IS and Business Strategy - Concepts¶

1. IS & Enterprise Architecture¶

Why do we need an enterprise IT architecture? - Challenges faced by organizations 1. Information Systems as islands or silos: (not enterprise-wide) - Traditionally, applications have been implemented primarily from a functional perspective, with little consideration for cross functional needs. 2. Changing business objectives (Agility) - Need to keep with innovations and industry changes 3. Need to partner with other companies (Extensibility) - Critical business processes cross organizational boundaries - Globalization - An enterprise-wide view of IS is crucial in addressing the above

Every enterprise has an IT architecture
- ![[Screen Shot 2024-02-24 at 11.22.29.png]]
Enterprise architecture definition
- business goals of an organization
- how these goals are realized by business processes
- how these business processes can be better served through technology
Five layers of enterprise architecture
- Strategy (Goals and Objectives of the Business): What do you do and how do you do it?
- Business Processes: Support the strategy and operational organization
- Applications: Support the business and implement the business functions in the IT systems
- Information: The fuel that drives business artifacts, their flow generates value to the user.
- Technical infrastructure: Hardware – networks, servers, terminals, cables, comm. devices

2. Business Model¶

Definition
- Representation of a business, its operations & how it creates value for customers
Businesses focus on core competencies (strengths in resources, skills, experiences, collaborations) to create a successful business model
Example
- Internet-based businesses
  - to attract huge number of customers to a Web site by providing free (almost) services, and then sell others the chance to advertise products to the crowd.
- Fresh Direct
  - An online grocery that provides home delivery of affordable high-quality groceries to consumers
  - Key characteristics:
    - Ability to source fresh produce
    - Cost leader
    - Efficient distribution
- Apple
  - Sells a variety of tech products with a consumer-centric strategy focused on the following:
  - Key Characteristics:
    - Innovation, Quality

3. Operational Effectiveness vs. Strategic Positioning¶

Competitive Advantage¶

Operational Effectiveness + Strategic Positioning = Competitive Advantage
Definition
- one firm possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit (or the firm has higher perceived value)
Example
- Firms cut costs, cut prices, and increase features in order to achieve competitive advantage

Operational Effectiveness¶

Definition
- Performing the same tasks better than rivals.
  - The danger lies in similarity and failure to innovate.
  - When offerings are roughly the same, they are more commodity.
    - Commodity: A basic good that can be interchanged with nearly identical offerings by others
Fast follower problem exists when competitors
- Watch a pioneer’s efforts
- Learn from their successes and missteps
- Enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate
- Vine / Instagram case
Examples of how IS contributes to Operational Effectiveness?
- Automation (Robotics)
- Process improvements (Touch payment)
- Better Command & Control (ERP, JIT)
- Streamlined flow of information (dissemination of information)

Strategic Positioning¶

Strategy in Organizational Context
- the direction and scope of an organization, generally over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations.
Definition
- Performing different activities than rivals, or the same activities in a different way (Resource-based view-VRIS Value, Rare, Inimitable, NonSubstitutable)
Technology should create and enable novel business approaches that are defensibly different and can be difficult for others to copy (At least in the short term).
Strategic value of IS:
- investing in a new information system helps a company differentiate itself from its competitor
- Example: British Airways developed their applications inhouse and customized the application to their unique circumstances. Mobile apps provided strategic value for BA.
Strategy Triangle![[Screen Shot 2024-02-25 at 17.38.38.png]]
- Example: FreshDirect & the Strategy Triangle![[Screen Shot 2024-02-25 at 17.39.21.png]]
- Traditional grocers can't easily compete with Fresh Direct because this would them straddling
  - Attempts to occupy more than one position, while failing to match the benefits of a more efficient, singularly focused rival.
  - Two markets (low-margin storefront and high-margin delivery)
  - Unable to gain optimal benefits from either.

4. Resource-Based View & Competitive Advantage¶

Resources
- Definition: things firms use to create its products and services and deliver them to customers
- Key characteristics: For sustainable competitive advantage, a firm must control an exploitable resource that have four critical characteristics: (VRIS)
  - Produce Value
  - Be Rare
  - Imperfectly imitable
  - Nonsubstitutable
- Examples:
  - Intangible
    - Brand, customer relationship, product designs, quality
    - Knowledge/Competency (secret Coke formula as example)
    - Patents & copyrights
  - Tangible
    - Manufacturing facilities
    - Supply chain
    - Financial Resources (cash in hand, ability to borrow money)
    - Plant and Infrastructure
    - Organizational structure and capabilities, Effective business processes
Example: Fresh Direct
- FreshDirect has the ability to source fresh produce
  - Fresh produce is of value to the customer
  - Straight from farm- It has rarity
  - Selection of the best (expert rating) & most fresh – Not easily imitable (set it up with great effort)
  - Substitutes (for fresh product) are not as good
- Resource-based thinking helps to avoid entering markets because growth is spotted.
- During Covid, sales went up by 60% in March 2020 but has diminished with increasing competition.
Powerful Resources
- Brand: symbolic embodiment of all the information connected with a product or service
- Scale: Advantages related to size (economies of scale)
- Switching costs: Costs incurred by consumers when switching from one product to another.
- Differentiation: Offer unique product or service that customers will find better than or in another way distinctive from products or services offered by competitors
- Network effects: When the value of a product or service increases as its number of users expands. (Metcalfe Law)
- Distribution channels: The path through which products or services get to customers.
- Intellectual property: Patents provide firms a degree of protection from copycats

5. Frameworks for Linking IS to Business Strategy¶

Tools
- Value Chain
  - Definition: Set of activities through which a product or service is created and delivered to customers![[Screen Shot 2024-02-25 at 21.26.05.png]]
- Porter’s Five Competitive Forces Model
- Information Systems SWOT Analysis

IS and Business Strategy - Zara Case¶

1. Porter's Five Forces¶

![[Screen Shot 2024-02-25 at 21.28.58.png]]

(1) Industry Rivalry¶

What leads to increased rivalry?
- Many sellers, small & large: more companies must compete for the same customers
- Slow market growth: Need to fight for market share
- Undifferentiated products: Increases incentive to cut price to steal share
- High exit barriers: companies must compete, cannot leave without a high penalty
The Internet has certainly intensified competition in all sectors of business (eg. the hotel and travel industry)

(2) Buyer Power¶

Buyers need better quality items at lower price
Buyer power – high when buyers have many choices and low when their choices are few
Strategies to induce buyers to stay with a given company (i.e., reduce buyer power & increase switching costs)
- Amazon – One-click, recommender systems, Prime, Returns
- NetFlix – set up and maintain your movie list
- United Airlines – frequent flyer program
- Apple iTunes – buy/manage your music
- Dell – customize a computer purchase
The internet can increase buyer power by increasing price transparency in markets where commodity products are sold.
The more differentiated and valuable an offering, the more the Internet shifts bargaining power to sellers.
Price transparency: Degree to which complete information is available.
Information asymmetry: Decision situation where one party has more or better information than its counterparty.
First-mover advantage – significant impact on gaining market share by being the first to market with a competitive advantage
In the case of the first-mover, all competitive advantages are temporary
- E.g., all airlines now have frequent flyer programs / tablet market / mobile phone market

(3) Supplier Power¶

Supplier power – high when choices are few and low when choices are many
The opposite of buyer power
Small and big companies can interact with suppliers with the same ease due to the Internet
How is supplier power increased?
- Patents/Trademarks
- Cartels and Consortia (OPEC)
How can we decrease supplier power?
- Building networks/finding marketplaces
- Effective payment systems

(4) Threat of Substitute Products and Services¶

The threat of substitutes is high when there are many alternatives for buyers and low when there are few alternatives
High switching costs can reduce this threat
Switching cost – a cost that makes buyers reluctant to switch to another product/service
- Long-term contract with financial penalty (cell phone companies)
- Personalized products based on purchase history (Eg. Amazon

(5) Threat of New Entrants¶

Threat of new entrants – high when it is easy for competitors to enter the market and low when entry barriers are significant
- Eg., Travel websites have virtually eliminated the need for regular travel agencies
Entry barrier – product or service feature that customers have come to expect and that must be offered by an entering organization
- Eg., Info. Tech. required to start a bank is nontrivial. Need to set up ATMs, online bill payment etc.

![[Screen Shot 2024-02-25 at 21.59.45.png]]

Example:![[Screen Shot 2024-02-25 at 23.05.49.png]]

2. Zara - Fast Fashion¶

(0) Speedy supply chain to cater new trends (25 days)¶

Designer sketches to capture latest trends
Pattern maker creates a prototype
Sew 8000+ new pieces at nearby factory
Apparel driven to distribution center
New items arrive

(1) Zara's strategic positioning¶

The majority of Zara’s merchandise is produced in-house, with an eye on leveraging technology in areas that speed up complex tasks, lower cycle time, and reduces errors.
The Problem with Contract Manufacturing
- Conventional practice is to outsource manufacturing to low-cost locations
- This is easily imitable and doesn't provide competitive advantage
- Most concerning is the use of sweatshop labor in such locations
  - Note: The Fair Factories Clearing House compiles audit information from different businesses about their manufacturing practices ![[Screen Shot 2024-02-25 at 23.52.12.png]] ![[Screen Shot 2024-02-25 at 23.52.27.png]]

(2) Zara and Four Critical Characteristics of Resources¶

Intangible resources: brand, customer relationship, product designs
Tangible resources: manufacturing facilities, supply chain, organizational structure![[Screen Shot 2024-02-25 at 23.57.56.png]]

Brand¶

Def: Symbolic embodiment of all the information connected with a product or service
Brands are about perception, communication, aspiration, and identity
High fashion but are relatively inexpensive, prices vary by country, cheaper in Spain & Europe
102 weeks of fast fashion, Every week new arrivals twice delivering latest trends, Cater to local tastes
No contract manufacturing in low-income countries

Distribution Channels¶

Def: The path through which products or services get to customers. This can be critical to a firm’s success.
Their primary outlet is the set of exclusive stores
Also, online presence that is tied to their brick & mortar for pickup & returns
Store displays are directed from the Cube (their HQ in Spain)
- Use of Virtual Reality
RFID-based inventory tracking

(3) Zara – IT in the Value Chain¶

Industry Value Chain
- Raw Materials
- Intermediate Goods
- Manufacturing
- Marketing & Sales
- After-Sales Service
IT roles in Zara's value chain
- Staff equipped with handhelds for intelligence gathering. POS connected to headquarters to monitor sales and trends. (Sales)
- Extensive use of IS for SCM (Inbound logistics)
- RFID-based Inventory Management (Outbound logistics, Sales)
- Virtual reality adoption at storefronts (Sales)
- Effective e-commerce strategy with robots for delivery at warehouses (Manufacturing)
- Ensures ROI on tech investment

(4) Porter’s Five Forces - Zara¶

Competitors:
- Many competitors (H&M, Gap) in the market, so competitive rivalry is high. But Zara is the fastest to deliver products and are the market leaders. (Moderate force).
Threat of new entrants:
- Barriers are low to enter this market. However, Zara already has an advantage in terms of well-established supply chain, manufacturing, and real estate. (Moderate to Low force)
Threat of substitutes:
- A product that meets the same economic need is a substitute. Cheaper garments might be a substitute product, but Zara's customers are primarily 'fashion conscious.' (Low force)
Buyer power is moderate:
- Buyers can switch easily, but the Zara mindset is what neutralizes that. Fast fashion at affordable prices, limited stock availability and biweekly arrivals adding to some shopping excitement, plus word of mouth helps reduce buyer power. (Moderate force).
Supplier power:
- Zara has licensed contracts and established supply chains with suppliers. Also, they have access to local suppliers. But there is a switching cost for Zara to change suppliers (Moderate to Low force)

IS and Business Strategy - Netflix Case¶

1. Netflix's Business Model¶

Netflix is the largest subscription streaming service that allows subscribers to watch from anywhere a variety of content including movies, TV shows, documentaries etc. on various types of devices.
Netflix provides its subscribers a highly customized viewing experience
Netflix streaming is available on PCs, tablets, smartphones, Internetconnected TVs, DVD players, video game consoles, etc…
Netflix ends its DVD mailing service (Sep 23)

2. Strategic Positioning or Operational Effectiveness¶

Economies of Scale¶

Scale economies can be attained by leveraging the cost of an investment across increasing units of production
Having a bigger customer base enables firms to: Have better cost structure / Have better profit prospects / Offer better pricing

The Long Tail¶

Netflix’s advantage came from the scale of the firm’s selection.
Long tail: Large selection of content beneficial for Internet retailers.
Selection attracts customers.
The Internet allows large-selection inventory efficiencies that offline firms can’t match. ![[Screen Shot 2024-02-26 at 01.11.23.png]]

Streaming and Scale Advantage¶

Size-based advantages come from both the scale of a firm’s streaming library (a longer tail) and the scale of the customer base (the ability to pay for that tail).
A larger, more profitable firm also gains pricing advantages.
Netflix can spend so much more than competitors because it has more subscribers than its rivals have.
Netflix is seeing roughly five times more usage—scale economies in action

Digital Products and Marginal Costs¶

Fixed costs: Costs that do not vary according to production volume.
Marginal costs: Costs associated with each individual unit produced
- Marginal costs are (effectively) zero for content owners
Coopetition (frenemies): Situation where firms both cooperate & compete with one another.
- To deliver streaming video, Netflix uses computers provided by the cloud computing services of Amazon (making Amazon and Netflix both partners and competitors)

The Qwikster Debacle¶

Netflix displaced Blockbuster with their mail-in DVD service.
Then in 2011, the firm was split into two distinct services:
- Internet-based streaming / Traditional DVD-by-mail, which was renamed Qwikster
Transition from a DVD-based service to Internet-based video streaming business resulted in:
- Drop in customer base + Drastic fall of share prices

Global Expansion¶

Global expansion plays a key role in the Netflix drive for scale-driven dominance.
Entering new markets usually involves heavy up-front expenses, such as legal fees.
The Netflix global bet has paid off.

3. The Data Asset - Collaborative Filtering, Churn¶

Data Asset & Collaborative FIltering¶

User data: provide better customer experience & build brands.
Netflix recommendation system - Cinematch - uses collaborative filtering.
- Collaborative filtering: Classification of software that monitors trends among many users and uses this data to personalize an individual customer’s experience.
- Advantages of Cinematch
  - Netflix could tailor recommendations based on availability of products and individual taste.
  - Studios also found an audience for their back catalog of movies and television shows.
- Data provided by Cinematch creates a switching cost.
  - Reduces churn rate: Rate at which customers leave a product or service

4. Disintermediation(去中介化) and Vertical Integration(垂直整合)¶

Content Acquisition: Escalating Costs, Limited Availability¶

First Sale Doctrine: rule in copyright law that says once a copyrighted item (like a book, DVD, or video game) is sold for the first time, the person who bought it can then sell, lend, or give it away without needing to get permission from the copyright holder
- Applicable only to the atoms of the physical product and not to the bits needed in streaming
Windowing: content is released to different platforms or markets at different times
- Film release windows: first be released in theaters, then available for purchase on DVD or digital download after a few months, followed by streaming services, and finally broadcast on TV

Disintermediation & Netflix Strategy¶

Def: Removing an organization from a firm’s distribution channel, collapses the path between supplier and customer.
- Why should Disney allow Netflix to stream its content?
Netflix is combating rivals with exclusive content by offering exclusive content of its own.
- Acquiring or developing original content is an expensive proposition.
- But it gives a firm exclusive first-window streaming rights
- Allows Netflix to pursue additional revenue streams, such as DVD sales or licensing to other channels and services.

Disintermediation & Netflix – Vertical Integration¶

Netflix’s move into the content creation business is a form of vertical integration as it moves backward in the value chain. ![[Screen Shot 2024-02-26 at 02.20.28.png]]
Disintermediation in the video industry offers two potentially big benefits.
1. First, studios don’t need to share revenue with third parties; they can keep all the money generated through new windows.
2. Also, critically important, if a studio goes directly to consumers, then studios get to collect and keep a potentially valuable data asset.

3. Netflix and Porter's Five Forces¶

![[Screen Shot 2024-02-26 at 02.23.01.png]] ![[Screen Shot 2024-02-26 at 02.23.27.png]] ![[Screen Shot 2024-02-26 at 02.23.40.png]] ![[Screen Shot 2024-02-26 at 02.25.08.png]] ![[Screen Shot 2024-02-26 at 02.25.33.png]]

4. How Netflix has leveraged the Web & IT to counter the forces¶

Competition / rivalry in the industry
- Data asset, large customer base
Threat / potential of new entrants
- Streaming infrastructure
- Data Asset
Power of suppliers = content suppliers not Netflix
- Original content (e.g., vertical integration)
Power of buyers = consumers
- Original content (e.g., vertical integration)
- Collaborative filtering (e.g., Netflix Cinematch)
- User profiles (e.g., data analytics and tailored ads)
- Variety of devices for access
Threat of Substitute Products = alternate methods of media consumption + substitute leisure activities
- Binge watching countered with customization
- Movie theater experience countered with convenient home viewing and large selection

IS and Business Strategy - Amazon Case¶

1. Types of Business Strategies¶

![[Screen Shot 2024-02-26 at 02.30.45.png]] ![[Screen Shot 2024-02-26 at 02.35.22.png]]

Focus¶

focusing on offering products or services
- To a particular segment or buyer group
- Within a segment of a product line
- To a specific geographic market
Examples
- Italian Restaurant –Olive Gardens
- The Web facilitates identifying such segments of customers

Differentiation¶

offering a product or service that is perceived as being “unique” or ‘niche’ in a broad marketplace
Examples
- Hummer – Like Nothing Else (Being revived now)
- Audi and Michelin – safety
- Zara – Fast fashion at affordable prices
- Porsche, Christian Dior – style
- Enterprise– We’ll pick you up

Overall Cost Leadership¶

offering the same or better quality product or service at a price that is less than what any of the competition is able to do
Examples
- Wal-Mart (Always Low Prices, Every Day Low Prices)
- Dell – a computer the way you want it at an affordable price
- Hyundai and Kia – reliable low-cost cars
- Grocery stores – high-volume, low-margin (Costco), minimal overheads (ALDI)

How to Apply IT to gain Cost Leadership?¶

Reduce inventory (JIT)
Reduce manpower costs per sale through automation
Reduce transaction costs for suppliers/customers through online systems
Reduce manufacturing costs (process control eliminates waste)

Other Strategies¶

Innovation: new ways (products / reduce time to market / new distribution)
Growth: expand (product capacity / global market / diversify)
Strategic Alliance
- Mergers, acquisitions, joint ventures, “virtual companies”
- Marketing, manufacturing, or distribution agreements.

2. Network Effects¶

Def: mechanisms in a product and business where every new user makes the product/service/experience more valuable to every other user
3 Value-adding sources of Networking Effects:
- 1. Exchange:
  2. Metcalf effect resulting in enhanced exchange of information
- 1. Staying Power: Long-term viability of a product or service.
  2. Tech products are long-term investments
  3. Long term viability due to switching costs and total cost of ownership
  4. Switching costs: Incurred when moving from one product to another.
  5. Total cost of ownership (TCO): Economic measure of the full cost of owning a product. (E.g., HP printers)
- 1. Complementary benefits: Products or services that add additional value to the primary product or service that makes up a network
  2. iOS products
Network structures
- One-sided market: Market that derives most of its value from a single class of users. (e.g., Instant messaging)
  - Same-side exchange benefits: Benefits derived by interaction among members of a single class of participants.
- Two-sided market: Network markets comprised of two distinct categories of participant. Both need to deliver value for the network to function.
  - E.g. Video game players and game producers
  - Cross-side exchange benefit: An increase in the number of users on one side of the market, creating a rise in the other side.
Network Effects are responsible for 70% of the value created by tech companies
Network effects are bad for innovation because it result in a dominant player and therefore a dominant standard. This limits competition against the dominant standard

3. The Amazon Case¶

Amazon's current strategy: Overall cost leadership + Innovation + Growth
- Amazon's Cost Leadership
  - advanced computing and networking technologies
  - maximum operational efficiency
  - minimization of operational costs
- Growth
  - Global market
  - Market Penetration (low cost, customer service, aggressive market campaign)
  - product development (in-car AI, AWS) heavy investment on R&D
  - Diversification through strategic acquisitions (e.g. Robots, Audible)
Amazon's current strengths: Scale / Data asset / Brand / IT-enabled supply chain management / Cloud Computing
Moving forward
- Cost Leader
- Growth: Grow business in specific sectors they are strong in (Web services, B toB, AI, Healthcare etc.)
- Innovation (Continue to innovate being a tech company)

(2) Amazon, Inhouse IS development¶

Why?
- Absolutely Mission Critical
- High Market Differentiation
Amazon web services (AWS)
- Allows firms to rent industrial-strength computing capacity on an asneeded basis.
- Goal was to monetize the firm’s expertise in scalability and reliability.

(3) Strategies to compete in network market¶

Exchange & Staying Power
- Leverage viral promotion
- Strengthen Prime
- Enhance Customization
- Establish more distribution channels
Encourage the development of complementary goods

Business Process Reengineering¶

1. Functional View of a Business¶

Def: organizes a company along functional lines (operations / marketing / accounting / finance / administration).
- Goal: Optimize within a function
- Optimizing one functional unit may adversely affect another function
Problems with Functional View
- No overall ‘enterprise’ (organizational) perspective
- Application Silos (incompatible software applications within different business units of an organization.)
- No common source of enterprise data

2. Process View of a Business¶

Goal: Optimize each process typically spanning multiple functions, Provides a holistic view of the organization ![[Screen Shot 2024-02-26 at 03.53.15.png]]
Business Process Reengineering (BPR) takes a critical look at core processes to spot areas that need improvement (especially with IT)
How IS Improves Business Processes
- Transactional
  - Convert unstructured processes into routine transactions
  - Payment processes (e.g. Movie theater)
- Automational
  - Replace manual processes by computerized processes
  - E.g. Face Recognition for verifying identity
- Informational
  - Provide vast amounts of information quickly
  - E.g., Search engines, Recommendation Systems
- Analytical
  - Enabling analytics to improve processes
  - E.g. Sales analysis by stores or regions
- Sequential to Parallel •
  - Convert sequential tasks to parallel
  - E.g., While a patient is being attended to in an emergency ward depending on initial assessment (Triage) level a bed may be scheduled for allocation or surgery may be scheduled
- Knowledge management
  - Capture of expertise and knowledge for improvement of processes
  - E.g., Push maintenance information to mobile devices to help technicians conduct repairs
- Geographical
  - Make processes independent of geographical locations
  - E.g. Amazon moving products in advance to warehouses
- Tracking
  - Detailed tracking of task status, input and output
  - E.g. Just in time inventory, shipment tracking
- Disintermediation
  - Connect two parties in a transaction directly which otherwise would have required an intermediary
  - E.g., Book flight tickets directly on the airline website

3. Modeling Business Processes¶

Def: A business process is a collection of related, structured activities or tasks that produce a specific service or product (serve a particular goal) for a particular customer or customers
BPMN ![[Screen Shot 2024-02-26 at 04.19.49.png]]