Characterization of strategic information systems
Strategic systems are information systems that are
developed in response to corporate business initiative. They are
intended to give competitive advantage to the organization. They
may deliver a product or service that is at a lower cost, that is
differentiated, that focuses on a particular market segment, or
Some of the key ideas of torefront writers are summarized. These include Michael Porter’s Competitive Advantage and the Value Chain, Charles Wiseman’s Strategic Perspective View and the Strategic Planning Process, F. Warren McFarlan’s Competitive Strategy with examples of Information Service’s Roles, and Gregory Parson’s Information Technology Management at the industry level, at the firm level, and at the strategy level.
Strategic information systems are those computer systems that
implement business strategies; They are those systems where
information services resources are applied to strategic business
opportunities in such a way that the computer systems have an
impact on the organization’s products and business
operations. Strategic information systems are always systems that
are developed in response to corporate business initiative. The
ideas in several well-known cases came from information Services
people, but they were directed at specific corporate business
thrusts. In other cases, the ideas came from business operational
people, and Information Services supplied the technological
capabilities to realize profitable results.
Most information systems are looked on as support activities to the business. They mechanize operations for better efficiency, control, and effectiveness, but they do not, in themselves, increase corporate profitability. They are simply used to provide management with sufficient dependable information to keep the business running smoothly, and they are used for analysis to plan new directions. Strategic information systems, on the other hand, become an integral and necessary part of the business, and directly influence market share, earnings, and all other aspects of marketplace profitability. They may even bring in new products, new markets, and new ways of doing business. They directly affect the competitive stance of the organization, giving it an advantage against the competitors.
Most literature on strategic information systems emphasizes the dramatic breakthroughs in computer systems, such as American Airline’s Sabre System and American Hospital Supply’s terminals in customer offices. These, and many other highly successful approaches are most attractive to think about, and it is always possible that an equivalent success may be attained in your organization. There are many possibilities for strategic information systems, however, which may not be dramatic breakthroughs, but which will certainly become a part of corporate decision making and will, increase corporate profitability. The development of any strategic information systems always enhances the image of information Services in the organization, and leads to information management having a more participatory role in the operation of the organization.
The three general types of information systems that are developed and in general use are financial systems, operational systems, and strategic systems. These categories are not mutually exclusive and, in fact, they always overlap to some. Well-directed financial systems and operational systems may well become the strategic systems for a particular organization.
Financial systems are the basic computerization of the accounting, budgeting, and finance operations of an organization. These are similar and ubiquitous in all organizations because the computer has proven to be ideal for the mechanization and control or financial systems; these include the personnel systems because the headcount control and payroll of a company is of prime financial concern. Financial systems should be one of the bases of all other systems because they give a common, controlled measurement of all operations and projects, and can supply trusted numbers for indicating departmental or project success. Organizational planning must be tied to financial analysis. There is always a greater opportunity to develop strategic systems when the financial systems are in place, and required figures can be readily retrieved from them.
Operational systems, or services systems, help control the details of the business. Such systems will vary with each type of enterprise. They are the computer systems that operational managers need to help run the business on a routing basis. They may be useful but mundane systems that simply keep track of inventory, for example, and print out reorder points and cost allocations. On the other hand, they may have a strategic perspective built into them, and may handle inventory in a way that dramatically impacts profitability. A prime example of this is the American Hospital Supply inventory control system installed on customer premises. Where the great majority of inventory control systems simply smooth the operations and give adequate cost control, this well-know hospital system broke through with a new version of the use of an operational system for competitive advantage. The great majority of operational systems for which many large and small computer systems have been purchased, however, simply help to manage and automate the business. They are important and necessary, but can only be put into the "strategic" category it they have a pronounced impact on the profitability of the business.
All businesses should have both long-range and short-range planning of operational systems to ensure that the possibilities of computer usefulness will be seized in a reasonable time. Such planning will project analysis and costing, system development life cycle considerations, and specific technology planning, such as for computers, databases, and communications. There must be computer capacity planning, technology forecasting, and personnel performance planning. It is more likely that those in the organization with entrepreneurial vision will conceive of strategic plans when such basic operational capabilities are in place and are well managed.
Operational systems, then, are those that keep the organization operating under control and most cost effectively. Any of them may be changed to strategic systems if they are viewed with strategic vision. They are fertile grounds for new business opportunities.
Strategic systems are those that link business and computer strategies. They may be systems where a new business thrust has been envisioned and its advantages can be best realized through the use of information technology. They may be systems where new computer technology has been made available on the market, and planners with an entrepreneural spirit perceive how the new capabilities can quickly gain competitive advantage. They may be systems where operational management people and Information Services people have brainstormed together over business problems, and have realized that a new competitive thrust is possible when computer methods are applied in a new way.
There is a tendency to think that strategic systems are only those that have been conceived at what popular, scientific writing sometimes calls the "achtpunckt." This is simply synthetic German for "the point where you say ‘acht!’ or ‘that’s it!’" The classical story of Archimedes discovering the principle of the density of matter by getting into a full bathtub, seeing it overflow, then shouting "Eureka!" or "I have found it!" is a perfect example of an achtpuncht. It is most pleasant and profitable if someone is brilliant enough, or lucky enough, to have such an experience. The great majority of people must be content, however, to work step-by-step at the process of trying to get strategic vision, trying to integrate information services thinking with corporate operational thinking, and trying to conceive of new directions to take in systems development. This is not an impossible task, but it is a slow task that requires a great deal of communication and cooperation. If the possibilities of strategic systems are clearly understood by all managers in an enterprise, and they approach the development of ideas and the planning systematically, the chances are good that strategic systems will be result. These may not be as dramatic as American Airline’s Sabre, but they can certainly be highly profitable.
There is general agreement that strategic systems are those information systems that may be used gaining competitive advantage. How is competitive advantage gained?. At this point, different writers list different possibilities, but none of them claim that there may not be other openings to move through. Some of the more common ways of thinking about gaining competitive advantage are:
Almost any data processing system may be called "strategic" if
it aligns the computer strategies with the business strategies of
the organization, and there is close cooperation in its
development between the information Services people and
operational business managers. There should be an explicit
connection between the organization’s business plan and its
systems plan to provide better support of the
organization’s goals and objectives, and closer management
control of the critical information systems.
Many organizations that have done substantial work with computers since the 1950’s have long used the term "strategic planning" for any computer developments that are going to directly affect the conduct of their business. Not included are budget, or annual planning and the planning of developing Information Services facilities and the many "housekeeping" tasks that are required in any corporation. Definitely included in strategic planning are any information systems that will be used by operational management to conduct the business more profitably. A simple test would be to ask whether the president of the corporation, or some senior vice presidents, would be interested in the immediate outcome of the systems development because they felt it would affect their profitability. If the answer is affirmative, then the system is strategic.
Strategic system, thus, attempt to match Information Services resources to strategic business opportunities where the computer systems will have an impact on the products and the business operations. Planning for strategic systems is not defined by calendar cycles or routine reporting. It is defined by the effort required to impact the competitive environment and the strategy of a firm at the point in time that management wants to move on the idea.
Effective strategic systems can only be accomplished, of course, if the capabilities are in place for the routine basic work of gathering data, evaluating possible equipment and software, and managing the routine reporting of project status. The calendarized planning and operational work is absolutely necessary as a base from which a strategic system can be planned and developed when a priority situation arises. When a new strategic need becomes apparent, Information Services should have laid the groundwork to be able to accept the task of meeting that need.
Strategic systems that are dramatic innovations will always be the ones that are written about in the literature. Consultants in strategic systems must have clearly innovative and successful examples to attract the attention of senior management. It should be clear, however, that most Information Services personnel will have to leverage the advertised successes to again funding for their own systems. These systems may not have an Olympic effect on an organization, but they will have a good chance of being clearly profitable. That will be sufficient for most operational management, and will draw out the necessary funding and support. It helps to talk about the possibilities of great breakthroughs, if it is always kept in mind that there are many strategic systems developed and installed that are successful enough to be highly praised within the organization and offer a competitive advantage, but will not be written up in the Harvard Business Review.
Another way of characterizing strategic information systems is to point out some of the key ideas of the foremost apostles of such systems. In the following sections there are brief summaries of some the thoughts about:
These people have all written and spoken about their ideas at length, and with great clarity. The only way that justice can really be done to their concepts is to read their original papers. Some of these therefore, are referenced.
Dr. Michael E. Porter, Professor of Business Administration,
Harvard Business School, Has addressed his ideas in two keystone
books. Competitive Strategy: Techniques for Analyzing Industries
and Competitors, and his newer book, Competitive Advantage,
present a framework for helping firms actually create and sustain
a competitive advantage in their industry in either cost or
differentiation. Dr. Porter’s theories on competitive
advantage are not tied to information systems, but are used by
others to involve information services technologies.
In his book, Dr. Porter says that there are two central questions in competitive strategy:
Both of these questions are dynamic, and neither is sufficient
alone to guide strategic choices. Both can be influenced by
competitor behavior, and both can be shaped by a firm’s
actions. It is imperative that these questions be answered by
analysis, which will be the starting point for good strategic
thinking, and will open up possibilities for the role of
information systems.Industry profitability is a function of live
basic competitive forces: the threat of new entrants, the threat
of substitute products or services, the bargaining power of
suppliers, the bargaining power of buyers, and the intensity of
the rivalry among existing competitors. Porter’s books give
techniques for getting a handle on the possible average
profitability of an industry over time. The analysis of these
forces is the base for estimating a firm’s relative
position and competitive advantage. In any industry, the
sustained average profitability of competitor’s varies
widely. The problem is to determine how a business can outperform
the industry average and attain a sustainable competitive
advantage. It is possible that the answer lies in information
technology together with good management.
Porter claims that the principal types of competitive advantage are low cost producer, differentiation, and focus. A firm has a competitive advantage if it is able to deliver its product or service at a lower cost than its competitors. If the quality of its product is satisfactory, this will translate into higher margins and higher returns. Another advantage is gained if the firm is able to differentiate itself in some way. Differentiation leads to offering something that is both unique and is desired, and translates into a premium price. Again, this will lead to higher margins and superior performance.
It seems that two types of competitive advantage, lower cost and differentiation, are mutually exclusive. To get lower cost, you sacrifice uniqueness. To get a premium price, there must be extra cost involved in the process. To be a superior performer,
however, you must go for competitive advantage in either cost or differentiation.
Another point of Porter’s is that competitive advantage is gained through a strategy bases on scope. It is necessary to look at the breadth of a firm’s activities, and narrow the competitive scope to gain focus in either an industry segment, a geographic area, a customer type, and so on. Competitive advantage is most readily gained by defining the competitive scope in which the firm is operating, and concentrating on it.
Based on these ideas of type and scope, Porter gives a useful tool for analysis which he calls The Value Chain (Figure No. 1). This value chain gives a framework on which a useful analysis can be hung. The basic notion is that to understand competitive advantage in any firm, one cannot look at the firm as a whole. It is necessary to identify the specific activities which the firm performs to do business. Each firm is a collection of the things that it does that all add up to the product being delivered to the customer. These activities are numerous and are unique to every industry, but it is only in these activities wherecost advantage or differentiation can be gained.
The basic idea is that the firm’s activities can be divided into nine generic types. Five are the primary activities, which are the activities that create the product, market it and deliver it; four are the support activities that cross between the primary activities. The primary activities are:
The support activities are shown across the top of Figure No. 1 because they are a part of all of the firm’s operations. They are not directed to the customer, but they allow the firm to perform its primary activities. The four generic types of support activities are:
The basic idea is that competitive advantage grows out of the
firm’s ability to perform these activities either less
expensively than its competitors, or in a unique way. Competitive
advantage should be linked precisely to these specific
activities, and not thought of broadly at a firm-wide level. This
is an attractive way of thinking for most information Services
people, as it is, fundamentally, the systems analysis approach.
Computer people are trained to reduce systems to their
components, look for the best application for each component,
then put together an interrelated system.
Information technology is also pervasive throughout all parts of the value chain. Every activity that the firm performs has the potential to imbed information technology because it involves information processing. As information technology moves away from repetitive transaction processing and permeates all activities in the value chain, it will be in a better position to be useful in gaining competitive advantage. Figure No. 2, Value Chain: Key Activities, gives a brief example of a typical analysis of a value chain for a manufacturing company. It is obvious that information processing plays an important role in all these key activities.
Porter emphasizes what he call the linkages between the activities that the firm performs. No activities in a firm are independent, yet each department is managed separately. It is most important to understand the cost linkages that are involved so that the firm may get an overall optimization of the production rather than departmental optimizations. A typical linkage might be that if more is spent in procurement, less is spent in operations. If more testing is done in operations, after-sales service costs will be lower. Multifunctional coordination is crucial to competitive advantage, but it is often difficult to see. Insights into linkages give the ability to have overall optimization. Any strategic information system must be analyzed across all departments in the organization.
Cost and Competitive Advantage. Cost leadership is one of Porter’s two types of competitive advantage. The cost leader delivers a product of acceptable quality at the lowest possible cost. It attempts to open up a significant and sustainable cost gap over all other competitors. The cost advantage is achieved through superior position in relation to the key cost drivers.
Cost leadership translates into above-average profits if the cost leader can command the average prices in the industry. On the other hand, cost leaders must maintain quality that is close to, or equal to, that of the competition. Achieving cost leadership usually requires trade-offs with differentiation. The two are usually incompatible.
Note that a firm’s relative cost position cannot be understood by viewing the firm as a whole. Overall cost grows out of the cost performing discrete activities. Cost position is determined by the cumulative cost of performing all value activities.
To sustain cost advantage, Porter gives a number of cost drivers which must be understood in detail because the sustainability of cost advantage in an activity depends on the cost drivers of that activity. Again, this type of detail is best obtained by classical systems analysis methods. Some of the cost drivers which must be analyzed, understood, and controlled are:
Care must be taken in the evaluation and perception of cost drivers because there are pitfalls if the thinking is incremental and indirect activities are ignored. Even though the manufacturing activities, for example, are obvious candidates for analyses, they should not have exclusive focus. Linkages must be exploited and cross-subsidies avoided.
Porter gives five steps to achieving cost leadership:
Differentiation Advantage. Differentiation is the second of
Porter’s two types of competitive advantage. In the
differentiation strategy, one or more characteristics that are
widely value by buyers are selected. The purpose is to achieve
and sustain performance that is superior to any competitor in
satisfying those buyer needs.
A differentiator selectively adds costs in areas that are important to the buyer. Thus, successful differentiation leads to premium prices, and these lead to above-average profitably if there is approximate cost parity. To achieve this, efficient forms of differentiation must be picked, and costs must be reduced in areas that are irrelevant to the buyer needs.
Buyers are like sellers in that they have their own value chains. The product being sold will represent one purchased input, but the seller may affect the buyer’s activities in other ways. Differentiation can lower the buyer’s cost and improve the buyer’s performance, and thus create value, or competitive advantage, for the buyer. The buyer may not be able to assess all the value that a firm provides, but it looks for signals of value, or perceived value.
A few typical factors which may lower the buyer’s costs are:
Figure No. 3 Representative Sources of Differentiation, shows
a number of typical examples of activities that should be
considered. It indicates the breadth and detail that must be
involved in the study.
Porter points out that differentiation is usually costly, depending on the cost drivers of the activities involved. A firm must find forms of differentiation where it has a cost advantage in differentiating.
Differentiation is achieved by enhancing the sources of uniqueness. These may be found throughout the value chain, and should be signaled to the buyer. The cost of differentiation can be turned to advantage if the less costly sources are exploited and the cost drivers are controlled. The emphasis must be on getting a sustainable cost advantage in differentiating. Efforts must be made to change the buyer’s criteria by reconfiguring the value chain to be unique in new ways, and by preemptively responding to changing buyer or channel circumstances.
Differentiation will nor work if there is too much uniqueness, or uniqueness that the buyers do not value. The buyer’s ability to pay a premium price, the signaling criteria, and the segments important to the buyer must all be understood. Also, there cannot be over reliance on sources of differentiation that competitors can emulate cheaply or quickly.
Porter lists seven steps to achieving differentiation:
Focus Strategies for Advantage. Porter’s writings also
discuss focus strategies. He emphasizes that a company that
attempts to completely satisfy every buyer does not have a
strategy. Focusing means selecting targets and optimizing the
strategies for them. Focus strategies further segment the
industry. They may be imitated, but can provide strategic
Clearly, multiple generic strategies may be implemented, but internal inconsistencies can then arise, and the distinctions between the focused entities may become blurred.
Porter’s work is directed towards competitive advantage in general, and is not specific to strategic information systems. It has been reviewed here at some length, however, because his concepts are frequently referred to in the writings of others who are concerned with strategic information systems. The value chain concept has been widely adopted, and the ideas of low cost and differentiation are accepted. This section, therefore, is an introduction into a further discussion of strategic information systems. The implementation of such systems tends to be can implementation of the factors elucidated by Porter.
Charles Wiseman has applied the current concepts of Strategic
Information Systems in work at GTE and other companies, and in
his consulting work as President of Competitive Applications,
Inc. His book, Strategy and Computers: Information Systems as
Competitive Weapons, extends Porter’s thinking in many
practical ways in the Information Systems area, and discusses
many examples of strategic systems.
Wiseman emphasizes that companies have begun to use information systems strategically to reap significant competitive advantage. He feels that the significance of these computer-based products and services does not lie in their technological sophistication or in the format of the reports they produce; rather, it is found in the role played by these information systems in the firm’s planning and implementation in gaining and maintaining competitive advantage.
Wiseman points out that although the use of information systems may not always lead to competitive advantage, it can serve as an important tool in the firm’s strategic plan. Strategic systems must not be discovered haphazardly. Those who would be competitive leaders must develop a systematic approach for identifying strategic information systems (SIS) opportunities. Both business management and information management must be involved.
He emphasizes that information technology is now in a position to be exploited competitively. A framework must be developed for identifying SIS opportunities. There will certainly be competitive response, so one should proceed with strategic thrusts based on information technology. These moves are just as important as other strategic thrusts, such as acquisition, geographical expansion, and so on. It is necessary to plan rationally about acquisition, major alliances with other firms, and other strategic thrusts.
IMB’S Business Systems Planning (BSP) and MIT’s Critical Success Factor (CSF) methodologies are ways to develop information architectures and to identify conventional information systems, which are primarily used for planning and control purposes. To identify SIS, a new model or framework is needed. The conventional approach works within the perceived structures of the organization. An effective SIS approach arises from the forging of new alliances that expand the horizon of expectation. Such an approach is most difficult to attain, and can only work with top management support. Innovations, however, frequently, come from simply a new look at existing circumstances, from a new viewpoint. Information Services people must start to look systematically at application opportunities related to managers.
Wiseman believes that the range of opportunities is limited by the framework adopted. He contrasts the framework for Conventional IS Opportunities (Figure No. 4) with the framework for Strategic IS Opportunities (Figure No. 5).
In the conventional view, there are two information system thrusts: to automate the basic processes of the firm, or to satisfy the information needs of managers, professionals, or others. There are three generic targets: strategic planning, management control, and operational control. In this perspective, there are, thus, six generic opportunity areas.
In the strategic view of IS opportunities, there are five strategic information thrusts and three strategic targets. This gives fifteen generic opportunity areas. This opens up the range and perspective of management vision.
Sustainable competitive advantage can mean many things to different firms. Competitive advantage may be with respect to a supplier, a customer, or a rival. It may exist because of a lower price, because of desirable features, or because of the various resources that a firm possesses. Sustainability is also highly relative, depending upon the business. In established businesses, it may refer to years, and the experience that the firm develops may be quite difficult to emulate. In other industries, a lead of a few weeks or months may be all that is necessary.
There is an advantage in looking at Figure No. 5 as a study group, and brainstorming through it to find out what information may be needed to do a job better. One can find competitive advantage in information systems when the subjects are broken down to specifics.
Strategic Thrusts. Wiseman uses the term strategic thrusts for the moves that companies make to gain or maintain some kind of competitive edge, or to reduce the competitive edge of one of the strategic targets. Information technology can be used to support or to shape one or more of these thrusts. Examining the possibilities of these thrusts takes imagination, and it is helped by understanding what other firms have done in similar situations. This is why so many examples are presented in the literature. Analogy is important.
There is no question that there is considerable overlap between conventional information systems and strategic information systems. Systems are complex and a great deal of data is involved. The idea is to look at this complexity in a new light, and see where competitive advantage might possibly be gained. Note that Wiseman takes Porter’s three generic categories: low cost producer, differentiation, and focus, and extends them to five categories: differentiation, cost, innovations, growth, and alliance.
Cost may be move that not only reduces the costs, but also reduces the costs of selected strategic targets so that you will benefit form preferential treatment. A strategic cost thrust may also aim at achieving economies of scale. The examples always seem obvious when they are described, but the opportunities can usually only be uncovered by considerable search.
Innovation is another strategic thrust that can be supported or shaped by information technology in either product or process. In many financial firms, the innovative product is really an information system. Innovation requires rapid response to opportunities to be successful, but this carries with it the question of considerable risk. There can be no innovation without risk, whether information systems are included or not. Innovation, however, can achieve advantage in product or process that results in a fundamental transformation in the way that type of business is conducted.
Grown achieves an advantage by expansion in volume or geographical distribution. It may also come from product-time diversification. Information systems can be od considerable help in the management of rapid growth.
Alliance gains competitive advantage by gaining growth, differentiation, or cost advantages through marketing agreements, forming joint ventures, or making appropriate acquisitions.
The Strategic Planning Process. Wiseman advocates brainstorming and the systematic search for SIS opportunities. He has had considerable success with a formalized framework for surfacing ideas. He describes his SIS Planning Process in five phases:
Phase A: Introduce the Information Services management to SIS concepts. Give an overview of the process describe cases. Gain approval to proceed with an idea-generation meeting in Information Service.
Phase B: Conduct an SIS idea-generation meeting with Information Services middle management. Test the SIS idea-generation methodology. Identify significant SIS areas for executive consideration.
Phase C: Conduct an SIS idea-generation meeting with senior Information Services management. Identify SIS ideas, and evaluate them together with the ideas from the previous meeting
Phase D: Introduce the top business executives to the SIS concept. Discuss some of the SIS ideas that were considered for the business. Gain approval to proceed with the SIS idea-generation meetings with business planners.
Phase E: Conduct an SIS idea-generation meeting with the corporate planners. Identify some SIS ideas and evaluate them together with the ideas that have emerged from the previous meeting.
Wiseman points out that the whole idea is designed to introduce the strategic perspective on information systems, stimulate the systematic search for SIS opportunities, and evaluate and select a set of projects that are expected to secure the greatest competitive advantage for the firm. In the idea-generation meetings of Phases B, C, and E of the process, there are always seven explicit steps:
Wiseman says that typical SIS idea-generation meetings will last for days. Each step takes about two hours, at least. The process generates many good SIS ideas, and a few will always be considered well worth implementation. Top management begins to focus their attention on SIS opportunities. The ideas that are generated can produce significant competitive advantage.
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