Information Technologys Strategic Importance

1
Chapter 2

• Information Technologys Strategic Importance

2
Introduction

• IT is changing the fabric of our society
• Shifts power from governments to citizens
• Flow of intellectual property is no longer
  constrained by national boundaries
• IT is changing business
• Senior executives expect IT to play a central
  role in streamlining operations and to link
  customers, suppliers, and employees more closely

3
The Current Challenge

• Walter Wriston, former Chairman of Citicorp, The
  essence of an information strategy is to turn the
  burden of burgeoning business data into a bounty
  of business opportunity. The business
  organization has to be rebuilt around the goal of
  managing information productively. The object of
  the game is to get information to the person or
  company that needs and can use it in a timely
  way.

4
Strategic Systems in Action

• Over the past two decades, information systems
  have been used to create value in business. Two
  industries, airlines and financial services,
  created systems that have resulted in significant
  competitive advantage to their owners.
• These systems have not been static, and their
  evolution is impressive given the dramatic
  changes in technology and the business
  environment over time.

5
Airline Reservation Systems

• In the 1960s, American Airlines created SABRE
  (Semi-Automated Business Research Environment)
• Initially invested 350 million to create the
  system
• Provides reservation services for airlines,
  hotels, and rental cars
• Links travel agencies, private or corporate
  travel systems, and Internet customers

6
SABRE Evolution

• AA continued to expand the system and provide
  outsourcing reservation services to competitors
• Integrated back office management for travel
  agencies
• Added a yield-management system to optimize fare
  structure and load factors
• An upgraded yield-management system in 1997
  increased corporate profits by 200 million

7
Competitors

• United Airlines created Apollo in the 1970s to
  compete with SABRE
• Initial cost of 250 million
• 1987 spun off to UAL subsidiary COVIA Corp
• COVIA sold to partners in 1988, valuing the
  company at 1 billion (renamed Galileo)
• Galileos IPO in 1997 valued the company at 2.5
  billion
• In 1999, Galileo earned 218 million on revenues
  of 1.53 billion

8
Internet-Based Systems

• Alaska Air Group created ITMs (Instant Travel
  Machines)
• These machines use a kiosk type interface to
  create travel reservations in hotels, airports,
  and business locations
• They bring the power of advanced reservations
  systems to busy travelers in a convenient
  location
• Coupled with paperless ticketing (e-tickets),
  these technologies are reducing business cost and
  increasing customer access

9
Online Travel Services

• Arguably, the single most successful B2C
  e-commerce segment attracts single largest
  audience, and largest slice of B2C revenues
• Internet becoming most common channel used to
  research travel and book reservations
• 2003 38 billion in revenue, expected to grow to
  70 billion by 2007
• Popular because they offer consumers more
  convenience (one stop offers content, commerce,
  community, customer service) than traditional
  travel agents
• For suppliers, offers a singular, focused
  customer pool that can be efficiently reached

10
Total U.S. Online Travel Booking Revenue

• Figure 11.9, Page 663

11
Travel as the Ideal Internet Product/Service

• An information-intensive product
• An electronic product in the sense that travel
  arrangements can be accomplished for the most
  part online
• Does not require inventory
• Suppliers are always looking for customers to
  fill excess capacity
• Do not require an expensive multi-channel
  presence

12
Online Travel Services Components

• Airline reservations the largest single component
  (21 billion in 2002 39 billion in 2006)
• Hotel reservations (7 billion in 2002, 15
  billion in 2006)
• Car reservations (3 billion in 2002, 7 billion
  in 2006)
• Cruise/tour reservations fairly slow growth
  since not as well suited for online environment
• Major segments
• Leisure
• Business travel expected to be a major growth
  area as corporations seek better control of
  corporate travel expenses

13
Projected Growth of Online Travel Market
Components

• Figure 11.10, Page 665

14
Projected Growth of Managed and Leisure/Business
Travel

• Figure 11.11, Page 666

15
Online Travel Industry Dynamics

• Competition among online providers is intense
• Industry is going through a period of
  consolidation as stronger, offline established
  firms purchase weaker and relatively inexpensive
  online firms
• Suppliers (the large national airlines, hotel
  chains, auto rental companies, etc) are
  attempting to eliminate the intermediaries such
  as the global distribution systems and travel
  agencies, using the Web as a means
• Examples Orbitz (airline consortium), auto
  rental company direct-to-customer Web sites.

16
Large Online Travel Sites

• Table 11.11, Page 667

17
The Travel Services Value Chain

• Figure 11.12, Page 668

18
Insight on Business Orbitz Takes Off

• A joint venture formed by American, Continental,
  Delta, Northwest and United
• Opened for business June 2000 today in 3rd place
  behind Expedia and Travelocity in terms of
  visitors
• Offers unique search technology and wide
  selection, low fares from its industry owners
• One of few examples on Web of manufacturer-direct
  
• Industry competitors have claimed unfair
  competition and antitrust issues

19
E-commerce in Action Expedia.com

• Online travel services company that provides
  access to information about and sales of travel
  arrangements
• Originally started by Microsoft, subsequently
  purchased by USA Networks (now InterActiveCorp)
• One of top players in online travel services,
  generating revenues of 591 million in 2002

20
Expedia, Inc. Consolidated Statements of
Operations and Summary Balance Sheet Data
2000-2002

• Table 11.12, Page 673

21
Stock Brokerage Systems

• In 1977, Merrill Lynch introduced the CMA (Cash
  Management Account)
• Combined checking accounts, debit cards, and
  margin-based brokerage accounts into a single
  entity
• Customers received a consolidated account
  statement at the end of the month
• Cash was automatically swept into a money market
  account
• By 1980, it served 186,000 accounts

22
CMA Evolution

• 1981 CMA available nationwide
• 500,000 accounts
• 1982 International CMA launched
• 1987 150 billion in assets under management
• 1.3 million accounts
• Started ATM access via Visa Premier program

23
CMA Intellectual Property

• Merrill was granted US patent 4346442 in August
  1982
• This patent effectively allowed Merrill to stop
  competition in unified accounts for 7 years
• During active development of CMA, the Merrill
  Lynch technology budget was estimated to be
  approx. 1.5 billion

24
Internet-Based Competitors

• The brokerage industry underwent dramatic changes
  with widespread Internet use
• Barriers to entry were removed as local office
  infrastructure became less important to investors
• Charles Schwab, E-Trade, Fidelity, and others
  embraced Internet transactions to expand and
  increase market share

25
Schwab.com Features
26
Online Financial Services

• Online financial services sector an example of an
  e-commerce success story, but success is somewhat
  different from what had been predicted
• Pure online financial services firms in general
  are not yet consistently profitable
• Multi-channel established financial services
  firms are showing fastest growth and strongest
  prospects

27
Online Asset Growth

• 2003 About 3.5 - 3.7 trillion managed online
• By 2005, estimated to grow to 5.4 trillion
• 2003 About 25-32 million households bank online
  about 20- 25 million household trade online
• By 2007, estimated online banking households will
  grow to 57 million online investing households
  will grow to 41 million
• Northern Europe (Norway, Finland, Sweden) lead
  all regions in movement to online banking

28
Growth of Online Investable Assets (in Trillions)

• Figure 11.4, Page 633

29
Online Investing and Banking

• Figure 11.5, Page 634

30
Online Banking Penetration in Various Countries
(2002, As a Percentage of Total Banking)

• Table 11.1, Page 635

31
Online Consumers Financial Activities (2002, As
a Percentage of Online Consumers)

• Table 11.2, Page 635

32
Financial Service Industry Trends

• Financial services industry provides four generic
  kinds of services
• Storage of and access to funds
• Protection of assets
• Means to grow assets
• Movement of funds
• Two important global trends
• Industry consolidation (Financial Reform Act of
  1998 amended Glass-Steagall Act and allows banks,
  brokerages and insurance firms to merge)
• Movement toward integrated financial services
  (financial supermarket model)

33
Traditional Providers of Financial Services

• Table 11.3, Page 636

34
Industry Consolidation and Integrated Financial
Services

• Figure 11.6, Page 637

35
The Financial Supermarket Model Integrated
Online Financial Services

• Figure 11.7, Page 638

36
Online Banking and Brokerage

• Online banking pioneered by NetBank and WingSpan
• Established brand name national banks have taken
  a substantial lead in market share
• Early online brokerage leaders, such as ETrade
  and Ameritrade have also been displaced at top by
  established firms (Fidelity and Charles Schwab)
• Online consumers have made it known that they
  prefer multi-channel firms with physical presence
• Multi-channel firms have lower customer
  acquisition, conversion and retention costs
• However, users of pure online firms utilize them
  more intensively

37
The Leading Financial Services Firms

• Table 11.4, Page 640

38
E-commerce in Action ETrade

• ETrade 4.1 million online customers offers
  online brokerage, banking,lending, corporate
  financial services
• Discounted commissions on stock trades, free
  online information, online order entry, more
  efficient order execution, and better customer
  service
• Online brokerage industry growth torrid
  1998-2000 has slowed somewhat since
• However, despite extraordinary growth and
  success, not consistently profitable collapse of
  stock market and its impact on ETrade
  demonstrated fragility of its reliance on pure
  online domestic brokerage
• Has since been seeking to expand physical
  presence and diversify revenue streams

39
ETrade Groups Consolidated Statements of
Operations and Summary Balance Sheet Data
2000-2002

• Table 11.5, Page 644

40
ETrade Key Performance Indicators

• Table 11.6, Page 646

41
ETrade Cost per New Account and Average
Commission per Transaction

• Table 11.7, Page 646

42
Financial Portals

• Provide comparison shopping services, independent
  financial advice and financial planning
• Financial portals generate revenue from
  advertising referral fees and subscription feels
• Examples Yahoo! Finance, Quicken.com, MSNMoney,
  AOLs Personal Finance channel
• A major source of visitors to major established
  financial services sites
• Add to online price competition in financial
  services industry

43
Strategic E-Business Systems

• Internet-based technologies can radically reshape
  markets resulting in massive realignment of
  customer and partner relationships
• Airlines previously viewed travel agents as their
  customers. Due to Web portals, they increasingly
  view individual travelers as customers, now that
  they have been given direct access to booking and
  flight information

44
Importance of Technology

• Advanced technology shapes the products and
  services of the future
• IT offers opportunities for innovative
  organizations to increase their value
• Information is so fundamental to business today,
  that small advances in information management are
  magnified as these increases are amplified across
  business processes

45
The Time Dimension

• Time is an irreplaceable asset and source of
  competitive advantage
• Information Technology and modern
  telecommunications systems are well suited to
  leveraging time as a strategic thrust
• Just-in-time manufacturing (JIT) is a common
  example

46
McDonnell Douglas Corp

• Implemented a JIT system for coordination of work
  flow. The resulting system required
• 111 new programs
• Modifications to 97 other programs
• 1900 person hours of programming labor
• Meetings for project planning and execution

47
JIT Benefits at McDonnell Douglas
48
Networkings Strategic Value
49
The Strategist Looks Inward

• Strategic systems are conceived by first
  analyzing the firms internal functions
• 85 of all e-business infrastructures are
  patterned after non online legacies
• Firms commonly have a portfolio of hundreds to
  thousands of applications
• Deciding which ones to automate requires a keen
  understanding of the firms strategy,
  competitors, and culture

50
Value Chains for E-Business

• Modern e-business models operate in nearly all
  the dimensions of the figure
• Use internal (example ERP) and external
  (Web-based B2C and B2B)
• Exploit the six strategic thrusts
• Firms adopting e-business models reconstruct
  their value chains around powerful new
  information technology

51
Financial Implications

• Strategic information systems require continued
  investments to sustain their advantages
• First movers capture time at expense of cost and
  potential failure
• Even established firms can be beaten when
  technology appears that is so disruptive, like
  the Internet, that no advantage exists for the
  incumbents

52
Legal Considerations

• Resort to the courts can be a tool for
  competitors to blunt the advantages gained by
  technology
• Protection of intellectual property by patents
  can also be a powerful tool to further the
  advantages of an innovator by denying the
  competition access to a newly created market

53
Cautions

• Most strategic information systems are
  evolutionary. They are based on pre-existing
  systems within the firm
• Successful firms focus on the details of success
  instead of a grand scheme. Lasting competitive
  advantage is not found in a few grand strokes
• The entire firm must be competitive across all
  areas. IS alone can not deliver a killer app
  that eliminates the competition

54
Summary

• Information technology is vital to the continued
  success of modern firms
• Senior leadership understands that IT is a potent
  source of competitive advantage
• They are prepared to invest in needed
  applications and hardware, but expect a
  substantial return on that investment