IT as a Competitive Advantage

1
IT as a Competitive Advantage

• Presented by
• Vaishali Soneta
• Matthew Pasley
• Megan Cox
• Michelle Wagener

2
The Importance of IT in an Organization

• Understanding IT and its Role can
• Gain a competitive advantage
• Improve efficiency of business processes
• Expand/revolutionize markets
• Not Understanding IT and its Role can
• Lead to Wasted IT budget
• Lead to Business Failure

3
IT as a Competitive Advantage

• Understanding Sources of sustained competitive
  advantage in the field of Strategic Management
• Obtain sustained competitive advantage by
  implementing strategies
• Exploit their internal strengths
• Responding to environmental opportunities
• Neutralizing external threats
• Avoiding internal weaknesses
• It works on 2 simplified assumption
• Environmental models- firms within an industry
  are identical in terms of relevant resources
  (control) and the strategies (pursue)
• Resources used to implement their strategies are
  highly mobile.

4
Resource Based View

• Based on 2 assumptions
• Firm within an industry may be heterogeneous with
  respect to strategic resources they control
• Resources may not be perfectly mobile across the
  firms
• Penrose, Edith, The Theory of the Growth of the
  firm, Oxford, Blackwell 1959
• Discussed that a firms strategy focuses on its
  resources instead of external environment. This
  is an inward-looking view of strategy

5
RBV
According to RBV, firm resources are the main
determinant Of competitive advantage and firm
profitability.
Competitive Advantage
?
Firm Resources
?
Firm Profitability
Michalisin et al, 1997
6
RBV
According to RBV, merely having resources doesnt
generate positive competitive advantage and
positive firm profitability. Only strategic
assets lead to a positive relationship
Competitive Advantage

Strategic Assets

Firm Profitability
Michalisin et al, 1997
7
RBV

• Physical Capital (property, plant, technologies)
• Human Capital (Employee Know-How, insight,
  judgment)
• Organizational Capital (culture, systems,
  structures, intellectual property rights)
• Tangible Resources (have physical properties and
  include various types of property, plant,
  equipment, and other physical technologies)
• Intangible Resources (the potentially valuable,
  non substitutable resource-based advantage is
  rare and imperfectly imitable)

• Strategic Assets are intangible assets that are
• Valuable
• Rare
• Imperfectly Imitable
• Nonsubstitutable
• Appropriability
• Mobility

Intangible Resources
8
Attributes to Create Competitive Advantage
Valuable if it allows the firm to exploit
opportunities in the market or thwart competitive
threats (idea of strategic fit of firm resources,
firm strategy, competitive context) allow a
firm to conceive of or implement strategies that
improve efficiency and effectiveness Rareness
number of firms in competitive arena possessing a
resource is less than the number of firms needed
to generate perfect competition. Appropriability
Appropriability addresses how easily the
resource can be appropriated by a competitor. It
assesses the value that the resource creates and
whether or not a given firm has the right to
accrue these profits
Barney, 1991 Michalisin et al, 1997
9
Attributes to Sustain Competitive Advantage
Imperfectly Imitable depends on unique
historical conditions, causal ambiguity (neither
firm or competitors know how resources yield a
CA), social complexity (beyond a managers ability
to systematically manage influence, like
culture) also a function of observability Non-s
ubstitutable no strategic equivalents the
rent-generating capacity of resource A is only
lessened to the extent that resource B can
provide strategic benefits similar to those
afforded by resource A Mobility Imperfect
Mobility Captures the extent to which the
underlying resources can be acquired through
factor markets Ex A charismatic leader may be a
substitute for a superior planning process if
both resources yield a clear view of the future
to the entire organization.
Barney, 1991 Michalisin et al, 1997 MIS
Quarterly vol28 No. 1/March 2004
10
Case Study Analysis

• RehabCare Group Inc.
• Progressive
• International Multifoods, Inc. (IMC)

11
RehabCare Group Inc.

• Matthew Pasley

12
RehabCare Group Inc.

• Incorporated in 1982 as a provider of temporary
  healthcare staffing and therapy program
  management for hospitals and skilled nursing
  facilities.
• Business is divided into two main catagories
  Hospital Rehabilitation Services and Healthcare
  Staffing Services
• Annual revenues of 540 million

www.rehabcare.com/investor
13
RehabCare Group Inc.
Example of Revenue Breakdown
RehabCare Annual Report
14
RehabCare Group Inc.

• Currently employs over 6,000 people nationwide
• Company has relationships with more than 7,000
  hospitals and skilled nursing facilities.
• They serve clients in all 50 states and the
  District of Columbia.

www.rehabcare.com/investor
15
RehabCare Group Inc.
RehabCare Annual Report page 4
16
RehabCare Group Inc.

• Business Model

• All Divisions operate based on 3 year to 5 year
  contracts.
• 75 of all contracts are renewed upon
  completion.

Personal interview with CIO Natasha Hawkins
17
RehabCare Group Inc.Business Model

• Premise of this service is that a hospital or
  nursing facility does not have the means to
  deliver Acute or nursing care. The company comes
  in and runs the facility with the only money out
  of the hospitals pocket coming from a monthly
  bill based on patient stay.
• Market is becoming increasingly hostile with new
  companies breaking in to gain market share.

Personal interview with CIO Natasha Hawkins
18
RehabCare Group Inc.

• Business Model

• The customer in relation to RehabCare is the
  hospital and the care physicians.
• The main measure of success or customer
  satisfaction is in number of contracts and length
  of contracts.

Personal interview with CIO Natasha Hawkins
19
RehabCare Group Inc.

• Business Model

• In the acute setting, most therapists are
  guaranteed work for the length of the contract
  while nursing home therapists can be only on one
  day to one year assignments.
• Revenues and margins are being increasingly hard
  to obtain due to stricter government regulations
  such as Medicare caps on patient care.

Personal interview with CIO Natasha Hawkins
20
RehabCare Group Inc.

• Business Model

RehabCare Annual Report page 15
21
RehabCare Group Inc.

• IT and the company

• As of 2000, the IT division of RehabCare
  consisted of seven people
• No training or service was being given to the
  staff and many processes were manual.
• Natasha Hawkins, CIO, stated, According to
  upper management and to the field, we in IT were
  just overhead or a group to call if their cell
  phones werent working.

Personal interview with CIO Natasha Hawkins
22
RehabCare Group Inc.

• IT and the company

• 2001 saw almost 40 of existing contracts come
  up for renewal and 1 out of every three were
  backing out.
• The company brought in a consulting firm to
  diagnose the problem and they found that
  RehabCare was behind in many aspects and one
  major one being IT.
• Currently IT consists of 17 employees ranging
  from help desk clerks to answer field questions
  to knowledgeable programmers.

Personal interview with CIO Natasha Hawkins
23
RehabCare Group Inc.

• Problem facing RehabCare

• Early 2001 saw contracts being lost and customer
  complaints rising.
• Customers complained of late, useless data as
  well as the fact that they felt disconnected with
  their service provider which was RehabCare.
• Continual Medicare audits came up with
  facilities being non compliant with government
  standards and facilities having to close until
  they straightened out their data.

Personal interview with CIO Natasha Hawkins
24
RehabCare Group Inc.

• Problem facing RehabCare

• Many clinicians had lost faith in the company
  and its goals.
• Divisions such as the contract therapy division
  went from signing 10-15 contracts a month to
  losing 5-8 a month and only signing 3-4 contracts
  a month .
• Many hospitals saw that working with RehabCare
  was too risky as a result of the continual
  Medicare audits and opted to self operate the
  facilities themselves.

Personal interview with CIO Natasha Hawkins
25
RehabCare Group Inc.

• The Proposal

• Natasha Hawkins, CIO The CEO and the
  division Presidents came to IT and sought answers
  to how we can gain back the customers confidence.
  We determined that the main problem was the lack
  of timely information as well as the feeling that
  they, the hospital, were disconnected from the
  company. We also knew that the Medicare audits
  had to begin having positive results. Our IT
  team stepped to the front of the line and said
  lets get this thing rolling.

Personal interview with CIO Natasha Hawkins
26
RehabCare Group Inc.

• Project Scope

• A budget of 1.5 million dollars was given to IT
  and a one year period was established to get the
  process done and the software package built.
  January 2003 it was to be fully implemented.
• Constructed a model that incorporated all the
  census systems that were currently being used
  into one central mainframe.
• Determined that the census data that was
  complied daily should be available to all users
  either in the facility or accessed from the
  internet.

Personal interview with CIO Natasha Hawkins
27
RehabCare Group Inc.

• How daily census was being collected
• HRS Division

• Each facility had paper sheets
• A census clerk would then manually input from
  each sheet into a software called FoxPro.
• The census clerk would then go in the next day
  and reconcile each line to the system at the
  hospital.

Personal interview with CIO Natasha Hawkins
28
RehabCare Group Inc.

• How daily census was being collected
• HRS Division

• Data from the facility would not be available to
  the hospital administrator till the next day.
• Since the process was manual and lack internal
  structure, sometimes days of information would
  not go in until the end of the month.
• Hospital would inaccurately accrue for their
  monthly bill and issue incorrect estimates.

Personal interview with CIO Natasha Hawkins
29
RehabCare Group Inc.

• IT enabled Project

• Built in-house software called PROMOS
  (Performance Management Operating System).
• Allowed for update of information instantly.
• Consolidated the FoxPro and STAR system into one
  functioning database.

Personal interview with Natasha Hawkins CIO
30
RehabCare Group Inc.

• IT enabled Project

• PROMOS was web enabled and allowed managers as
  well as hospital administrators to access it at
  all times.
• Built with the flexibility to produce many
  statistical reports for management upon request.

Personal interview with CIO Natasha Hawkins
31
RehabCare Group Inc.

• IT enabled Project - Results

• Took about 3 months longer and 500K more.
• Upper management was very pleased with the
  results and is now pushing to put more money into
  IT enabled projects.
• Success was contributed to the business lines
  and not the IT group .
• Instant praise was given to management by the
  hospital administrators.
• Days sales outstanding dropped by 7 days in a
  matter of 3 months.

Personal interview with CIO Natasha Hawkins
32
RehabCare Group Inc.

• Market Results Competitive advantage

• In September 2003 RehabCare purchased CPR
  therapists which was over 70 contracts and 13
  million in revenue.
• In August of 2003 signed a joint venture with
  UCLA hospitals for 10 years.
• Contract therapy is signing approximately 18 new
  contracts a month .
• St.Anthonys in St.Louis just completed an
  therapy wing to accommodate patient care that are
  being given by RehabCare.

RehabCare Annual Report 2003
33
RehabCare Group Inc.

• Market Results Competitive Advantage

• All of these acquisitions and joint ventures are
  being done with intense competition from their
  competitors such as Select Medical and Sundance.
• When we first started here in 2001 they shut an
  entire outpatient program down because they
  didnt have enough faith that we could correctly
  manage it. Now, they have increased our
  inpatient unit from 19 beds to 48 beds and they
  are begging us to treat outpatient, subacute, or
  any type of therapy because we are making their
  lives easy. We put in systems such as PROMOS
  that makes operating their business easy,
  flexible and makes them look good in the hospital
  market. Bridged Jensen, Program Manager
  St.Anthonys hospital.

Phone call with Bridged Jensen, Program Manager
at St. Anthony's Hospital
34
RehabCare Group Inc.IT Enhancement
RehabCare Annual Report page 25
35
Does RehabCare Have a Sustainable Competitive
Advantage?

• Did it contain the necessary Resource Attributes?
• Valuable
• Rareness
• Appropriability
• Imperfectly Imitable
• Non-substitutable
• Imperfect Mobility

36
Extent of Success through 6 attributes
RehabCare
Valuable Joint ventures and acquisitions
Rareness In-House built Census software
Appropriability Unless Internal IT department goes to a competitor
Imperfectly Imitable Cornered the market
Non-substitutable No software has flexibility nor is web enabled
Imperfect Mobility Strong relationship between IT/Management and hospital administrator
37
Progressive Auto Insurance

• Megan Cox

38
Background Information

• On March 10, 1937 Joseph Lewis and Jack Green
  started Progressive Mutual Insurance Company
  because they wanted to provide vehicle owners
  with security and protection
• In 1956 the company formed Progressive Casualty
  Company to write auto insurance for high risk
  drivers
• In 1990 the company introduced a full range of
  personal auto insurance products and immediate
  response claims service that was available 24
  hrs. a day seven days a week

39
Five Year Financial Highlights
40
Progressive and the Internet

• In 1995 the company introduced Progressive.com
  the first industrys presence on the internet
• In 1998 progressive became the first company to
  allow customers to access their account
  information online when it launched
  personal.progressive.com
• Also in 1998 Progressive launched its
  Foragentsonly.com site, which provides a variety
  of functions to its authorized independent agents

41
Organization of the company

• CEO is Glenn Renwick
• CFO is Thomas Forrester
• CIO is Ray Voelker
• According to Voelker, he and Renwick communicate
  three or four times a week
• Its obviously a lot easier for me to discuss
  technical things with Glenn, says Voelker.
  Although he was only in technology for two
  years, he has a context for the things that we
  need to discuss.

42
Products Offered

• Auto
• Motorcycle/ATV
• Boat/PWC
• RV
• Segway HT
• Commercial Auto

43
Progressive and Market Share

• PRIVATE PASSENGER
• AUTO RANKINGS
• Market Share
• 1 State Farm 20.1
• 2 Allstate 11.4
• 3 Progressive 7.0
• 4 GEICO 5.4
• 5 Nationwide 4.6
• 6 USAA 3.8
• 7 Farmers/Zurich 3.8
• 8 Liberty Mutual 2.5
• 9 AIG 2.4
• 10 American Family 2.1
• Based on estimated 2003 net

44
Progressives Customers

• The combined growth in Progressive Policies in
  force over the past three years is 57---a lot of
  new customers
• Our goal to be consumers No. 1 choice for auto
  insurance demands that we not only attract new
  customers, but also that we make it attractive
  for them to stay.
• Everything we do recognizes the needs of busy
  customers who are cost-conscious, increasingly
  savvy about insurance and ready for easy new ways
  to quote, buy and manage their policies,
  including claims service that respects their time
  and reduces the trauma and inconvenience of
  loss.

45
Progressives Shareholders

• 30 year compounded annual return to shareholders
  of 22.8, compared to SP 500 average return of
  9.1

46
Progressive as a Critical Differentiator

• By making innovative use of information
  technology and new service strategies,
  Progressive has been able to increase its market
  share and improve bottom line performance.
• The creative application of information
  technology has become the cornerstone of
  Progressives competitive strategy
• The company is committed to applying information
  technology to continuously improve customer
  service and lower the cost of its operations

47
Progressive as a Critical Differentiator

• According to Peter Lewis
• Technology is just a tool, but you can turn it
  into a weapon against competitors if you focus on
  a single mantra--in our case, speed--and keep
  innovative around it. It has worked well for us
  and will continue to do so

48
Technologies Progressive Integrates to Establish
Themselves as a Critical Differentiator

• Wireless Application Protocol
• ForAgentsOnly.com (FAO)
• personal.progressive.com
• Immediate Response Vehicle

49
Wireless Application Protocol

• WAP enables Progressive to get onto every cell
  phone with a web browser
• Gives Policyholders access to company and account
  information through WAP
• Customers can also access direct staff, claims
  representatives and customer service support
  through a WAP--enabled device

50
ForAgentsonly.com

• Chris Garson, Progressives Agency Business IT
  Director states
• agents and brokers tell us that they want to
  work with companies that make things easy and
  this technology does just that
• This speeds up transactions, satisfying agents
  and their customers. And, agents and brokers can
  be confident that the information they provide
  their customers is up-to-date and accurate.

51
Personalprogressive.com

• Progressive decided that its not enough that you
  can by insurance online at progressive.com--you
  should be able to manage your policy, by making
  payments and changing coverages, whenever you
  want to--with personal progressive you can

52
Immediate Response Vehicle

• The IRV is a specially-marked and outfitted
  vehicle that transports trained claims
  professionals to wherever the customer needs them
• Outfitted with the latest technology, the claim
  rep. In an IRV is able to make a damage estimate
  and write a check right on the spot

53
What has IT done for Progressive?

• Since starting its net initiatives, Progressives
  revenues have jumped from 3.4 billion in 1996 to
  9.5 billion in 2002--an average of almost 20
  annually, vs. 5 for the overall auto-insurance
  industry

54
Progressive and the Importance of IT

• I have often described Progressive as a
  technology company in the auto insurance
  business.
• Much of what we have achieved has been made
  possible by our talented information technology
  staff
• Our continuous investment in technology over the
  past several years has positioned us well to
  remain a leader in technology solutions for
  service delivery to both our customers and
  agents.

55
Question Does Progressive Demonstrate any of
the Six Resource Attributes?
56
Extent of Success through 6 attributes
Progressive
Valuable Fast delivery of service
Rareness IS-business Partnership
Appropriability Possess next-generation software to improve efficiency and therefore have rent-earning potential
Imperfectly Imitable Difficult for the competitors to imitate Information Integration strategy
Non-substitutable IS technical skills, development and cost efficient
Imperfect Mobility Technological knowledge with managerial experience
57
International Multifoods, Inc. (IMC)

• Michelle Wagener

58
International Multifoods, Inc. (IMC)

• Established in late 1800s
• A Midwest based flour milling company
• One of the leading food product and service
  distribution businesses
• Operate in Canada, Venezuela, and United States
• IMC acquired Vending Services of America (VSA) in
  1984

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
59
International Multifoods, Inc. (IMC)
60
Vending Services of America (VSA)

• Major subsidiary of IMC
• Began in 1970s as an entrepreneurial venture
• Internally grew by acquiring small vending
  service firms

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
61
VSA Sales and Accounts

• 1985 1993 grew from 200 million to 900
  million
• 1994 VSA operated 20 distribution centers
• - VSA served 18,000 accounts
• - VSA stored 12,000 items

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
62
IMC and VSA

• In 1994, IMC suffered major financial losses
• IMCs upper management decided to focus on the
  manufacturing and distribution of products
• VSA becomes critical to IMCs strategy
• This focus put IMC in the specialty food service
  distribution market

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
63
Vending Industry Sales
Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
64
Concern of the Vending Industry

• 1994 customers spent 22 billion on vending
• Industry in trouble because of decline in
  manufacturing jobs, changing consumer
  preferences, and substitutes of vended goods
• No barrier to entry in vending industry

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
65
History of IS at VSA

• Lagged behind the industry in IT budget
• Spent less than .2 of revenue per year on
  technology (industry spent .5-1)
• IT was not well understood by top managers
• IT expense was not a strategic asset
• IT at VSA frustrated customers and users

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
66
VSA Challenges

• Costs increasing
• Profit margins decreasing
• Small profit margins (2-3)
• Problems with customer service and inventory
  (Customer service is life-blood of VSA)

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
67
VSA Challenges cont.

• Poor Information Systems
• Sales declined in 1994
• Competed in a decentralized manner
• Not achieving economies of scale
• Morale problems

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
68
The Proposal

• Renaissance IS
• the most advanced system in the industry
• Investment of 20 million
• Support a central sales order staff
• Allow to better measure
• product freshness
• manufacture promotion and rebate programs
• product turnover trends
• customer usage history
• Transform VSA into an integrated company

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
69
Renaissance Project
Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
70
Expected Benefits

• Reduce operating expenses
• Improve customer service
• Workstation reductions in purchasing, operations,
  and administration
• GMs will not have to rely on personalized
  relationships with customers for major sales
• Net benefit 25 million over 5 years

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
71
Implementation Plan

• 2 years devoted to system design, implementation,
  development, followed by a planned roll-out over
  2, 6 month phases in 1994
• A major IS consulting firm served as coordinator
  of the project
• Pilot studies completed (revealed major problems)

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
72
Problems with Renaissance

• Reconciling orders processed
• Response time was poor
• Disappointing results
• Manpower savings
• Overtime requirements
• Fill rates
• Revenue
• Sales margin improvement
• Poor implementation and misjudgments

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
73
What to do?

• Two alternatives after pilot studies revealed
  disappointing results
• 1 scratch the Renaissance system altogether
• 2 modify the system and/or the implementation
  plan in order to enhance the chances of success

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
74
Decision

• VSA chose option 2
• Focus on
• Renaissances performance (in terms of customer
  waiting times and order processing cycles)
• Improve the systems capacity (storage and
  processing)
• Improve data integrity (should be 99.99
  accurate, currently is only 70)
• Simplify the system

Journal of Information Technology, Sep2001, Vol.
16 Issue 3, p 175-190, International Multifoods
Case A and B
75
Results

• By 1996
• No improvement in Renaissance system or VSA
• Management turnover increasing
• Morale problems increasing
• Sales declined 1
• IMC management continued to distance itself from
  VSA and Renaissance project

76
Does Multifoods Have a Sustainable Competitive
Advantage?

• Did it contain the necessary Resource Attributes?
• Valuable
• Rareness
• Appropriability
• Imperfectly Imitable
• Non-substitutable
• Imperfect Mobility

77
Extent of Success through 6 attributes
Multifoods
Valuable Not able to manage external relationships not responding to customer needs
Rareness Losing customers and buyers IT systems not flexible, reacting slowly
Appropriability Little money or attention paid to IT poor IS infrastructure and technical skills not able to integrate IT and business processes
Imperfectly Imitable Lack complex relationships with vendors and customers and a strong IT strategy
Non-substitutable IT system
Imperfect Mobility Poor relationships with customers, and between management levels
78
Extent of Success through 6 attributes
RehabCare Progressive Multifoods
Valuable Joint ventures and acquisitions Fast delivery of service Not able to manage external relationships not responding to customer needs
Rareness In-House built Census software IS-business Partnership Losing customers and buyers IT systems not flexible, reacting slowly
Appropriability Unless Internal IT department goes to a competitor Possess next-generation software to improve efficiency and therefore have rent-earning potential Little money or attention paid to IT poor IS infrastructure and technical skills not able to integrate IT and business processes
Imperfectly Imitable Cornered the market Difficult for the competitors to imitate Information Integration strategy Lack complex relationships with vendors and customers and a strong IT strategy
Non-substitutable No software has flexibility nor is web enabled IS technical skills, development and cost efficient IT system
Imperfect Mobility Strong relationship between IT/Management and hospital administrator Technological knowledge with managerial experience Poor relationships with customers, and between management levels