Information Systems and Business Strategy

How IS Impact Organizations

Economic Impact

IT can help firms lower the cost of market participation (transaction costs).
Locating & communicating to supplier, making contract, buying insurance, product information etc.

Firms can contract with external suppliers instead of using internal sources. (Chrysler Corporation obtains more than 70
percent of its parts from other companies)

IS/IT enables firms to lower their transaction costs and increase revenues with outsourcing few activities. (transaction cost theory)

 According to Agency theory , as firms grow in size , coordination cost increases because more supervision & management is required. IS/IT enables firms to reduce management costs and supervision cost. So it reduces agency cost.

 Behavioral Impact IT facilitates flattening of hierarchies by broadening the distribution of information to empower lower-level employees. IS/IT has moved decision-making to lower levels of management and managers make decisions faster because information is readily available.

 Post-industrial theories In developed industries, Authority arises from knowledge and competence rather than formal positions; knowledge workers tend knowledge & information decentralized. to be self-managed; should become more

How IS Impact Organizations (cont)

Organizational Resistance to change

New information system may change organization structure, business process.

New information system may change routines of the people. So employees resist these changes.

How IS Impact Organizations (cont)

The Internet and Organizations The Internet increases the accessibility, storage, distribution of information and knowledge for business firms. The Internet lowers the transaction and agency costs of firms dramatically. Businesses are rapidly rebuilding their key business processes based on Internet technology. Example: online order entry, customer service, and fulfillment of orders.

IS and Business Strategy

Business strategy determines

The products and services a firm produces The industries in which the firm competes Competitors, suppliers, and customers of the firm Long-term goals of the firm

 To understand how IT fits into the strategic thinking process, it is useful to consider the three levels of business strategy
the business, the firm, and the industry level

At each level of strategy IT plays an important role.

Business Level Strategy - Value Chain Model

The value chain model looks at a business in terms of a set of primary and support activities that add value to the firms products or services. Firm gains a competitive advantage when it provides the product or service with more value or the same value at a lower price VC model can be used to determine where information systems can have the most impact to effect the competitive position of the firm

Value Chain

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Primary Activities of the VC Model

Inbound logistics - receiving and storing of materials stockless inventory systems Operations - transformation of inputs to finished goods or the process of providing a service computer controlled machinery used by Gillette for producing razor blades

Primary Activities of the VC Model

Outbound logistics - storing and distributing the product airline reservation system automated shipping scheduling systems Sales and marketing - promoting and selling the firms product

Support Activities for the VC Model

Administration and management voice mail and e-mail, intranets Human resources employee skills database, systems that facilitate compliance with government regulations Technology development - improving products and the production process an oil company uses infrared data gathered by satellite to search for oil deposits

Support Activities for the VC Model

Procurement (purchasing inputs) on-line electronic auctions exist that provide access to excess inventory retailers use on-line systems to access the inventory files and production schedules of their suppliers

Firm-Level Strategy and Information Technology

Creating synergies Combining two organizations to achieve efficiency & cost advantage. e.g. US Airways and America West were merged to create synergies. It combines experience & strong network of US Airways and low cost structure, information systems and routes of America West Airlines.

Firm-Level Strategy and Information Technology

Enhancing core competencies A core competency is an activity for which a firm is a world-class leader. It is gained over many years of experience.

Any information system that encourages the sharing of knowledge across business units enhances competency. Procter and Gamble(world leader in brand mgt & product innovation) uses intranet called InnovationNet to help people working on similar problems to share ideas.

Firm-Level Strategy and Information Technology

Network based strategies 1) Network economics In a network, larger the number of subscribers ,greater the value to all the participants. E.g. eBay The more people offering products on eBay, the more valuable is the eBay site to everyone because more products are listed and more competition among suppliers lowers prices. Internet sites can be used to build communities of users.

Firm-Level Strategy and Information Technology

2) Virtual company It uses other organizations to create & distribute products. It uses networks to link people, assets & ideas. E.g. Li & Fung It does not own any factory or machines. Outsources its work to more than 7500 suppliers in 37 countries all over the world. It sends order to raw material suppliers & factories to produce clothes. Its extranet tracks the entire production process.

Industry-Level Strategy and Information Systems

The principal concepts for analyzing strategy at the industry level is the competitive forces model.

Porters Competitive Forces Model

This model provides a general view of the firm, its competitors & the firms environment
NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES

THE FIRM

EXISTING COMPETITOR

SUPPLIERS

CUSTOMERS

 Existing competitors
Differentiation & competitive advantage

New Market entrants

Entry barriers

Substitutes
Product/ service performing the same function

Suppliers
Switching cost & Bargaining power

Customers
Bargaining power affects profit margin

Strategies Used With the Competitive Forces Model

1) Product differentiation involves developing new and unique products and services not easily duplicated by competitors e.g. Lands End provides tailor made clothes Build to order products (Dell Computer) 2) Becoming the low-cost producer (provide same value but at a lower cost than competitors) e.g. Wal-marts Inventory replenishment system

3) Focus on niche market involves Narrowing the market by developing niches for specialized products or services where a business can compete better than its rivals Analyzing customer buying pattern, taste & preferences. e.g. Customer data analysis through CRM Hilton Hotels

4) Strengthen customer and supplier intimacy Use IS to develop strong ties with customers and suppliers (SCM and CRM are major tools in this area) e.g. Supplier intimacy Chrsyler Corporation & Tata Motors give suppliers access to production schedules Customer intimacy Amazon.com

Competitive Forces Model and the Internet

Substitute products/services Online banking, stock trading, reservations, online music, books Customers bargaining power Availability of pricing information Expansion of options Suppliers bargaining power Suppliers benefit from elimination of intermediaries

Competitive Forces Model and the Internet

Threat of new entrants The Internet has reduced barriers to entry such as the need for a sales force, access to channels, and physical assets Rivalries among existing competitors Widens the geographic market Increases number of competitors Reduces differences among competitors Pressure to compete on price

Network-Based Strategy
-Network Economics -Virtual Company Model -Business Ecosystems