AFM241 Chapter Notes - Chapter 3: Customer Switching, Encyclopedia, Switching Barriers
17 May 2018
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Chapter 3 – IT strategy
3.1 Introduction
• IT investment go through periods of optimism and pessimism
• During optimism, expectations tend to become unrealistic
• During pessimism, doubt prevails about the value of investing in new IT
• People argue that IT investment are easily replicated→not a source of competitive
advantage
• The role of IT a e to support or lead the fir’s strateg
• The firm may be an IT conservative or IT innovative
• We will start by reviewing some of the factors driving IT strategy and explore some of the most
commonly encountered views regarding the role of IT.
3.2 Factors Driving IT Strategy
• IT strateg has ee desried as the shared isio aog the fir’s top aageet tea TMT
• Prior experiences tend to affect how executives view and deal IT
• Can IT change the basis of competition?
• Can IT build barriers to entry?
• Can IT change the balance of power in supplier relationships?
• Can IT generate new products?
3.2.1 IT and Basis of Competition
• Firms can be classified into three groups
• 1. Chooses to focus on their capability to produce a product or offer a service at a cost per
unit that is lower than their competitors (e.g. Walmart- cost leader)
• 2. Chooses to leverage their superior capability to offer new products or different mix of
product features. (e.g. Apple – product differentiator)
• 3. Chooses to specialize in only one niche market and serve this market either in terms of
lower cost or product features. (e.g. BlackBerry- focuses on security)
• IT can change cost leaders into cost differentiators by adding some new features to products
• IT can also change vice versa by reducing existing staff or growing without hiring staff, improving
material use, and increasing machine efficiency through better scheduling or more cost-effective
maintenance.
• IT can also be used to leverage a product/service that has remained the same to achieve a
substantial reduction in its cost per unit
• One example of a firm used IT to leverage data that the firm collected to identify patterns in sales
(newspaper stands) and used this knowledge to add value to the product the firm was selling
3.2.2 IT and Barriers to Entry
• Recall from chapter 2, there are seven potential forces that define the barrier to entry. We will
review the effect of IT on these forces.
• In some cases, it creates a new one or raises an existing barrier to entry, while in some other
cases it reduces or eliminates an existing barrier
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• 1. Economies of scale: firms that can produce at large volumes can achieve lower per unit cost.
• Large retailors increased fixed cost to adopt new procurement, distribution, and inventory
control technologies such as distribution centers, bar coding, and POS terminals. There
ade it diffiult for saller retailers to eter eause the do’t hae eooies of sale.
• 2. Network effects: a uer’s illigess to u a fir’s produt or series ireases ith the
uer of uers ho u the fir’s produt/series.
• Use IT to generate network related effects. E.g. BlackBerry Messenger, allows messaging
among BlackBerry users. Similar with Facebook and Skype.
• 3. Customer switching cost: refers to the fixed costs that buyers face if they decide to switch to
another product or service. It may be physical capital such as investment in customized hardware or
human capital such as training time.
• IT i this ase oets a fir’s logisti failities to a supplier’s aufaturig failities
through a customized supply management system. These firms face a switching cost
• 4. Capital requirements: refers to the need to invest large amounts of resources in order to
compete in an industry.
• IT investments had become a barrier to entry for smaller companies but;
• Firms can leverage IT innovations such as cloud computing to alleviate the burden of capital
requirements. This reduces barrier to entry.
• 5. Incumbent advantage: existing firms may have a cost or quality advantage due to various
isolating mechanisms or proprietary technology.
• E.g. Encyclopaedia Britannica was the oldest and most prestigious English language
encyclopaedia. But it gave in to Wikipedia and stopped their print edition.
• In this case, the incumbent advantage was eroded by the power of crowd sourcing, which
was made possible through the Internet.
• 6. Access to distribution channels: works as a barrier to entry for newcomers because they have to
secure distribution of their product or service.
• Traditionally people used physical channels of distribution but the power of IT now
introduced e-commerce and obsoleted the physical market. Online shopping vs retail stores.
Rip Blockbuster.
3.2.3 IT and Balance of Power
• IT balances out the power between buyers and sellers
3.2.4 IT and New Products
• One of the notable contributions of IT is in terms of the ability to achieve mass customization
• Customers were able to go to an online system to let them customize the product
3.2.5 IT and Hyper-Competition
• Hyper-competition is a term that captures the current new competitive environment.
• rapid teholog hage is oe of the four fores that fuel hyper-opetitio
• The others are:
• . Custoer hages ad fragetig of ustoers’ preferees
• 2. Falling geographic and industry boundaries
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• 3. Deep pockets among competitors due to the rise of giant global alliances.
3.3 General Views Regarding Role of IT
• Gie that IT strateg has ee defied as the shared ie, aog a fir’s seior eeuties
regarding the role of IT in the organization
• Vies of IT a e lassified either i ters of the futioal role of IT or i ters of the fir’s
position towards IT
• From a functional standpoint, the role that IT can play is to automate existing processes, as a
channel for information flow within the firm, or as force that can transform an industry
• Fro the fir’s stadpoit, the positio that a fir a adopt towards IT is that of a leader
or follower, innovative or conservative, offensive or defensive IT adopter.
3.3.1 Functional Roles of IT
• Automation is one of oldest, and perhaps the most common, functional role that IT can play in a
firm.
• e.g. replace human labour to achieve lower cost and improve quality
• The main limitation with the automation view is that senior executives, who invest on IT in order to
automate processes tend to focus on short-term effect and neglect long-term potential.
• E.g. if employees feel that their work is mechanical and no incentives to be creative with IT
investment
• IT is a source of new information that facilitates the flow of information within the company
• Informate up means the functional role of IT may be to provide information to senior management
• Making it easier and efficient for senior executives to exercise their organizational control
and coordinate activities across the value chain
• Allows them to receive timely information that enables them to identify problems and take
actions immediately
• Informate down the functional role of IT may be to provide information to front line managers and
employees.
• Transform: means that senior executives view IT is a vehicle for fundamentally altering the structure
and competitive forces of the industry where the firm operates.
• Chagig the fir’s relatioships ith its suppliers, ustoers, ad alterig the produts,
markets, organizational structures, etc.
.. Fir’s Dispositio Toards IT
Innovative versus conservative
• IT innovators want to be IT leaders within their industry.
• They are the first to explore, develop, and capitalize on innovative IT initiatives.
• They have consistent IT strategic perspective.
• IT conservative firms tend to adopt a more cautious approach with IT investments, and they do not
wish to establish themselves as IT leaders in their industry.
• Only invest when tests have been proven successful and not take risk IT projects
Offensive versus defensive approach to IT
• The distitio rests o the fir’s IT related priorities
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