Chapter 3

Competing with Information Systems

3.1 Information Society and the Changing Competitive Environment [Figure 3.2]

In an information society, most people active in the economy are employed in the handling of information, and most goods and services produced are related to processing of information. In the 1950s the information sector became the largest employer of the U.S. workforce. In the 1980s more than 50 percent of the workforce was employed in this sector.

Knowledge work has particular importance in an information society. Peter Drucker, a well-known analyst of management, noted that the ability of a nation's economy to generate knowledge - both theory and technological know-how and employ it through productive organizations will in the future determine that nation's success in international competition. The organizations, in turn, have to be able to generate and skilfully deploy know-how in their area of core competence.

The performance of its knowledge workers is a key to the firm's success. These workers deal with information, which is an abstraction of reality, rather than with concrete objects.

3.2 Business Challenges of the Information Society [Figure 3.3]

The competitive environment of the information society presents new and serious challenges that organizations have to meet to prevent their decline. These challenges include:

1. Increasingly keep global competition calls for rapid product and process innovation. - Business globalization is the emergence of global markets as the arena of competition and cooperation among firms. - Product innovation results in the development of a new product or service. - Process innovation deals with ways to redesign business processes by exploiting the capabilities of information technologies.

2. Dramatic increases in knowledge that can affect your business call for organizational knowledge management supported by information technology. - Information systems have to enable knowledge workers to access the information necessary for their work without being swamped by information overload. Beyond that, knowledge workers have to be empowered to solve problems and make decisions, using their knowledge. - Information systems should be able to perform routine and non-critical decision making, subject to human approval when appropriate. Organizations need to successfully introduce information technology for both individual and, to an increasing degree, group knowledge work. - The basic support to a knowledge worker is delivered by a personal workstation. - Many firms have made the Internet part of their vital knowledge resource. - Knowledge management is the operation of the organizational methods, procedures, and information systems that are used to collect the knowledge and experience of the members of the organization and bring them to bear on problems and opportunities.

3. Faster pace of business events - the cause and the result of time-based competition - The pace of events in an information society is set by technologies. The speeds of today's computer and telecommunications technologies have resulted in a dramatic increase in the number of events occurring within a given time. This time compression calls for faster decisions during business problem solving. - Time-based competition takes place where those first to market have a change to preempt it. 3.3 How the Role of Information Systems Evolved

Four eras of the development of information systems are: 1. Operational Support 2. Support of Management and Knowledge Work 3. Support of Business Transformation and Competition 4. Ubiquitous Computing

Operational Support

- Mid 1950's to the mid 1970s - Used to support business operations in order to raise their efficiency - Management support began to emerge in the form of voluminous reports - Systems were designed to serve the needs of major corporate units rather than individual users. - Companies generally had a single data processing department which was responsible for all application development. - End users did not have direct access to computer technology - A large backlog of applications development requests (3 or more years) - Access to computing was severely restricted.

Support for Management and Knowledge Work

- Late 1970s - Designed to support management and knowledge work - End-user computing began. - Knowledge workers began using software packages, which they customized to meet their needs, and even began developing systems of their own. - Users took more control of the information systems. - Support of managerial functions became the primary objective, with some information systems directly support the decision-making process, relying on corporate databases. - Raising management effectiveness replaced operational efficiency as the primary justification for the new systems. - Systems were designed to support the individual needs of managers and professionals.

Support of Business Transformation and Competition

- Mid 1980's - Strategic information systems gained importance as systems expected to help a company compete. - Effectiveness of systems was measured in terms of market share and corporate profits. - Strategic information systems were developed to interact with customers, suppliers, or other external stakeholders. - Strategic information systems were also developed to support business transformation through a firm's extensively redesigned internal business processes. - Information systems supported line-of-business units - the units responsible for the development and marketing of individual products. - Close interaction between systems developers and users became mandatory. - End users initiate and participate in the development of systems. They also develop systems themselves. - Line-of-business units control their own information systems.

Ubiquitous Computing

- 1990's - Recognition that the pursuit of competitive advantage cannot be based on a single information system. Competing with information systems has to be based on a broad and continually enhanced corporate platform of information technology linked to a successful business strategy. - Client/server computing and the Internet - Networked computers of various power are found in business organizations - A virtual workplace - Electronic integration of the entire organization is the principal objective and organizational effectiveness is the primary justification for newly introduced systems that join the networked computer infrastructure of the firm. - Integration with corporate partners is accomplished with interorganizational systems. - Collaborating teams, often organized into larger clusters, are the primary Aclients@ of the information systems function. - Sustained process of organizational learning and innovation is necessary to continually gain the high ground in competition. - Information systems are called upon to enhance core competencies of the owner firms. - Concept of outsourcing functions of corporations to their partners, who supply the materials and services in which the firm does not specialize. - Organizational effectiveness is the result of both competitive initiatives based on new products and services in the marketplace and on redesigned business processes, enabled by the capabilities of information systems.

3.4 Principal Competitive Thrusts with Strategic Information Systems

An information system is strategic if its objectives are to improve the competitive position of the organization. Such a system helps the firm attract customers profitably and for an extended period of time. Strategic information systems are distinguished by the following characteristics. 1. External focus 2. Innovative use of information technology. 3. High degree of project risk

Relatively few strategic information systems enable their owner firms to gain lasting competitive advantage over their rivals.

The principal competitive thrusts for seeking competitive advantage with strategic systems are: 1. Redefining a company's business in terms of information 2. Creating products and services based on information 3. Transforming a company's products and processes with information systems

Redefining Company Business in Terms of Information

Some companies redefine their businesses when they realize that they are in the information processing business rather than what original business was intended to do. By building its strengths and developing a platform of information technology on which new systems can be developed, companies can change the way they compete for years to come by launching new products and services.

Creating Products and Services Based on Information

Many firms compete by creating new products and services based on information or information systems. Indeed, companies in various industries distinct from the information business itself enter the field by marketing their expertise to others. Transforming Company Products and Processes with Information systems

Using information systems, companies are able to transform their products and business processes. Thus, a physical product may be combined with service and information and differentiated from the product offered by competitors. Furthermore, by varying the service and information components, the product can be customized for small market segments or even individualized for specific customers.

By transforming the processes through which it converts input materials into a product reaching the customer's hands, a company may realize efficiencies that can help it compete. Information systems may be used to tightly control the process, avoiding excessive inventories. They can also lower the cost of transactions with customers and suppliers. Yield management states that maximizing the revenue from a perishable commodity, such as an airline flight or a hotel-room night.

3.5 Strategies, Forces, and Tactics in Competitive Markets [Figure 3.11][Slide 3-8]

All successful organizations compete. Moreover, in the information society, businesses compete globally. Four fundamental competitive strategies can be employed. These strategies are designed to combat the competitive forces operating in the marketplace.

Competitive Strategies

To compete in the marketplace, a firm may adopt one of the four competitive strategies shown in Figure 3.11. The first two strategies (differentiation and cost leadership) can be pursued by companies with a broad scope of products, which they market across a number of customer segments. The other two strategies (focused differentiation and cost focus) apply to firms that focus on a narrow customer segment. Four competitive strategies include: 1. Differentiation 2. Cost leadership 3. Focused differentiation 4. Cost focus


When a company aims to distinguish its product or service from that offered by the competition, it is pursuing the differentiation strategy. Distinguishing features include: the superior attributes of the product itself or the blurring of differences between products and services offered by competitors.

Cost Leadership

If a company is able to offer its product or service at a cost significantly lower than its competitors, it is exercising cost leadership. This is usually the effect of highly efficient internal operations. Based on economies of scale, this strategy is accessible to companies with large market shares.

Focused Differentiation

When a company is able to identify a segment of the market (a niche) which is can serve in a superior fashion, it is engaging in focused differentiation. Smaller firms in particular compete by specializing a product or a service for a limited-size niche. Information systems may be used to contribute to this goal by helping identify the customers to be served and then customizing the product for their needs.

The niche may be a customer segment, a narrowly defined product, or a geographical region. Information systems relying on extensive customer databases and demographic data are potent tools in niche identification. This is known as database marketing.

Cost Focus

If a company serves a narrow market segment with a product or service that it offers at a significantly lower cost than its competitors, that company is employing the cost focus strategy. Relatively difficulty to pursue for small companies, this strategy may be built on the advantage of geographic proximity combined with the use of information technology to achieve operational effectiveness.

Competitive Forces [Figure 3.12]

Competitive strategies of differentiation, cost leadership, focused differentiation, or cost focus may be deployed. Such a strategy may be used to combat some of the five competitive forces that some firm faces. These include: 1. Threat of new competitors - erect barriers to entry 2. Intensifying rivalry among existing competitors - change the basis of competition 3. Pressures from potential substitute products - deliver products of surpassing value 4. Bargaining power of customers - introduce switching costs 5. Bargaining power of suppliers - develop alternatives

Competitive Tactics [Figure 3.13][Slide 3-9]

The combination of competitive strategies, the market forces they target, and the tactics used to implement the strategies can be mapped into a framework called the strategic cube. The strategic cube does not tell the company exactly where it may apply information systems in its activities in order to seek competitive advantage. Competitive tactics include internal growth or innovation, mergers or acquisitions, or strategic alliances with other companies. 3.6 Using Value Chain to Identify Opportunities for Strategic Information Systems [Figure 3.14][Slide 3-10]

Strategic deployment of information systems is aimed at changing both company operations and its products. To establish targets of opportunity, companies need to track the chain of activities through which the company transforms its input resources, such as raw materials, into the products and services it delivers to its customers. The value chain concept views a firm as a series, or chain, of basic activities that add value to its products and services and thus add a margin of value to the firm. The stages of a value chain include: 1. Inbound logistics 2. Operations 3. Outbound logistics 4. Marketing and sales 5. Service

In the value chain concept, some business activities are primary activities, and others are support activities. This framework can be used to highlight where competitive strategies can best be applied in a business.

Inbound Logistics - the activities of inbound logistics include obtaining raw materials, subassemblies, and other input products from the suppliers, warehousing them, and delivering them to the production site. Inbound logistics is supported by information systems that deal with the company's suppliers.

Operations - during operations, the input resources are transformed into finished products. The nature of operations depends on the firm's line of business. In manufacturing companies, operations are more clearly defined than in service companies - this is where the goods are made. The operations of service companies are highly information-intensive.

Outbound Logistics - outbound logistics involves storing the firm's products and delivering them to customers against orders. Note that the ultimate buyer may actually receive the product from an intermediary, such as a distributor.

Marketing and Sales - establishing customers need for the product and assisting the customer in specifying the assortment and quantities are the tasks of marketing. Sales personnel are better able to serve their customers, and customers are able to establish their requirements for products.

Service - after-sales continuation of customer relationship through superior service is sometimes a contractual requirement and always a good business practice.

Virtual Value Chain and Integration of Value Chains [Figure 3.15]

A competitive company needs to analyze the entirety of its value chain, including the linkages between the stages. In the process, some firms are able to build an integrated information value chain. An integrated value chai, realized with information, is the objective of leading companies for the appropriate products and services.

3.7 Success with Strategic Information Systems

Keys to success of a strategic information system? 1. Active support of senior company management in the discovery of strategic opportunities and in the implementation process 2. Integration of planning for the strategic use of information systems into the overall company strategic planning process. 3. Direct reporting by those responsible for strategic use of information systems to the business managers of the area to be affected by the new system. 4. Placement of control mechanisms in the hands of these business managers. 5. Readiness for strategic use of information systems, implying successful use of the technological platform already in place and experience with technological innovation.

Identifying opportunities for strategic deployment of information systems is part of the larger process of strategic planning. A strategic information system has to be built on the strengths of the company that cannot be easily imitated. It has been determined that lasting, sustainable competitive advantage can be gained with information systems only if an organization possesses other resources as well. Such resources include:

1. A well-developed and flexible information technology platform or a database reflecting the marketplace experience with the firm's products, accumulated over several years. 2. Continual investment is required to maintain the advantage.