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Strategic Information Systems Essay, Research Paper

The Path of Development of

Strategic Information Systems Theory

Zedrik Avecilla

Abstract

During the last 15 years, an area has developed within the Information Systems discipline which is generally referred to as ’strategic information systems’. It concerns itself with systems whose importance to the organisation extend beyond merely assisting it to perform its existing functions efficiently, or even just effectively. A strategic information system is instrumental in the organisation’s achievement of its competitive or other strategic objectives.

This paper presents a critical summary of the literature, and is accompanied by an extensive reference list. It begins by tracing the development of contemporary theory about strategic uses of corporations’ internal information systems, primarily from Porter’s theories relating to competitive strategy. This leads to discussion of systems which transcend the boundaries of particular organisations and are associated with cooperation between them. The process whereby strategic information systems are created or identified is then examined.

A number of weaknesses in the existing body of theory are identified, and suggestions made as to directions in which knowledge is or may be progressing.

Introduction

The topic of ’strategic information systems’ is concerned with systems which contribute significantly to the achievement of an organisation’s overall objectives. The body of knowledge is of recent origin and highly dynamic, and the area has an aura of excitement about it.

It is risky to attempt a historical exposition of such a recently emerged topic. On the other hand, the line of development which the conventional wisdom has followed is itself interesting and instructive. This paper is prepared as an introduction to the literature, but embodies interpretation in both its structure and its expression, and should therefore be read with at least as critical a disposition as any other paper in the area. It may also be compared with other critical interpretations such as Swatman & Swatman (1992), Galliers (1993) and Ciborra (1994).

The notion and its origins are first discussed. The emergence of the key ideas is then traced. The process whereby strategic information systems come into being is assessed. Finally, areas of weakness are identified, and directions of current and future development suggested.

Origins

The role of Information Systems (IS) has developed during the years. The original conception was of automation of existing manual and pre-computer mechanical processes. This was quickly succeeded by the rationalisation and integration of systems. In both of these forms, IS was regarded primarily as an operational support tool, and secondarily as a service to management.

During the 1980s, an additional potential was discovered. It was found that, in some cases, information technology (IT) had been critical to the implementation of an organisation’s strategy. The dominant sense in which the term is used is that a strategic information system (SIS) is an information system which supports an organisation in fulfilling its business goals.

An alternative interpretation of the term is that it is not necessary a particular IS, but rather the combination of those parts of an organisation’s cluster of information systems which provide information into its strategic planning processes (Higgins & Vincze 1993. p.93). The functions involved include the gathering, maintenance and analysis of data concerning internal resources, and intelligence about competitors, suppliers, customers, government and other relevant organisations.

A variety of interpretations of strategy exist, most of which have a great deal to do with competition between corporations. Chamberlin’s theory of monopolistic competition sees corporations as being heterogeneous, and competing on the basis of asset differences, such as technical knowledge, reputation, ability for teamwork, organisational culture and skills, and other ‘invisible assets’ (Chamberlin 1933, Itami 1987). Competition therefore means cultivating unique strengths and capabilities, and defending them against imitation by other firms. Another alternative sees competition as a process linked to innovation in product, market, or technology (Schumpeter 1950).

Porter’s Strategic Theory

The context within which SIS theory emerged was the competitive strategy framework put forward by Porter (1980, 1985), which was based on industrial organisation economics. For developments along that path, see Kaufmann 1966, Kantrow 1980, Pyburn 1981, Parsons 1983, EDP Analyzer 1984a, 1984b, McFarlan 1984, Benjamin et al 1984, Wiseman & Macmillan 1984, Ives & Learmonth 1984, Cash & Konsynski 1985, Porter & Millar 1985, Keen 1986, King 1986). This first section outlines the basis of that theory. Strategic information systems theory will then be shown to be concerned with the use of information technology to support or sharpen an enterprise’s competitive strategy.

Competitive strategy is an enterprise’s plan for achieving sustainable competitive advantage over, or reducing the edge of, its adversaries. In Porter’s view, the performance of individual corporations is determined by the extent to which they cope with, and manipulate, the five key ‘forces’ which make up the industry structure:

? the bargaining power of suppliers;

? the bargaining power of buyer;

? the threat of new entrants;

? the threat of substitute products; and

? rivalry among existing firms.

Porter’s classic diagram representing these forces is reproduced in Exhibit 1. Enterprises, through their strategies, can influence the five forces and the industry structure, at least to some extent.

There are two basic strategic stances that enterprises can adopt:

? low cost; and

? product differentiation.

In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage in either of these two, subject to reaching some threshhold of adequacy in the other. In Exhibit 2, Somogyi & Galliers (1987) provide examples of applications of information technology which are consistent with these two strategic stances, mapped against the particular enterprise activities to which they contribute.

Another important consideration in positioning is ‘competitive scope’, or the breadth of the enterprise’s target markets within its industry, i.e. the range of product varieties it offers, the distribution channels it employs, the types of buyers it serves, the geographic areas in which it sells, and the array of related industries in which it competes.

Under Porter’s framework, enterprises have four generic strategies available to them whereby they can attain above-average performance. They are:

? cost leadership;

? differentiation;

? cost focus; and

? focused differentiation.

Porter’s representation of them is reproduced in Exhibit 3.

Exhibit 1: Porter’s Forces Driving Industry Competition

(Porter 1980)

According to Porter, competitive advantage grows out of the way an enterprise organises and performs discrete activities. The operations of any enterprise can be divided into a series of activities such as salespeople making sales calls, service technicians performing repairs, scientists in the laboratory designing products or processes, and treasurers raising capital.

Exhibit 2: Examples of IT Applications to Porter’s Strategic Stances

(Somogyi & Galliers 1987)

Low Cost Differentiation

Product Design * Production engineering * R&D databases *

and Development systems * Project control Professional work stations *

systems Electronic mail * CAD *

Custom engineering systems *

Integrated systems to

manufacturing

Operations * Process engineering * CAM for flexibility *

systems * Process control Quality assurance systems *

systems * Labor control Systems to suppliers *

systems * Inventory Quality monitoring systems

management systems * for suppliers

Procurement systems

Marketing * Streamlined distribution * Sophisticated marketing

systems * Centralised systems * Market databases *

control systems * IT display and promotion *

Econometric modelling Telemarketing * Competition

systems analysis systems * Modelling

capabilities * High service

level distribution system

Sales * Sales control systems * * Differential pricing

Advertising monitoring systems * Office-field

systems * Systems to communication * Custom-sales

consolidate sales function support * Dealer support

* Strict systems * Systems to customers

incentive-monitoring

systems

Administration * Cost control systems * * Office automation for

Quantitative planning and integration of functions *

budgeting systems * Office Environment scanning and

automation for staff nonquantitative planning

reduction systems * Teleconferencing

By performing these activities, enterprises create value for their customers. The ultimate value an enterprise creates is measured by the amount customers are willing to pay for its product or services. A firm is profitable if this value exceeds the collective cost of performing all of the required activities. To gain competitive advantage over its rivals, a firm must either provide comparable value to the customer, but perform activities more efficiently than its competitors (lower cost), or perform activities in a unique way that creates greater buyer value and commands a premium price (differentiation).

Exhibit 3: Porter’s Four Generic Strategies

(Porter 1980)

Many differentiation bases exist, classified into four major groups (Borden 1964, quoted in Wiseman 1988):

? product (quality, features, options, style, brand name, packaging, sizes, services, warranties, returns);

? price (list, discounts, allowances, payment period, credit terms);

? place (channels, coverage, locations, inventory, transport); and

? promotion (advertising, personal selling, sales promotion, publicity).

IT can be used to support or sharpen the firm’s product through these various attributes.

Of especial importance is ‘product differentiation’. This is the degree to which buyers perceive products from alternative suppliers to be different, or as it is expressed by economic theory, the degree to which buyers perceive imperfections in product substitutability. The buyers of differentiated products may have to pay a price when satisfying their preference for something special, in return for greater added-value. The connection between the producer and buyers may be reinforced, at least to the level of customer loyalty, and perhaps to the point of establishing a partnership between them. Such a relationship imposes ’switching costs’ on the buyer, because its internal processes become adapted to the beneficial peculiarities of the particular factor of production, and use of an alternative would force internal changes. Hence product differentiation also serves as an entry barrier. In addition, a continuous process of product differentiation may produce an additional cost advantage over competitors and potential entrants, through intellectual property protections, such as patents, and the cost of imitation.

The activities performed by a particular enterprise can be analysed into primary activities, which directly add value to the enterprise’s factors of production, which are together referred to as the ‘value chain’, and supporting activities. Exhibit 4 reproduces Porter’s diagram.

Exhibit 4: Porter’s Enterprise Value-Chain

(Porter 1980)

The primary, value-adding activities include those involved in the production, marketing delivery, and servicing of the product. They are linked, generally in a chain. Support activities include those providing purchased inputs, technology, human resources, or overall infrastructure functions to support the primary activities.

By co-ordinating linked activities, an enterprise should be able to reduce transaction costs, gather better information for control purposes, and substitute less costly operations in one activity for more costly ones elsewhere. Co-ordinating linked activities is also an important way to reduce the combined time required to perform them. Hence co-ordination is increasingly important to competitive advantage. Gaining competitive advantage requires that an enterprise’s value chain be managed as a system rather than as a collection of separate parts. Reconfiguring the value chain, by re-locating, re-ordering, re-grouping, or even eliminating activities is often at the root of a major improvement in competitive position.

An enterprise’s value chain for competing in a particular industry is embedded in a larger stream of activities that Porter terms its ‘value system’, but which might be more usefully referred to as the ‘industry value-chain’. This includes suppliers and distribution channels. Exhibit 5 reproduces Porter’s representation. Competitive advantage is a function of how well a company can manage the entire industry value-chain. A corporation can create competitive advantage by co-ordinating its links in that chain.

Exhibit 5: Porter’s Industry Value-Chain

(Porter 1980)

An enterprise’s activities are subject to influence from:

? new technologies. These may alter the path of the value chain, eg. the invention of semiconductors forced many vacuum-tube producers out of business, and the printing and publishing industries are currently confronted by a major upheaval;

? new or shifting buyer needs. Customers are demanding the convenience and consistency offered by fast-food chains. This in turn influences related market segments;

? change in industry segmentation. The disappearance of old intermediaries and the emergence of new ones creates the potential to substantially reconfigure the value chain. Enterprises that fail to adjust will be forced out;

? shifts in the costs or availability of factors of production. Competitive advantage can be gained by optimising based on current conditions. On the other hand, enterprises saddled with assets and approaches tailored to outdated modes of operation suffer;

? change in government regulations. Changes in product standards, environmental controls, restrictions on entry to the market, and trade barriers all affect an enterprise’s performance.

Several developments in several different business disciplines have been associated with the value-chain concept. Activity-based costing (ABC – Johnson & Kaplan 1987) is one. Another is business process redesign / business process reengineering (Hammer 1990, Hammer & Champy 1993).

Key Elements of the Theory

As is commonly the case with emergent areas of study, conventional empirical research was not feasible during the early years. Most of the early literature was anecdotal, mentioning early examples of systems, but lacking references to authoritative papers or case studies. Indeed, details about many of the leading cases only became widely available many years later, e.g. American Airlines (Copeland & McKenney 1988), McKesson (Clemons & Row 1988), and American Hospital Supply [now Baxter] (Main & Short 1989, Venkatraman & Short 1990).

The early papers and books focussed on the ‘competitive advantage’ which IT could lead to, and were optimistic, even ‘upbeat’. It is certainly not contended that these sources were unquestioning, nor that they contained no seeds of the subsequent developments in the theory of strategic application of IT. They were, however, very positive in the tone in which they discussed IT’s contribution to corporate strategy.

During the period following 1985, as experience was gathered and deeper studies were reported on, the literature became somewhat more circumspect. The new materials focussed less on the opportunities than on the processes and the pitfalls. Progressively, a collection of qualifications arose to the initial, relatively ‘naive’ theory (Miron et al 1988, Karimi & Konsynski 1991, Galliers 1993, Kettinger et al 1994). Associated with this phase were new, and often more ambiguous, case studies, including Philadelphia National Bank (Clemons 1990), CALM (Clarke & Jenkins 1993), Minitel (Cats-Baril & Jelassi 1994) and MSAS Cargo (Ives & Jarvenpaa 1994).

One series of papers focussed not on companies which adopted a successful leadership role in the application of IT, but rather on those which followed. They recognised that where one corporation achieved a significant competitive advantage, it quickly became incumbent on its competitors to neutralise that advantage, and hence to avoid ‘competitive disadvantage’ (Vitale 1986, Warner 1987, Brousseau 1990). The notion of ‘competitive necessity’ was created to complement that of ‘competitive advantage’.

A special case was the phenomenon of ’second-mover advantage’, where the first-mover actually incurs a disadvantage. This may arise variously because the pioneer increases the knowledge available about the application (hence driving the risks down); establishes a level of volume (and hence overcomes resistance and drives average costs down); and/or becomes locked into a system which quickly becomes obsolescent (and hence is subject to being overtaken by a well-informed and unencumbered second-mover).

A distinction came to be drawn between ’sustainable’ and ‘contestable’ competitive advantage (Clemons 1986, Feeny & Ives 1989, Ciborra 1992). The thesis was that many kinds of advantage which can possibly be derived from innovative use of IT result only in ephemeral advantage, which is quickly neutralisable by second- and later-movers. A distinction needs to be made between the sustainability of the original advantage, and of any derived advantage (such as increased market share).

An enhancement to the Porter framework of competitive strategy was the notion of ‘alliance’ (Barrett & Konsynski 1982, Gummesson 1987, EDP Analyzer 1987, Johnston & Vitale 1988, Rockart & Short 1989, Wiseman 1989, Konsynski & McFarlan 1990, Ford 1990, Bowersox 1990). This referred to chains or clusters of organisations which collaborate in order to gain competitive advantage over other, similar organisations, or to neutralise the advantage of one or more competitor organisations.

A further idea which has emerged is that innovation in IT is of strategic importance only if it is compatible with, and preferably leverages upon the company’s existing characteristics and advantages (Beath & Ives 1986, Clemons & Row 1987, Ives & Vitale 1988, Hopper 1990). One particularly important facet of this is the notion of ’strategic alignment’ of IT policies and initiatives with the directions indicated by the corporation’s senior executives (Henderson & Venkatraman 1989, Earl 1989, Broadbent & Weill 1991).



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