4-1 Chapter 4 Information Systems Investment & Strategic Advantage “The most important discoveries...

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Chapter 4

Information Systems Investment & Strategic Advantage

“The most important discoveries of the next 50 years are likely to be ones of which we cannot now

even conceive.”

Sir John Maddox, 1999

Dr. Ali Zolait - Information Systems Today: Managing in the Digital World

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1) Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.

2) Describe how to formulate and present the business case for an information system.

3) Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.

4) Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.

Learning Objectives


Valuing Information Systems

• Information systems can have strategic value to an organization

• Information systems can be used in three ways to add value to an organization:

1. Automating

2. Informating

3. Strategizing

4-3Dr. Ali Zolait - Information Systems Today: Managing in the Digital World

IS for Automating: Doing Things Faster

• With automation, tasks can be completed:o Fastero Cheapero More accuratelyo With greater

consistency


Automating: Example

• Loan processing comparison for 3 methods (from the moment the customer takes the application until the applicant is notified of decision)o Manual loan process—25 to 40 dayso Technology-supported process—5 to 20 dayso Fully automated process—1 hour to 15 days


IS for Organizational Learning: Doing Things Better

• Information systems can also be used to:o Learn about

processeso Improve

processeso Support

organizational learning


Informating: Example• Computer-based

loan system identifies peak times during the year when specific loans are processed


IS for Supporting Strategy: Doing Things Smarter

• IS used to gain or sustain competitive advantageo Turning benefits

of automating and informating into strategic advantage


Strategizing: Five Types of Organizational Strategies

• Organizational strategies define the way in which a company plans to gain/sustain competitive advantage

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Source: Courtesy A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (Homewood, III.: Richard D. Irwin, 1995).


Overall Low Cost Leadership Strategy

• Offer best prices in the industry or product/service category

• Broad focuso Wal-Mart

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Broad Differentiation Strategy

• Offer better products/services than competitors

• Broad Focuso Nordstrom

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Focused Low-Cost Strategy

• Offer best prices in the industry or product/service in specific category

• Focus on nicheo Dell

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Focused Differentiation Strategy

• Offer better products/services than competitors

• Focus on nicheo Apple

•High-quality computers

•Home and educational markets

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Best-Cost Provider Strategy

• Provide products of reasonably good quality at competitive priceso Target

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Sources of Competitive Advantage1. Best-made product on the market2. Superior customer service3. Achieving lower costs than rivals4. Having proprietary manufacturing technology5. Having shorter lead times in research and

development projects6. Having a well-known brand name and

reputation7. Giving customers more value for their money


Competitive Advantage• Manager use value chain Analysis to

identify opportunities to use information systems for competitive advantage?

• Look at organization as big input/output process

• Porter’s Value Chain


Value Chain Analysis• Tool used by managers to identify opportunities

for gaining competitive advantageo Analyzing an organization activities to determine

where value added to product & cost incurred


IS and Value Chain Analysis• Information systems use in adding value:

oUse of InternetoUse of Extranet/Intranet


Learning Objectives

1. Discuss how organizations can use information systems for automation, organizational learning, and strategic advantage.

2. Describe how to formulate and present the business case for an information system.

3. Explain why and how companies are continually looking for innovative ways to use information systems for competitive advantage.

4. Describe freeconomics and how organizations can leverage digital technologies to provide free goods and services to customers as a business strategy for gaining a competitive advantage.


Making the Business Case for an IS• Identification of benefits that the

proposed information system will bring to the organizationoAutomating benefitso Informating benefits Lawyers defense

oStrategic benefits

• People ask for justification, quantifying why they should spend on IS

• Presenting the value provided by IS4-20Dr. Ali Zolait - Information Systems Today: Managing in the

Digital World

What Dose Making the Business Case for an IS Mean?

Productivity Gains

• Easy to identify costs with developing an IS

• Difficult to identify productivity gainsoThere are limitation to productivity gains with

development of an IS

• Why hasn’t productivity increased at the rate of IS investments?o IS may have increased productivity, but

other forces simultaneously may work to reduce it


The Productivity Paradox• Information systems may be used

in unintended ways, employees spending time on oWeb surfingoJunk mailoGames


Measurement Problems

• IS Benefits difficult to quantifyoWrong things

measured•efficiency vs.

effectiveness

• Example: ATM


Time Lags

• Benefits do not always occur at the same time IS is implementedo Some IS/IT

implementation requires people to gain experience

o System must be integrated with existing systems


Redistribution

• IS may be beneficial for individual firms but not for a particular industry

• IS may redistribute the pieces of the pie rather than make the pie biggero Increases in market share

come at the expense of the competitors’ market share


Mismanagement

• Bad business model cannot be overcome by good information systemo IS implementation

poorly, or as a temporary fix

o Creation of unanticipated bottlenecks


Making a Successful Business Case• Difficult to quantify

benefits of IS• Money doesn’t grow

on trees• Need to make a

strong business case & managers arguments are o Based on: (3Fs)

•Faith•Fear•Facts


Fiction

Arguments Based on Faith

• Arguments based on beliefs about:o Organizational

strategyo Competitive

advantageo Industry forceso Customer perceptions

• Example: Procter & Gamble


Arguments Based on Fear• Arguments based on

the notion that if system is not implemented:o Company loses to a

competitoro Goes out of business

• Example: Automotive industry


Factors in IS Investment Decisions

• Often considered when presenting arguments based on fear


Porter’s Five Forces Model

• Framework used to analyze competition within an industry


Arguments Based on Fact

• Arguments based on:oDataoQuantitative

analysiso Indisputable

factors


Arguments Based on Fact (cont’d)

• Primary tools: oCost-benefit analysis

• Identify costs

• Identify benefits

•Contrast expected costs and benefits

oWeighted multicriteria analysis


Cost-Benefit Analysis

• Identifying costsoTotal cost of ownership (TCO)

•Cost of acquisition

•Cost of use

•Cost of maintenance

oRecurring vs. nonrecurring costsoTangible vs. intangible costs


Cost-Benefit Analysis (cont’d)

• Identifying BenefitsoTangible benefits

•5 percent increase in sales

•Reduction of order entry errors

o Intangible benefits• Improvement to customer service

• Improvement in overall perception of a firm


Cost-Benefit Analysis (cont’d)

• Contrasts total expected tangible costs with total tangible benefitsoBreak-even analysis—identifies the point

when tangible costs equal tangible benefitsoNet-present-value analysis—identifies the

present value of future cash flows

• Comparing computing investment


Comparing computing investment • Weighted Multicriteria Analysis

o Method used for deciding between alternative IS investments or alternatives of the same system


Presenting the Business Case• Persuade decision makers in the firm

oKnow the audienceo Identify stakeholder groups


Presenting the Business Case (cont’d)

• Convert benefits to monetary terms


Presenting the Business Case (cont’d)

• Devise proxy variableso Used when clear-cut assessment is not possible

•Measures of perceived value of change to the organization

• Measure what is important to managemento Case becomes more meaningfulo Focus on senior management’s “hot button” issues

• Hot issues for the senior managers could be the cycle time (how long it takes to process an order), customer feedback…etc


Assessing Value for IS Infrastructure

• Present holistic view o Economic value (contribution)o Architectural value (ability to extend infrastructure) o Operational value (measure the cost of not investing)o Regulatory and compliance value (measure the

impact)

• View IS as asset rather than necessary expense


Howard Rubin, president of Meta group argued that , when assessing IS value

Learning Objectives






Valuing Innovations• Which new technology will make or break your

business?


Successful Innovation Is Difficult• Innovation is often fleeting

o The advantages gained from innovations are often short lived

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Innovation is often risky Sometimes even superior

products can lose the race Blu-ray vs. HD DVD

Innovation choices are often difficult Foreseeing the future is not always possible

In 1994 the Internet was not given much attention


Organizational Requirements for Innovation

• Process requirements—the organization has to be willing to do whatever it takes to implement the change

• Resource requirements—need to have the human capital necessary for successful deployment of the system

• Risk tolerance requirements—organizational members must have appropriate tolerance of risk and uncertainty


Competitive environments require that organizations must remain at the cutting edge their use of IS

Predicting the Next New Thing• Deciding which innovations to adopt is very

difficult

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Diffusion of Innovations Classic view

of adoption of innovations


The Innovator’s Dilemma• Disruptive innovations

o New technologies, products, or services that eventually surpass dominant technologies

•Online vs. brick-and-mortar retailing

•Automobiles vs. horses

•CDs vs. records

•MP3 vs. CDso Undermine effective management practices


Disruptive Innovations• 1970s:

mid- and high-performance users were bulk of the market

• Digital Equipment Company (DEC) tried to sell to those markets

• Microcomputers seen as “toys”


Disruptive Innovations (cont’d)

• 1980s:Microcomputers focusing on low-performance users’ needs

• Ignored by DEC


Disruptive Innovations (cont’d)• 1990s:

Growing performance of Microcomputers, meeting mid-performance users’ needs

• DEC lost biggest market segment


Disruptive Innovations (cont’d)• Today, micro-

computers meeting entire market’s needs

• DEC out of business

• Next disruptive innovation: 3G and 4G mobile phones?


The Innovator’s Solution• Christensen outlines a process—

disruptive growth engine—that helps organizations respond to disruptive innovations more effectively

1. Start early

2. Executive leadership

3. Build a team of expert innovators

4. Educate the organization


Implementing the Innovation Process

• E-Business Innovation Cycleo The model

holds that the key to success is the extent of IS use in timely and innovative ways

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Based on: Wheeler (2002)


E-Business Innovation CycleChoosing Enabling/Emerging Technologies

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Organization first jobs, groups and Process that all devoted to looking for emerging IT



E-Business Innovation Cycle (cont’d)Matching Technologies to Opportunities

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Most promising new technology matched with current economic opportunities



E-Business Innovation Cycle (cont’d)

Executing Business Innovation for Growth

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Stage at which the change is actually implemented



E-Business Innovation Cycle (cont’d)

Assessing Value

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Value created for customers and internal operations assessed



Three Ways to Think About Investments in Disruptive Innovations

• Put technology ahead of strategy o Technology is so important to success it needs to be

considered first.o Strategy is developed afterwards.

• Put technology ahead of marketingo Rapid development of technology makes it

impossible for people to know what they want.

• Innovation is continuouso New technologies are constantly being developed.


Learning Objectives






Freeconomics• FREECONOMICS—The leveraging of

digital technologies to provide free goods and services to customers as a business strategy for gaining competitive advantage


How Does Freeconomics Work (for Yahoo!)

• From Yahoo! free e-mail service


The Freeconomic Value Proposition• What a business

provides to a customer and what that customer is willing to pay for that product or service


A broad ecosystem of many participants

Approaches for Applying Freeconomics

• Advertising

• Freemium

• Cross-Subsidies

• Zero Marginal Cost

• Labor Exchange

• Gift Economy


END OF CHAPTER CONTENT


Opening Case: Managing in the Digital World: TiVo

• Unprecedented control over television viewingo Automatic recording of

favorite showso Scheduling using the Webo Pause a show and

resume it latero Search by actors or a type

of a showo View photos on your TVo Burn DVDs


The IT Department Often Knows

• Strategies to grapple with ethical decisionso IT equipment and data use policy

•Whistle-blower provision

oReport violations, then let company handle ito IT professionals should develop “Code of

Ethics”


Rootkits: Sony’s Secret

• Sony BMG Music Entertainment was using “rootkit” to copyright protect CDsoRootkit was installed on users’ hard drives

without their knowledgeoLeft computers vulnerable to malicious

intruders—Trojan horses usedoRootkit was discontinued and uninstall

instructions were given to affected customers


Microsoft’s Bill Gates and Paul Allen

• Both dropped out of college to run Micro-Soft in 1975

• Partnership with IBM to install MS-DOS on all PCs set the stage

• Gates’ worth—$58 Billion

• Allen’s worth—$16.8 Billion


Who Is Sharing Files?

Active consumersAccustomed to on-demand lifestyle

Informed about current eventsInternet is primary source

Conversations focused on tech gadgets, car accessories, home theater setups

Many were Mac usersGamersFrustrated with music and entertainment

industries for punishing them


For Sale by Owner: Your Company’s Name.com

• Domainers—buy and sell domain nameso 2006—$9 billion businesso 2009—projected to be worth $23 billion

• Ad space rentingo Domainer registers URL such as Amazon.como Webpage with advertisements is displayedo Search engine owner pays money to the domainer

for each click on an ad


What Were You Thinking? Brain Sensor Research for Market Research

• EmSenseoEEG sensor headsetoData on EEG, monitors breathing and heart

rate, head motion, blink rate, and skin temperature. Moreover, the company has also devised algorithms that translate physiological data from the sensors into information about emotions that marketers can use.

• Game designers can tell when players are involved or bored

• Scientists argue that EEG is not as reliable as MRI


Photo Industry

• In only four years (2002-2006) photography moved from film to digitalo Canon, Konica Minolta no longer make film modelso Nikon makes two film models:

•One for professional photographers

•One for beginners

• Business models changed rapidlyo Digital technology was a disruptive innovation for

the photo industry


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