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ISMT 101 IS & Business Integration Now we move to the strategic level… Business implications Mgmt Decision Making (8) Technology components HW (2) SW (3) Network Internet DB (5) (6) (4) People Organizational use Major IS (1) (1) Digital Economy EB (7) (10) IS-Biz Integration • Does IT indeed payoff? • Why some firms obtain real benefits while others did NOT? • How to use IT to support corporate strategy? Does IT indeed payoff “We see computers everywhere, but in the productivity statistics.” Robert Solow, Nobel Prize-winning economist Substantial IT investment has been made  But, in general, IT-performance relationship is not clear  Worldwide IT spending $ Billions $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1960s Source: IDC 2004 1970s 1980s 1990s 2000s Substantial tech investment, but… 25% 20% U.S OCAM Investment per Worker * U.S Output per Worker % Annual Change 15% 10% 5% 0% -5% -10% 1965 1970 1975 * OCAM is BEA's Office, Computing & Acctg Machinery 1980 Year 1985 1990 1995 Substantial tech investment, but… 40.0% 35.0% Growth Rate of IT Capital per Worker Growth Rate of Output per Worker 35.1% 32.7% 30.8% 30.0% 25.6% 25.0% 20.0% 16.9% 15.0% 10.0% 5.0% 1.5% 2.1% 1.8% 3.0% 1.4% 0.0% United States Japan France Germany United Kingdom Economy Slowdown in the G5 0.1 U.S % Annual Change in Output per Worker 0.09 Japan France 0.08 Germany 0.07 U.K 0.06 0.05 0.04 0.03 0.02 0.01 -0.01 1965 1970 1975 1980 Year 1985 1990 1995 Country-level recap  Substantial IT investment was made worldwide  However, the substantial IT investment was associated with country-level economic slowdown IT leads to different outcomes Source: Brynjolfsson, Erik, The IT Productivity Gap, "Optimize" magazine, July 2003, Issue 21 How IT affect Porter’s Five Forces Porter (2001), Harvard Business Review  IT  Bargaining power of suppliers  (+/-) Online procurement can shift bargaining power relative to physical channels  (-) Disintermediation: Suppliers can reach end users directly Direct Sale PC industry rivalry = High Threat of new entrants = High Threat of substitution = Low Bargaining power of Medium customers = Bargaining power of Medium IT and competitive forces Strategic questions:      Can IT be incorporated into or generate products/services? Can IT create entry barriers? Can IT lock-in customers? Can IT change the basis of competition? Can IT change the relationship with suppliers and partners? Analyze ATM:  Based on networking Costs of ATM $20000 Difficult ATM is a necessity  Shared ATM network    Dell’s strategy to combat the forces Web-based customization helps lock-in consumers Direct Sale Efficient inbound logistics enable Web-based customization Competitive Advantage Cost Leadership Differentiation Internal Activities Value Chain Analysis IT Focus External Environment Competitive Forces Strategies to achieve competitive advantage  Competitive advantage: above-average profit within an industry To achieve competitive advantage…  Cost leadership strategy seeks to provide goods and services at the lowest price  Differentiation strategy seeks to provide unique products and services that customers value  Focus strategy is focused on finding and developing a niche market (a small segment in the market) Competitive Advantage Cost Leadership Differentiation Internal Activities Value Chain Analysis IT IT reduces inventory holding costs Focus External Environment Web-based customization helps lock-in customers Competitive Forces Competitive Advantage Cost Leadership Differentiation Internal Activities Value Chain Analysis IT Web-based hub enables outsourcing Focus External Environment Tech leadership leads to entry Competitive barrier and customer lock-in Forces Wal-Mart    World’s #1 retailer with 4,800 stores and 1.5 million employees World’s largest company in sales volume 48% more productive than the rest of the retail industry How Wal-Mart Does It?  Powerful information systems  Leader in the use of EDI  Smart in-store systems for inventory and operations  Satellite communications network for tracking material flows  Vendor managed inventory (VMI) systems  VMI is based on EDI (EDI is a technological innovation)  VMI is a managerial innovation – vendor checks inventory level continuously, and decides when to replenish Wal-Mart’s inventory Competitive Advantage Cost Leadership Differentiation Internal Activities Value Chain Analysis IT Use EDI to enhance efficiencies of logistics Focus External Environment Require suppliers to use EDI, thus Competitive increasing lock-in Forces Competitive Advantage Cost Leadership Differentiation Internal Activities Value Chain Analysis IT “Total Gold” increase efficiencies of CRM Focus External Environment Increase customer loyalty Competitive Forces Homework – analyzing a new case Industry features  Low-tech industry—different than Dell  Mature products—different than Cisco  Less room to enhance customers’ experience— different than Harrah’s  More like Wal-Mart, but lack monopoly power Homework – analyzing a new case Case analysis How to use IT to improve efficiencies of (some of) the value chain activities How to use IT to shape (some of) the five competitive forces What is the best strategy among the three strategies (cost leadership, differentiation, focus) focus Approach to competitive advantage  Create entry barrier (tech leadership, monopoly)   Develop systems with high switching costs   E.g., Cisco, Wal-Mart E.g., Dell, eBay, Harrah’s Use IT to change the industry nature  E.g., Skype