won the court case, sustaining its market dominance for several years.
However, with time, Microsoft established its Excel spreadsheet application as the world leader,
not only by aggressive marketing but also by including better features in its application.

Another example of a company creating a new service is FedEx, which created a market in
the late 1970s by providing overnight delivery service. FedEx’s market share slipped when the
U.S. Postal Service, United Parcel Service, and other companies’ entered the same market several
years later, providing virtually the same service at the same or lower prices. However, FedEx’s
IS to track their own packages, a service it now offers through the Web. Clients can connect to
the system and receive real-time information about any item they send or are scheduled to
receive. The extra service has been credited for attracting clients back to FedEx. Competitors
have emulated this initiative, too. Evidently, strategic initiatives cannot be static; they must be
dynamic for a business to maintain its advantage.

We have already mentioned Amazon.com’s one-click service. This unique feature, in

addition to brand-name recognition and excellent overall service, has given the company a
competitive advantage in the online retail industry. While the technologies of online catalogs,
search engines, payment processing, wish lists, and customer feedback have been adopted by
many online retailers and are no longer of strategic importance, the one-click feature is still a
strategic technology.

One recent example of how strategic advantage can be wiped out within just a few months is
in the Internet arena. Netscape Corporation dominated the Web browser market, which was new
in 1994. By allowing individual users to download its browser free, it cornered over 80 percent of
the market. The wide use of the browser by individuals moved commercial organizations to
purchase the product and the software compatible with the browser. Netscape’s dominance

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quickly diminished when Microsoft aggressively marketed its own browser, which many
perceived as at least as good as Netscape’s. Microsoft provided Internet Explorer free of charge to
anyone and then bundled it into the operating system software distributed with almost all PCs.
Even after the court-ordered unbundling, its browser still dominates. Microsoft now has over 85
percent of the browser market, while Netscape’s share has slipped to 12 percent.

Initiative #5: Differentiate Products and Services

A company can achieve a competitive advantage by persuading consumers that its product or
service is better than its competitors’, even if it’s not. Called product differentiation, this
advantage is usually achieved through advertising. Brand name success is a perfect example of
product differentiation. Think of Levi’s Jeans, Chanel and Lucky perfumes, ad Nautica clothes.
The customer buys the brand-name product, perceiving it to be superior to similar products. In
fact, some products are the same, but units sold under a prestigious brand name sell for higher
prices. You often see this phenomenon in the food, clothing, drug, and cosmetics markets.

The advent of the Internet as a business tool gives companies an opportunity to render a great
number of services through the Web and e-mail, from delivering new software applications to
answering frequently asked questions to presenting information about huge selection of items on
the Web in vivid color and animation. All are new services. While mimicking such services is
easy, companies that offered them first often manage to maintain a measure of competitive
advantage because the brand name they establish keeps attracting customers. For example,
Amazon.com established a name for itself as the predominant seller of books, music CDs, and
small appliances on the Web. Although Barnes & Noble, the big “brick and mortar” bookstore
chain, followed suit and established its own online store, it found luring customers away from
Amazon difficult. Clearly its brand name gives Amazon its great market share. Marketing experts
have acknowledged brand-name recognition as a key to success in retail on the Web. When
consumers look to purchase an item, they tend first to visit the sites that are more familiar. Online
businesses can increase brand-name recognition by inventing and implementing ISs that enhance
the shopping experience and the speed at which orders are fulfilled.

Initiative #6: Enhance Products or Services

Instead of differentiating a product or service, an organization may actually add to it to enhance

its value to the customer, called product or service enhancement. For example, car manufacturers
may entice customers by offering a longer warranty period for their cars, and real-estate agents
may attract more business by providing useful financing information to potential buyers.

Since the Internet opened its doors to commercial enterprises in the early 1990s, an increasing
number of companies have supplemented their products and services. Their Web sites provide
up-to-date information that helps customers utilize their purchased products better or receive
additional services. Companies that pioneered such Internet use reaped great rewards.

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 For example, Charles Schwab gained a huge competitive advantage over other, older
brokerage companies such as Merrill Lynch, by operating a site for online stock transactions.
Nearly half its revenue now comes from this site, while revenue from stock trading of “brick and
mortar” brokers constantly diminishes.

Initiative #7 Establish Alliances

Companies can gain competitive advantage by combining services to make them more attractive
(and usually less expensive) than purchasing services separately. These alliances provide two
draws for customers: combined service is cheaper and one-stop shopping is more convenient. The
travel industry is very aggressive in this area. For example, airlines collaborate with hotel chains
and car-rental firms to offer travel and lodging packages and with credit-card companies that
offer discount ticket purchases from particular airlines or the products of particular
manufacturers. Credit-card companies commonly offer frequent flier miles for every dollar spent.
In all these cases, alliances create competitive advantages.

By creating an alliance, organizations enjoy synergy: the combined profit for the allies from
the sales of a package of goods or services exceeds the profits earned when each acts
individually. Sometimes, the alliances form more than two organizations. Consider the benefits
American Express and its business partners offer. Clients who subscribe to a corporate charge
card receive a quarterly management report summarizing expenses by category and by employee,
a 10 percent discount on FedEx next-business-day delivery if they pay for shipping services the
American Express card, a 10 percent discount on Kinko’s product and copying services, a 2
percent discount on ExxonMobil gasoline purchases, and travel and lodging discounts from Hertz
and Hilton on car rentals and lodging respectively.

What is the common denominator of all these companies? An information system that tracks
all these transactions and discounts. A package of attractive deals entices clients who need all
these services (and most businesses do), why purchase them without discounts and other
benefits? Would this offer be feasible without an IS to track transactions and discount? Probably
not.

Growing Web use for e-commerce has pushed organizations to create alliances that would be
unimaginable a few years ago. Consider the alliance between Hewlett-Packard and FedEx. HP is
a leading manufacturer of computers and computer equipment, known primarily for its excellent
printers. FedEx, as we mentioned earlier, is a shipping company. HP maintains inventory of its
products at FedEx facilities. When customers order items from HP via its Web site, HP routes the
order, via the Web, to FedEx. FedEx packages the items and ships them to customers. This
arrangement lets HP ship ordered items within hours rather than days. The alliance gives HP an
advantage that other computer equipment makers do not share and gives HP a great volume of
business from FedEx orders.

On the Web, the best examples of alliances are affiliate programs. Anyone who maintains a
Web site can place links to commercial sites. Any purchase that results from clicking through to a
commercial site rewards the first site’s owner with a fee. Some online retailers have thousand of
affiliates. The early adopters of such programs, Amazon.com, Buy.com, Priceline, and other large
e-retailers, enjoyed a competitive advantage.

Initiative #8: Lock in Suppliers or Buyers

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Organizations can achieve competitive advantage if they are powerful enough to lock either
suppliers into their mode of operation or buyers to their product. Processing bargaining power—
the leverage to influence buyers and suppliers—is the key to this approach. As such, companies
so large that suppliers and buyers must listen to their demands use this tactic nearly excessively.

A firm gains bargaining power with a supplier either when the firm has few competitors or when
the firm is a major competitor in its industry. In the former case, the fewer the companies that
make up a supplier’s customer base, the more important each company is to the supplier; in the
latter case, the more important a specific company is to a supplier’s success, the greater
bargaining power that company has over that supplier.

The most common leverage in bargaining is purchase volume. Companies that spend millions
of dollars purchasing parts and services have the power to force their suppliers to conform to their
methods of operation, and even to shift some costs onto suppliers as part of the business
arrangement. Consider Wal-Mart, the world’s largest retailer. Not only does the company bring
suppliers in for meetings in a warehouse where it badgers them to provide the lowest prices, but it
also requires them to use information systems compatible with its own to automate processes.

One way to lock in buyers in a free market is to create the impression that an organization’s
product is significantly better than the competitors’, or to enjoy a situation in which customers
fear high switching costs. In the software arena, ERP (enterprise resource planning) applications
are a good example. This type of software helps organizations manage a wide array of options:
purchasing, manufacturing, human resources finance, and so forth. The software is expensive,
costing hundreds of thousands, or even millions of dollars. After a company purchase ERP
software from a firm, it’s locked to the firm’s services: training, implementation updates, and so
forth. Thus, companies that sell ERP software, such as SAP, Baan, PeopleSoft, J.D. Edwards, and
Oracle, make great efforts to improve both their software and support services to maintain
leadership in this market.

Another way to lock in clients is by creating a standard. The software industry has pursued
this strategy vigorously, especially in the Internet arena. For example, Microsoft’s decision to
give away its Web browser by letting both individuals and organizations download it free from its
site was not altruistic. Microsoft executives knew that the greater the number of Internet Explorer
(IE) users, the greater the user base. The greater the user base, the more likely organizations were
to purchase Microsoft’s proprietary software t help manage their Web sites. Also, once individual
users committed to IE as their main browser, they were likely to purchase Microsoft software that
enhanced the browser’s capabilities.

Similarly, Adobe gives away its Acrobat Reader software; an application that lets Web
surfers open and manipulate documents creates using different computers running different
operating systems, such as IBM and Mac. When the Reader user base became large enough,
organizations and individuals found it economically justifiable to purchase and use the writer
application (the application used to create the documents) and related applications. Using this
strategy put Adobe’s PDF (portable data format) standard in an unrivaled position.

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 S T R AT E G I C I N F O R M AT I O N A S A C OM P E T I T I V E W E A P O N

Companies can take some of the strategic initiatives just described using information systems. As
we mentioned at the beginning of the chapter, a strategic information system (SIS) is any
information system that can help an organization achieve a long-term competitive advantage. An
SIS can be created from scratch, developed by modifying an existing system, or “discovered” by
realizing that a system already in place can be used to strategic advantage. While companies
continue to explore new ways of devising SISs, some successful SISs resulted from less lofty
endeavors: the intention to improve mundane operations using IT yielded a system with strategic
qualities.

Strategic information systems combine two types of ideas: ideas for making potentially
winning business moves and ideas for harnessing information technology to implement the
moves. For an information system to be a SIS, two conditions must exist. First, the information
system must serve an organizational goal, rather than simply provide information; second, the IS
unit must work with managers of other functional units (including marketing, finance,
purchasing, human resources, and so on) to pursue the organizational goal.

Creating an IS

To develop an SIS, top management must be involved from initial consideration through
development and implementation. In other words, the SIS must be part of the overall
organizational strategic plan. There is always the danger that a new SIS will be considered the IS
unit’s exclusive property. However, to succeed the project must be a corporate effort, involving
all managers who will use the system.

The purpose of these systems is not simply to reduce cost or increase output per employee;
many create a whole new service or product. Some completely change the way an organization
does business, because so many fundamental business changes are involved, measuring financial
impact is difficult, if not impossible, even after implementation, let alone before. For example, if
a bank is considering offering a full range of financial services via the Web, how can
management know whether the move justifies the great cost of the special software? It is
extremely difficult to estimate the success of such a bold approach in terms of how many new
customers the bank would gain.

Reengineering and Organizational Change

Sometimes, to implement an SIS and achieve competitive advantage, organizations must rethink
the entire way they operate. While brainstorming about strategic plans, management should ask
“if we establish this business unit again from scratch, what processes would we implement and
how?” The answer to this question often leads to the decision to eliminate on set of operations
and build others from the ground up. Management consultants call changes such as these
reengineering. Reengineering often involves adaptation of new machinery and elimination of
management layers. Frequently, information technology plays an important role in this process.

Reengineering goal is not to gain small incremental cost savings but to achieve efficiency
leaps—of 100 percent and even 1000 percent. With that degree of improvement, a company
often gains competitive advantage. Interestingly, a company that undertakes reengineering along
with implementing a new SIS cannot always tell whether the SIS was successful. The

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reengineering process makes it impossible to determine how much each change contributed to the
organization’s improved position.

Implementation of an SIS requires a business revamp process—to undergo organizational

change—to gain an advantage. For example, when GM decided to manufacture a new car that
would compete with Japanese cars, it chose a production process totally different of that of its
other cars. Management first identified goals that could make the new car successful in terms of
how to build it and also how to deliver and service it. Realizing that none of its existing division
could meet these goals because of their organizational structure, their cultures, and their
inadequate ISs, management established Saturn as an independent company with a completely
separate operation.

Part of GM’s initiative was recognizing the importance of Saturn dealerships in gaining
competitive advantage. Through satellite communications, the new company gave dealers access
to factory information. Clients could find out if, and exactly when, different cars with different
features would be available.

Another feature of Saturn’s SIS was improved customer service. Saturn embeds an electronic
computer chip in the chassis of its car. The chip maintains a record of the cars technical details
and the owner’s name. When the car is serviced after the sale, new information is added to the
chip. At their first service visit, many Saturn owners were surprised to be greeted by name as
they rolled down their windows. While the quality of the car itself has been important to Saturn’s
success, the new SIS also played an important role.

Competitive advantage as a moving target

As you may have guess, competitive advantage is not long lasting. In time, competitors imitate
the leader, and advantage diminishes. So, the quest for innovative for strategies must be
dynamic. Corporations must continuously contemplate new ways to use information technology
to their advantage. In a way, companies’ jockeying for the latest competitive advantage is lot like
an arms race. Side A develops an advanced weapon, and then Side B develops a similar weapon
that terminates the advantage of Side A, and so on.

In an environment when most information technology is available to all, all SISs originally
develop to create a strategic advantage quickly become an expected standard business practice. A
prime example is the banking industry, where surveys indicate that increased IS costs did not
yield long—strategic advantages. The few banks that provided services such as ATMs and
banking by phone once had a powerful strategic advantage, but now almost every bank provides
these services. Home banking, the popular name for banking from a home PC, provided some
banks a moderate advantage but quickly became a staple for many banks. The next wave Web-
based banking, attractive Web-savvy client to some banks but did not improved any particular
bank’s profit because the technology is immediately available to all.

A system can only help a company sustain competitive advantage if the company
continuously modifies and enhances it, creating a moving target for competitors. American
Airlines’ SABRE—the online reservation system for travel agents—is a classic example. The
innovative IS was designed in the late 1970s to expedite airline reservation and sell travel
agencies a new service. But over the years, the company spun off an office automation package

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for travel agencies called Agency Data Systems. The reservation system now encompasses hotel
reservations, car rentals, train schedule, theatre tickets, and limousine rentals. It also provides a
feature that lets travelers SABRE from their own computers. The system has been so successful
that in some years American earned more from it than its airline operations. The organizational
unit that developed and operated the software became a separate IT powerhouse at AMR, the
parent company of American Airlines, and now operates as Sabre Inc., an AMR subsidiary. It is
the leading provider of technology for the travel industry. Chances are you are using its
technology when you make airline reservation through the Web.

Another example is Amazon.com. Management believes that it must add new features to its
website to attract buyers back over and over again. The company continuously improves its Web
pages’ look and the online services it provides. It moved from merely selling books through the
Web to providing bestseller list, readers’ reviews, authors’ interviews, consumer wish list,
product reviews by customers, and other “cool stuff.”

Sources of strategic information systems

Many strategic information systems are not the fruits of calculated plans or forethought. Usually,
they evolve because managers recognize that they can use an existing system to create a strategic
competitive advantage. Strategic information systems have evolved from systems design for
automation or from systems design to provide a new service or enhance an existing service, for
example State Street Banks simply wanted to automate management of its pension funds and
enhance its ISs over the years. However, because these systems were so advanced and because
other pension-management institutions have no advanced ISs for this purpose, competitors started
paying State Street for use of its ISs. These ISs became strategic weapons. SISs have also
evolved from profitability using excess information that a company’s existing IS collected, or
from using customer data to expand an existing business into complementary businesses. For
years, credit bureaus such as Experian, TransUnion, and Equifax have collected data to sell credit
reports to financial institutions and other clients, but they also sell the data to any organization for
purposes other the credit checks, such as target marketing.

Although many SISs are based on existing technology, sometimes an advance in technology
creates an opportunity for an SIS. Technological advances in themselves do not guaranty strategic
advantage, but smart use of technology can make the difference between leading and lagging
behind. Often, the new idea gives the organization the competitive advantage.

From Automation to SISs - many companies originally developed SISs to automate manual
processes. Such is the case ASAP, the information system that lets giant hospital supplier Baxter
International Inc.’s customers place orders electronically and receive products more quickly than
ever before. In 1978 American Hospital Supply Corporation (AHS), now part of Baxter
Healthcare Corporation and one of America’s largest providers of medical supplies decided that
shortening the time between receiving and shipping an order would give it a competitive
advantage. That year the company installed ASAP (Analytic Systems Automatic Purchasing), a
new information system, to help the company achieve its goal. The system integrated shipping,
billing, invoicing, and inventory data and information, allowing the company to improve its
service.

AHS took an innovative step facilitate communication with customers: it offered to pay for
and install terminals and software in its customers’ hospital offices, so that hospital personnel

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could enter and transmit orders electronically. No more paperwork for the hospital, and
immediate useful data for AHS. Pretty soon, the hospitals realized that they not only received
their orders quickly but also spent much less time placing orders. The hospitals eventually
preferred working only with AHS for all items AHS could sell them. AHS enjoyed a 17 percent
compound annual growth rate in sales. With accurate up-to-date order data available at any time,
AHS reduced inventory and lowered sales costs, reaping a profit four times the industry average.

In time, other hospital suppliers adopted similar systems, but hospitals hooked into ASAP
had every reason to stay with AHS. The already had hardware and software installed and
personnel trained to use the system. Switching to another purchasing system would have been too
costly. What started as an automation system turned into an SIS. AHS gained competitive
advantage by providing enhanced services and incidentally creating high switching cost for its
customers.

SIS from a New service - Another famous example of an SIS is Merrill Lynch’s Cash
Management Account, or CMA account. In 1980 for the first time, clients could withdraw cash
from their investments directly, rather than having to sell shares and wait for checks to clear
before accessing their money. Merrill Lynch made this possible by establishing an alliance with a
bank to provide a combined investment and banking service that was much more efficient to the
customer. Is the late 1970s, the concept of central asset account (also called an asset management
account) was revolutionary. Only a computer-based information system could promptly track
every investment and withdrawal of millions of client dollars efficiently and effectively.

Before Merrill Lynch’s CMA account, a customer needed two separate accounts to access the
cash value of his or her stocks or mutual funds: one account with a stock broker (to invest money
in stock and other securities) and another with a bank (to maintain a checking account). The
customer could access the cash value of the stock only by first selling some stock through the
stock brokerage account, then depositing the sales proceeds in a checking account, and finally
waiting for the deposit to clear before writing a check. The process was time-consuming and
inefficient.

With Merrill Lynch’s CMA service, every dollar that a consumer deposits buys shares in a
money-market fund. All the customer does to liquidate some of his or her account is written a
check. Shares of the mutual fund are automatically redeemed. The customer does not need to wait
to receive money from the broker and then deposit it in a checking account.

At the time, this service was revolutionary. Many corporations, small businesses, and
individuals subscribed to the service. By the time other organizations followed suit, Merrill
Lynch have captured the lion’s share of the market.

SISs from new technology - Often, the technology involved in an SIS has been around for
some time, just waiting to be used strategically. Sometimes, however, a new technology sparks a
major change in the way a firm does business. For instance, progress in telecommunications
technology now let’s organizations connect their branches across continents into one large
network of offices. This network turns disparate sites into one large virtual site capable of
providing information to any member of the organization and any customer, anywhere, at
anytime via dedicated lines or the Internet. A new technology may be available to anyone in the
industry, but the company that figures out how to harness it gains competitive advantages.

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 SISs from excess information - Sometimes, the potential for a strategic move is in a firm’s
existing information system. In fact, many companies collect huge amounts of data that are not
necessary for their own business, but may put them to use in a new service or complementary
product. For instance web-based content providers often request subscribers to type in personal
information that has nothing to do with operating the site. However, they sell the personal data of
other organizations. The highly trafficked sites generate a significant portion of their revenue
from such sales, which allow them to further invest in the site and attract more visitors.

The proliferation of the Web as a commercial vehicle has enhanced the ability to collect
consumer and corporate data by anyone who maintains a Web site. Millions of consumers
voluntarily provide personal information.

Looking for strategic use of its information, a company should ask these three questions:

1. What information that we generate, or could generate, from our databases could another
company use? What would that company be willing to pay?
2. What information, or data-trafficking capacity, that we have can we use to start a new
business?
3. Can we produce information that may help create new products (or services), or to other
companies’ products (or services)?

Modern approaches to data resources regard them as gold mines: the gold is there; it only
needs to be mined. Similarly, data that can be used in one of the three situations listed may
become strategic resource. As you will learn in chapter 8, “data and knowledge management’”
searching for useful data in huge amounts of records, indeed, is called “data mining.”

SISs from vertical information - When you shop for a new car, dealers offer you two
services. First, they offer to take your old car as a trade-in. second, they offer to help you finance
the purchase of the new car. Why do they offer these services? Because they understand that they
solve the two main problems you’re likely to have when shopping for a new car. Dealers stretch
their business “backwardforward,” an effort known as vertical extension, to enhance their chances
of getting your business.

Consider real-estate agencies. Real-estates agents expand their services vertically to offer
financing information you need before you purchase and relocation information that you need
after your purchase. The agency can ask you for information that will help moving companies
make you an offer as soon as you purchase your new home. Realtors who extend their services
vertically are more appealing to some clients.

Attracting new customers and maintaining the ones you have is a constant challenge for
online service providers. Therefore, they use software and links with other companies to offer
additional services every few months. For example, brokerage sites offer financial advice such as
investment portfolio allocation and retirement planning.

S U C C E S S A N D FA I L U R E O N T H E W E B

The statistics are staggering: according to the research firm Webmergers.com, between
January 2000 and June 2001, 435 “substantial” dot-coms shut down, and nearly half of them were

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e-commerce companies. In the late 1990s many companies rush to open businesses, or expand
their existing businesses, on the Web. At first glance it seemed that anyone who first
implemented a business idea on the Web was going to succeed, but the results were disastrous for
many investors in these companies. In 2000 and 2001 flurry of dot-com failures, everybody
realized that the business idea must be sound. For instance, simply letting consumers order items
from their PCs without thoroughly analyzing what they need and want may lead to failure.
Furthermore, investing millions of dollars in a business that cannot offer something unique does
not make sense. This is true offline as well as online.

On the Web, being the first to market or to use a new technology does not guarantee success.
Consider the most recognized brand name on the Web, Amazon.com. Amazon’s strategy was
simple: to build the largest retail store on the Web, advertise endlessly to herald its name, use
Web technologies that nobody used before, and hold prices extremely low—even below cost—
until it established a huge market share. Then, when millions of people were used to purchasing
from Amazon, it planned to increase prices gradually, and to leverage its market share to make
profit. When established in 1995, the company actually planned not to turn a profit before 2003.
But pressures forced the company to change its plans. So, how has it done?

Indeed, the company has established the greatest brand name online. It has also used great
Web software and provided superb customer service. However, it has not performed, overall,
better than its competitors. Observers are afraid that the company will never be profitable.
Competitors soon adopted the same technologies that Amazon used. The only valuable service
that differentiates it from competitors, the patented on-click shopping, seems not to be enough to
convince consumers to purchase at the company’s site. Apparently, price is more important to
consumers, and some items have been sold for less elsewhere. Web shoppers now use
comparative shopping tools as offered by MySimon.com, ScanIt, and DealTime.com to look for
the lowest price of the item they wish to purchase. As to the convenience of the online purchase,
few people are bothered by the fact that they have to click twice rather than once. Amazon’s
major competitors use the same features that were, for a brief time, so innovative at its site:
customer wish list, customer reviews of products, and customer assistance by offering items
related to those a consumer is purchasing.

Strategic plans do not always materialize. Amazon.com hoped to be mainly an electronic link
between manufacturers, or wholesalers, and consumers. It main capital investment was supposed
to be in IT. Yet, Amazon.com and its imitators soon found out that to keep up with increasing
online orders they needed warehouses and inventory. In 2001 Amazon.com found itself owning
eight distribution centers across the U.S., covering 3.8 million square feet. The company has
fixed assets (such as buildings, furniture, and equipment) worth over $366 million and an
inventory worth $174. And despite its 2001 revenue of $2.7 billion it has been profitable.

Businesses that have succeeded on the Web rely on business models that enabled them to
generate profits quickly. So they would not have to lose money selling below cost or rely on
repeated investor cash infusions. A case in point is eBay, the Web-based auction site. The
company does not sell any product directly and therefore has never had to invest money in
warehouses and distribution centers (as have Amazon and other online retailers). Furthermore, it
makes money one very transaction executed thru its site. The transaction takes place between a
bidder and a seller, and eBay collects a fee. The company’s only major investment is information
technology: hardware, software, and telecommunications devices. Like Amazon, eBay’s
competitive advantage is not in its technology, which can be emulated by competitors, but in the

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name recognition and the trust customers have in the site. However, while Amazon faces many
competitors, including the e-commerce arms of traditional retailers, eBay faces little competition.
At auction sites, “customers” look to offer items for sale or for items on which to bid; eBay does
not intervene in the pricing of these items. As long as it can maintain competitive fees, it can
remain the most successful auction site. The Amazons of the world, on the other hand, are judged
by the prices of items that they purchase from manufacturers and resell. Their success heavily
depends on how efficiently they operate distribution centers and how quickly the shipping
companies get merchandise to customers.

Thousands of Web businesses have already shut their doors. eToys was the largest online toy
retailer. For some time, the total value of its shares was greater than the shares’ value of Toys R
Us, the large “brick and mortar” toy chain. Yet, it d=faced many competitors, could not achieve
profitability, and went bankrupted in 2001. So did Toysmart.com and many other online retailers.
These companies failed to implement the requirements for strategic advantage: others soon
emulated the new service they offered. They could not lock suppliers or customers. Even when
they lowered to just compete on cost, so did their competitors and none could attain great leaps in
efficiency. In other words, the dream of being a totally virtual retailer did not materialize. Online
merchants, like traditional ones, had to maintain large inventories in huge warehouses; they could
not simply have all items shipped directly from manufacturers to consumers.

Sometimes a strategic move fails simply because it comes too late to capture any significant
market share. Analysts say this was the reason for shutting down Go.com. In January 1999 the
Disney Company established Go.com as a portal. The site failed to draw significant traffic. In
January 2001 the company announced the portal’s demise. Was the reason for failure really in
coming late to a Web that already had portals such as Yahoo! and AOL? Perhaps it was, but
simply being first does not guarantee success. In the early days of the Web, before the word
portal had even been invented, TimeWarner (now part of AOL-TmieWarner) established the
Pathfinder site. The site was supposed to promote online content provided by Time Inc.
magazines, such as Time, Sports Illustrated, and People. After pouring millions of dollars into
developing and updating the site, TimeWarner eventually shut down Pathfinder, saying that most
readers were going directly to the magazine Web sites. Pathfinder might have been either a case
of an idea before its time, or lack of focus on what Web surfers expected.

To succeed, Web businesses must offer a new product or service for which other
organizations or consumers are willing to pay. If they sell physical goods, they must overcome
the traditional retail fulfillment challenge: shipping the items so they reach the customer’s doors
within hours. They must create barriers to entrants, which most companies have so far not been
able to do on the Web since technological innovations soon become common place off-the-shelf
purchases, such as online catalogs, order processing, and payment processing software
applications. They must create high switching cost for their customers, which virtually no
company has managed to do on the Web: the competition is just a click away. Finally, they have
to create strategic alliance. In their struggles, many online companies did merge, create alliances
with their competitors or ally themselves with related businesses. Some chose to collaborate with
traditional businesses. Several online retailers have become the arm of brick-and-mortar
businesses. Such alliances may gain strategic advantages for some time.

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 THE BLEEDING EDGE

As you may often hear, huge rewards go to whoever first implements a new idea. Innovators may
enjoy a strategies advantage until competitors discover the benefits of a new business idea or a
new technology. However, as you saw on the case of MortgagePower Plus and the examples of
failure on the Web, taking such steps before competitors have tested a system involves great risk.
In some cases, failure results from rushing implementation without adequately testing a market.
But even with more planning, pioneers sometimes get burned.

For example, several supermarket chains tried self-check stations in the mid-1990s.
Consumers were expected to ring up the items they purchased. By and large, investment in such
devices failed not because the new technology was bad, but because many consumers either
preferred the human touch, or because they did not want to learn how to correct mistakes when
the devices did not pick up the price it up twice.

While it is tempting to take the lead, the risk of business failure is quite high. Several
organizations have experienced disasters with new business ideas, which are only magnified
when implementing new technology. When failure occurs because an organization tries to be on
the technological leading edge, observers call it bleeding edge. The pioneering organization
“bleeds” cash on a technology that increase costs instead of profits. Adopting a new technology
involves great risk: there is no experience from which to learn, no guarantees that the technology
will work well, and no certainty that customers and employees will welcome it.

Being on the bleeding edge often means that implementation costs are significantly more than
anticipated, the new technology does not work as well as expected, or that the parties who were
supposed to benefit—employees, customers, or suppliers—do not like using it. Thus, instead of
leading, the organization ends up “bleeding,” that is, suffering from high cost and lost market
share. For this reason, some organizations decide to let competitors test new technology before
they adopt it. They risk losing the initial rewards they might reap, but if a competitor succeeds,
they can quickly adopt the technology and even try to use it better than the pioneering
organization.

Microsoft generally takes this approach. It seizes an existing idea, improves it and promotes the
result with its great marketing power. For instance, the company did not invent word processing
but its Word is the most popular word-processing application today. The company did not invent
the electronic spreadsheet, but its Excel is the most popular spreadsheet application. And
Microsoft was not the first to introduce a PC database management application, but it sells the
highly Access, a PC database management application. The company joined the Internet rush
late, but it developed and gave a way Internet Explorer, a Web browser that competed with the
highly popular Netscape navigator and now dominates the market (in part because it was given
free to everyone, including for-profit businesses). You may call this approach “competing by
emulating and improving,” rather than competing by being on the leading edge.

Additional Readings from the INTERNET

1). http://en.wikipedia.org
References:

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1) Oz, Effy: Management Information Systems Third edition, Thomson Learning
Center, 5 Shenton Way UIC Building, Singapore 2002.

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