Abdisalam Issa-Salwe, Lecture Notes, Thames Valley University, 2008.

Lecture 5

Using Information Technology for Competitive Advantage

Abdisalam Issa-Salwe

Taibah University Information Systems College of Computer Science & Engineering Information Systems Department
1 Abdisalam Issa-Salwe, Lecture Notes, Thames Valley University, UK, 2008.

Topic list
Porters five forces model Value chain EDI Data warehousing Data mining Intelligent agents Value added networks

Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

Strategic Advantage and IT

Important Managerial Questions: What is strategy? What is strategic advantage? Information Systems as a strategic resource How do we use Information Systems to achieve some form of strategic advantage over competitors?
Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

What is Strategy
Definition of strategy Early 1990s definition: A well coordinated set of objectives, policies, and plans aimed at securing a long-term competitive advantage. A vision for the organization that is implemented. Websters Dictionary a careful plan or method the art of devising or employing plans toward a goal the art and science of military command exercised to meet the enemy in combat under advantageous circumstances
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What is Strategy?
Strategy Henry Mintzberg: Explicitly planned: Intended Strategy Realized: planned and succeed Unrealized: planned but fail Implicit, not explicitly planned yet executed: Emergent Strategy
Planned Strategy Executed Strategy

Failed Strategy

Emergent Strategy
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Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

Strategic Advantage and IT

Evolution of Strategy Concepts

Competitive Strategy Speeding Up Competitive Advantage Sustainable Competitive Advantage Temporary (Non-Sustainable) Competitive Advantage Strategic Advantage Temporary Strategic Advantage

Strategy

Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

Strategic Advantage and IT

Evolution of Strategy Concepts
Three eras of approaches for achieving strategic advantage Portfolio of Business (1970s) performance a result of businesses you pick to be in motivated by economies of scale Portfolio of Capabilities (mid 1980s) performance a result of internal processes and routines, which provide distinctive capabilities motivated by economies of scale and scope Portfolio of Relationships (mid 1990s) performance a result of building a wide array of relationships with external companies that possess hard-to-imitate capabilities motivated by economies of scale, scope, and expertise
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Information Systems as a Strategic Resource

Inwardly Strategic focused on internal processes lower costs increase employee productivity improve teamwork enhance communication

Outwardly Strategic

aimed at direct competition beat competitors

new services new knowledge that leads to new services

Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

IS as a Strategic Resource
Hayes and Wheelwright (1985) - operations effectiveness, applies equally well to ISD effectiveness Stage 1: Internally Neutral not seen as a source of process improvement technology Minimize negative impact of functional area on organization Top management in control; tells dept. what to do Stage 2: Externally Neutral not seen as a source of external competitive advantage
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IS as a Strategic Resource (cont)

Stage 3: Internally Supportive source of internally focused competitive advantages Stage 4: Externally Supportive viewed as competitive force in the business function drives issues of topmanagement strategy making

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IS as a Strategic Resource
Competitive Marketplace
Externally Strategic

Company A
Internally Strategic Inter-Firm Strategic Focus Alliance

Company B

Abdisalam Issa-Salwe, College of Computer Science & Engineering, Taibah University

Porters five forces model

Professor Michael Porter of Harvard University maintained that in every industry, competition depends on the collective strength of five basic forces Interacting with these forces are the generic corporate strategies. IT can be a powerful agent to change the balance of power in and between these forces.
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Porters five forces model (cont)

Michael Porter has identified five forces that are widely used to assess the structure of any industry. Porters five forces are the:
Bargaining power of suppliers, Bargaining power of buyers, Threat of new entrants, Threat of substitutes, and Rivalry among competitors.
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Porters five forces model (cont)

All organisations operate in one or more industries. By the nature of their participation in an industry, they are affected by existing or potential uses of information technology

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Porters five forces model (cont)

New entrants can increase overall capacity in the industry, thereby reducing prices and incumbents' cost advantages. Market is cornered with product, but success may inspire others to enter the business and challenge position. The threat of new entrants is the possibility that new firms will enter the industry. New entrants bring a desire to gain market share and often have significant resources. Their presence may force prices down and put pressure on profits. IT can help create or raise barriers to entry by increasing mandatory investments in hardware and software, facilitating control over databases, or locking in customers to existing distribution channels. There are many types of barriers to entry:
switching costs, economies of scale, high investment in IT, economies of experience, access to distribution channels, and government policy
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Porters five forces model (cont)

Intensity of industry rivalry depends on factors beyond the control of the individual firm,
such as degree of concentration, diversity, or dependency; rate of industry growth; or switching costs. It is critical to understand the strategies of one's rivals in detail. For instance, Ford's strategy depends on the strategies of Toyota, Nissan, GM, and Volkswagen, and vice versa.

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Porters five forces model (cont)

Threat of substitute products may arise from products and services in other industries. Examples: * the products of stock brokers and insurance companies now compete against banks for the investment dollar. * the automobile eliminated the horse with buggy, and the silicon chip eliminated electromechanical adding machines. The life cycle of products can be reduced through the use of IT, such as ComputerAided Design (CAD). IT has also provided the basis for creating new informationintensive products.
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Porters five forces model (cont)

Bargaining power of buyers The power of buyers describes the effect that your customers have on the profitability of your business. The transaction between the seller and the buyer creates value for both parties. Buyers drives prices down and the quality of products up. Buyer power depends on the level of switching costs, the competitive position of the buyer in the industry (size, volume), whether the buyer can purchase a commodity product, or whether the buyer poses a serious threat of backward integration (i.e., buying out or merging with its suppliers). Installing computer terminals at the buyers' site is one way to raise the buyers' cost of switching to other suppliers.

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Porters five forces model (cont)

Bargaining power of suppliers Any business requires inputslabor, parts, raw materials, and services. The cost of your inputs can have a significant effect on your companys profitability. Whether It is in some ways the antithesis of buyer power. The threat of forward integration (i.e., buying out or merging with its customers) is one determinant of supplier power. Influential suppliers drive prices up and reduce the quality and quantity of products and services. Supplier power also depends on size, volume, and concentration relative to other firms in the industry.

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Porters five forces model (cont)

Together, the strength of the five forces determines the profit potential in an industry by influencing the prices, costs, and required investments of businesses the elements of return on investment. Stronger forces are associated with a more challenging business environment. To identify the important structural features of your industry via the five forces, you conduct an industry analysis that answers the question,
What are the key factors for competitive success?
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Value Chain Analysis

The value chain is a systematic approach to examining the development of competitive advantage. The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities
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Value Chain Analysis (cont)

The value chain begins with the data resource. Information is developed from the data resource to support the knowledge environment of an intelligent learning organisation.
Data is the raw material for information which is the raw material for the knowledge environment.

Knowledge is the raw material for business intelligence that supports business strategies.
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Electronic Data Interchange (EDI)

EDI was first developed by the automobile/transportation industry in the 1970s. Today, it is widely used in a variety of industries, including distribution, finance and accounting, health care, manufacturing, purchasing, retail, tax form filing, and shipping. Early, EDI packages used rather simple standard forms that forced companies to convert data to fit the forms. Newer, EDI systems allow companies to create custom systems using simple programming or authoring tools.

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Electronic Data Interchange (EDI) (cont)

Electronic Data Interchange (EDI) is the electronic exchange of routine business transactions. EDI defines the electronic exchange of structured business data, such as purchase orders, invoices, and shipping notices, typically between one organisation and another.
Typical transactions include such documents as purchase orders, invoices, advance shipping notification, payments, etc. Exchange of electronic data using inter-organisational information systems Set of hardware, software, and standards that accommodate the EDI process

The relationship is usually between a vendor and customer.

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Electronic Data Interchange (EDI) (cont)

It is important to differentiate between EDI and electronic commerce (e-commerce).
Electronic commerce encompasses all aspects of electronic business exchanges, including person-toperson interaction (collaboration), money transfers, data sharing and exchange, Web site merchant systems, and so on. EDI as a subset of electronic commerce that encompasses the exchange of business information in a standardised electronic form.

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Electronic Data Interchange (EDI) (cont)

EDI can reduce costs, workforce requirements, and errors associated with retyping orders, invoices, and other documents. With EDI, computer data already entered by one organisation is made available to a business partner. EDI is typically handled using storeand-forward technologies similar to e-mail.
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Electronic Data Interchange (EDI) (cont)

Two approaches in the implementation of EDI.

Many large organisations acquire or build their own proprietary systems, often in association with their business partners. To work with a value added network provider, which provides EDI transaction services, security, document interchange assistance, standard message formats, communication protocols, and communication parameters for EDI.

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Value Added Network (VAN)

A (VAN) Value Added Network is a third party who stores the data to be communicated. Serves as a middle person, so neither party can access the others private network. The main key to a VAN is that the other partner does not touch your network, as business partners initiate the sending or retrieving of the data from the VAN.
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Value Added Network (VAN) (cont)

With the data being sent to or received from the VAN by the business partners initiating the communication, business partners are insuring a safe method of data transportation. The different ways of communicating to the VAN include dialup as well as FTP protocols.

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Business intelligent agents

Business intelligence represent a popular trend in many public and private sector organisations. Ideally, any manager or knowledge worker should be able to compose information requests without programmer assistance and achieve answers at the speed of thought. Follow-up questions should be immediately asked and answered in order to maintain continuity of thought on a particular topic of importance.

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Business intelligent agents (cont)

Intelligent Agents execute tasks on behalf of a business process, computer application, or an individual.
For example, corporate use of monitoring software based on agents can be a key component in cutting support costs and increase computer efficiency.

Intelligent agents have been written to search through e-mail messages for certain keywords or simple concepts (phrases).
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Business intelligent agents (cont..)

Knowledge-based expert systems, or simply expert systems, use human knowledge to solve problems that normally would require human intelligence. These expert systems represent the expertise knowledge as data or rules within the computer.

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Data warehouse, data marts

Data warehouses are computer based information systems that are home for "secondhand" data that originated from either another application or from an external system or source. Warehouses optimize database query and reporting tools because of their ability to analyse data, often from disparate databases and in interesting ways. They are a way for managers and decision makers to extract information quickly and easily in order to answer questions about their business. In other words, data warehouses are read-only, integrated databases designed to answer comparative and "what if" questions.

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Data warehouse, data marts (cont)

Data Marts:
Data in a data warehouse should be reasonably current, but not necessarily up to the minute, although developments in the data warehouse industry have made frequent and incremental data dumps more feasible. Data marts are smaller than data warehouses and generally contain information from a single department of a business or organisation. The current trend in data warehousing is to develop a data warehouse with several smaller related data marts for specific kinds of queries and reports.

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A Data Warehouse Architecture

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Data mining
Data mining is primarily used today by companies with a strong consumer focus retail, financial, communication, and marketing organisations. It enables these companies to determine relationships among "internal" factors such as price, product positioning, or staff skills, and "external" factors such as economic indicators, competition, and customer demographics.

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Data mining
Data mining, or knowledge discovery, is the computer-assisted process of digging through and analysing enormous sets of data and then extracting the meaning of the data. Data mining tools predict behaviors and future trends, allowing businesses to make proactive, knowledge-driven decisions. Data mining tools can answer business questions that traditionally were too time consuming to resolve. They scour databases for hidden patterns, finding predictive information that experts may miss because it lies outside their expectations.

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Data mining (cont)

With data mining, a retailer could use point-of-sale records of customer purchases to send targeted promotions based on an individual's purchase history. By mining demographic data from comment or warranty cards, the retailer could develop products and promotions to appeal to specific customer segments
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Data mining (cont)

Data mining consists of five major elements:
Extract, transform, and load transaction data onto the data warehouse system. Store and manage the data in a multidimensional database system. Provide data access to business analysts and information technology professionals. Analyse the data by application software. Present the data in a useful format, such as a graph or table.

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Reference
Laudon, K. & Laudon, J. (2006): Management Information Systems:Managing the Digital Firm, 9th ed. Prentice Hall Abdisalam Issa-Salwe, Lecture Notes, Thames Valley University, 2008. Lachlan M. MacKinnon, Information: Types of Information Systems, http://www.macs.hw.ac.uk/~lachlan/dbislectures/le ctures/types.ppt, Dave Chaffey, Paul Bocij, Andrew Greasley and Simon Hickies (eds) (2003): Business Information Systems: Technology, Development and Management, Pearson Education Limited, London. BPP, Information Systems, Study Text, Paper 2.1, BPP Professional Education, United Kingdom.

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Tutorial Question
EDI: As more and more companies get connected to the Internet, EDI is becoming increasingly important as an easy mechanism for companies to buy, sell, and trade information..

Discuss critically this assessement

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