Chapter 3 Effects of IT on Strategy and Competition

Report
Chapter 3
Strategy and
Information Systems
Jason C. H. Chen, Ph.D.
Professor of MIS
School of Business Administration
Gonzaga University
Spokane, WA 99258
[email protected]
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Chapter Opening Scenario:
“Where’s the Data?”
• Buyers don’t communicate with operations
when negotiating with vendors
• Buyers need data to look at prices and costs
of dealing with individual vendors
• Need more data and people involved in
making negotiating deals
• What are missing and needed in this
scenario?
• Strategy and Information Systems
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Chapter Preview
• Recall from Chapter 1 that MIS is the development and use of
information systems that enable organizations to achieve their goals
and objectives. In Chapter 2, you learned how information systems
can help people collaborate.
• This chapter focuses on how information systems support competitive
strategy and how IS can create competitive advantages. As you will
learn in your organizational behavior classes, a body of knowledge
exists to help organizations analyze their industry, select a
competitive strategy, and develop business processes.
• In the first part of this chapter, we will survey that knowledge and
show how to use it, via several steps, to structure information
systems.
• Then, in the last section, we will discuss how companies use
information systems to gain a competitive advantage.
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BUSINESS VALUE & FOCUS –
IS Perspective
IS/E-BUSINESS
•SCM
•CRM
•BPR
•ERP
Customer
centric
Who are the customers?
Where are the customers?
Their purchasing habits
How to reach them?
SCM: Supply Chain Mgt.
CRM: Customer Relationship Mgt.
BPR: Business Process Reengineering
ERP: Enterprise Resource Planning
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Demands
Products
Value
What they need/want?
How many they need/want?
When they need/want?
How to reach them?
Business Models & Strategies
4
What is Business Model?
• A business model is a set of planned activities
(sometimes referred to as business processes)
designed to result in a profit in a marketplace.
• The business model is at the center of the
business plan.
• An e-commerce business model aims to use and
leverage the unique qualities of the Internet and
the www.
Why New Models?
– Profitability (making money)
Source: E-Commerce: business, technology, society, Laudon and Traver, A/W
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Study Questions
Q1 How does organizational strategy determine
information systems structure?
Q2
Q3
Q4
Q5
Q6
Q7
Q8
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
2022?
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Planning is everything ...
What are Two Major Outputs for an organization?
develop
Customers,
market,
competition
determined by
Vision
Mission
guide
Strategy
determines
Goals/
Objectives
create
Tactic
Products,
Services
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Q1: How Does Organizational Strategy
Determine Information Systems Structure?
• An organization’s goals and objectives determine its
competitive strategy.
• Ultimately, an organization’s competitive strategy determines
its information system’s
– Structures
– Features
– Functions
Fig 3-1 Organizational Strategy Determines Information Systems
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Organizational Strategy Determines Information Systems
Fig 3-1 Organizational Strategy Determines Information Systems
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Study Questions
Q1
How does organizational strategy determine information systems
structure?
Q2
What five forces determine industry structure?
Q3
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
2022?
Q4
Q5
Q6
Q7
Q8
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Striving for Competitive Advantage
• Firm level: Industry & Competitive Analysis
– Competitive Forces Model
– Competitive Strategy
• Business level
– Value-Chain Analysis
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Five Forces Model
• Five competitive forces determine industry profitability:
bargaining power of customers, threat of substitutions,
bargaining power of suppliers, threat of new entrants, and
rivalry among existing firms (video).
• Intensity of each force determines characteristics of the
industry, how profitable it is, and how sustainable that
profitability will be.
• Assessing an industry structure based on five questions:
1.
2.
3.
4.
5.
How much bargaining power do customers have?
How much of a threat do substitution products or services pose?
How much bargaining power do suppliers have?
How great is the threat of new competitors entering the marketplace?
How great is the rivalry among existing firms?
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PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
THE FIRM
INDUSTRY
COMPETITORS
•Cost-effectiveness
•Market access
•Differentiation of
product or service
•Selection of suppler
•Threat of backward
integration
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
Bargaining power
Dr. Chen, Management
Information
Systems
Dr. Chen, The
Trends of the
Information Systems Technology
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
13
N
Fig 3-2 Porter’s Five Forces Model of Industry Structure
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Q/A - Enhancing your Analytic Skill
Linda is in the computer repair businesses. Mark
and Jill, two recent university graduates are
unemployed, but are thinking of doing computer
repairs at their homes. This is an example of which
of the five forces?
a. bargaining power of customers
b. bargaining power of suppliers
c. threat of new entrants
d. threat of substitution
e. rivalry among existing firms
… and the answer is:
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Fig 3-3 Examples of Five Forces
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GearUp’s Competitive Strategy
Low Cost/Focused
• Do everything to keep costs down
 GearUp’s response the customer force is to provide
the lowest prices for goods to be found, anywhere
 The response to the rivalry threat is to keep its
customers’ attention focused on GearUp via
compelling emails.
• Focus within sporting goods category
• Focus on buyers interested in special, short-term
sales
Dr. Chen, Management Information Systems
Fig 3-4: Five Forces at GearUp
Medium
GearUp, organizations examine these five forces and determine how they
intend to respond to them. That examination leads to competitive strategy.
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Study Questions
Q1
Q2
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
Q3
How does analysis of industry structure
determine competitive strategy?
Q4
Q5
Q6
How does competitive strategy determine value chain structure?
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
2022?
Q7
Q8
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Porter’s Competitive
Advantage Strategies
• Cost leadership: be the cheapest
• Differentiation: focus on making
your product and/or service stand out
for non-cost reasons
• Focus: occupy narrow market niche
where the products/services can stand
out by virtue of their cost leadership
or differentiation.
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Porter’s Competitive Strategy Model
• Firms engage in one of four competitive strategies: (video)
1. Be the cost leader across a wide industry – Wal-Mart is the
lowest cost leader in the retail industry.
2. Differentiate its products across a wide industry – Apple
Computer competes on how much better its computers are than
PCs.
3. Be the cost leader in a focused industry segment – Southwest
Airlines is the cost leader in certain portions of the airline
industry.
4. Differentiate its product in a focused industry segment – Apple’s
iPhone competes by being different than other cell phones.
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Figure 3 (Extra): Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Lower Cost
Position
Industrywide
(Broad
Target)
Particular
Segment only
(Narrow
Target)
Overall Cost
Leadership
Uniqueness
Perceived by
Customer
Differentiation
Focus
N
Competitive Mechanism
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Dr. Chen,
The Trends
Management
of the Information
Information
Systems
Systems
Technology
TM -22
Q3: How Does Analysis of Industry Structure
Determine Competitive Strategy?
Fig 3-4: Porter’s Four Competitive Strategies
To be effective, organization goals, objectives, culture, and activities must
be consistent with organization strategy.
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In-Class-Group Work
Discussion Question
• Using the five competitive forces model as
described in this chapter to describe how (and
what) IT might be used to provide a winning
position for:
• A global airline
– Use UA as an example (Group work together)
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Use the five competitive forces model as described in this
chapter to describe how information technology might be
used to provide a winning position for each of these
businesses
• Ans: The five forces are substitutes, supplier,
buyer, new entrants, and inter-industry. The
question asks the student to pick a force and
describe how each of these 5 types of business
might use information resources to reduce the
threat of that force. An example of analyzing the
substitute force is given below:
• Global airline-it is difficult to think of what might
be a substitute threat for a global airline. Perhaps it
might be a cruise ship offering "offices at sea". In
that case the global airline might use information
resources to offer "offices in the air".
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PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
ENTRANTS
Internal Forces:
1.customer focus
2.communication
3.core competencies
4.complexity
5.Quality
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
THE FIRM
INDUSTRY
COMPETITORS
Other forces should
be considered in the
e-Age:
1. Digitalization
2. Globalization
3. Deregulation
•Cost-effectiveness
•Market access
•Differentiation of
product or service
SUPPLIERS
Bargaining power
Dr. Chen, Management
Information
Systems
Dr. Chen, The
Trends of the
Information Systems Technology
CUSTOMERS
26 N
TM -26
Porter’s Five Forces Model and
Value Chain
• According to Porter, there are five competitive
forces in any industry, and the attractiveness of the
industry depends on the strength of each force.
• Under the perspective of market structure, Porter’s
competitive forces model has been broadly adopted
as the underpinning for investigating the effect of
information technology on the relationships
between suppliers, customers, and other potential
threats.
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Business Strategies
and its Competitive Advantage
Lower Cost
Position
Industry
wide
(Broad
Target)
Particular
Segment
only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Cost
Leadership
Differentiation
Cost Focus
Differentiation
Focus
Industrial economy
Knowledge-based
economy
Competitive Mechanism
Dr. Chen,
Dr. Chen,
The Trends
Management
of the Information
Information
Systems
Systems
Technology
TM -28
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PART II
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Study Questions
Q1
Q2
Q3
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
Q4
How does competitive strategy determine
value chain structure?
Q5
Q6
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
2022?
Q7
Q8
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Striving for Competitive Advantage
•
Firm level : Industry & Competitive Analysis
– Competitive Forces Model
– Competitive Strategy
•
Business level
– Value-Chain Analysis
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Q4: How Does Competitive Strategy
Determine Value Chain Structure?
Business Level: The Value Chain
(Value)
Porter’s Value Chain Model
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Fig 3-7: Task Descriptions for Primary Activities of the Value Chain
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Primary Activities in the Value Chain
• Inbound logistics—receiving, handling raw materials
and other inputs
 Value in parts, time required to contact vendors,
maintaining relationships with vendors, ordering parts,
receiving shipment, and so forth
• Operations—transform or assemble materials into
finished products
• Outbound logistics—deliver finished products to
customers
• Marketing and sales—create marketing strategies and
sell products or services to customers
• Services—after-sale customer support
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Support Activities in the Value Chain
• Contribute indirectly to production, sale, and service
of product

Procurement—finding vendors, setting up contractual
arrangements, and negotiating prices
 Technology development—research and development,
developing new techniques, methods, and procedures
 Human resources—recruiting, compensation, evaluation,
and training of full-time and part-time employees
performance measurement IS
 Example: ____________________________
 Firm infrastructure—general management, finance,
accounting, legal, and government affairs
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Value Chain
• Competitive strategy implemented by creating value
 Value—amount of money a customer is willing to pay for a
resource, product, or service
 Margin—difference between value an activity generates and
cost of activity
 Value chain—a network of value-creating activities
• Primary activities
• Support activities
Rather than automating or improving existing functional
systems, Porter contends companies should create new,
more efficient business processes that integrate the
activities of the entire value chain.
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Value Chain in Order Management
An Existing Product
Support Activities
Administrative and Other
Indirect Value Added
Primary Activities
Production
Sales
and
Manufacturing
Distribution/
Service
Logistics
D.B.
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Accounting
N
Value Chain in Order Management
A New Product
Support Activities
Administrative and Other
Indirect Value Added
Primary Activities
Production
Sales
Finance
and
Manufacturing
D.B.
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Distribution/
Marketing
Logistics
Service
Fig 3-6: Bicycle Maker’s Value Chain
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Support Activities in the Value Chain
Support Activity
Description
Technology
R & D, New Techniques,
Methods, Procedures
Procurement
Raw Materials
Human Resources
Training, Recruiting,
Compensation
Firm Infrastructure
General Management,
Finance, Accounting, Legal,
Government Affairs
Dr. Chen, Management Information Systems
Value Chain Linkages
• Linkages are the interactions across the value
activities.
 Ex: Manufacturing systems use linkages to reduce
inventory costs, sales forecasts to plan production;
production plan to determine raw materials needs;
material needs to schedule purchases. End result is just-intime inventory, which reduces inventory sizes and costs.
• Business process design
 Organizations should not automate or improve existing
functional systems. Rather, they should create new, more
efficient business processes that integrate activities of all
departments involved in a value chain.
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Study Questions
Q1
Q4
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
Q5
How do business processes generate value?
Q6
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
2022?
Q2
Q3
Q7
Q8
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How Do Business Processes Generate Value?
• Business process—network of activities that generate
value by transforming inputs into outputs.
• Cost of a business process is cost of inputs plus the
cost of activities.
• Margin of the business process equals the value of the
outputs minus the cost (margin = value – cost)
• Activity transforms input resources into output
resources.
• Resources flow between or among activities.
• Facilities store resources; some facilities, such as
inventories, store physical items.
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How Do Business Processes Generate Value?
• Each company has many business processes which
are networks of activities that generate value by
transforming inputs into outputs.
• You determine the cost of each business process by
adding the cost of inputs plus the cost of activities
used in the process.
• You determine the margin of each business process
by subtracting the cost of the activity from the value
of the output.
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An Alternate Process for Bicycle Manufacturer
Fig 3-8 Three Examples of Business Processes
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Compare Three Business Processes For Bicycle
Manufacturer
• Notice that activities get data resources from databases and
put data into databases
• Business processes vary in cost and effectiveness. In fact,
the streamlining of business processes to increase margin
(add value, reduce costs, or both) is key to competitive
advantage.
• Example of using a linkage across business processes to
improve process margin:
 Querying both databases allows purchasing department to make
decisions on raw materials quantities and customer demand.
 By using this data, purchasing can reduce size of raw materials
inventory, reducing production costs and thus adding margin to the
value chain.
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Fig 3-9: Improved Material Ordering Process
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Business Process Summary
• Key to a company’s competitive advantage is to increase
the margin of its products by adding value, reducing costs,
or both.
• Business process redesign helps a business streamline its
activities in order to increase its margins.
• Most difficult part of process redesign is associated with
employee resistance.
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Study Questions
Q1
Q2
Q3
Q4
Q5
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
How do business processes generate value?
Q6
How does competitive strategy determine business
processes and the structure of information
systems?
Q7
Q8
How do information systems provide competitive advantages?
2022?
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Q6: How Does Competitive Strategy Determine Business
Processes and the Structure of Information Systems?
Fig 3-10: Operations Value Chains for Bicycle Rental Companies
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Fig 3-10: Operations Value Chains for Bicycle Rental Companies
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Fig 3-10: Operations Value Chains for Bicycle Rental Companies
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High-Service Business Bike Rental
[1]
[2]
[3]
[4]
Fig 3-11 Business Process & Information System (DB process) for Bike Rental
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Bottom Line
• Each business must first analyze its industry structure and
choose a competitive strategy. Will it be a low-cost provider
or differentiate its products from competitors?
• Then it must design its business processes to span valuegenerating activities.
• Those processes determine scope and requirements of each
organization’s information systems.
Dr. Chen, Management Information Systems
Study Questions
Q1
Q2
Q3
Q4
Q5
Q6
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
Q7
How do information systems provide
competitive advantages?
Q8
2022?
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Q7: How Do Information Systems Provide
Competitive Advantages?
• Product Implementation
– 1. Create a new product or service
– 2. Enhance products or services
– 3. Differentiate products or services
• System Implementation
–
–
–
–
–
4. Lock in customers and buyers
5. Lock in suppliers
6. Raise barriers to market entry
7. Establish alliance
8. Reduce costs
Figure 3-12: Principles of Competitive Advantage
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• There are two ways businesses can respond to the five
competitive forces. (video)
– 1) They can gain a competitive advantage via their products
and services by
• creating new products or services,
• Enhancing existing products or services,
• Differentiating their products and services from those of their
competitors by cost and quality
– 2) They can gain a competitive advantage by developing
superior business processes with Information Systems.
Products/
Services
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Fig 3-13: Information Systems Create Competitive Advantages as Product or Support (Two
Roles
58
Dr. Chen, Management Information Systems
Gaining Competitive Advantage by Using
Business Processes
1. Lock in customers
 Create high switching costs
2. Lock in suppliers
 Make it easy to connect to and work with your organization
3. Create entry barriers
 Make it difficult and expensive for new competition
4. Create better business processes to establish alliances
 Organizations—establish standards, promote product
awareness and needs, develop market size, reduce purchasing
costs, and provide other benefits
5. Reduce costs
 Enables reducing prices and/or to increasing profitability.
Increased profitability means more cash to fund further
infrastructure development and greater competitive
59
advantage.
Dr. Chen, Management Information Systems
How Does an Actual Company Use IS to Create
Competitive Advantages?
• ABC, Inc, an actual company, created a competitive
advantage in shipping industry by:
 Superior customer service
 Making it easy for customers to business with by
minimizing data entry:
• Drop-down lists, automatic fill-ins, contact lists for
customers
• Minimizing data-entry errors
• Following slide shows some of the Web pages of
ABC’s information system.
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Fig 3-14: ABC, Inc Web Page to Select recipient from customer records
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Fig 3-15: ABC, Inc Web Page to Select Contact from Customer Records
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Fig 3-16: ABC, Inc Web Page to Specify Email Notification
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Fig 3-17: ABC, Inc Web Page to Print a Shipping Labels
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How Does This System Create a
Competitive Advantage?
• ABC’s information system helps the company create a
competitive advantage:
 Enhances its existing services - making it easy for the
customer to use its system, and reducing errors.
 Differentiates its products/services from its competitors who
don’t have a similar service to provide to customers.
 Provides new services for customers that competitors don’t
provide (i.e., innovation)
 Locks in customers into its system based on the benefits they
receive from it.
 Raises barriers to market entry
 Increases profit margins by decreasing costs and decreasing
errors
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Study Questions
Q1
Q7
How does organizational strategy determine information systems
structure?
What five forces determine industry structure?
How does analysis of industry structure determine competitive
strategy?
How does competitive strategy determine value chain structure?
How do business processes generate value?
How does competitive strategy determine business processes and
the structure of information systems?
How do information systems provide competitive advantages?
Q8
2022?
Q2
Q3
Q4
Q5
Q6
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Q8 2022?
• Unlikely GearUp will exist
 Like most startups, it will go bankrupt or
 Purchased by a large retailer, or
 It will merge with other personal shopping sites to form a
supersite, or
 It grows into a bigger company and becomes a supersite of its
own.
• New opportunities for IT-based organizations
 Reduce medical costs by supporting governmental functions, like
Medicare and related programs
 Web-based services to track medical bills, Medicare and
supplemental insurance payments, track unpaid bills
Dr. Chen, Management Information Systems
Essential Value Propositions for a
Successful Company
•
•
•
Business Model
________
Core
________
Competency
Execution
________
– Set corporate goals and get executive sponsorship for
the initiative
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Dr. Chen, Management Information Systems
Enhanced Model of “Built To Last”:
Continuity and Change in Visionary Companies
 Strategic Competitive Advantages and creating
values
Preserve
•Core Values
•Core Purpose
Change
•Culture &
Operating Practices
•Specific Goals
and Strategies
•Processes
•Safety
•Quality Care
•Efficiency
•Effectiveness
•Innovation
Management
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IT
(tangible, strategic mechanism)
69
• END OF CHAPTER 3
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