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Strategic Uses of Information Technology Chapter 3 Information Systems Management In Practice 7E McNurlin & Sprague PowerPoints prepared by Michael Matthew Visiting Lecturer, GACC, Macquarie University – Sydney Australia

Chapter 3 Use of the Internet by businesses set off a revolution in the use of IT, so that utilizing the Internet to conduct business became the strategic use of information technology. The questions that remain are: Has the revolution ended, or Does an even larger revolution loom? Does IT still matter?, and What sorts of strategic uses are companies making?

Chapter 3 cont. Strategic roles of IT fall into one of three categories: “ working inward” (improving a firm’s internal processes and structure) “ working outward” (improving the firm’s products and relationships with customers) and “ working across” (improving its processes and relationships with its business partners) Grainger, GE Power Systems, Wire Nova Scotia, The Shipping Industry, Cisco Systems and UPS Supply Chain Solutions, Semco, S. A., A Day in the Life of an E-lancer, General Mills and Land O’ Lakes, Sara Lee Bakery Group, and Dell Computer serve as examples of how companies are using information systems in strategic roles

Today’s Lecture Introduction History of Strategic Uses of IT Whither the Internet Revolution? The Cheap Revolution Episode Two: Profitability Strikes Back Does IT Still Matter? Working Inward: Business-to-Employee Building an Intranet Fostering a Sense of Belonging

Today’s Lecture cont. Working Outward: Business-to-Consumer Jumping to a New Experience Curve The Emergence of Electronic Tenders Getting Closer to Customers Being an Online Customer Working Across: Business-to-Business Coordinating with Co-suppliers Establishing Close and Tight Relationships Becoming a Customer-Centric Value Chain Getting Back-End Systems into Shape

Introduction Use of the Internet by businesses in mid/late ’90s set off a revolution in the use of IT Utilizing the Internet to conduct business became the strategic use of IT Strategic = having a significant, long-term impact on a firm’s growth, industry and $$ What now? Dot-com crash A larger revolution to come? Does IT still matter? What strategic uses are companies making of IT (esp. the Internet)

Introduction Figure 3-1 Strategic Uses of Information Systems

Introduction Last 20 Years – Strategic Uses of IT 1 st edition Mid 1980s, hot topic = end user computing (working inward) Help employees learn about PCs 2 nd edition Late ’80s strategic use focused outward to gain competitive advantage e.g. Merrill Lynch cash management account Now considered ‘normal’ = competitive necessity Vs. competitive advantage

Introduction Last 20 Years – Strategic Uses of IT cont. 3 rd & 4 th editions (1990s) Strategic use attention turned inward to reengineering business processes Intent = not to automate existing processes but to totally redesign how the enterprise operated Good idea but many failed as they were ‘lay-off’ plans Introduction of ERP systems was also aimed at internal operations, specifically providing single sources of data enterprise-wide

Introduction Last 20 Years – Strategic Uses of IT cont. 3 rd & 4 th editions (1990s) cont. Internet’s potential becoming evident Dot-coms = looked at its outward use to gain a competitive advantage Most established firms initially used the Internet technology internally, building intranets to improve company processes Publishing e-forms Accompanying workflow processes

Introduction Last 20 Years – Strategic Uses of IT cont. 5 th edition (late ’90s) Use of the Internet for business underway Bursting of the dot com bubble E-Business has become more reality based Integration of the Internet into how companies work has proceeded 6 th edition (early ’00s) Theme = leveraging traditional operations by using the Internet to work more closely with others Innovations of the dot-coms created competitive challenges for ‘bricks and mortar’ firms Their ‘strike back’ is essentially the theme for this 6 th edition

Introduction Last 20 Years – Strategic Uses of IT cont. 7 th edition (2005) “ Something has changed” Especially with regards to the use of IT for competitive advantage Some may question IT’s ability to give companies a competitive edge but it is absolutely necessary for competitive parity (necessity?) Being used strategically: Inward Outward Across

Introduction Whither the Internet Revolution? Internet frenzy peaked in 2000 Is the Information Revolution dead? Not if history is any guide British Railway Revolution – mid 1800s 10 fold increase after the boom During boom = great excitement and small companies flourished After = glamour gone. Business became serious and full of hard work Industry became orderly and profits began to reflect real returns Connecting industries Race for space followed by the ‘real deal’

Introduction Whither the Internet Revolution? cont. We are now in a period where organizations are re-architecting themselves around Internet technologies Tearing down old structures as they go Real gains will come when Internet technology adapts to organizations and people When the technology disappears and becomes part of life It will be ‘quiet’ compared to frenzy of ’99/00 but many think it will be a giant revolution

Introduction The Cheap Revolution CIOs are shifting from buying expensive proprietary products to buying cheap generic products “ Cheap Tech” Cost savings are compelling Google = runs on 100,000 cheap servers One breaks = discards Avoids expensive service contracts and in-house staff “ Dellification” Moved from selling PCs to also selling servers, printers, storage devices…. “ Cheap” is occurring elsewhere: Labor – outsourcing to other countries Film production – camcorders etc. Software – Linux Vs. Microsoft Telecommunications – Voice-over-IP…

Introduction Episode Two: Profitability Strikes Back Dot-coms became dot-bombs (dot-cons?) because they couldn’t generate profits Episode One: The Dot-Com Menace Episode Two: Profitability Strikes Back Whilst it has taken these so-called “old economy firms” longer to utilize the Web they realize that they must do so in a profit-making manner Use the Internet to complement your strategy, not replace your past way of serving customers nor disintermediate your channels Michael Porter, Harvard Business School

GRAINGER Case example: Using the Internet to complement your strategy Distributes non-production products to companies through stocking locations all over the U.S. Customers who purchase on their website also purchase through traditional channels Physical sites make its online presence more valuable Customers who want fast delivery Ordering is less expensive and shipping is cheaper in bulk to stocking locations Vs. individual small shipments Continue publishing its paper catalogs It receives a surge of online orders every time it issues its paper catalog

Introduction Definitions ‘ e’ = electronic e-business Conducting business using telecommunications networks esp. Internet Involves more than buying and selling e-commerce Conducting commerce (buying and selling) electronically using the Internet Note: IT definitions ‘evolve’

E-Business Drivers Key Components that have accelerated the rapid growth and acceptance of e-business: Wide access to a public network Standard communication protocol Standard user interface E-business applications run over the Internet, drastically reducing access and communications costs Pre Internet – 95% of Fortune 500 used EDI Vs. 2% of all U.S. companies With standardized communication protocols and user interfaces, implementation and training costs are far lower As a result, a much broader set of users and firms has access to the systems, allowing rapid growth

Does IT Still Matter? “ IT Doesn’t Matter” – article by Nicholas Carr in Harvard Business Review May 2003 Controversial and now a book Bottom line = IT doesn’t matter anymore, at least not strategically IT is an infrastructure technology, like rail, electricity, telephone etc. Such technology can create a strategic advantage for an individual firm at the beginning of its life cycle when it is expensive and risky Carr = IT is now at the end of buildout and is neither proprietary or expensive = A commodity which is available to anyone and won’t give any individual firm a competitive advantage

Does IT Still Matter? cont. Reached the end of its buildout: Power of IT now outstrips the needs of business IT prices have dropped = now affordable Capacity of Internet has caught up with demand (fibre surplus) Many vendors want to be seen as utilities Investment bubble has burst When an infrastructure technology reaches the end of its buildout, it simply becomes a cost of doing business Although IT is necessary for competitiveness, Competitive advantage comes from the firm’s business model

Does IT Still Matter? cont. Management of IT should become “boring” focussing on: Manage the risks Focus on vulnerabilities (which are more common with open systems) rather than opportunities Keep costs down Greatest risk = overspending, so only pay for use and limit upgrading Don’t update PCs when not needed Stay behind the technology leaders But not too far behind! Delay investments until there are standards and best practices and prices drop Only innovate when risks are low

Does IT Still Matter? cont. This ‘negative’ view deals with individual firms = losing competitive advantage Infrastructure technology brings its greatest economic and social benefits to all once it has become a shared infrastructure = what IT is becoming The debate is on Many other views Is he right? Regardless = has prompted some important discussions in Board Rooms etc. because executives need to understand the underpinnings of IT to know how to guide it IT is one of their strategic resources, besides people and $ for working inward, outward and across

Working Inward: Business-to-Employee Building an Intranet The primary e-business way to reach employees is via ‘Intranets’ Intranets are private company networks that use Internet technologies and protocols, and possibly the Internet itself Benefits of using intranets: Wider access to company information More efficient and less expensive systems development Decreased training (due to browser interface) By using an intranet’s open-system architecture, companies can significantly decrease the cost of providing companywide information and connectivity

Working Inward: Business-to-Employee Building an Intranet cont. Benefits cont. Investments in a intranet (open) = significantly less $$ than a proprietary network The link to the Internet allows companies to expand intranets worldwide easily and cheaply Significant Benefit = unthinkable before the Internet! Because an intranet uses the browser interface (and internet ‘protocols’ /technology) = users do not need extensive training on different products To a certain extent = applies to ‘all’ products today Companies only need to record information in one place, where it can be kept up-to-date for access by all employees no matter where in the world they are located

WORKING INWARD: Business to Employee

Working Inward: Business-to-Employee Building an Intranet Due to the ease with which Web sites can be created, many employees have (did?) build their own, leading to a proliferation of sites with company information Deciding how much control of the systems should be decentralized Proposed solutions Create a corporate portal to act as the gateway to the firm’s internal resources, information, and Internet services Microsoft, KPMG, Dell etc. Develop separate departmental or divisional portals, such as sales, HR, operations, and finance portals which are linked to form a corporate portal

GE POWER SYSTEMS Case example: Building an Intranet Chairman surveyed sales force (2001) Found they were spending more time in the office searching for information than they were out with their customers GE Power Systems answered the challenge by building a Web-based sales portal for its sales-people Main data feeds from existing Oracle etc. systems Sales, parts, pricing, inventory, customers etc. Also had a news feed from outside Flexible to include more types of information and access to more applications Single point of entry

Working Inward: Business-to-Employee Fostering a Sense of Belonging Intranets are evolving into very important enterprise structures In some enterprises, the intranet is seen as the enterprise Videos of executives – vision and mission Internal forms, rules and processes Need to file an expense report? Can also be seen as ‘cold’ Can provide the foundation for creating a sense of belonging by giving a means of communicating and creating communities Care of employees = one of the most important things enterprises do!

Use of Internet to help an impoverished province of Canada Traditional industries ‘gone’ The Challenge The Solution Wire Nova Scotia (WiNS) Co-ordinate 67 community access sites Building an Online Community General Conferences Personal Conferences Regional Conferences Coordinator Conferences WIRE NOVA SCOTIA Case example: Fostering a Sense of Belonging

Working Outward: Business-to-Customer In most industries companies need sophisticated computer systems to compete Airlines, hotels, rental car companies = a sophisticated reservation system (theirs or someone else’s) is a must Similar ‘musts’ in other industries Wholesale = automated order entry and distribution Finance = ATMs., trading and settlement… As industry leaders increase the sophistication of their systems to improve Quality, service innovation and speed Competitors must do the same or find themselves at a disadvantage

Working Outward: Business-to-Customer Jumping to a New Experience Curve Using IT (or any technology) as the basis for a product or service can, in some cases, be viewed as moving up a series of experience curves More experience leads to a set of connected curves Vs. one continuous learning curve Each curve represents a new technology or combination thereof in a product or service as well as in its manufacture and/or support Moving to a new curve requires substantial investment in a new technology

THE SHIPPING INDUSTRY Case Example: Jumping to a New Experience Curve

CISCO SYSTEMS and UPS Case Example: Jumping to a New Experience Curve In the late 1990s Cisco committed itself to manufacturing products within 2 weeks of order BUT = could not guarantee delivery Turned over its European supply chain to UPS Supply Chain Solutions (UPS SCS) Uses UPS system to find the best shipper to move the package from the Netherlands centre to the customer The systems of the two companies have become increasingly linked Each movement of product is recorded in both systems Handles over 1m boxes a year Because UPS can ensure reliable transit times, Cisco is able to now promise delivery times for its European customers

Working Outward: Business-to-Customer The Emergence of “Electronic Tenders” Initially IT has been embedded in products and services for its computational capabilities e.g. in cars and elevators to make them operate more efficiently Now = allows product/service to be “tended” i.e. cared for, attended to, or kept track of by another computer e.g. vehicle diagnostics monitored by car dealer Packages / luggage etc. with bar codes = able to be tracked Potential uses are endless and we are just at the beginning Options are endless but the goal is still to get closer to the customer

Working Outward: Business-to-Customer Getting Closer to Customers Business-to-consumer e-business is the most widely reported form of e-business. Nearly every type of product can now be purchased online: books, CDs, flowers etc. Many success stories – Dell, Cheap Tickets, ETrade …. Success is not easily achieved: Amazon.com had its business viability questioned for a long time Levi Strauss, despite encouraging figures, quit selling jeans over the Internet “…complex proposition and management had better uses for company funds” Advantages are numerous and seem obvious (Figure 3-4) Potential problems are also numerous but not so obvious (Figure 3-5)

WORKING OUTWARD: Business to Customer

Working Outward: Business-to-Customer Getting Closer to Customers cont. Use of the Internet has grown more sophisticated Customer Relationship Management (CRM) Involves using IT to know more about customers (and non-customers?) Whether you visit their website, call them (home, office, mobile) or buy something – the firm is often keeping track and combining that information to create a profile of you Followed on from ERP ERP focussed on internal data CRM focuses on customer data Boon or bane = depends on how intrusive you think they are Great useful information Vs. Invasion of privacy Privacy – protection laws in many countries

Working Outward: Business-to-Customer Getting Closer to Customers cont. Successful selling over the Internet entails much more than just setting up a Web site and taking orders It involves organizing the entire value chain around the Internet The E-Business Model Redefining Customer Value “ On-demand”: reduces the time it takes to respond to customer requests Convenience: one stop shopping plus single point of contact. Online business allows gathering and managing customer information (to serve the customer) Access to a wide range of competitive prices and sellers for products Note: as in the ‘real world’; the highest volume sellers do not always have the lowest price: Prices are offset by branding, awareness and customer trust

Working Outward: Business-to-Customer Getting Closer to Customers cont. The Internet is not only used to sell to customers online. It is also used to provide services to companies Sometimes it is can be difficult to know which is more valuable – the product or the service The current focus is on staying in closer contact with customers, understanding them better, and eventually, becoming customer driven by delivering personalized products and service

SEMCO Case Example – Using the Internet to get Closer to Customers Brazilian heavy equipment manufacturer with an ‘interesting’ management attitude/structure Letting employees ‘self manage’ and following their ideas with $ First = moved into services and more recently into the marketspace of e-business services over the Internet Now = even teaming with a virtual trade show company to host virtual trade fairs for companies too small to have one on their own All of this change has occurred by following the employees When they have a good idea = Semco management is likely to provide the funding to test it out Unusual company, however its forays into using the Internet to expand its business provide lessons for others

Working Outward: Business-to-Customer Being an Online Customer Companies large and small are transacting business via the Internet Some (still?) use it as their main means of business, even after the dot-com crash

TerenceNet Case Example – A Day in the Life of an E-Lancer E-business consulting, development, and research firm for small/medium businesses Much of its work is procured from www.elance.com Website that puts e-business freelancers in contact with clients Charges 10% commission Bid on projects Have private conversations with potential clients Even able to sub-contract to others (become a client!) Trust involved on both sides When you sign up on Elance, it’s like joining a community

Working Across: Business-to-Business Streamlining processes that cross company boundaries is the next big management challenge Companies have spent a lot of time and effort streamlining their internal processes, but their efficiencies often stop at their corporate walls Working across business takes many forms including: Working with ‘co-suppliers’ Working with customers in a close mutually dependent relationship Building a virtual enterprise, in fact, one that might evolve into an e-marketplace

Working Across: Business-to-Business Businesses have long used IT to reduce costs and time of inter-organizational transactions, for example: Inter-organizational Systems (IOS) Reservation systems Sabre (AA) Electronic funds transfer systems Cirrus (Green Machine) Electronic Data Interchange Systems (EDI) Transmission, in standard syntax, of data for business transactions between computers of independent organizations

Working Across: Business-to-Business Coordinating with Co-suppliers Collaborating with non-competitors is a type of working across Example – two food manufacturers might have the same customers (supermarkets and other retailers) but do not compete with each other Lack of convenient ways to share information quickly and easily has deterred co-suppliers from working together Internet takes away this deterrent

GENERAL MILLS & LAND OF LAKES Case Example – Coordinating with Co-suppliers Seven largest US food companies supply about 40% of supermarket shelf space for dry goods Use own trucks etc. Only supply 15% of refrigerated One truck for several supermarkets Less efficient, delays etc. = unhappy clients Combine their deliveries on General Mills trucks Now = looking into integrating their order taking and billing processes

Working Across: Business-to-Business Establishing Close and Tight Relationships Strategic use of IT and the Internet has moved to the most difficult area = working across companies Having relationships with various players in one’s business ecosystem Banks, advertising agencies, suppliers, distributors, retailers, even competitors Such relationships often have accompanying linking information systems

Working Across: Business-to-Business Establishing Close and Tight Relationships cont. Need to determine what level of systems integration they want: Loose = provide ad hoc access to internal information Business processes remain distinct Such limited integration requires little risk or cost Close = two parties exchange information in a formal manner Leads to greater benefits, so there is greater impetus to make the relationship work Risks increase because confidentialities are shared Costs are also higher Tight = two parties share at least one business process Most risky – business critical and the most costly to integrate Due to high costs and risks = can only have a few!! Where does one organizational boundary begin and the other end? = Intermeshed!

WORKING OUTWARD: Business to Business

SARA LEE Case Example: Close relationship becoming a tight one Sara Lee was one of the first to initiate scan-based trading with large retailers that sell its baked goods Using this technology, Sara Lee does not get paid until a loaf of bread is sold and passes through the point-of-sale scanner The technology requires drawing from a single database hosted by a third party Its use has improved the quality of delivery people, lowered costs, and increased revenues Note: Sara Lee requires retailers to adhere to a number of prerequisites – to demonstrate that they are good trading partners Look at how it is administered: ‘ Seven prerequisites for SBT’ Management structure to support

Working Across: Business-to-Business Becoming a Customer-Centric Value Chain A company’s value chain consists of: Upstream supply chain Working with its suppliers of raw materials and parts Downstream demand chain Working with its distributors and retailers to sell its products and services to end customers Traditionally most companies make-to-stock = build products / create services and then “push” them to customers Supply-Push world Today, we are seeing the rise of the reverse – a demand-pull world where a customer’s order triggers the creation of a customized product or service the customer has defined

DELL COMPUTER Case Example: Demand - Pull Dell is the foremost example of the demand-pull business model Customers configure their on PCs on Dell’s Website, and once an order is initiated, Dell’s suppliers can see the ordering information and production schedule on Dell’s extranet In fact, their production systems grab this information automatically; as a result, Dell’s extranet has become a private exchange Dell is even working to give suppliers two tiers down access to customer order information, so they can react to changes even faster

Working Across: Business-to-Business Becoming a Customer-Centric Value Chain cont. Pros and Cons of Demand-Pull Value-chain transparency = should reduce the number of duplicate orders 10,000 memory chips Vs. 30,000 ‘ordered’ due to shortage Creating private exchanges such as Dell changes the level of co-operation among firms Con = infrastructure Manufacturer’s becomes its suppliers – binding them even tighter Requires TRUST Becoming customer centric is not easy, especially for supply-push companies The promise of CRM is alluring Aims to help companies shift their attention from managing their operations to satisfying their customers

Working Across: Business-to-Business Getting Back-End Systems in Shape Most, if not all, B2B systems must integrate with existing back-end systems which has proved to be particularly difficult Challenge Variety of platforms Incompatible Approach Purchase ‘new’ systems Database Management Systems (DBMS) ERP Systems Extranet = securely share with suppliers, partners etc. Goal = extend the company’s back-end systems to reengineer business processes external to the company

Conclusion Over the years a few innovative companies have used IT for strategic advantage ‘ Models’ but many companies did not have the resources or skills to follow their example With the growth of the Internet and development of e-business, IT has become a strategic tool in every industry Looking for cohesion of often dispersed employees? Intranets and Portals Increasingly customer centric view has many using IT in working across Value chains are looking to shift from supply-push to demand-pull As IT continues to evolve, so do its strategic uses

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