Chapter 1 – Creating Business Advantage with IT



This a good chapter to begin our semester because it asks the fundamental questions managers should be asking about IT.  In the following pages I have pulled out what strikes me as the main points of the chapter, and I have commented on them in brackets.  I assume you all have your own comments about the main points.  I have some questions at the end that you may want to frame your responses around, but feel free to make other comments about the chapter if you wish.


3 Ways of Looking at Strategy


Michael Porter’s Value Chain Analysis

Value Chain” – the stream of activities through which goods and services are created and delivered to customers.  Each step in the chain is examined for costs incurred and value created. 

[While the value chain concept is nearly twenty years old now, we see increasing interest in it through the re-engineering efforts which have dominated much of corporate life for the last decade.]


Business Roles – Suppliers, producers, distributors, customers

[Give some thought to the relative strength of these four roles.  My ordering would be customers –1, producers –2, suppliers – 3, and distributors a distant 4th.  “Dis-intermediation works against distributors.  Ask an insurance agent who distributes insurance for several companies how she feels competing against on-line insurance services that connect producers directly to customers.]


Economies of Scale – a participant who can leverage a position within a single product line or market

[the old phone monopoly or the advantage of the local newspaper if it is the only one in town]


Economies of Scope – a participant who can leverage a position to launch new products lines or enter new businesses

[Microsoft fits here, doesn’t it?  It uses its position with MS-Dos (then Windows) to launch MS-Office.  Tough turn of events for Word Perfect]


Changes from the Industrial economy to the network economy – The ability to link companies through the internet and other ubiquitous communications media mean that groups of companies now can compete and add a different dimension to the competition for power. 

[Page 32 has a good table of comparisons.  A current IT example might be the gathering of companies around Linux as a way of competing with Microsoft.  No company can take MS on alone, but by using open and sharable standards, they can collectively compete.  Others might argue that Nike is a good example as it is really a collection of companies that blew Converse out of the US market (Anyone remember Converse All-Stars?)]


Porter’s Competitive Analysis


Porter asserts that you get competition from five directions – existing competitors, new competitors, your suppliers, your customers, and substitute products and services. 

[We often don’t think of suppliers and customers as competitors, but in fact suppliers always have the right to go past you directly to customers (why are you necessary?), and customers can go directly to suppliers (as travel agents are learning).  For substitute products and services, think of TurboTax and the number of CPAs who will NOT be getting consumer business that is being handled quite well by $39 software.  While the book does not mention it, remember that Porter also said companies had 8 responses they could make to competitive threats –



I wish more corporate mission statements identified the strategy the company was using.  Can you tell from your own employer?]


McFarlan’s Strategic Grid

The grid looks at the role of IT in a company. 

[The Table on page 34 sums it up nicely.  What makes the grid worth thinking about is the realization that IT does NOT have the same importance for each company.  This is one reason why universal metrics like “IT costs should be 2% of sales” make no sense in the real world.  Besides budgeting, staffing is also impacted by the role IT plays.  The amount and kind of talent you need in the IT department is determined by where you see your company in the grid.]



5 Strategic Questions


Given the concepts presented in the three frames above, the questions for managers involve how IT can enhance the role of a company in the value chain, against all forms of competition, and given the general position of the firm. 


  1. Can IT reengineer core activities and change the nature of competition?

[As you think about the two examples in the text, consider the general concept of “self-service.”  McDonalds succeeded early because of two innovations – a limited menu (which it has since abandoned), and self-service.  You have to go get the food, which saves McD’s the cost of waitresses.  Much of the innovation we are seeing in ecommerce is really just self-service taken to a new level.]


  1. Can IT change relationships and power between buyers and suppliers?

[The hospital supply example is a good description of various ad hoc networks being formed.  Those in manufacturing would take a different slant to this concept.  The demands of lean manufacturing are driving very different relationships between suppliers and producers.  We see companies picking fewer suppliers (the Harley Davidson case we will read in a few weeks is a great example), and linking to them through IT to keep parts at critical inventory levels.  Suppliers adjust or lose sales.]


  1. Can IT change barriers to entry?

[First a word on the barriers-to-entry concept.  Some small business advisors will tell you you should never buy a business that costs less than one million dollars.  The point here is that if lots of people can get into a business, it will always be very competitive and very low profit.  We see this in the rapid turnover in restaurants and in the number of people who get into – and then out of – apartment rentals.  If IT lowers barriers to entry, it will increase competition and lower profits.  Here the book does a very balanced job explaining how expensive IT really is and how it has not lowered barriers as much as some thought.  Nevertheless, a well-leveraged IT infrastructure can lower your entry into some markets as we see in the entry of Dell into the printer market and Amazon into the CD market.]


  1. Can IT Change switching costs?

[How can we keep our customers coming back?  The Intuit example is a great one.  When I run this year’s TurboTax it knows where to find the information form last year’s return and saves me a great deal of time.  If I switched to another online tax service, I would have to be assured that it wouldn’t lose this ability and require more work from me.  Intuit then leverages this capability to hook me on other business software products that can build on existing information in my tax returns.  Each sale makes the next sale easier.  It is hard to think of other companies that interlock their products so well.]


  1. Can IT add value to existing products or create new ones?

[Read the first paragraph over about three times until you can think of examples of other companies that are using information to change themselves.  I will give you one – Southern Pacific Railroad.  They move boxcars along right-of-ways and would be seen as a very low-tech company.  Except they thought about all that right-of-way and wondered if they could use it to bury optical fiber and carry digital signals across the country in addition to carrying box cars.  The resulting network became SPRint.  Clever companies are seizing opportunities.]



Questions to consider for this week:


1.      Without giving away any proprietary information, present an example of competitive threats your company faces.  Which of the five threats causes you the most concern?  Which of the 8 responses are you using to fight back?


  1. Pick one of the five questions for managers and explain which one is most pertinent to your situation.  Are you changing core activities?  Adjusting to your suppliers?  Seeing new entrants?  Holding your customers?  Finding new products and services to sell?  What pressures is that placing on your organization?  How is IT responding?  Are you changing your company because your IT department enables that change, or changing IT because competitive pressures demand it?