Lecture 4 (using information technology for competitive advantage)

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Using Information Technology
for Competitive Advantage
Lecture 4
Abdisalam Issa-Salwe
Department of Computer Science
Faculty of Information Science and Technology
East Africa University
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Topic list
 Porter’s five forces model
 Value chain
 EDI
 Data warehousing
 Data mining
 Intelligent agents
 Value added networks
East Africa University, Faculty of Information Science and Technology, Department of Computer Science

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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?
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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.”
 Webster’s 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
Failed
Strategy
Emergent
Strategy
Executed
Strategy
Evolution of Strategy Concepts
 Competitive Strategy
Competitive Advantage
 Sustainable Competitive Advantage
 Temporary (Non-Sustainable)
Competitive Advantage
Strategic Advantage
 Temporary Strategic Advantage
Strategy
Speeding Up

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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
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
 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

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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 top-
management strategy making

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IS as a Strategic Resource
Inter-Firm
Strategic
Focus
“Alliance”
Competitive Marketplace
Company A
Internally
Strategic
Company B
Externally
Strategic
Inter-Firm
Strategic
Focus
“Alliance”
Company A
Internally
Strategic
Company B
Externally
Strategic
Company A
Internally
Strategic
Company B
Externally
Strategic
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Porter’s 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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Porter’s five forces model (cont…)
 Michael Porter has identified five forces
that are widely used to assess the
structure of any industry. Porter’s five
forces are the:
Bargaining power of suppliers,
Bargaining power of buyers,
Threat of new entrants,
Threat of substitutes, and
Rivalry among competitors.
14East Africa University, Faculty of Information Science and Technology, Department of Computer Science

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 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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 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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 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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 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 Computer-Aided Design
(CAD). IT has also provided the basis for
creating new information-intensive products.

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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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Bargaining power of suppliers
 Any business requires inputs—labor, parts, raw materials, and
services. The cost of your inputs can have a significant effect on
your company’s 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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 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 'margin' depicted in the diagram is the same
as added value.
 The organization 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 organization and another.
 Typical transactions include such documents as
purchase orders, invoices, advance shipping
notification, payments, etc.
 Exchange of electronic data using inter-
organizational 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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 It is important to differentiate between EDI and
electronic commerce (e-commerce).
 Electronic commerce encompasses all aspects
of electronic business exchanges, including
person-to-person 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 standardized electronic form.
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 EDI can reduce costs, workforce
requirements, and errors associated with
retyping orders, invoices, and other
documents.
 With EDI, computer data already entered
by one organization is made available to a
business partner.
 EDI is typically handled using store-and-
forward technologies similar to e-mail.

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 Two approaches in the implementation of
EDI.
 Many large organizations 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 other’s 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 organizations.
 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 analyze 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 organization. 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 organizations.
 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
analyzing 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.
 Analyze 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/lectures/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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Group Discussion
 Group 1: Discuss using Information
Technology for Competitive
Advantage
 Group 2: Porter’s five forces model
 Group 3: Discuss the concept of
Value chain (looking at the
systematic approach to examining
the development of competitive
advantage).

Lecture 4 (using information technology for competitive advantage)

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