Information System Strategies for Dealing with Competitive Forces
What is a firm to do when 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? How do you become the most successful firm in an industry in terms of profit and share price (two measures of success)?
Basic Strategy 101: Align the IT with the Business Objectives
The basic principle of IT strategy for a business is to ensure the technology serves the business, and not the other way around. The research on IT and business performance has found that (a) the more successfully a firm can align its IT with its business goals, the more profitable it will be, and (b) only about one-quarter of firms achieve alignment of IT with business. About half of a business firm’s profits can be explained by alignment of IT with business (Luftman, 2003; Henderson, et al., 1996).
Most businesses get it wrong: IT takes on a life of its own and does not serve management and shareholder interests very well. Instead of business people taking an active role in shaping IT to the enterprise, they ignore it, claim to not understand IT, and tolerate failure in the IT area as just a nuisance to work around. Such firms pay a hefty price in poor performance. Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on revenues and profits.
So how do you as a manager achieve this alignment of IT with business? In the following sections, we discuss some basic ways to do this, but here’s a summary:
- Identify your business strategy and goals.
- Break these strategic goals down into concrete activities and processes.
- Identify how you will measure progress towards the business goals (e.g. metrics).
- Ask yourself “How can information technology help me achieve progress towards our business goals and how it will improve our business processes and activities?”
- Measure actual performance. Let the numbers speak.
Because the system replenishes inventory with lightning speed, Walmart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Walmart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. By using systems to keep operating costs low, Walmart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)
Walmart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response. Dell Computer Corporation’s assemble-to-order system, described in the following discussion, is another example of an efficient customer response system.
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 continuously introduces new and unique search services on its Web site, such as Google Maps. Apple created iPod, a unique portable digital music player, plus a unique online Web music service where songs can be purchased for $.69 to $1.29 each. Apple has continued to innovate with its multimedia iPhone, iPad tablet computer, and iPod video player.
Manufacturers and retailers are using information systems to create products and services that are customized and personalized to fit the precise specifications of individual customers. For example, Nike sells customized sneakers through its Nike iD program on its Web site. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to eight characters. Nike transmits the orders via computers to specially-equipped plants in China and Korea. The sneakers cost only $10 extra and take about three weeks to reach the customer. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.
Table 3.1 lists a number of companies that have developed IS-based products and services that other firms have found difficult to copy.
Table 3.1 IS-Enabled New Products and Services Providing Competitive Advantage
|Amazon: One-click shopping
||Amazon holds a patent on one-click shopping that it licenses to other online retailers
|Online music: Apple iPod and iTunes
||An integrated handheld player backed up with an online library of over 10 million songs
|Golf club customization: Ping
||Customers can select from more than 1 million different golf club options; a build-to-order system ships their customized clubs within 48 hours
|Online person-to-person payment: PayPal.com
||Enables transfer of money between individual bank accounts and between bank accounts and credit card accounts
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. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.
The data come from a range of sources—credit card transactions, demographic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with Web sites. Sophisticated software tools find patterns in these large pools of data and infer rules from them that can be used to guide decision making. Analysis of such data drives one-to-one marketing where personal messages can be created based on individualized preferences. For example, Hilton Hotels’ OnQ system analyzes detailed data collected on active guests in all of its properties to determine the preferences of each guest and each guest’s profitability. Hilton uses this information to give its most profitable customers additional privileges, such as late checkouts. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis (see Chapters 2 and 8).
Strengthen Customer and Supplier Intimacy
Use information systems to tighten linkages with suppliers and develop intimacy with customers. Toyota, Ford, and other automobile manufacturers have information systems that give their suppliers direct access to their production schedules, enabling suppliers to decide how and when to ship supplies to the plants where cars are assembled. This allows suppliers more lead time in producing goods. On the customer side, Amazon.com keeps track of user preferences for book and CD purchases, and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product or service to competitor) and loyalty to your firm.
The Internet’s Impact on Competitive Advantage
Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense (Porter, 2001). Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. Profits have been dampened. Table 3.3 summarizes some of the potentially negative impacts of the Internet on business firms identified by Porter.
The Internet has nearly destroyed some industries and has severely threatened others. For instance, the printed encyclopedia industry and the travel agency industry have been nearly decimated by the availability of substitutes over the Internet. Likewise, the Internet has had a significant impact on the retail, music, book, retail brokerage, software, telecommunications, and travel industries. The chapter-ending case provides a detailed discussion of the Internet’s impact on publishing.
However, the Internet has also created entirely new markets, formed the basis for thousands of new products, services, and business models, and provided new opportunities for building brands with very large and loyal customer bases. Amazon, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are examples. In this sense, the Internet is “transforming” entire industries, forcing firms to change how they do business.
The Business Value Chain Model
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? Here’s where the business value chain model is helpful.
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 either primary activities or support activities
Primary activities are most directly related to the production and distribution of the firm’s products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes receiving and storing materials for distribution to production. Operations transforms inputs into finished products. Outbound logistics entails storing and distributing finished products. Sales and marketing includes promoting and selling the firm’s products. The service activity includes maintenance and repair of the firm’s goods and services.
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).
You can ask at each stage of the value chain, “How can we use information systems to improve operational efficiency and improve customer and supplier intimacy?” This will force you to critically examine how you perform value-adding activities at each stage and how the business processes might be improved. For example, value chain analysis would indicate that Verizon, described in the chapter-opening case, should improve its processes for product development and quality control. You can also begin to ask how information systems can be used to improve the relationship with customers and with suppliers who lie outside the firm value chain but belong to the firm’s extended value chain where they are absolutely critical to your success. Here, supply chain management systems that coordinate the flow of resources into your firm, and customer relationship management systems that coordinate your sales and support employees with customers, are two of the most common system applications that result from a business value chain analysis. We discuss these enterprise applications in detail later in Chapter 8.
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. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, research organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective.
Once you have analyzed the various stages in the value chain at your business, you can come up with candidate applications of information systems. Then, once you have a list of candidate applications, you can decide which to develop first. 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. If your competitors are making similar improvements, then at least you will not be at a competitive disadvantage—the worst of all cases!
Global Business and System Strategies
There are four main ways of organizing businesses internationally: domestic exporter, multinational, franchiser, and transnational, each with different patterns of organizational structure or governance. In each type of global business organization, business functions may be centralized (in the home country), decentralized (to local foreign units), and coordinated (all units participate as equals).
The domestic exporter strategy is characterized by heavy centralization of corporate activities in the home country of origin. Production, finance/accounting, sales/marketing, human resources, and strategic management are set up to optimize resources in the home country. International sales are sometimes dispersed using agency agreements or subsidiaries, but foreign marketing is still totally reliant on the domestic home base for marketing themes and strategies. Caterpillar Corporation and other heavy capital equipment manufacturers fall into this category of firm.
A multinational strategy concentrates financial management and control out of a central home base while decentralizing production, sales, and marketing operations to units in other countries. The products and services on sale in different countries are adapted to suit local market conditions. The organization becomes a far-flung confederation of production and marketing facilities operating in different countries. Many financial service firms, along with a host of manufacturers such as Ford Motor Co. and Intel Corporation, fit this pattern.
Franchisers have the product created, designed, financed, and initially produced in the home country but rely heavily on foreign personnel for further production, marketing, and human resources. Food franchisers, such as McDonald’s and Starbucks, fit this pattern. McDonald’s created a new form of fast-food chain in the United States and continues to rely largely on the United States for inspiration of new products, strategic management, and financing. Nevertheless, local production of some items, local marketing, and local recruitment of personnel are required.
Transnational firms have no single national headquarters but instead have many regional headquarters and perhaps a world headquarters. In a transnational strategy, nearly all the value-adding activities are managed from a global perspective without reference to national borders, optimizing sources of supply and demand wherever they appear and taking advantage of any local competitive advantages. There is a strong central management core of decision making but considerable dispersal of power and financial muscle throughout the global divisions. Few companies have actually attained transnational status, but Citigroup, Sony, and Nestlé are attempting this transition.
Nestlé S.A., the largest food and beverage company in the world, is one of the world’s most globalized companies, with nearly 280,000 employees at 500 facilities in 200 countries. Nestlé launched a $2.4 billion initiative to adopt a single set of business processes and systems for procurement, distribution, and sales management using mySAP enterprise software. All of Nestlé’s worldwide business units use the same processes and systems for making sales commitments, establishing factory production schedules, billing customers, compiling management reports, and reporting financial results. Nestlé has learned how to operate as a single unit on a global scale.
Global System Configuration
Figure 3.5 depicts four types of systems configurations for global business organizations. Centralized systems are those in which systems development and operation occur totally at the domestic home base. Duplicated systems are those in which development occurs at the home base but operations are handed over to autonomous units in foreign locations. Decentralized systems are those in which each foreign unit designs its own unique solutions and systems. Networked systems are those in which systems development and operations occur in an integrated and coordinated fashion across all units.
Competing on Business Processes
Technology alone is often not enough to make organizations more competitive, efficient, or quality-oriented. The organization itself needs to be changed to take advantage of the power of information technology. These changes may require minor adjustments in work activities, but, often, entire business processes will need to be redesigned. Business process management (BPM) addresses these needs.
What Is Business Process Management?
Business process management (BPM) is an approach to business which aims to continuously improve business processes. BPM uses a variety of tools and methodologies to understand existing processes, design new processes, and optimize those processes. BPM is never concluded because continuous improvement requires continual change. Companies practicing business process management need to go through the following steps:
- Identify processes for change: One of the most important strategic decisions that a firm can make is not deciding how to use computers to improve business processes, but rather understanding what business processes need improvement. When systems are used to strengthen the wrong business model or business processes, the business can become more efficient at doing what it should not do. As a result, the firm becomes vulnerable to competitors who may have discovered the right business model. Considerable time and cost may also be spent improving business processes that have little impact on overall firm performance and revenue. Managers need to determine what business processes are the most important and how improving these processes will help business performance.
- Analyze existing processes: Existing business processes should be modeled and documented, noting inputs, outputs, resources, and the sequence of activities. The process design team identifies redundant steps, paper-intensive tasks, bottlenecks, and other inefficiencies.