Information Technology and Systems

Session 3: Strategic Information Systems for Competitive

advantage

Dr. Arghya Ray

Assistant Professor
FORE School of Management
Most of the content of these slides are prepared from:
• Management Information Systems: Managing the Digital Firm, 16th Edition, By Laudon and Laudon, Pearson.
• Management Information Systems: Managing the Digital Firm, 12th Edition, By Laudon and Laudon, Pearson.
• Links provided in the slides
 ORGANIZATIONS AND INFORMATION SYSTEMS
• Information systems and organizations influence one another. Information systems are built to serve interests of business firm.
• Organizations too must be aware of and open to the influences of information systems to benefit from new technologies.

Some of the changes that occur in business firms because of new information technology (IT) investments cannot be
foreseen and have results that may or may not meet your expectations. Who would have imagined fifteen years ago, for
instance, that e-mail and instant messaging would become a dominant form of business communication and that many
managers would be inundated with more than 200 e-mail messages each day?
 ORGANIZATIONS AND INFORMATION SYSTEMS
How do these definitions of organizations relate to information systems technology?
• A technical view of organizations encourages us to focus on how inputs are combined to create outputs when technology changes
are introduced into the company.
• The firm is seen as infinitely malleable, with capital and labor substituting for each other quite easily.
• But the more realistic behavioral definition of an organization suggests that building new information systems, or rebuilding old ones,
involves much more than a technical rearrangement of machines or workers—that some information systems change the
organizational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of
time.
• Changing these elements can take a long time, be very disruptive, and requires more resources to support training and learning.
• Technological change requires changes in who owns and controls information, who has the right to access and update that
information, and who makes decisions about whom, when, and how. This more complex view forces us to look at the way work is
designed and the procedures used to achieve outputs.
• The technical and behavioral definitions of organizations are not contradictory. Indeed, they complement each other:
The technical definition tells us how thousands of firms in competitive markets combine capital, labor, and information technology,
whereas the behavioral model takes us inside the individual firm to see how that technology affects the organization’s inner
workings.
 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS
Information systems have become integral, online, interactive tools deeply involved in the minute-to-minute operations and decision
making of large organizations.
Economic Impacts
• From the point of view of economics, IT changes both the relative costs of capital and the costs of information.
Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the
cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. Additionally, as the cost of
information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain relatively
expensive. Hence, over time we should expect managers to increase their investments in IT because of its declining cost relative to other
capital investments.
• IT also affects the cost and quality of information and changes the economics of information. (Transaction-cost theory)
Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the
marketplace what it cannot make itself. Information technology, especially the use of networks, can help firms lower the cost of market
participation (transaction costs), making it worthwhile for firms to contract with external suppliers instead of using internal sources. As a
result, firms can shrink in size (numbers of employees) because it is far less expensive to outsource work to a competitive marketplace
rather than hire employees.
• Information technology also can reduce internal management costs. (Agency Theory)
Information technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce agency costs
because it becomes easier for managers to oversee a greater number of employees.
 Transaction Cost Theory
Transaction cost theory states firms and individuals seek to economize on transaction costs, much as they do on production costs.
Using markets is expensive because of costs such as locating and communicating with distant suppliers, monitoring contract
compliance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985).
Traditionally, firms have tried to reduce transaction costs through vertical integration, by getting bigger, hiring more employees,
and buying their own suppliers and distributors, as both General Motors and Ford used to do.

Figure 3-6 shows that as transaction costs

decrease, firm size (the number of employees)
should shrink because it becomes easier and
cheaper for the firm to contract for the purchase of
goods and services in the marketplace rather than
to make the product or offer the service itself. Firm
size can stay constant or contract even as the
company increases its revenues. For example,
when Eastman Chemical Company split off from
Kodak in 1994, it had $3.3 billion in revenue and
24,000 full-time employees. In 2009, it generated
over $5 billion in revenue with only 10,000
employees.
 Agency Theory
According to agency theory, the firm is viewed as a “nexus of contracts” among self-interested individuals rather than as a unified, profit-
maximizing entity (Jensen and Meckling, 1976).
A principal (owner) employs “agents” (employees) to perform work on his or her behalf. However, agents need constant supervision
and management; otherwise, they will tend to pursue their own interests rather than those of the owners. As firms grow in size and
scope, agency costs or coordination costs rise because owners must expend more and more effort supervising and managing employees.

Information technology, by reducing the costs of

acquiring and analyzing information, permits
organizations to reduce agency costs because it
becomes easier for managers to oversee a greater
number of employees. Figure 3-7 shows that by
reducing overall management costs, information
technology enables firms to increase revenues
while shrinking the number of middle managers
and clerical workers.

Because IT reduces both agency and transaction costs for firms,

we should expect firm size to shrink over time as more capital is
invested in IT. Firms should have fewer managers, and we
expect to see revenue per employee increase over time.
 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS
ORGANIZATIONAL AND BEHAVIORAL IMPACTS
• IT Flattens Organizations
IT facilitates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase
management efficiency. IT pushes decision-making rights lower in the organization because lower-level employees receive the
information they need to make decisions without supervision. Because managers receive so much more accurate information on time,
they become much faster at making decisions, so fewer managers are required. Management costs decline as a percentage of revenues,
and the hierarchy becomes much more efficient. These changes mean that the management span of control has also been broadened.
• Postindustrial Organizations
Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In
postindustrial societies, authority increasingly relies on knowledge and competence, and not merely on formal positions. Hence, the
shape of organizations flattens because professional workers tend to be self-managing, and decision making should become more
decentralized as knowledge and information become more widespread throughout the firm (Drucker, 1988). For e.g., The global
consulting service Accenture is an example. It has no operational headquarters and no formal branches. Many of its 190,000 employees
move from location to location to work on projects at client locations in 49 different countries.
• Understanding Organizational Resistance to Change
Information systems inevitably become bound up in organizational politics because they influence access to a key resource—namely,
information. Information systems can affect who does what to whom, when, where, and how in an organization. Because information
systems potentially change an organization’s structure, culture, business processes, and strategy, there is often considerable resistance to
them when they are introduced.
 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS
ORGANIZATIONAL AND BEHAVIORAL IMPACTS
 HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS
THE INTERNET AND ORGANIZATIONS
• The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations. In essence, the
Internet is capable of dramatically lowering the transaction and agency costs facing most organizations.
• Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a
key component of their IT infrastructures. If prior networking is any guide, one result will be simpler business processes, fewer
employees, and much flatter organizations than in the past.

IMPLICATIONS FOR THE DESIGN AND UNDERSTANDING OF INFORMATION SYSTEMS:

The central organizational factors to consider when planning a new system are the following:
• The environment in which the organization must function
• The structure of the organization: hierarchy, specialization, routines, and business processes
• The organization’s culture and politics
• The type of organization and its style of leadership
• The principal interest groups affected by the system and the attitudes of workers who will be using the system
• The kinds of tasks, decisions, and business processes that the information system is designed to assist
 USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
• There’s almost always a stand-out firm in almost every sector.
• In the automotive industry, Toyota is considered a superior performer. In pure online retail, Amazon is the leader, in off-line
retail Walmart, the largest retailer on earth, is the leader. In online music, Apple’s iTunes is considered the leader with more
than 75 percent of the downloaded music market, and in the related industry of digital music players, the iPod is the leader.
In Web search, Google is considered the leader.
• Firms that “do better” than others are said to have a competitive advantage over others: They either have access to special
resources that others do not, or they are able to use commonly available resources more efficiently—usually because of
superior knowledge and information assets.
Why do some firms do better than others and how do they achieve competitive advantage?
How can you analyze a business and identify its strategic advantages?
How can you develop a strategic advantage for your own business?
And how do information systems contribute to strategic advantages?
USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE Traditional Competitors: All firms share market space
with other competitors who are continuously devising
PORTER’S COMPETITIVE FORCES MODEL new, more efficient ways to produce by introducing new
products and services, and attempting to attract
customers by developing their brands and imposing
switching costs on their customers.

New Market Entrants: In a free economy with mobile

labor and financial resources, new companies are always
entering the marketplace. In some industries, there are
very low barriers to entry, whereas in other industries,
entry is very difficult.

Substitute Products and Services: In just about every

industry, there are substitutes that your customers
might use if your prices become too high. New
technologies create new substitutes all the time. The
more substitute products and services in your industry,
the less you can control pricing and the lower your profit
Customers : A profitable company depends in large measure on its margins.
ability to attract and retain customers (while denying them to Suppliers: The market power of suppliers can have a
competitors), and charge high prices. The power of customers grows if significant impact on firm profits, especially when the
they can easily switch to a competitor’s products and services, or if they firm cannot raise prices as fast as can suppliers. The
can force a business and its competitors to compete on price alone in a more different suppliers a firm has, the greater control it
transparent marketplace where there is little product differentiation, can exercise over suppliers in terms of price, quality, and
and all prices are known instantly (such as on the Internet). delivery schedules.
USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE

Source:
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USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
INFORMATION SYSTEM STRATEGIES FOR DEALING WITH COMPETITIVE FORCES (PORTER’s Generic Strategies)

What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract
some of these forces? How do you prevent substitutes and inhibit new market entrants?

Low-Cost Leadership: Use information systems to achieve the lowest operational costs and the lowest prices.
Example: Walmart → use of inventory replenishment system. Walmart pays only 16.6 percent of sales revenue for overhead.
(Operating costs average 20.7 percent of sales in the retail industry).

Product Differentiation: Use information systems to enable new products and services, or greatly change the customer
convenience in using your existing products and services. For instance, Google services, Apple iPod. The ability to offer individually
tailored products or services using the same production resources as mass production is called mass customization. E.g., Nike

Focus on Market Niche: Use information systems to enable a specific market focus, and serve this narrow target market better
than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing
techniques. For example, Hilton Hotels’ OnQ system

Strengthen Customer and Supplier Intimacy: Use information systems to tighten linkages with suppliers and develop intimacy with
customers. E.g., Supplier Side Intimacy → Chrysler Corporation. Customer Side Intimacy→ Amazon.com
Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing
product), and loyalty to your firm.
USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
THE BUSINESS VALUE CHAIN MODEL

Disadvantage of Porter’s Five forces analysis:

Although the Porter model is very helpful for identifying competitive forces and suggesting generic strategies, it is not very specific
about what exactly to do, and it does not provide a methodology to follow for achieving competitive advantages.
If your goal is to achieve operational excellence, where do you start?

The value chain model highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985)
and where information systems are most likely to have a strategic impact. This model identifies specific, critical leverage points where
a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a
series or chain of basic activities that add a margin of value to a firm’s products or services. These activities can be categorized as:
1. Primary activities are most directly related to the production and distribution of the firm’s products and services, which create
value for the customer.
2. Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration
and management), human resources (employee recruiting, hiring, and training), technology (improving products and the
production process), and procurement (purchasing input).
USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
THE BUSINESS VALUE CHAIN MODEL
Using the business value chain model will also
cause you to consider benchmarking your
business processes against your competitors
or others in related industries, and identifying
industry best practices.

Once you have analyzed the various stages in

the value chain at your business, you can
come up with candidate applications of
information systems.

By making improvements in your own

business value chain that your competitors
might miss, you can achieve competitive
advantage by attaining operational
excellence, lowering costs, improving profit
margins, and forging a closer relationship
with customers and suppliers.

Extending the Value Chain: The Value Web

USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
Extending the value Web

• A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or
service for a market collectively. It is more customer driven and operates in a less linear fashion than the traditional value chain.
• Internet technology has made it possible to create highly synchronized industry value chains called value webs.
• Looking at the industry value chain encourages you to think about how to use information systems to link up more efficiently with your
suppliers, strategic partners, and customers. Strategic advantage derives from your ability to relate your value chain to the value chains
of other partners in the process.
• By working with other firms, industry participants can use information technology to develop industry-wide standards for exchanging
information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts
increase efficiency, making product substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry
members can build industry-wide, IT-supported consortia, symposia, and communications networks to coordinate activities concerning
government agencies, foreign competition, and competing industries. E.g., Amazon.com
• Value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or
in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or
unbundled in response to changing market conditions.
• Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can
deliver the required products or services at the right price and location.
USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE
SYNERGIES, CORE COMPETENCIES, AND NETWORKBASED STRATEGIES

• A large corporation is typically a collection of businesses. Often, the firm is organized financially as a collection of strategic
business units and the returns to the firm are directly tied to the performance of all the strategic business units. Information
systems can improve the overall performance of these business units by promoting synergies and core competencies.

• Synergies: The idea of synergies is that when the output of some units can be used as inputs to other units, or two organizations
pool markets and expertise, these relationships lower costs and generate profits. One use of information technology in these
synergy situations is to tie together the operations of disparate business units so that they can act as a whole. For example,
acquiring Countrywide Financial enabled Bank of America to extend its mortgage lending business and to tap into a large pool of
new customers who might be interested in its credit card, consumer banking, and other financial products.

• Enhancing Core Competencies: A core competency is an activity for which a firm is a world-class leader. Any information system
that encourages the sharing of knowledge across business units enhances competency. Such systems might encourage or
enhance existing competencies and help employees become aware of new external knowledge; such systems might also help a
business leverage existing competencies to related markets. For example, Procter & Gamble, a world leader in brand management
and consumer product innovation, uses a series of systems to enhance its core competencies. An intranet called InnovationNet
SYNERGIES, CORE COMPETENCIES, AND NETWORKBASED STRATEGIES
• Network-Based Strategies: The availability of Internet and networking technology have inspired strategies that take advantage of firms’
abilities to create networks or network with each other. Network-based strategies include:
➢ Network Economics: Business models based on a network may help firms strategically by taking advantage of network economics. From
this network economics perspective, information technology can be strategically useful. Internet sites can be used by firms to build
communities of users—like-minded customers who want to share their experiences. This builds customer loyalty and enjoyment, and
builds unique ties to customers. EBay, the giant online auction site, and iVillage, an online community for women, are examples.
➢ Virtual Company Model: Another network-based strategy uses the model of a virtual company to create a competitive business. A virtual
company, also known as a virtual organization, uses networks to link people, assets, and ideas, enabling it to ally with other companies to
create and distribute products and services without being limited by traditional organizational boundaries or physical locations. One
company can use the capabilities of another company without being physically tied to that company. The virtual company model is useful
when a company finds it cheaper to acquire products, services, or capabilities from an external vendor or when it needs to move quickly to
exploit new market opportunities and lacks the time and resources to respond on its own. Fashion companies, such as GUESS, Ann Taylor,
Levi Strauss, and Reebok, enlist Hong Kong-based Li & Fung to manage production and shipment of their garments.
➢ Business Ecosystems: The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference
being that cooperation takes place across many industries rather than many firms. E.g., Is the mobile Internet platform. In this ecosystem
there are four industries: device makers (Apple iPhone, RIM BlackBerry, Motorola, LG, and others), wireless telecommunication firms
(AT&T, Verizon, T-Mobile, Sprint, and others), independent software applications providers (generally small firms selling games,
applications, and ring tones), and Internet service providers (who participate as providers of Internet service to the mobile platform).
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Paper Discussion: New approach in mobile telecom operators analysis “Analysis of Eight Key Fields”
Link: https://www.researchgate.net/publication/308611478_New_approach_in_mobile_telecom_operators_analysis_-_Analysis_of_Eig
SWOT analysis should give following answers:
• Company positions against competitors,
• The best future opportunities,
• Current and future threats.
The main SWOT disadvantage is huge subjectivity.
Ansoff matrix is the solution for strategic analysis which was
devolped by Russian economist Igor Ansoff.
The resulting matrix offers structured way to assess
potential strategies for growth.
The main sequences of this strategy are:
• Market penetration – focus on selling existing products
and services on existing market,
• Market development – focus on developing new markets
or market segments for existing products and services,
• Product development – focus on developing new
products or services for existing markets .
• Diversification – focus on the development of new
products and services to sell into new market.
PESTEL analysis is one of the most popular analysis for considering six important external factors those could have an impact
for any company or organizations:
• Political: stability of government, potential changes to legislation, global influences, etc.
• Economic: economic growth, employment rates, inflation rates, monetary policy, consumer confidence, etc.
• Social: income distribution, demographic influences, lifestyle factors, etc.
• Technological: international influences, changes in ICT technology, take up rates, etc.
• Legal: taxation policies, employment laws, industry regulations, health and safety, etc.
• Environmental: regulation and restrictions, attitudes of customers, etc.
The main disadvantage of this analysis is quite big analysis subjectivity.

The Porter’s Five Forces is another tool for external

analysis.
The Porter's Five Forces model is used to analyze
competitive environment of the company on the
market.
• The Boston Matrix is one of the most popular tools for analyzing and understanding of own internal capabilities of a company
or organizations.
• This analyzing technique is known by several different names: B-Box, BCG Analysis, BCG Matrix, Boston Box, Boston Matrix,
Boston Consultancy Group (BCG) Analysis and the Portofolio Diagram.
• The Boston Matrix is used for analyzing how companies can allocate resources to each their products and services and how these
products and/or services are positioned on the market.