Management Information Systems,

Sixth Edition

Chapter 2
Strategic Uses of Information Systems
 Objectives

• Explain what business strategy and strategic

moves are
• Illustrate how information systems can give
businesses a competitive advantage
• Identify basic initiatives for gaining a competitive
advantage
• Explain what makes an information system a
strategic information system

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 Objectives (continued)

• Identify fundamental requirements for

developing strategic information systems
• Explain circumstances and initiatives that make
one IT strategy succeed and another fail

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 Strategy and Strategic Moves

• Strategy: framework, or approach, to obtaining

an advantageous position
• Business strategy: a plan to help an
organization outperform its competitors
– Often done by creating new opportunities, not
beating rivals
• Information system may be built to solve a
problem or to seize an opportunity

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 Strategy and Strategic Moves
(continued)
• Strategic information system (SIS): an
information system that helps seize opportunities
• Strategic advantage: using strategy to maximize
company strengths
• Competitive advantage: having maximized an
organization’s strengths to beat its rivals
• Using the Web strategically can be advantageous
– Simply extending business to the Web is no longer
a strategic advantage

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 Achieving a Competitive Advantage

• Competitive advantage is achieved when a for-

profit company increases its profits significantly,
usually through increased market share
• Many initiatives can be used to gain competitive
advantage
• Strategic moves often combine two or more
initiatives
• The essence of strategy is innovation

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 Achieving a Competitive Advantage
(continued)

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 Achieving a Competitive Advantage
(continued)

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 Initiative #1: Reduce Costs

• Customers want to pay as little as possible for

products or services
• Reduce costs to lower price
• Automation greatly reduces manufacturing costs
• Web can automate customer service activities
• Companies that are first to adopt advanced
systems that reduce labor enjoy competitive
advantage until their rivals do likewise

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 Initiative #2: Raise Barriers
to Market Entrants
• Less competition is better for company
• Gain competitive advantage by making it difficult
or impossible for others to produce the same
product or service
• To lower competition, raise barriers to entrants
– Obtain legal protection of intellectual property
(copyrights and patents on inventions, techniques,
and services)
– Examples: Amazon’s one-click, Priceline’s reverse
auction

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 Initiative #2: Raise Barriers
to Market Entrants (continued)
• Build unmatchable information systems
– Rivals must do likewise or license your
technology
– Example: State Street Corp.’s pension fund
management ISs

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 Initiative #3: Establish High
Switching Costs
• Switching costs: expenses incurred when
customer stops buying from one company and
starts buying from another
– Explicit: charge customer for switching (early
termination of contract)
– Implicit: indirect costs over period of time, such as
implementation of new product, staff retraining
• High switching costs lock in customers
– Example: proprietary software, such as ERP
systems, that have custom modifications

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 Initiative #4: Create New Products
or Services
• Having a unique product or service gives
competitive advantage for a period of time
• First mover: organization that is first to offer a
new product or service
– Usually results in superior brand name, better
technology, more experience, or critical mass
• Critical mass: body of clients that is large
enough to attract other clients
• Examples: eBay, Apple’s iPhone

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 Initiative #4: Create New Products
or Services (continued)

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 Initiative #4: Create New Products
or Services (continued)
• Being a first mover is not a guarantee of long-
term success
– Netscape
– Infoseek
• Must continue to improve and innovate to
maintain competitive advantage

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 Initiative #5: Differentiate Products
or Services
• Product differentiation: persuading customers
that your product is better than competitors’
– Usually achieved through advertising and
customer experience
– Exemplified by brand name success
– Promotes brand name
• Example: Skype, YouTube

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 Initiative #5: Differentiate Products
or Services (continued)

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 Initiative #5: Differentiate Products or
Services (continued)

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 Initiative #6: Enhance Products
or Services
• Enhance existing products or services to
increase value to consumer
• Many products and services have been
enhanced by use of the Web
– Examples: Charles Schwab, Progressive Groups

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 Initiative #6: Enhance Products or
Services (continued)

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 Initiative #7: Establish Alliances

• Alliance: two companies combining services

– Makes product more attractive
– Reduces costs
– Provides one-stop shopping
• Affiliate program: linking to other companies
and rewarding the linker for click-throughs

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 Initiative #7: Establish Alliances
(continued)

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 Initiative #8: Lock in Suppliers
or Buyers
• Accomplished by achieving bargaining power
• Bargaining power: leverage to influence buyers
and suppliers
– Achieved by being major competitor or
eliminating competitors
– Uses purchase volume as leverage over
suppliers
• Lock in buyers by making them fear high
switching costs

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 Initiative #8: Lock in Suppliers
or Buyers (continued)
• Lock in clients by:
– Giving away a product to make it become a
standard (Microsoft’s Internet Explorer, Adobe’s
Acrobat Reader, Macromedia’s Flash player)
– Creating a physical or software limitation on using
technology (Apple Computer’s iTunes)

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 Creating and Maintaining
Strategic Information Systems
• Many opportunities to accomplish competitive
edge with information technology
• Innovative software can establish a competitive
advantage
• Strategic information systems can be created
from scratch or by modifying a previous system
• To be an SIS, an information system must:
– Serve an organization goal
– Collaborate with other functional units of company

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 Creating an SIS
• Top management must be involved throughout the
process
• Strategic information system must be part of the
overall organizational strategic plan
• Management should ask questions to determine
whether to develop a new SIS
• Estimating the financial benefits of SIS is extremely
difficult
– Many fundamental business changes may be
involved

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 Creating an SIS (continued)

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 Reengineering and Organizational
Change
• To implement SIS, organizations must rethink the
way they operate
• Reengineering: Eliminating and rebuilding
operations from the ground up
– Often involves new machinery and elimination of
management layers
– Frequently involves information technology
– Goal is to achieve huge efficiency improvements
• New SIS requires revamping business processes

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 Competitive Advantage
as a Moving Target
• Competitive advantage is often short-lived
• Competitors soon imitate the leader, diminishing
the advantage
• SIS quickly becomes a standard business
practice
• Must continually modify and enhance technology
to sustain competitive advantage

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 JetBlue: A Success Story

• JetBlue: airline company that entered a formerly

hurting market with great success
– Ticketless travel
– Automation with IT
– Reduced costs
– Improved service

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 JetBlue: A Success Story (continued)

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 Massive Automation

• JetBlue developed Open Skies software to

automate ticket handling
– Avoids travel agents and their fees
– Uses reservation agents who work from home
using VoIP
– Encourages Internet flight booking by customers
• Maintenance information system used to log
airplane parts and time cycles for replacement

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 Massive Automation (continued)

• Flight planning to maximize occupied seats is

automated
• Operational data is updated flight by flight and
available to management at all times
• Training management system eliminates need
for paper records, allows tracking of employee
training

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 Away from Tradition

• JetBlue used innovative technique for routing

airplanes
– Does not use hub-and-spokes method, only point
to point
– Take most profitable route between cities
• Keeping flight manuals on laptop computers
allows for paperless cockpits
– Saves preflight time associated with calculating
weight of plane (annual savings of ~4800 hours)

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 Away from Tradition (continued)

• Uses biometrics for authentication and

authorization
• Implemented a paperless frequent flier program

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 Enhanced Service

• Technology helps JetBlue offer better service

– Leather seats
– Real-time in-flight television
– On-schedule departures and arrivals
– Fewest mishandled bags in the industry
– Rapid check-in times and fast baggage retrieval
– Better security

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 Impressive Performance

• Most important metric in airline industry is cost

per available seat-mile (CASM)
– Measures how much it costs to fly a passenger
one mile
• JetBlue had lowest or second-lowest CASM for
its first three years of operations
– Less than 7 cents (industry average is 11 cents)
• JetBlue fills 78% of its seats, while competitors
fill only 71%

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 Late Mover Advantage

• Late mover: enters the market later than other

competitors
– Can be viewed as advantage
– Implements latest available technologies
– Not burdened with legacy systems
• JetBlue used 40% beta software

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 Ford on the Web: A Failure Story

• Some strategic moves end up being colossal

failures
• May fail because of lack of attention to details
• Unable to predict customer or business partner
response
• Ford’s great failed initiative was undertaken by
Jacque Nasser, CEO of Ford

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 The Ideas

• Nasser was eager to push Ford to the Web; his

ideas included:
– Install devices in vehicles to enable drivers and
passengers to access Web
– Establish Web site to market parts to auto
manufacturers via auctions to encourage price
competition among parts suppliers
– Push vehicle sales to Web and bypass dealers
and their fees

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 Hitting the Wall

• Customers not very interested in Web access in

vehicles in 2000
• Other car companies learned to use online part
auctioning
• State franchising laws did not allow car
companies to bypass dealers
– Online sales initiative failed

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 The Retreat

• Ford abandoned plan to sell directly to

consumers online
• Web site used to select proper model only, but
consumers must still utilize a dealer
• Web site sold cars, but not enough to save
Nasser’s job

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 The Bleeding Edge

• Ford case shows that being a first mover is risky

• Pioneers sometimes get burned even with
careful planning
• Bleeding edge: failure occurring because of
company trying to be on leading edge
– No prior experience from which to learn
– Implementation costs are greater than anticipated
– Technology ends up losing money for company

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 The Bleeding Edge (continued)

• Due to bleeding edge, companies often wait

before implementing newer technologies
• Microsoft’s approach is to seize an existing idea,
improve it, and promote it with marketing power
– Also known as competing by emulating and
improving

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 Summary
• Some information systems have become
strategic tools as a result of strategic planning;
others have evolved into strategic tools
• Strategic information systems help companies
gain strategic advantage
• Company achieves strategic advantage by using
strategy to maximize its strength, resulting in a
competitive advantage

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 Summary (continued)

• Various initiatives for establishing strategic

advantage:
– Cost reduction, raising barriers to competitors,
establishing high switching costs, new products,
differentiating products, enhancing products,
alliances, and locking suppliers
• Creating standards often establishes strategic
advantage in software industry

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 Summary (continued)
• Reengineering: the process of redesigning a
business process from scratch to significantly
reduce costs
• Strategic advances from information systems are
short-lived; new opportunities must always be
sought
• Must keep systems on the leading edge to maintain
strategic advantage
• Bleeding edge is the undesirable result of a failed
innovation effort

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