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2nd Module: The Strategic Role of Information Systems: Structure: 1. Strategic Information Systems 2. Information Systems and Competitive Advantage 3. Inter-organisational Information Systems 4. Organisational Strategy and Information Systems What does strategic role mean in this context? It means that the organisation has become dependent on their information systems and would not be able to exist anymore if it was suddenly deprived of them. For example: online businesses such as Amazon, Easyjet, or the Nasdaq stock exchange, but also more traditional businesses such as Foreign Exchange currency dealers etc. In all these examples, IT is a necessary condition for successful business. Strategic dependence develops based on: - How well a business competes in a market. - Its market sector with its unique characteristics. Online trading, for example, would run any competitor without Information Systems into serious trouble (and quickly out of business). More traditional businesses, on the other hand, such as taylors who have an exclusive offer from Buckingham Palace to make handcrafted clothes for the Queen might not face the risk of running out of business, even if they do not rely on Information Systems. So it very much depends on the market sector and its characteristics whether IT is important or not. In most market sectors, Information Systems are nowadays very important, possibly even of strategic importance. Information Systems and Competitive Advantage Since the mid 1980s it was recognised that Information Systems could bring a competitive advantage to organisations that rely on them (McFarlan, 1984; Porter, 1980; Porter & Millar, 1985). However, strategic Information Systems were not always successful and costs sometimes outweighed gains. The reason for this was that competitors often copied the Information Systems achievements of their rivals and many competitors introduced similar information systems at the same time, which did not bring a significant gain to anyone. So in order to gain an advantage, the organisation needed the idea earlier than their rivals, and needed to ensure that their rivals could not copy this idea (which can be done by patenting new technologies). However, not everything can be patented, e.g. new ideas cannot be patented. An example of something that could not be patented was the Direct Line Motor Insurance that applied IT to sell motor insurance directly, without a broker taking part. Ideas like this cannot be patented, and there were soon many competitors that had the same ideas, so Direct Line finally moved out of business. Strategic Advantage: Usually, only a few companies survive on the market, and they compete for customers, e.g. there are only a couple of private banks on the market (Barclays, NatWest, Lloyds, HSBC, etc.). Strategic vs. Sustainable Advantage Strategic Advantage: Usually, only a few companies survive on the market, and they compete for customers, e.g. there are only a couple of private banks on the market (Barclays, NatWest, Lloyds, HSBC, etc.). For these few competitors, Information Systems are often an essential part of the company. All of these companies might end up benefiting from Information Systems, because IT helps them to save cost in many ways. Since all of those companies have similar Information Systems, however, the systems are just necessary for them to survive on the market, but the systems themselves do not bring any competitive advantage. For example, all of these banks offer Cash Machines, Telephone Banking, Internet Banking, etc. Sustainable Advantage: If a company is unique in a particular way, Information Systems can help the company profit from its uniqueness. In short, a sustainable advantage can be described as: Profiting from one’s uniqueness and getting more advantages through having Information Systems that support what the company does best. The advantage itself does not come from the Information Systems per se, just through enhancing and making more effective what the company is already good at. An example is the investment bank Merrill Lynch, which had a unique product palette for wealthy customers. This product palette could not be replicated by other investment banks. However, it should not be forgotten that many information system implementations actually failed. Because failure is reported less often than success, it is hard to estimate how many implementations ended up being useless or unsuccessful. Failures are sometimes reported in newspapers, when famous organisations sue companies that provided the technology. There are different reasons for failures, such as: 1. The Implementation Costs became too high. 2. The Information Systems did not result in a competitive advantage. 3. The Information Systems caused unforeseen and adverse consequences. In any case, it should be considered that Information Systems are rarely the driving force towards competitive advantage. They might only provide conditions necessary for success. As a result, the development of new information systems for particular purposes is quite risky. It should be kept in mind that many success stories resulted from further development of already existing Information Systems, such as online airline ticket reservation websites resulted from other online sales websites. In general, there is vivid disagreement among many business scientists as to whether Information Systems bring a competitive advantage or not. Inter-organisational Information Systems Inter-organisational Information Systems are “systems that create electronic links between customers and suppliers, between organisations in different industries, and even between competitors.” (Duncan, 1997). This might foster completely new organisational structures, with co-operation between several smaller and specialised companies instead of large businesses being active in several areas. An example of an inter-organisational system is the Economost system by the McKesson Corporation. This system distributes medication to individual drugstores, who tended to be pushed out of business by large drugstore chains. The Economost system helped these independent drugstores in several ways: It automated the ordering process, which reduced customer costs. It helped to set the prices and to offer a better targeted mix of products, etc. This again helped the independent drugstores to afford services that usually only large chains could afford. Not a single store would have been able to afford the IT technology, but the collective effort of many stores ensured that the Economost system could be sold at a price that each store could afford. This system also enabled the stores to have marketing services that they would otherwise fail to achieve. As the Economost system shows, partnerships formed through inter-organisational Information Systems are a contrast to the traditional dog-eatdog view that was prominent until recently. Another example would be the alliance between several airlines in order to ensure survival of each individual airline. In order to enable cooperation between these airlines, interorganisational information systems provide very useful help, particularly for small airlines that would otherwise go out of business. Organisational Strategy and Information Systems When Information Systems play such an important role in an organisation, it is essential that assessment of the strategic impact as well as planning and organisation are taken very seriously. Bleeke and Ernst (1993) for example consider the following strategy for businesses in the context of the global marketplace: “Businesses need to collaborate to compete” Information systems play a large part in allowing businesses to communicate with their collaborators. This leads to a structural change, away from the core business that dominated business practice in the 1990s to alliance-based businesses with networks through interorganisational information systems. “Reengineering” is another term that has now been used to describe the practice of forming alliances, though the idea of reengineering is not really new. What all these new approaches of forming alliances have in common is that they depend on Information Systems to build these alliances. Examples are companies offering products, but where it is required that suppliers are able to access databases within the company. References: Bleeke, J. & Ernst, D. (1993). Collaborating to Compete. New York: Wiley. Duncan, W.M. (1997). Information Systems Management. London: University of London Press. McFarlan, F.W. (1984). Information Technology Changes the way you compete. Harvard Business Review, 62 (3), 98-103. Porter, M.E. (1998). Competitive Strategy. New York: Free Press. Porter, M.E. & Millar, V.E. (1985). How Information gives you competitive advantage. Harvard Business Review, 4, 149-160. References for students who are interested in further reading can also be found on page 9 of the study guide.