Chapter 3: Strategy, information systems, and Competitive Advantage

Productivity Paradox: claims that there is no anecdotal evidence that the increase in information technology investment is related to increase in productivity However: there may have been way mistakes on how the productivity was measured There are 3 ways that the value of IT can be realized: 1. Productivity: making products faster with less inputs or better quality of outputs with fewer inputs. 2. Changing the structure of the industry: can change the way companies compete, for example movie rentals were traditionally in a physical presence, but because of investing in IT, now they are available on the internet, which changed the whole industry (resulting in Netflix, and the bankruptcy of blockbuster) 3. Benefits to the customer: Customer will see better/innovative products which are also cheaper and convenient (renting movies with a click of a button instead of going out in the cold winter)

Productivity for organizations can be increased either through increased efficiency or effective business processes. Increasing efficiency implies that you are doing things right, for example, business processes can be accomplished faster or with less resources and facilities, easy to measure. (Usually happens through automation: BPA or BPI) Increasing effectiveness is when companies focus on doing the right things, this often requires businesses to change their business process rather than just making it more efficient. (Usually happens through BPI or BPT) A value chain is a network of business processes that improve the effectiveness (or value) of a good or service. In general, the more value a company adds to their product the higher they can price it, margin is the difference between the cost and the selling price, essentially it is the profit.

There are two types of activities that support value chains: 1. Primary activities: are activities in which value is directly added to the product (which results in the price of the product being higher). Examples of primary activities are in-bound logistics, operations, out-bound logistics, marketing and sales, service (refer to figure 3-3, pg. 64)

2. Support Activities: are activities that support the primary activities Examples include firm infrastructure, Human Resources, Technology development, and procurement

It is crucial to understand the value chain because it will allow us to develop information systems that can improve productivity. Information systems can also increase productivity offering new and improved services (primary activities) such as shopping online and 24/7 customer support. Generally, anything that can contribute to the margin (profit) will be considered a primary activity, since support activities are not valued by the end customer (why would they care how fast a companies MIS systems are). An organizations strategy reflects its goals and objectives, and the companys strategy is influenced by the competitive structure of the industry. One model used to assess the industry structure is Porters Five Forces Model (figure 3-5 pg. 66). According to this model, 5 forces determine industry profitability: the bargaining power of supplies, bargaining power of buyers, threat of substitutes, threat of new entrants (entry/exit costs) and the existing rivalry in the industry (degree of existing competition) A company assesses these forces and then responds to the structure by having a competitive strategy. According to Porter there are 4 competitive strategies that a company can employ, they can either become a cost leader or differentiate their products across the whole industry or just a segment of the industry (whole population of airline buyers or just business travellers) refer to figure 3-6 pg. 67. It is necessary for information systems in the organization to be aligned with the organizations competitive strategy.

Improvements in information technology can result in: Disruptive technologies: which introduce a very new package of attributes to the accepted mainstream products. (MP3 players from previous CD players). Sustaining technologies: which are changes in technology that maintain the rate of improvement in customer value. (wireless mouse, more recently, improvement voice recognition software such as Siri by Apple) Sustaining technologies often make processes more efficient (and often more effective)

Diffusion of innovation refers to the steps in which new technology is implemented into the mainstream (daily life) or if it is rejected from mainstream, there are 5 steps in this process 1. Knowledge: when the customer finds out about the product but does not know enough about it 2. Persuasion: when the customer persuades themselves to find out more about the product 3. Decision: the customer compares the pros and cons and decides if it is worth buying 4. Implementation: the customer uses the product and decides if it is worth using or if a more efficient way is possible 5. Confirmation: if the customer is happy, they reach this stage where the use the product to its full potential.

Competitive Advantage can be provided by information systems through two channels: Via Products: they can create new products, enhance products or differentiate products Via Business processes: they can create higher switching costs which results in locking in the customers, they can lock in suppliers by making it really easy for them to trade with just one company, raise barriers to market entry, establish alliances and reduce costs.

Competitive advantage cannot be sustained by technology itself, there has be the people and procedures as well, we can say that information systems can sustain competitive advantage. Other companies can easily replicate information technology, but competitors cannot replicate the way the information technology is integrated with the people and procedures of a company, that is a very difficult thing to do. The more integration there is in a company between its information technology and people the higher chances there are for the company to sustain its competitive advantage. The same information technology installed into different organizations will result in two different outcomes (because the people are different) People are the most important part of an information system