Using IT to Achieve a Competitive Advantage

Presented by:Paula Hayes, Tara Hines, Bill

Krampe and Andy Roth

“I guess we’ve always known that information gives you a certain power, but the degree to which we can retrieve it in our computer really does give us the power of competitive advantage”

Sam Walton from Made in America: My Story, Doubleday, 1992

What is IT?

Information Technology is the amalgamation of hardware, software, data, people, and procedures that enables or inhibits business objectives depending on management’s involvement in IT.

IS480 lecture notes, Lacity, Fall 2001

Using IT to Achieve a Competitive Advantage Creating the Competitive

Advantage

Features and examples of successful systems

Sustaining the competitive advantage through IT

Strategic Information Systems Implement systems that cannot be easily

duplicated

Develop an SIS that can be integrated with unique ideas and practical design solutions at the end user level

Develop an SIS that can transform the whole business

The Grassroots of IT and Strategy by Claudio Ciborra, 1994

Nature of Information Technology, Lacity, Fall 2001

• Implements structures, processes, and staffing to fill other 8 roles

• Alignment of IS strategy and business

• Fosters relationships with senior management

IS LeadershipContribution to Business Operations

Critical

Service

excellence

Service

excellence

Useful

Low cost

Migrate/ Eliminate

Commodity Differentiate

Contribution to Business Positioning

Creating Competitive Advantage through IT Lowering costs

Enhancing differentiation

Changing competitive scope

How Information Gives You Competitive Advantage, by M. E. Porter and V. E. Millar, 1985

Success Stories Frito-Lay – first to use hand held

computers (HHC) in their ordering system

Boeing – high speed, 2 way Internet and live television services to aircraft in flight (Connexion)

American Airlines – SABRE system

PepsiCo 2000 Annual Report

Frito-Lay Sales 2000

PepsiCo 2000 Annual Report

Frito-Lay Market Share 2000

PepsiCo 2000 Annual Report

Lay’s Potato Chips Ruffles Potato

Chips Doritos Tortilla

Chips 3D’s Snacks Tostitos Tortilla

Chips Cheetos Cheese

Flavored Snacks

Sunchips Cracker Jack Grandma’s

Cookies Chester’s Popcorn Funyuns Onion

Rings Rold Gold Pretzels Orbertos Meat

Snacks

Customers Grocery Stores Convenience Stores Gas Stations Restaurants Bars Vending Machines

IT at Frito-Lay

The Sr. VP of Technology is Arthur B. Anderson

Expert Advice - Timing is Everything - CIO Magazine September 1, 1997

Critical Difference Frito-Lay introduced its now classic

inventory replenishment system using handheld computing technology.

Allowed Frito-lay to differentiate itself from other snack companies in service to its grocery store customers and to reposition itself as a technology leader.

Charles Feld - Tough Optimist - CIO Magazine September 15, 1997

The Pioneer Charles Feld

Vice president of MIS Frito-lay 1983-1992

Was able to translate complex technical issues into business issues for upper management and to help them sort out priorities.

Able to build consensus in an organization

Survival Tips from the Pioneers - Early Adopters - CIO Magazine March 15, 2001

The Problem The field sales guys technically

owned the merchandise once they took it out of the warehouse

Their day wasn’t done until the books were settled

Survival Tips from the Pioneers - Early Adopters - CIO Magazine March 15, 2001

The Solution First-generation handheld computers

(HHC) in 1986

Based on a Fujitsu device with a home grown application

HHCs would transmit daily sales figures back to the corporate mainframe in Plano, TX

Survival Tips from the Pioneers - Early Adopters - CIO Magazine March 15, 2001

The Problems Very few vendors with this

technology

There were no standards for hardward, software or radio frequency data transmissions

The skeptics believed it would never be as reliable as the manual system

Survival Tips from the Pioneers - Early Adopters - CIO Magazine March 15, 2001

The Benefits Frito-lay was able to change prices on

products quickly.

Frito-lay could have different prices for different geographic regions.

The system paid for itself from day one because the sales force agreed to give up 1 percent of their sales budgets to fund it.

http://www.smeal.psu.edu/misweb/infosys/emiscase.html

Frito-Lays Information System Everyday 10,000 salespeople use

handheld computers to track the 14 million Frito-Lay products sold off shelves and vending machines.

It is combined with other data into a gigantic database used to generate vital market information.

http://www.smeal.psu.edu/misweb/infosys/emiscase.html

The Result Because the database is updated

daily, Frito-lay has access to almost real-time information on every aspect of their business.

Financial, historical, and competitive data.

http://www.smeal.psu.edu/misweb/infosys/emiscase.html

The Competitive Advantage

Tightens the link between every function involved in making, distributing and selling the products. Helps to locate potential problems in

maintaining sales levels and market share.

Helps reduce the costs of supplies.

Used to automate the production scheduling process for the chips as they come off the line.

http://www.smeal.psu.edu/misweb/infosys/emiscase.html

The Most Important Advantage The most important advantage of

Frito-Lays information systems comes through centralizing data yet allowing managers of regional operations access to this vast database and software to use it effectively in a distributed processing environment.

http://www.smeal.psu.edu/misweb/infosys/emiscase.html

The Customer Frito-Lay salespersons can key in

orders for each customer on-the-spot.

Customer receives a printout of the order and a receipt, with tax, discounts, and promotions and no errors.

Faster delivery and less “stales”

• Heritage—Airplane maker founded in 1916, Seattle, Washington

• Today • Largest aerospace company in the world; largest

manufacturer of commercial airplanes, military aircraft and satellites

• 198,000 employees• Major operations in 27 states, Canada and Australia• Customers in 145 countries

The Boeing Company

http://www.boeing.com

Company Leadership

Vice Chairman

Harry Stonecipher

President andChief Executive Officer,

Military Aircraft andMissile Systems

Jerry Daniels

President andChief Executive Officer,Commercial Airplanes

Alan Mulally

President andChief Executive Officer,

Space and Communications

Jim Albaugh

Senior Vice President, Engineering & TechnologyChief Technology Officer

Dave Swain

Chairman andChief Executive Officer

Phil Condit

Senior Vice PresidentPresident,

Connexion by BoeingSM

Scott Carson

Business Unit Leaders

http://www.boeing.com

Global Sales

Dollars in billions

International United States

29.6 34.5 33.7

26.523.5

17.6

0

10

20

30

40

50

60

70

1998 1999 2000

$58.0$51.3

$56.1

Boeing is the largest United States exporter.

http://www.boeing.com

60%60%

24%

1%

Revenue by Market Segment

Total = $51.3 billion

Year-end 2000

15%15%

Other

Military Aircraftand Missiles

Commercial Airplanes

Space and Communications

http://www.boeing.com

Commercial Airplanes

In the next 24 hours, 3 million people will board 42,300 flights on Boeing jetliners, carrying them to nearly every country on Earth.

Headquarters— Seattle, WA

Main products—717, 737, 747, 757, 767, 777 and Boeing Business Jet. Commercial Airplanes is the world’s largest producer of commercial jetliners, with more than 13,000 in service worldwide.

http://www.boeing.com

Space and Communications

In the next 24 hours, 335 satellites put into orbit by Boeing launch vehicles will pass overhead.

Headquarters—Seal Beach in Southern California

Human space flight and exploration International Space Station and Space

Shuttle Missile defense and National Missile Defense

and space control Information and communications

Built the original 40 GPS satelliteshttp://www.boeing.com

Military Aircraft and Missiles

In the next 24 hours, 6,000 Boeing military aircraft and missiles will be on guard with the air forces of 20 countries and with every branch of the U.S. military.

Headquarters—St. Louis, Missouri

http://www.boeing.com

Connexion by BoeingSM

High-speed, two-way Internet and live television services to aircraft in flight.

Personalized, real-time services for airline passenger including on-line shopping and e-mail services

Aircraft personnel have access to operational data not currently available through traditional communication channels Helps to improve airline operational efficiency

http://www.connexionbyboeing.com

Connexion Market Segments

Private Jet Airliner Market Service is currently available for this market

Commercial Airliner Market Installation is expected to begin in early 2002

Governmental Market Military planes

As the market matures, future markets develop Cruise Ships Oil Drilling Platforms

Competitive Advantage According to Larry DeShon, Marketing Vice

President for United Airlines, “There is currently no service comparable to this in the market.”

First truly broadband communication service for people on the move

First-Mover (First-to-Market) Advantage Fills the void area created by the limited

choices you now have when you fly, for example:

Reading Books, Watching pre-recorded Movies, and Sleeping

Daily Defense International December 15, 2001

Competitive Advantage

“Our competency in satellite systems, commercial aircraft construction, and high-speed, critical data transfer methodology gives us a competitive advantage that no narrowband provider can match.” Phil Condit, Boeing CEO

Sustainable Competitive Advantage

Boeing is already the world’s largest manufacturer of commercial airliners in the world.

Four of the world’s largest airline companies have signed deal with Boeing to pursue Connexion.

Infrastructure to support Connexion is already in place Boeing owns the satellites required to make

Connexion work Large Capital Investment Requirements keeps

competitors out of field

The “Mega” Deals Three of the United States largest airlines

and Boeing American Airlines Delta Airlines United Airlines

All signed Letter of Intent to pursue venture

Lufthansa and Boeing Industry-leading European Air Carrier and

Boeing have signed a Memorandum of Understanding

International launch customer for Connexion

Connexion and the Customers Business travelers need to stay

connected in the Information Age Mobile communications have a dramatic

impact on business productivity Last year, Boeing’s CEO Phil Condit was

in the air for 600 hours or the equivalent of 75 eight-hour work days The airplanes he uses have the Connexion

capabilities and they act as his sky office Leisure air travelers with has a more

complete and seamless flight experience

http://www.connexionbyboeing.com

Potential Problems September 11, 2001 changed the airline

industry forever. The future of some airline companies and

the industry as a whole is questionable. Boeing lost the largest military aircraft

contract in history to Lockheed, a chief competitor. Could be good for Connexion as Boeing is

forced to pursue other strategies more forcefully.

American Airlines

SABRE Reservation System

Overview of American Airlines

Products First Class Coach 7 Day Advance

$16,377.0M Operating Revenue (1999)

Customer Definition: Anyone who has the need for “fast and convenient air travel, both foreign and domestic, for both business and personal trips.”

Sources: Morenet UMSL, Business and Company Resource Centerhttp://galenet.galegroup.com

Organizational Chart

T h o m as W . H a rtonC F O

M ich ae l W . G unV P , M arke ting

Jo h n R . S a m u e lV P , Te ch no lo gy

D o n a ld J . C a rtyP re sid e n t a n d C E O

Sources: Morenet UMSL, Business and Company Resource Centerhttp://galenet.galegroup.com

Organizational Chart (cont.) Upper Management members of

Board of Directors Needs of each division represented Different frames of reference brought

into decision making CIO reports to CEO 10600 other employees

$1,545,000 sales/employeeSources: Morenet UMSL, Business and Company Resource Center

http://galenet.galegroup.com

The Traditional Purchasing Chain

Disintermediation:Longer, Not Shorter Value Chains are Coming. By Paul Saffo (1998)

The Need for Automated Reservation 1950’s introduction of jet planes

dropped price of airline tickets Not enough employees to take

reservations Frequently changing schedules and fares

The idea of SABRE Automate Reservation Process

Updated database reflecting changes in flight schedules and fares

Printed tickets and boarding passes automatically

The Success of SABRE Processed 84,000 phone calls per day (a

40% increase) Saved 30% on American’s investment in

staff alone Delivered an error rate of less than 1% What this means to the customer:

“I’m choosing American b/c I won’t have to wait as long on the phone or in line to get my ticket.

I’ve noticed their fares are a little cheaper than the industry.

I know they’re going to get my reservation correct.”

Sources: www.sabre.com/about/history/index.html

Problem in Sustaining Competitive Advantage Customers Needs Change

One stop shopping for hotel and airline reservation available through travel agents

Travel agents marketed as pampering tool and sign of status

Are travel agents the enemy?

The Travel Agent ModelNo, they become the NEW CUSTOMER!

Disintermediation:Longer, Not Shorter Value Chains are Coming. By Paul Saffo (1998)

The Success of the Travel Agent Model

Be a First Mover and you’ll be considered the “brains of the operation.” SABRE used as term for every airlines’ entire IT

operation Motivate the customer to use your product

Free Microcomputer Workstation Terminals What this means to the Travel Agent Customer:

“Wow, American Airlines really knows a lot about technology. They’re the industry leader.

“Wow, American Airlines gave me a computer! Would anyone else do that? I don’t think so. And if other’s come around trying to sell a similar product I won’t listen.”

Problem in Sustaining Competitive Advantage

Competition will attempt to shut you down Law suits poured in claiming “Unfair Advantage” Other airlines began drafting their own

automated reservation systems Result: The US Dept. of Justice Rules

SABRE continue in operation Other Airlines be allowed to create similar

systems Only use one type of terminal per travel agency

Sustaining Competitive Advantage, Paul Saffo 1985

American Sustains Competitive Advantage First Mover

Already viewed as the brains of Automation Successful track record used to retain

existing customers and seek out more Switching costs high

Computer Terminal Commission Incentive to travel agents Lose all your previous transaction Provided listing of all flights with all airlines Travel agents made to sign contracts

Source: Parker and Case, MIS: Strategy and Actions,2nd ed., McGraw-Hill, 1993.

American Sustains Competitive Advantage Being the First Mover also allows you to

stay ahead of the game Expanded services offered through the

reservation systems Rental cars Hotel rooms

Motivate everyone in the channel of distribution to request your product Commissions for the travel agencies The “Pull Strategy”

Sustaining Competitive Advantage, Paul Saffo 1985

The Pull Strategy: The Frequent Flier Model

Disintermediation:Longer, Not Shorter Value Chains are Coming. By Paul Saffo (1998)

Problems in Sustaining Competitive Advantage

Once again, competition turned this into a commodity

Changed the scope of business

Back to the drawing board

The Credit Card Model

Disintermediation:Longer, Not Shorter Value Chains are Coming. By Paul Saffo (1998)

American Sustains Competitive Advantage Competitive Advantage can

spawn new business Spun SABRE off into a subsidiary

“….If you told me I had to sell either the airline or the system, I’d probably sell the airline.” -Robert Crandall, CEO and President

There is a “…higher return on investment on booking tickets than by operating aircraft.”-Computer Network, 1990

-Computer Network, 1990

SABRE’s Success Today, ROI is still in excess of 500% 3 out of 5 airline tickets are purchased

through SABRE Online Travel Agents

SABRE Roving Agent Wireless check-in system

SABRE Pass Touch Self Serve Kiosk passenger system

SABRE Wireless Check-In

What Should You Know? CIOs Should Report to CEOs Competitive Advantage is difficult to sustain

The customer’s needs change or the customer changes all together

Competition will always imitate Lawsuits will arise with seemingly unfavorable

outcomes IT Competitive Advantage can change the scope

of business There is a pattern: introduce competitive

advantage -> some problem makes it a commodity->reposition for advantage

Rarely, A Product Sustains SABRE sustained

Being the first mover

Offering tangible benefits to customer

Making switching costs high

Involving customers at every level

IT can Create CompetitiveAdvantage

• IT can differentiate a product or service (Boeing and Frito-Lay)

• IT can shorten business processes: (Frito-Lay - eliminates up to 30,000 to 50,000 man hours of paperwork each week) • IT can spawn new businesses

(Boeing)• IT can change entire industry structures

(American Airlines)

Management of Information Systems, Lacity, Fall 2001

IT Systems

Contribution to Business Operations

Critical

Frito-Lay

American Airlines

Useful

Commodity Differentiate

Where will Boeing be?

Best Practices for Managing IT: The CIO

1. Serves as a bridge between IS, senior management, and users.

2. Works to encourage joint problem solving

3. Provides vision and leadership to accelerate the delivery of new competitive or business-critical systems.

Paradigm Shift The New Promise of Information Technology, Don Tapscott and Art Caston, 1993

Best Practices / Lessons Timing – first to market Innovative – offers a change to a

process or product Flexibility – able to respond quickly

to market Partnership – able to create

customer loyalty

IS480 lecture notes, Lacity, Fall 2001

Summary Difficult to achieve a true

competitive advantage-- Access to capital-- Switching cost-- Technical skills-- Management IT skills

MIS Quarterly, 1995 “IT and sustained competitive advantage” by Francisco Mata