Strategic Uses of Information Systems

This week we examine the strategic uses of information systems, primarily as a tool for gaining competitive advantage. The outline presented here is intended to help point out important topics and terms. It is not intended to replace lecture (or reading the chapter). If you are following along in the text, this topic is covered in chapter two.

Objectives

• identify terms and acronyms associated with SIS (such as SIS)
• describe and discuss techniques used to gain a competitive advantage
• discuss the advantages and disadvantages of creating and deploying strategic information systems
• differentiate between the terms strategic and tactical

Terms used in chapter 2

These terms are listed in roughly the order encountered in the text.

• SIS: A strategic information system is an IS used to provide information which could be of strategic value. This is generally defined as seizing the opportunity to gain a long-term (as opposed to fleeting) competitive advantage.
• first mover: A first mover is an organization which is the first to offer a new product or service. This is considered risky since resources are used to create something new which is of unproven value. The rewards for success can be great and may provide a considerable competitive advantage. First mover may also be applied to an organization which is the first to use a new technology.
• late mover: A late mover is an organization that waits to see if a new product or service offered by a competitor is successful before offering that product or service. This approach is much less risky than trying to be a first mover, but it does carry a risk of ending up in a competitive disadvantage if a competitor produces a popular new product or service. Late mover may also be applied to an organization which is not the first to use a particular technology. It also applies to organizations that come into a previously established market. In that case, late movers have the advantage of not having to maintain legacy (existing) systems, and can decide to start out with more efficient systems and procedures right from the start.
• critical mass: Critical mass is used to describe when an organization or system has enough usage or success to achieve a specific result.
• tipping point: Tipping point is used to describe when a number of small changes have accumulated and can now cause a big change.
• bleeding edge: Bleeding edge is used to describe organizations that use the latest technology which puts them in a risky position.
• strategic: Strategic planning suggests critical or opportune steps which can be used to achieve longer term goals. Strategy concerns a big-picture attitude and is the domain of higher-level managers.
• tactical: Tactical planning concerns the implementation of techniques to achieve goals. Tactical is short-term as opposed to long-term strategy. Tactical planning is used by lower-level managers to implement some of the steps defined by longer-term strategic plans.
• reengineering: Reengineering is when a process or organization is redesigned from the ground up, generally with the hope of huge productivity gains.
• DMCA: Digital Millennium Copyright Act

Strategic Information Systems (SIS)

SIS are generally differentiated from other BIS because they are used to seize opportunities rather than just solve problems. SIS are often used to try to gain a strategic advantage over rivals, leading to a competitive advantage in the market. SIS may also be used to enter new markets. It is also important to remember that gaining a competitive advantage is not a static, unchanging event. Competitors will almost certainly seek to reduce, eliminate, or reverse any competitive advantage you have. Maintaining a competitive advantage is an ongoing process.

Eight ways to gain competitive advantage

• reduce costs: This involves reducing your costs relative to your competition. Some ways you can do this include lowering the cost of raw materials, lowering the cost of labor, and increasing productivity. This is the primary reason why companies automate production or move production overseas.
• raise barriers to market entrants: This makes it more difficult for competitors to get started in your market. This is often done using "intellectual property" tools such as patents and copyrights. It can also be done by making it extremely expensive for competitors to enter a market, often due to a massive investment in some technology or other infrastructure that gives your organization a large advantage.
• establish high switching costs: This involves making it costly for your customers to switch to a competitor. A good example of this is the reluctance of companies to switch from using one software package to another because of the time and expense of training and working out compatibility problems. Other common examples that are mentioned in the text are cell phones and printers. Cell phone users often have penalties for ending a contract early and often have to buy a new phone to switch service. Printer manufacturers sell their printers cheap and make their profit by selling high profit margin toner and ink cartridges. A user who decides to switch has to buy a new printer.
• create new products and services: Being the first to market (first mover) with a new product or service can draw new customers and help keep existing customers. One example is eBay, which was the first major online auction service. Another example was Visicalc, the first major spreadsheet application. Visicalc not only helped themselves by creating a new product, but also helped Apple become the early dominant microcomputer. It is important to keep on improving, however. Some companies try to keep competitors away using copyright and patent law, but you have to keep on improving to stay in the lead. Lotus 1-2-3 took over the lead from Visicalc, and then lost the lead to Excel. Apple lost the lead to the IBM PC.
• differentiate products or services: People buy famous brand names even when they cost more than lesser known brands because they perceive that they will get a higher quality product. Being able to differentiate yourself in a positive way from your competition is a big advantage. A good example of this is Apple's iPod. Apple has a reputation for great products. This has helped them marginalize Microsoft's attempt to take away market share with the Zune.
• enhance products or services: One strategy is to make your products more enticing to customers by adding something of value. This can range from having longer warranty periods, to offering discounts, to giving rewards to frequent customers. We can see this all over with things like frequent flier miles, preferred customer cards, satisfaction guarantees, etc.
• establish alliances: Businesses can partner with each other to enhance each others products and/or services. The text gives the example of combining an airline, hotel, car rental, and restaurants together to create a one-stop vacation planning service. You can see the same type of alliances when you see a Starbucks inside a Meijer's, a TCF bank inside a Jewel, or a fast food or doughnut store inside a gas station. Amazon provides an online marketplace for many, many other businesses, including other booksellers.
• lock in suppliers or buyers: You can do this a number of different ways. One of the most common is for large businesses to use their size to negotiate favorable contracts with suppliers. Wal-Mart is famous (notorious?) for this. In fact, Wal-Mart's negotiations with their suppliers has been a major force in driving jobs out of the U.S. and into China. It is difficult to impossible for Wal-Mart's competitors to negotiate such favorable contracts because they don't have the same size advantage. One way to lock in a customer is to create a standard that makes it difficult to break away from using your product. Some software examples of this are Microsoft Windows, Microsoft Office, Adobe PDFs, and Flash animation.

Reducing costs

One of the most common mistakes to make is to equate reducing costs to reducing prices. They are not the same. Reducing costs is a way to gain strategic advantage. It refers to the cost of producing a good or service. It does NOT refer to the price being charged for that good or service.

Reducing the price of a product can help differentiate it from competing products, but can create many problems. If the profit margin on a product is small, a price reduction can make the product unprofitable. You usually have to sell a lot more of a product to make up for the difference in profit caused by lowering the price (unless you were also able to reduce the cost of production). Let's look at one example. Suppose you are selling a tool for $5 and getting back $1 in profit. You decide to reduce the price of the tool to $4.50. You now have to sell twice as many of that product to retain the same profit.

Questions involving development of an SIS

• What would be the most effective way to gain an advantage?
• Would having some information more accessible or timely help establish a significant advantage?
• Can an SIS be developed that provides what the organization wants?
• Will the development costs be justified?
• Will competitors be able to do the same thing?
• How long will it take competitors to catch up?
• Can the new system be continually enhanced to extend the organization's competitive advantage?
• What is the risk of not pursuing this SIS development?
• Are there alternatives? If so, what are their advantages and disadvantages?

Copyrights and patents

Competitive advantage is a moving target. Once a competitive advantage has been achieved, action must be taken to maintain it or competitors will quickly try to eliminate it. One of the techniques used by organizations to prevent competitors from catching up is to protect what is know as "intellectual property". The primary vehicles for such protection are trade secrets, copyrights, and patents. Copyrights and patents give the claim holder exclusive rights to a concept, idea, or product for a length of time. During that time, the claim holder can prevent competitors from using the protected concepts, ideas, or products.

Copyrights and patents have become a controversial subject in recent years. Governments have been increasingly strengthening copyrights and patents. At the same time it has become clear that many copyrights and patents have suppressed innovation. This has led many to question what the real purpose of "intellectual property" laws are and should be.

The Digital Millennium Copyright Act (DMCA) is a law passed in 1998 that increased penalties for copyright violations and made it illegal to circumvent copy protection (or even tell people how copy protection can be circumvented). The DMCA is often used to force websites to remove content that a company would rather not have publicly accessible. This often includes material that is not infringing any copyright - but many website operators do not have the time, resources, or interest to investigate and fight such requests. Website operators often just comply with DMCA takedown requests because it is easier and safer than risking becoming liable for penalties for not complying with the request. Wikipedia has an article which explains the history and content of the DMCA.

Design by buzzword

If you stay in the IT field you will always hear about the latest and greatest trends. Just as in retail, "new" sells. That's one reason why it is easy to get everyone excited about being up-to-date and using all the new "buzzword" technologies. Unfortunately, it is also often the case that tried-and-true older technologies are a better choice for many solutions. Beware of the "buzzwords".

Closely associated with such buzzwords are jargon. Jargon is used in most professions for a few reasons. First, jargon helps to communicate ideas very quickly and accurately without the need for going into detail. Second, jargon signals that the people engaged in discussion are fluent enough in the given field to use jargon. Third, jargon is sometimes used by people in the field to discourage outsiders from asking questions. This may be due to annoyance, or sometimes because the outsider has asked a question the "expert" should know but doesn't. In this case the use of jargon is a defensive measure by the expert.

Rockwell Automation's Retroencabulator sales video is a good example of the use of jargon.