The chapter discusses strategic uses of information systems and competitive advantage. It explains that strategic information systems help companies gain strategic advantages over competitors through initiatives like reducing costs, creating barriers to entry, establishing customer lock-in, innovating new products and services, and differentiating offerings. While information systems can provide early competitive benefits, these advantages erode over time as competitors catch up, so companies must continually innovate and reinvent their strategies and systems.

1. Management Information Systems,
Sixth Edition
Chapter 2
Strategic Uses of Information Systems

2. 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
Management Information Systems, Sixth Edition 2

3. Objectives (continued)
• Identify fundamental requirements for
developing strategic information systems
• Explain circumstances and initiatives that make
one IT strategy succeed and another fail
Management Information Systems, Sixth Edition 3

4. 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
Management Information Systems, Sixth Edition 4

5. 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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6. 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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7. Achieving a Competitive Advantage
(continued)
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8. Achieving a Competitive Advantage
(continued)
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9. 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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10. 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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11. 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
Management Information Systems, Sixth Edition 11

12. 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
Management Information Systems, Sixth Edition 12

13. 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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14. Initiative #4: Create New Products
or Services (continued)
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15. 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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16. 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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17. Initiative #5: Differentiate Products
or Services (continued)
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18. Initiative #5: Differentiate Products or
Services (continued)
Management Information Systems, Sixth Edition 18

19. 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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20. Initiative #6: Enhance Products or
Services (continued)
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21. 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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22. Initiative #7: Establish Alliances
(continued)
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23. 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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24. 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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25. 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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26. 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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27. Creating an SIS (continued)
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28. 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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29. 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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30. 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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31. JetBlue: A Success Story (continued)
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32. 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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33. 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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34. 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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35. Away from Tradition (continued)
• Uses biometrics for authentication and
authorization
• Implemented a paperless frequent flier program
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36. 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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37. 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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38. 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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39. 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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40. 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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41. 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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42. 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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43. 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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44. 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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45. 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
Management Information Systems, Sixth Edition 45

46. 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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47. 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
Management Information Systems, Sixth Edition 47