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CIMA E3: why you must grasp the implications of IT

Iryna McDonald tells you how to pass the E3 paper

July 2016

The role of information systems in organisational strategy makes up 15% of the CIMA E3 syllabus, with two lead learning outcomes:
E1: Evaluate the information system requirements for successful strategic implementation.
• Evaluate the information systems required to sustain an organisation.
• Advise management on development of strategies for knowledge management.
E2: Evaluate opportunities for the use of IT and IS for the organisation, including big data.
• Evaluate the impact of IT and IS on the organisation and its strategy.
• Evaluate the strategic and competitive impact of information systems, including the potential contribution of big data.

The understanding of this topic is not only vital for the E3 exam, but also for the Strategic case study. Whereas in objective test exam technology is often examined alongside other strategic tools such as Porter’s Five Forces or Value Chain, in the February 2016 case study exam students were asked to review strategic benefits and risks of e-business.
The topic of information systems is historically perceived by students as complex, due to the intangible nature of technology; it is often hard to grasp the practical application of many new technological developments such as big data or cloud computing. Yet all of us use technology every day by browsing the internet or using self-service checkouts, which highlights to us that organisations are becoming more and more aware of the significance of IT in sustaining their ability to compete. For example, in the retail industry the competitive battlefield has shifted away from physical stores towards internet sales. As a result, major retailers are now looking to harness the ability of their website to collect better information about products and customers.

Impact of IT and IS on the organisation
When you last purchased something on the Internet did you by any chance buy it from Amazon? The company is renowned for its global reach, user friendly website and next day delivery capability. But did you know that Amazon is much more than just an online retailer of goods? Some 67% of Amazon’s income comes from its web service division, which essentially allows other companies to virtually rent Amazon’s technological infrastructure to provide processing power.
Being a virtual organisation, Amazon maintains limited physical presence and instead relies on managing its supply chain to be able to deliver its goods. The company was one of the first retailers to realise the benefits of using technology in managing its supply chain. In the upstream supply it encourages independent sellers to list products on its website. Use of GPS and scheduling software in the downstream supply chain ensures on-time delivery to the customer. Apparently, it is even possible to book a tour of an Amazon fulfilment centre to see the whole process in action!
Despite the large scale of the retail side of the Amazon business, it is the provision of cloud computing services that adds most to the company’s bottom line. Having established the technological infrastructure necessary to process online retail orders, Amazon now also hires their computing power and internet services to other organisations that might need to process complex calculations or just want to add extra flexibility to their data processing. At the core of Amazon’s corporate level strategy lies the understanding that having built up the competencies in data management and analysis, it should not only use them to optimise the operations of its website but exploit these valuable assets, which can generate revenue and profits in their own right. Thus by using technology both within the business and as a core service offered to its corporate customers, Amazon has created a business model that diversifies company’s operations away from retail towards IT outsourcing industry.

Impact of technology and big data
Efficient data processing is rapidly becoming a business necessity – with the arrival of the ‘internet of things’ many more devices are becoming connected. This creates a deluge of data that an organisation needs to make sense of. Your smartphone has a multitude of sensors, tracking information about location, pace, voice and even temperature. By applying statistical tools to this data a company can now better understand its customers and thus improve its products and services, which may provide it with an edge over its competitors. The big data concept brings together the need for vast quantities of information processed in real time from a variety of sources in order to help companies make better decisions.
Companies such as Pinterest use big data to deliver a personalised visual bookmark service to its users by analysing the intent of each Pin. Using specialised software application, Pinterest will take into account the context of the Pin, together with related images to make suggestions about similar objects the consumer might like as well as the organisations you can buy them from. With over 30 billion Pins and fast growth in the number of users, Pinterest had to double its computing power and triple its storage capacity in the past six months.
Such complex processing requires powerful computing capabilities often beyond the resources available to any one company. This in turn creates demand for cloud computing services.
To support it growth, Pinterest decided to gain access to extra computing power through Amazon web service division. This collaboration allowed Pinterest to reduce the capital investment required to establish data centres while transferring the risks of technology failure and security breaches to a provider who is better equipped to handle them.

Opportunities presented by IT and IS
At the strategic level, the conversation about utilisation of technology is moving away from considering whether one is needed towards how it could be used to generate an edge over rivals. With better access to data processing capability companies can now focus more on their core competencies of product innovation and customer service and less on technological infrastructure. Therefore IS could be seen as both a sources of competitive advantage through the enhanced ability to meet customer needs, as well as the strategic imperative for the future survival of the organisation, with technology affecting every aspect of its operations.

Have a go at these questions to test your technical knowledge
Question 1: ARC airline has introduced dynamic pricing for its tickets as part of a strategy to improve the company’s overall profitability. Its website is linked to a specialised software application deploying big data techniques through monitoring of travel patterns, weather conditions and holiday periods to change ticket prices in real time. Despite the initial success of the dynamic pricing, ARC received several complaints from customers about the website freezing or becoming unresponsive during peak usage times. As a result, the ARC board requested that a change be made to dynamic pricing system operations to address these customer complaints.
Which one of the following features will help ARC address customer complaints?
a) Increasing the volume of indicators taken into account when setting prices levels to include frequently searched destinations.
b) Use a greater variety of source of information, such as previous ticket purchases made by customers as well as photos and comments made by them on social media.
c) Enhance veracity of customer data by asking customers to log in before confirming the final ticket price.
d) Increase velocity of pricing decision by adding extra data processing capability through cloud computing.

Question 2: KIK, an upmarket clothing retail chain, is planning to expand abroad to country Z. KIK currently operates through physical stores in premium locations in its home country K. Recent market research identified that in country Z there is an increasing preference among consumers for online shopping. As a result, the KIK board has made a decision to enter country Z using only e-business operating model.
Which of the following benefits will KIK gain from operating an e-business model? Select all that apply.
a) Enhanced shareholder returns through better ROCE.
b) Decreased risk of damage to the company’s reputation.
c) Seamless management of the supply chain from factory to the consumer.
d) Greater price transparency for its garments in country K.
e) Better customer retention through data analysis and relationship management.
f) Greater insight into competitors’ strategies.

• Iryna McDonald is a tutor at Kaplan Financial

Question 1: answer D
Velocity as an element of big data refers to speed of decision making. ARC’s customers complained about the website becoming unresponsive as it struggled to process a large volume of information necessary to set the prices in real time. Cloud computing will allow ARC to gain
on-demand access to data processing using infrastructure provided by a third party, thus reducing the revenue lost from customers who are not able to make a booking.

Question 2: answer A, C, E
E-business is less capital intensive compared with operating physical stores, which will enhance Return on Capital Employed (ROCE). A further move towards becoming a virtual retailer would allow KIK to link clothing manufacturers directly to the customers ordering garments. Through the website, the company will be able to collect more information about its customers and thus target them with relevant offerings, leading to better customer retention.
However, the e-business model might increase the risk of reputation damage: a breach of security in the event of hackers stealing credit card details might undermine customers’ trust in KIK’s ability to safeguard data. Greater price transparency is unlikely to arise in country K as the website will only operate in country Z. Although the website will provide better information to KIK about its customers and products, it will not provide new information about competitors.

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