Management Information Systems

UNIT I
Lesson 9 – Strategic Analysis
Learning Objectives

1. To know company’s interaction with the business environment through external agents
2. To learn the methods of obtaining a competitive advantage
3. To study about the uses of Information Systems in gaining competitive advantage

9.1 Introduction

In some ways, information systems designed for competitive advantage are not much
different from transaction-processing and decision support systems. In many cases, advantages
over your rivals can result from changes in the basic transaction processing systems and business
methods. The real difference with strategy lies in its goal: to change the way the business operates
and gains an advantage over the other firms in the industry.
Creating strategic systems requires that you understand the entire firm and its relation-
ships with external agents in the environment, such as suppliers, consumers, workers, and rivals.
Many systems have been devised to help you analyze and create corporate strategies. A common
thread in gaining a competitive advantage is to improve the ties and communication with
suppliers and consumers. Electronic communication can provide automatic data collection,
minimize errors, and create faster responses.
Information systems can provide a competitive advantage through increasing the barriers
to entry and controlling distribution channels. Services from information systems can be used to
differentiate, your product from the others in the market or even to create entirely new products.
Computer systems might give you an edge through low-cost production or, improved quality
management.
Designing strategic systems can be a dangerous task with many opportunities to fail. One
complication is that development costs are high. Some strategic systems use new technology,
which carries higher costs and a greater risk of incompatibilities and other problems.

9.2 Competitive Environment

One of the important trends facing most businesses today is the increased level of
competition. Improved telecommunications and faster delivery services mean that local firms
competition from regional, national, and international firms. Local firms have to compete against
national mail-order companies, which offer wide selections, next-day delivery low prices. The
Internet, home shopping channels, and toll free phone numbers make it easier for consumers to
compare prices, putting pressure on all firms.
Large national retailers and franchises put pressure on-local stores. They also compare
against themselves for market territories. Their size gives them leverage in dealing manufacturers.
By purchasing in large quantities, they can negotiate lower prices. Their volume also makes it
easier for them to buy from foreign producers.
Several international trends are creating increased competition. The internet search for lower
manufacturing costs puts pressure on firms to cut their costs. For instance, the Japanese have
moved production to other Asian nations to build television sets. Decreasing trade barriers
throughout the world also creates larger markets.

9.3 External Agents

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Competitive advantage can be gained by establishing or changing relationships between

firm and its external agents. External agents consist of suppliers, customers, rivals, potential new
entrants, substitute products, and sometimes the government. From a systems perspective, each
of these entities is outside the control of the firm. Yet they strongly affect the company. Through
proved ties to these agents, they become part of your system, which can be used to improve the
competitive position of the firm.

Customers

The intermediate layers also cause confusion about what the customers want because it is
hard to identify the customer. To the manufacturer, is the customer the wholesale firm that buys
the products, the retailer, or the final consumer? It is often wise to focus on the final consumer,
but the manufacturer has to consider the needs of the retailer as well. For example, in the bicycle
industry, one company found a new way to package its bicycles so that they could be assembled
(by the retailer) in half the normal time. This particular situation helped both the retailer and the
final consumer, but imago what happens when the manufacturer receives conflicting demands
from the various "customers."
An important goal in any company is to satisfy the customers. If there are many layers of
buyers between the company and the ultimate consumer, it can be difficult to determine what the
customer wants. Similarly, the layers create delays that make it difficult for the retailer to order
and obtain the products. For example, with older, slower manufacturing processes, merchants
have to place most orders for the Christmas season around July-five or six months before the
sales would occur. What happens if the economy changes or some event causes people to
suddenly demand a different product? The retailer, manufacturer, and customers all suffer as a
result of these long lead times.

Suppliers

Suppliers can provide individual parts, entire products, or even services (such as a bank
that lends money). Three major issues involving suppliers are price, quality, and delivery sched-
ules. Just as with customers, problems can arise when there are many layers of suppliers. For
instance, increased layers can result in longer delays between ordering and delivery because the
supplier has to contact its supplier, who contacts its supplier.

Rivals, New Entrants, and Substitutes

The goal of a strategic approach is to derive a competitive advantage over the rival, or
other firms in the industry. There could be many competitors or just a few larger rivals. The com-
petition could take place in a small town, across a nation, or worldwide. One of the first steps in
any strategic analysis is to identify the primary competitors and to assess their strengths and
weaknesses.
A related issue is the concept of potential competitors or entrants in the business. In some
cases, you might identify the major rivals, implement a strategy, and then immediately lose
everything as new firms enter your business. Entrants might build their firms from scratch, such
as the way Burger King built new stores in the same areas as McDonald's restaurants.
Alternatively, other firms may increase the sales of products that are similar to your products.
Substitute products are related economically by the degree to which consumers are willing to use
one product instead of the other. A classic example comes from the late 1970s, when the U.S.
economy faced high inflation rates and banks were subject to limits on the interest rates they
could pay on deposits. Merrill Lynch, the stock brokerage firm, introduced a service enabling
customers to store their money in a wide variety of financial instruments that paid significantly

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higher interest rates than did checking accounts, and still write checks on the account. Many
larger customers took their money away from banks and put it in these asset accounts. These new
accounts were perceived as close substitutes for traditional bank services, and people transferred
huge sums of money out of the banking system

Government Regulations

In any economy, government intervention has a strong influence on the firm. There are
myriad government agencies, regulations, taxes, and reports. The situation multiplies for multi-
national firms that are subject to the regulations of many nations. These agencies and regulations
can have strong effects on the profitability of a firm. Generally, an individual firm has no control
over government regulations, but sometimes suggestions can lead to modifications. For instance,
it is now possible to submit some documents to government agencies in computer form. In fact,
some reports (such as financial reports) are required to be filed electronically. Electronic forms
can decrease your storage costs and make it easier to find documents that have been stored for
long periods of time.

9.4 IS Techniques to Gain Competitive Advantage

Competitive advantage may be achieved with many techniques in business. Information

technology is one area that may provide several opportunities. In general, MIS techniques may
not be better than other methods. However, some firms have experienced considerable success
from using these techniques, so they are well worth considering.
Additionally, the rapid changes in technology often lead to competitive advantages if
your firm is the first to find a creative use for the new technology. The other side of the coin is
that untested new technologies may not work as planned. Hence, the pioneer is taking a risk: If
the project fails, the development costs may put the firm at a competitive disadvantage
The question we wish to examine is how information systems can take advantage of these
techniques. The fundamental mechanisms for gaining competitive advantage are barriers to entry,
switching costs, lower production costs, product differentiation, control over distribution
channels, innovation, and quality control.

Sources of Barriers to Entry

• Economies of scale (size)
• Economies of scope (breadth)
• Product differentiation
• Capital requirements
• Cost disadvantages (independent of size) Distribution channel access Government policy

Barriers to Entry
The additional costs of creating a sophisticated information system make it harder for firms to
enter the industry.
• Distribution Channels: Control over distribution prevents others from entering the
industry. Consumers are reluctant to switch to a competitor if they have to learn a new
system or transfer data.
• Lower Production Costs: Using technology to become the least-cost producer gives an
advantage over the competition.
• Product Differentiation: Technology can add new features to a product or create
entirely new products that entice consumers.

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• Quality Management: Monitoring production lines and analyzing data are important
aspects of quality control. Improving quality leads to more repeat sales.
• The Value Chain: Evaluating the entire production process identifies how value is added
at each step. Combining steps or acquiring additional stages of the value chain can lead to
greater profits.

9.5 The Search for Innovation

Industry and academic leaders are constantly searching for ways to improve
organizations and gain a competitive advantage. Illustrated by Figure 10.8, one method to
organize the search is to examine the primary processes of the firm: research, engineering and
design, manufacturing, logistics and supply, marketing, sales and order management, service, and
general management. Each of these processes has its own inputs, outputs, and objectives.
Analyzing them in detail enables managers to spot problems and to search for innovative
opportunities
The following sections present general ideas for each of these processes that have
generated interest and some success. Most of them use technology to improve the process or to
help the processes work together better. Keep in mind that any firm, there can be many ways of
improving processes. Relying on information technology is not always the best answer

Research

IT support for research takes the form of computer analysis and modeling, statistical
analysis of data, project management and budgeting, and workgroup technologies that make it
easy for researchers to collaborate and share information with each other and with managers
throughout the company.
Research in firms varies enormously depending on the industry and the overall corporate
strategy. At a minimum, most firms at least have a product development team that is constantly
searching for new products or improvements in existing products. Some companies like 3M,
DuPont, AT&T, or Intel, spend considerable sums of money on basic research to create entirely
new products. To these firms, strategic advantage comes from being the leader in the industry
with a constant cycle of new products

Engineering and Design

Engineering and design processes are responsible for converting theoretical research into
new products. Engineers establish manufacturing procedures, design new equipment, and
coordinate suppliers with production. In particular, the design process must optimize the
production line to minimize costs and retain high quality

Manufacturing

There are four key features to production: costs, speed or timing, quality, and flexibility.
Competing through lower costs and higher quality are time-honored means of gaining a
competitive advantage. They might not be sufficient today. Increasingly, firms are turning to
mass customization in an attempt to gain market share. Twenty or 30 years ago, the large firms
in an industry were content to build huge plants, gain economies of scale, and aim at the mass
market. This approach tended to leave niches open for competing firms. The problem with this
strategy is that it allows rival firms to gain a toehold, which they might use to build market share
and eventually compete directly against your primary market. Today's firms are trying to shift
production fast enough so that they can cover virtually all of the niche markets.

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Logistics and Supply

The implementation of just-in-time (JIT) inventory systems is largely credited to

Japanese manufacturers. Today they are used by manufacturers worldwide. Manufacturers
attempt to cut costs by holding minimal inventories. Instead, inventories are maintained by the
suppliers, who deliver the products to the assembly line just as they are needed. The system can
only work if the suppliers and factories are linked electronically-often there is only a one or two-
hour delay between ordering and delivery.

Marketing

A well-known application of IT to improve marketing is the use of frequent-buyer

databases that identify major customers. More traditional point-of-sale transaction systems can be
leveraged by identifying preferences and rapidly spotting patterns or trends. At the tactical level,
expert systems are used to help analyze data and perform statistical trend analysis. Geographic
information systems are being used by leading firms to identify patterns and possibilities for new
sales. Information systems can also be used to link firms more closely to external marketing firms
for research data, communication, and development of promotional materials.

Sales and Order Management

Sales and order management are often handled simply as an operations or transaction
processing area. However, in the last 10 years, several firms have used technology to gain a
competitive advantage by improving the way they handle sales and orders. Frito.-Lay's use of
handheld computers is a classic example. The systems enable managers to more closely track
their own sales, sales of competitors, and other external factors, because salespeople can enter
data immediately. For certain industries, the concept can be extended further to installing
workstations at the customer sites that tap into your central databases. Federal Express and Baxter
Healthcare both used this technology to gain a leadership position.

Service

Service industries and service-based processes (like accounting, MIS, and law) have their
own problems and opportunities. Technology is used to support services with on-site, portable
computers. These systems enable workers to have complete access to information almost
anywhere in the world. Leading companies are building specialized databases to support their
service workers, such as the "answer line" databases that support General Electric and Whirlpool
customer service representatives.

Management

Executives are also increasingly turning to electronic conferencing tools and workgroup
software, even e-mail. Executives can cover more areas and deal with more people with these
systems than they can by phone or through face-to-face contact. Some studies have shown that, in
traditional conversations, managers spend as much as 50 percent of the time on personal chit-
chat. Electronic systems (although they might be less personal) tend to be more efficient. On the
other hand, some companies have been restricting employee access to electronic networks
(especially the Internet) because they waste too much time on personal communications.

Larger firms are building electronic links to their strategic partners, for instance, by pro-

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viding electronic access to corporate data to accounting and legal firms. These links enable the
external partners to keep a closer eye on the firm, speeding the identification of problems and
assisting them in spotting broad patterns and opportunities.

9.6 Summary

Information systems can provide benefits beyond traditional cost saving. Competitive ad-
vantages can be gained by creating barriers to entry and gaining control over distribution
channels. Using information systems to build ties to suppliers and customers can provide lower
costs and better quality products. Computer systems also provide incentives for customers to
remain with your company if they incur costs of learning new systems and transferring data when
switching to a competitor. Information systems can also be used to differentiate your products
from the others in the marketplace. Similarly, innovative services offered with the help of
technology can entice customers and expand your market

You can search for competitive advantages by examining Porter's external forces of ri-
vals, customers, suppliers, substitute products, and new entrants. You can also search for
strategies in research, engineering, and design. In manufacturing, you can look for ways to
decrease costs and improve logistics. In marketing, potential gains can be found in better un-
derstanding of customer wants, as well as sales and order management. Services can be supported
through better information flows and workgroup products. Management can be helped with better
data and better decision tools

Strategic systems face many risks. They tend to be expensive and difficult to create. Any
gains created may disappear when competitors pick up the technology and imitate your offerings.
Additionally, making strategic changes to your firm might alter the industry, which might
adversely affect your firm. And if these problems are not enough to discourage you, remember
that attempts to monopolize a market are illegal, so you have to make sure that your plans do not
violate governmental regulations.

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The Job of the General Manager

Setting Direction
vision
mission
values

Assessing General Creating Strategy

Performance Manager determining the way
today and tomorrow forward

Implementing
Change
making it happen

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Business Strategy Components

Goals

Value
Proposition

Product Market Core

Focus Activities

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The Diamond-E Framework

Management
Preferences

Organization Strategy Environment

Resources

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Strategic Risks

TIME HORIZON

SHORT-TERM LONG-TERM

Errors in reading the Environmental

environment cause changes make the
ENVIRONMENTAL RISKS strategic failure strategy obsolete
Internal capabilities
CAPABILITY RISKS Strategic demands develop
exceed the capacity
inconsistently with
to execute
strategy

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Porter’s Five Forces Model

POTENTIAL
ENTRANTS
Threat of new entrants

INDUSTRY
Bargaining power of suppliers COMPETITORS

SUPPLIERS BUYERS
Rivalry Among
Existing Firms Bargaining power of buyers

Threat of substitute
products or services
SUBSTITUTES

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Apple’s Strategy

• Differentiation on
• “Change the world
Goals product and service
through technology” through a user-friendly
graphic interface and
integrated products
Value
Proposition

Product Market Core

Focus Activities

• Complete desktop solution R&D Mnf’g Dist’n

• 50% US; 50% foreign
• Education (50%MS); home • Fully integrated
• Hardware, software, peripherals
• High end

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Review Questions

1. Briefly describe four techniques in gaining competitive advantages.

2. What are all the external agents?
3. What are barriers to entry important to gain a competitive advantage?
4. How can information systems be used to gain control over distribution channels?

Discussion Questions

1. Discuss the costs and dangers associated with the Strategies.

2. Try to do the SWOT analysis for a company of your own choice

Application Exercises

1. Identify TWO firms that have chosen to be technology leaders and those that are
followers. What other differences can you find between the firms?
2. Identify the leading FIVE companies in any industry and try to know the competitive
advantages they enjoyed over each other.

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