Information Systems and Business Strategy
A business strategy is an organization’s set of activities and decisions to determine products, industries in which to compete, competitors, suppliers and customers, and long-term goals.
Information systems can be used to support strategy at the business, firm, and industry level. Value chain analysis is useful at the business level to highlight specific activities where information technology is most likely to have a strategic impact. The value chain model views the organization as a series or "chain" of basic activities that add value to a firm's products. These activities may be primary activities directly related to the production and distribution of the firm’s products or services, or support activities, such as the organization’s infrastructure, human resources, technology, and procurement that make the delivery of the primary activities possible. The value chain can be linked to the value chains of its business partners and customers. [Figure 3-11]
FIGURE 3-11 The firm value chain and the industry value chain Illustrated are various examples of strategic information systems for the primary and support activities of a firm and of its value partners that would add a margin of value to a firm’s products or services. |
Information systems can serve strategically to enable the firm to produce its products at a lower cost or greater value.
Internet technology makes it possible to extend the value chain so that it ties together the firm’s suppliers, business partners, and customers into a value web [Figure 3-12].
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At the business level of strategy, information systems can be used to help firms achieve product differentiation and focused differentiation, and become the low-cost producer. Information systems can also be used to “lock in” customers and suppliers using efficient customer response systems and supply chain management applications.
Strategic information systems should be developed for the internal or external value activities that add the most value.
Information systems can be used for product differentiation to create products or services that cannot be easily duplicated or that serve highly specialized markets, raising the market entry costs for competitors.
Information systems can be used for focused differentiation, analyzing and mining existing sales and marketing data to identify market niches, specific targets for a product or service that a firm can serve in a superior manner. An information system can also give companies a competitive advantage by treating existing information as a resource that can be "mined" to increase profitability and market presentation, as well as identify profitable and nonprofitable customers.
Strategically oriented information systems can help firms maximize the efficiency of their supply chain and customer response systems, enabling “stockless inventories” and allowing delivery products and services at a lower price than their competitors can provide. The convenience of using information systems can raise switching costs, the cost to a customer of switching to a competitor’s product or service. [Figure 3-13, Figure 3-14]
FIGURE 3-13 Stockless inventory compared to traditional and just-in-time supply methods The just-in-time supply method reduces inventory requirements of the customer, whereas stockless inventory enables the customer to eliminate inventories entirely. Deliveries are made daily, sometimes directly to the departments that need the supplies. |
FIGURE 3-14 Business-level strategy Efficient customer response and supply chain management systems are often interrelated, helping firms lock in customers and suppliers while lowering operating costs. Other types of systems can be used to support product differentiation, focused differentiation, and low-cost producer strategies. |
At the firm level, information systems can be used to achieve new efficiencies or to enhance services by tying together the operations of disparate business units and promoting the sharing of knowledge across business units. In addition, information systems that encourage the sharing of knowledge across business units can enhance a firm’s core competency, the activity for which the firm is a world leader.
At the industry level, systems can be used to a provide competitive advantage by facilitating cooperation with other firms in the industry, creating consortiums or communities for sharing information, exchanging transactions, or coordinating activities. The main concepts for analyzing industry-level strategy are information partnerships, the competitive forces model, business ecosystems, and network economics. Information partnerships enable two companies to achieve synergies by sharing information. The competitive forces model describes the interaction of firms in an industry that affect an organization’s ability to compete: the threat of new entrants into its market, pressure from substitute products and services, the bargaining power of customers and suppliers, and the positioning of traditional industry competitors. [Figure 3-15]
FIGURE 3-15 Porter’s competitive forces model Various forces affect an organization’s ability to compete and therefore greatly influence a firm’s business strategy. There are threats from new market entrants and from substitute products and services. Customers and suppliers wield bargaining power. Traditional competitors constantly adapt their strategies to maintain their market positioning. |
Information systems can be used to develop industry-wide standards, forcing all market participants to subscribe to similar standards, making product substitution less likely and possibly raising entry costs. The Internet has raised the bargaining power of customers, but it has also created new opportunities for building brands and customer bases.
The Internet and emergence of digital firm has given rise to the concept business ecosystems, loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers. The computer chip, automobile, and medical device industries can be seen as industrial sets or ecosystems that involve the cooperation of multiple other industries. Many firms use information systems to develop into keystone firms by building IT-based platforms that other firms can use. [Figure 3-16].
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FIGURE 3-16 An ecosystem strategic model The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays an important role in enabling a dense network of interactions among the participating firms. |
Unlike the traditional economic theory of diminishing returns, in network economics, the costs of adding another participant are about zero, whereas the marginal gain is much larger. For example, it is no more expensive to operate a television station with 1,000 subscribers one than with 10 million. Information technology can be used to build Web communities of loyal users, or provide services that increase in value and lower in cost with more customers.