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Using Information Technology for Competitive Advantage

MIS 480 GROUP PRESENTATION. Using Information Technology for Competitive Advantage. Jolanta Zadlo & Gary Gray. IT as a Competitive Weapon. IT and Competitive Advantage Sustainability of Competitive Advantage Case Studies Sabre GE Conclusion. Definition: Information Technology.

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Using Information Technology for Competitive Advantage

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  1. MIS 480 GROUP PRESENTATION Using Information Technology for Competitive Advantage Jolanta Zadlo & Gary Gray

  2. IT as a Competitive Weapon • IT and Competitive Advantage • Sustainability of Competitive Advantage • Case Studies • Sabre • GE • Conclusion

  3. Definition: Information Technology Information Technology (IT) is the amalgamation of hardware, software, data, people and procedures that enables or inhibits business objectives depending on management’s involvement in IT. Source: Why General Managers Need to Understand Information Technology, lecture notes, Lacity, 2002

  4. How the information revolution affects competition • Changes industry structure thereby altering the rules of competition • Creates competitive advantage by giving new ways to outperform rivals • Spawns whole new businesses Source: How information gives you competitive advantage, Porter and Millar, 1985

  5. How IT creates a competitive advantage • Differentiate a product or service • Improve business processes (lower costs) • Change a business structure • Create new business Source: IS 480 lecture notes, Lacity, 2002

  6. Competitive advantage comes from critical differentiators Critical Useful Commodity Differentiator Source: IS 480 lecture notes, Lacity, 2002

  7. IT as a Competitive Weapon - Sustainability Very few companies sustain their competitive edge over the long term Sustainability occurs when it is difficult or impossible for the competition to respond “IT as a Basis for Sustainable Competitive Advantage,” Feeny & Ives

  8. IT as a Competitive Weapon - Sustainability • IT Resources-Easily Duplicated • Capital for investment • Proprietary technology • Technical Skills “IT as a Basis for Sustainable Competitive Advantage,” Feeny & Ives

  9. IT as a Competitive Weapon - Sustainability • IT Resources-NOT Easily Duplicated • Managerial IT Skills • Understanding business needs • Collaborating with colleagues • Managing market & technical risk of innovation “IT as a Basis for Sustainable Competitive Advantage,” Feeny & Ives

  10. IT as a Competitive Weapon - Sustainability Sustainable Advantage • How long before a competitor responds? • Which competitors can/will respond? • Will the response be effective? Supply System Analysis Project Life-cycle Analysis Competitor Analysis Lead Time Competitive Asymmetry Pre-emption Potential “IT as a Basis for Sustainable Competitive Advantage,” Feeny & Ives

  11. IT as a Competitive Weapon - Sustainability • 3 Pillars Supporting Sustainable Advantage • Lead Time • Information leaks • Followers take short cuts • Followers implement better solutions • Competitor Analysis • (Difficulty of competitor to respond or copy application) • Supply system analysis • Market capture • Switching costs

  12. Case studies selected: AmericanAirlines General Electric Company

  13. SabreHoldings Corporation Current Company Background • S&P Fortune 500 Company • $2.1B in revenues in 2001 • TSG – “The Sabre Group” • Traded on the NYSE – 1996 • Current Price – about $21 • Headquarters – Dallas/Fort Worth, TX Source: www.sabre.com

  14. Sabre Holdings Corporation Current Company Background • 7,000 employees in 45 countries • Sabre connects more than 60,000 • travel agency locations worldwide, • providing content for 400 airlines • (complete flight data, seat maps, etc) , • 55,000 hotel properties (room availability, type, price), 52 car rental companies, nine cruise lines, 33 railroads and 229 tour operators. Source: www.sabre.com

  15. Sabre Holdings Corporation Financial Data • Revenues from operations declined 19% in 2001 due to 9/11 events and lower US and worldwide travel volumes, but were more than compensated for by revenue from outsourcing to EDS, profits did not fare as well. Source: Sabre’s 2001 Summary Annual Report

  16. Sabre Holdings Corporation Financial Picture Source: Sabre’s 2001 Summary Annual Report

  17. Sabre Holdings Corporation Information Technology • Both Carol Kelly, Senior VP and CIO, • and Craig Murphy, Senior VP and CTO • report to the CEO • Sabre outsourced its mainframe and data center to EDS. However, Sabre has retained a sizeable investment in IT. Source: Interview of Jim Menge, VP Technology Sales, Sabre

  18. What isSabre Semi- Automatic Business Research Environment Source: Computerworld, Technology Takes Flight, Sep 2002

  19. IT to Improve Business Processes: American Airlines developed Sabre to automate the process of reserving airline seats. Source: Computerworld, Technology Takes Flight, 9/02

  20. American Airlines: improves a business process • 1959 – American Airlines (AA) and IBM sign a contract for the joint development of a real-time reservation system that combines in a centralized electronic unit, 2 basic reservation records – the passenger name record (PNR) and the seat inventory. AA spends $150M on the development of the system.Sabrewas based upon technology created by MIT for DOD. Source: Data Management, Sep 1981 & Computerworld Mar 1999

  21. American Airlines: improves a business process • AA’s reservation process used a system based on computer cards and teletypes and required the efforts of 12 people, at least 15 steps and up to 3 hours to record • a roundtrip reservation. • The error rate was 8%. • Sabrereduced costs and the error rate. Source: www.sabre.com

  22. American Airlines: improves a business process • 1960 – American Airlines (AA) installed the first Sabre system, a computer reservation system (CRS). Represented state-of-the-art technology and processed 84,000 calls per day. Research, development and installation cost $40 million with an investment of 400 man-years of effort. Source: www.sabre.com

  23. American Airlines: improves a business process • 1964 – AA completes cutover toSabrewith a coast to coast network in the US. • Sabreis the largest, private real-time data processing system. Source: www.sabre.com

  24. Competitive Edge Competitive advantage from process change Source: www.sabre.com

  25. Competitive Edge • AA saved 30% of its investment in staff alone • Sabredelivers an error rate of less than 1% • Sabrecreates a competitive edge that lasts for5 to 7 years Source: www.sabre.com

  26. Competitive Edge • Other CRS providers today: • Apollo – rolled out by United in 1976 • Worldspan – Delta, Northwest and TWA • Amadeus – largest foreign owned CRS • Sabrecontinues as the industry leader today • Worldspan is the only airline owned CRS Source: www.sabre.com and BTMC records

  27. SabreSystem History – 1970s • 1972 – Sabresystem upgraded to IBM 360s • 1976 – Sabresystem first installation • in a travel agency – by year end 130 locations • and captured about 86% of the market • United Airlines introduces Apollo • 1978 – Sabrestores 1M fares Source: www.sabre.com

  28. SabreSystem History – 1980s • 1981 – Sabrehas a slight market share advantage over Apollo • The competitive edge has all but disappeared • 1981 – AA introduces the first airline frequent flyer program • 1984 – Sabreintroduces low-fare search engine – a service unmatched in the industry Sources: Business Week, Aug 1982, Direct Marketing, Jul 1983 and www.sabre.com

  29. SabreSystem History – 1980s • 1985 – AA allows travel agencies to use personal computers to tap into theSabresystem via computer online services to access airline, hotel and car rental reservations • 1986 – AA/Sabreinstalls the industry’s first automated yield management system • 1988 –Sabresystem stores 36 million fares Source: www.sabre.com

  30. SabreSystem History – 1980s • 1987 – With airlines in their 8th year of deregulation, information and transaction processing has become more profitable than selling seats. AA’sSabreSystem produced pretax margins of 30% vs. 5.2% percent from tickets. Source: Business Week, 1987

  31. SabreSystem History – 1980s • 1988–Sabresystem stores 36 million fares • 1989 – A computer foul-up shut down AA’sSabreticketing system for 12 hours, apparently the result of a glitch written into the system. The system failure left 14,000 travel agencies and a large part of AA without flight information. • Lesson ? Sources: New York Times and Business Week, 1989

  32. SabreSystem History – 1990s • 1995–Sabrebegins to prepare for Y2K – software is distributed to 40,000 travel agents in 1998. Y2K costs estimated at $78M. • 1996–Sabrenames its first CIO Source: www.sabre.com & Computerworld, May 1996 and Computerworld, Mar 1998

  33. The Web Threat Airlines begin to focus on the Web as a means to further reduce their distribution costs Source: www.sabre.com

  34. A New Way to Cut Costs • 1995 – AA and all major US carriers reduce travel agency commissions on domestic flights. Commission is capped at $50. • Additional reductions are made in 1997 (% decreased from 10% to 8%), 1998 (international commissions capped at $100), 1999 (% decreased to 5%), 2001 (domestic caps reduced to $20) and 2002 (commissions eliminated) Source: www.sabre.com and BTMC records

  35. SabreSystem History – 1990s • 1996–Sabrebecomes a separate subsidiary of AMR and AMR releases 18% to be publicly traded (total spin-off in 2000) Source: www.sabre.com

  36. SabreSystem History – 1990s • 1996 –– Travelocity.com, currently the industry’s leading online consumer travel website is launched. Source: www.sabre.com

  37. SabreSystem History – 1990s • By 1998 Sabre had evolved into a global distribution system (GDS) for travel reservations connecting more than 30,000 travel agents and 3 million online customers with 400 airlines, 50 car rental companies, 35,000 hotels and dozens of railways, tour companies and cruise lines. • About 1% of all airline tickets are purchased on the web in early 1998. Source: Computerworld, Sep 2002 & Forbes, Apr 1998

  38. SabreSystem History – 1990s • 1999 – Sabre®Virtually There™, a web based system that provides travelers itinerary and destination info via the internet Source: www.sabre.com

  39. The Web Threat • 1995 –Sabreconsiders development of the first corporate online booking tool – BTS. The project is incubated for 2 to 3 years. • 1997 – Development of the BTS begins. • 1998 – BTMC agrees to beta testSabre’sBTS for Boeing travelers. Source: interview and BTMC records

  40. Online Booking • 1998 –Sabreis unable to expand BTS to be a multi-CRS system. • 1999 – BTMC terminates agreement withSabreand signs with small startup firm – Internet Travel Network for a multi-CRS system. • BTS is available today in a Spanish version which is still in use today. Source: BTMC interview and BTMC records

  41. Online Booking • 2000 –Sabreacquires GetThere.com, formerly Internet Travel Network for $757M. GetThere’s online product is currently the leading provider of online booking solutions. Purchase completed to gain customer base and keep competitors from purchasing. Sources: www.sabre.com, interview & Computerworld, Aug 2000

  42. The Web Threat • Sabre’srecent response to the web which threatens its core business model • Sabresigns deals with Hotwire.com and Priceline.com to provide key technology – both companies are also competitors ofSabre’sTravelocity.com Source: Computerworld, Aug 2000

  43. The Initial Outsourcing • In August 1996, Sabre signed a 7 year outsourcing deal which transferred responsibility for its travel reservations network. A partnership of Paris-based airline network SITA and Atlanta-based Equant essentially purchased the network for $450M for 7 years. Sabre transferred 80% of its network engineers to SITA. Source: Computerworld, December 1997

  44. Outsourcing a mature product • In July 2001,Sabresigned a 10 year, $2.2B outsourcing contract with EDS. EDS purchasedSabre’sIT infrastructure assets and data centers andSabre’sairline technology outsourcing business. Over 4,000Sabreemployees transferred to EDS. This transaction represented $600M in revenue to Sabre. Source: Computerworld July 2001 and interview

  45. The Future • Sabre continues to develop and release new products on an ever increasing pace. • Continued change required to maintain customer satisfaction. Revenues from the traditional CRS/GDS model must be replaced by new lines of business.

  46. Success with IT: Strategies • 1980’s: Killer Application • AA/UA-Reservation Systems • American Hospital Supply-Online ordering system • Frito-Lay-Handheld devices for sales • Early1990’s: Re-engineering • Redesigning business processes around technology • Mid1990’s: Information Management • Knowledge Management • ERP • CRM http://www.cio.com/archive/050101/davenport_content.html

  47. Success with IT: Strategies • Late1990’s: e-Commerce • Today • e-Commerce is not enough • IT investment in the business core (touches customer) • Business commitment • Commitment to change (continually re-invent and never rest) • Using multiple technologies and management approaches (not just one) • Company must excel in front office(e-commerce, CRM) , back office (ERP), and data warehousing, mining, and KM • Information focus (to make smart decisions) http://www.cio.com/archive/050101/davenport_content.html

  48. Strategy e@GE Summary Overview It’s All About “E”

  49. Case Study:General Electric • Company Overview • Digitization Strategy • Examples • Buy Side • Plastics • Appliances • Power Systems • Aircraft Engines • Sell Side • Make Side • Summary e-business Is Business Just Simpler, Faster, and Better

  50. General Electric:Company Overview • Formed in 1892 • Only company part of the Dow Jones's Industrial Index since the Index’s debut • 67,588 patents, 2 Nobel Prizes and numerous other honors • Operates in more than 100 countries and employs 313,000 people worldwide • GE is considered to be one of the largest and most diversified industrial corporations in the world www.ge.com

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