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Value Chain

Value Chain. The IT/IS view McCord & Laudon. IT & People interact & change each other IT should be used to increase profit. If IT doesn’t get adopted fully, it can’t increase profit and is a failure Because of “B”, technical or economic models rarely work.

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Value Chain

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  1. Value Chain The IT/IS view McCord & Laudon

  2. IT & People interact & change each other IT should be used to increase profit. If IT doesn’t get adopted fully, it can’t increase profit and is a failure Because of “B”, technical or economic models rarely work Profit is made by improving the Value chain Strategy is the method used to improve the Value chain Objectives in Business Strategy

  3. Benefits of EC • EC gave power to consumers • EC eliminates middle, lowers cost • EC reaches more people • Profit Function: Profit = Revenue – Cost • Revenue = #units * price + donations • Cost = Inventory, office expenses (phone, office) advertising, taxes, royalties,

  4. Internet Economy • Small but growing at a phenomenal rate • Business to Business (B2B) e-commerce --largest share of the Internet economy • The Internet Economy is going through Stages • B2C • B2B • Integration

  5. E-Commerce and the Buyer/Seller Models • Replace as many steps as possible with electronically-enabled capability • Integrate! Integrate! Integrate! • Measure the value derived from new processes: value chain • Value chain gets smaller • New intermediaries are added to chain • Value chain goes virtual

  6. Value Chain Model • Chain of basic activities that add to firm’s products or services • Primary activities • Secondary activities • Useful way to think about business strategy

  7. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Business strategy decisions of the firms will determine the following: • The products and services a firm produces • The industries in which the firm competes • Competitors, suppliers, and customers of the firm • Long-term goals of the firm

  8. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY • Value Chain Model: • Highlights the primary or support activities that add business value • A good tool for understanding strategy at the business firm level • Primary Activities: • Directly related to the production and distribution of a firm’s products or services

  9. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY • Support Activities: • Make the delivery of primary activities possible • Consist of the organization’s infrastructure, human resources, technology, and procurement

  10. Figure 3-11 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY The Firm Value Chain and the Industry Value Chain

  11. Firm Infrastructure(general management, accounting, finance, strategic planning) Support Activities Human Resource Management (recruiting, training, development) Technology Development (R&D< product and process improvement) Procurement (purchasing of raw materials, machines, supplies) Inbound Logistics (raw materials handling and warehous- ing) Outbound Logistics (warehous- ing and distribution of finished product) Marketing and Sales (advertising, promotion, pricing, channel relations) Service (installation, repair, parts) Operations (machine assembling, testing) Primary Activities

  12. Primary Activities • Inbound logistics • Tracks everything in warehouse • Automatic storage/retrieval system for automated pickup of orders • Operations • A CAM system that produces products • Outbound Logistics • online data entry system for contact with clients • Marketing and Sales • Marketing Analysis system • Service • Expert Diagnostic systems

  13. Secondary Activities • Firm Infrastructure • An office system to support policy & procedure • HR Mgmt • Managers choose hires from skills database • Technology Development • CAD systems do design & send to CAM for production • (Computer Aided Design/Computer Aided Manufacturing) • Procurement • EDI system with your suppliers, etc. B2B applications • (Electronic Data Interchange/Business to Business

  14. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Strategic question: • How can IT be used at each point in the value chain to lower costs, differentiate products, and change the scope of competition?

  15. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Value Web: (Like a vertical & Horizontal portal) • Internet-enabled Web of cooperating firms • Customer-driven network of independent firms • Uses information technology to coordinate value chains of separate firms for collectively producing a product or service

  16. Figure 3-12 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY The Value Web

  17. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Porter’s Five Forces Model In the larger environment, there are five main forces or threats: • New market entrants • Substitute products and services • Suppliers • Customers • Other firms competing directly

  18. Figure 3-15 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Porter’s Competitive Forces Model

  19. Four Types of Strategies Unique Standard Product Market Product Diff/ mass customization Mass/Broad Lo Cost Linkage niche Narrow

  20. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Business-Level Strategy: The Value Chain Model • The most common generic business level strategies are: • Become the low-cost producer • Differentiate your product from competitors’ products • Change the scope of competition by enlarging the market or narrowing it to a specialized niche

  21. Figure 3-14 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Business-level Strategy

  22. Internet Strategy Examples • Supply Chain management • Stockless inventory Nike Mass Customization • Continuous replenishment Walmart • Just-in-time inventory Amazon • Intrafirm Strategy • Product Diff (of IT Products) Dell Netbank • Focused Diff (Data Analysis) Amazon • Low Cost producer Used Cars • Efficient Customer Response • Point-of-sale system Barcode scanners • Data analysis Target Registry • Online orders eBay

  23. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Information Systems Products and Services • Systems that Create Product Differentiation: • Firms can use IT to develop differentiated products. • Create brand loyalty by developing new and unique products and services • Product and services not easily duplicated by competitors • Examples: Dell, Orbitz

  24. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Systems that Support Focused Differentiation: • Uses intensive analysis of customer data to support new ways of contacting and serving the customer • Enables development of new market niches for specialized products or services • Example: Wyndam Hotels frequent guest program

  25. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Supply Chain Management and Efficient Customer Response Systems: • Link your firm’s value chain to the value chains of your suppliers and customers • Directly links consumer behavior back to distribution, production, and supply chains • Example: Wal-Mart directly links customer purchases to suppliers in nearly real time. It is the suppliers’ job to ensure products are shipped to the store to replace purchased products

  26. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Switching Costs and Lock-in Effects • IT is used at the firm level to discourage customers from switching to other suppliers, and “locking” them into a firm’s channels. • Switching cost is the expense incurred by a customer or company for changing from one supplier or system to another. • Example: Baxter International

  27. Figure 3-13 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Stockless Inventory compared to Traditional and Just-in-time Supply Methods

  28. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Firm-Level Strategy and Information Technology • Core Competency: • Activity at which a firm excels as a world-class leader • Information systems encourage the sharing of knowledge across business units and therefore enhance firm competency

  29. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Industry-Level Strategy and Information Systems: Competitive Forces and Network Economics Firms operate in a larger environment composed of other firms, governments, and nations • Information partnership: • Cooperative alliance formed between two or more corporations for sharing information to gain strategic advantage • Help firms gain access to new customers, creating new opportunities for cross-selling and targeting products

  30. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY IT and the Internet can greatly change the strength of these competitive forces: • Encourage new entrants. Example: NetFlix vs. Blockbuster • Increase customer bargaining power. Example: Expedia.com and others

  31. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY IT and the Internet can greatly change the strength of these competitive forces: (Continued) • Decrease in supplier power. Example: eCampus.com increases the efficiency of used textbook market, reducing publisher profits • Substitute products. Example: online music lowers value of record stores

  32. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Business Ecosystems: IT plays a powerful role in creating new forms of business ecosystems. • Business ecosystems are interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers.

  33. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY • Examples: • Microsoft: 1 billion PCs worldwide and hundreds of thousands of businesses rely on Microsoft’s platform. • EBay: Millions of people and thousands of business firms use this platform. • Wal-Mart: Enterprise systems used by suppliers to increase their efficiency

  34. Figure 3-16 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY An Ecosystem Strategic Model

  35. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Network Economics: • IT products and services exhibit powerful network effects and create potential “winner take all” situations. • Network effects occur when adding more resources to a process incurs little or zero cost, but large gains in output. • Contrary to the law of diminishing returns typical of industrial and agricultural products

  36. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy INFORMATION SYSTEMS AND BUSINESS STRATEGY Network Economics: (Continued) • Example: Value of the Internet grows exponentially with the linear increase in users. • Example: Because certain software can become a standard (like Windows operating systems or Windows Office), people can get locked into that standard and the value of Windows grows as more and more people use it. • Good strategy: Use IT to build products and services that exhibit network effects.

  37. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy MANAGEMENT OPPORTUNITIES, CHALLENGES AND SOLUTIONS Management Opportunities: • Firms face a continuing stream of IT-based opportunities to achieve strategic advantages

  38. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy MANAGEMENT OPPORTUNITIES, CHALLENGES AND SOLUTIONS Management Challenges: • Some firms face big hurdles in implementing contemporary systems. • Once an advantage is achieved, there are difficulties in sustaining the advantage. • Organizations often cannot change fast enough to accommodate new technologies.

  39. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy MANAGEMENT OPPORTUNITIES, CHALLENGES AND SOLUTIONS Solution Guidelines: • Perform a strategic systems analysis • Understand the structure and competitive dynamics of the industry where your firm operates • Understand the business, firm, and industry value chains • Consider how your firm can manage “strategic transitions” as it seeks to implement systems that provide competitive advantages

  40. IT & People interact & change each other IT should be used to increase profit. If IT doesn’t get adopted fully, it can’t increase profit and is a failure Because of “B”, technical or economic models rarely work Profit is made by improving the Value chain Strategy is the method used to improve the Value chain Objectives in Business Strategy

  41. Benefits of EC • EC gave power to consumers • EC eliminates middle, lowers cost • EC reaches more people • Profit Function: Profit = Revenue – Cost • Revenue = #units * price + donations • Cost = Inventory, office expenses (phone, office) advertising, taxes, royalties,

  42. Class/Group Exercise

  43. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Economic Impacts: (Continued) • Transaction cost theory:Firms seek to economize on the cost of participating in markets (transaction costs). • IT lowers market transaction costs for firm, making it worthwhile for firms to transact with other firms rather than grow the number of employees.

  44. Figure 3-7 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS The Transaction Cost Theory of the Impact of Information Technology on the Organization

  45. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS • Agency theory:Firm is nexus of contracts among self-interested parties requiring supervision. • Firms experience agency costs (the cost of managing and supervising). • IT can reduce agency costs, making it possible for firms to grow without adding to the costs of supervising, and without adding employees.

  46. Figure 3-8 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS The Agency Cost Theory of the Impact of Information Technology on the Organization

  47. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Organizational and Behavioral Impacts IT Flattens Organizations: • Facilitates flattening of hierarchies • Broadens the distribution of timely information • Increases the speed of decision making

  48. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS IT Flattens Organizations: (Continued) • Empowers lower-level employees to make decisions without supervision and increase management efficiency • Management span of control (the number of employees supervised by each manager) will also grow

  49. Figure 3-9 Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Flattening Organizations

  50. Management Information Systems Chapter 3 Information Systems, Organizations, Management, and Strategy HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Postindustrial Organizations and Virtual Firms Postindustrial Organizations: • Authority increasingly relies on knowledge and • competence. • Information technology encourages task • force-networked organizations.

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