IT Strategy

S. Ramanathan

What is IT Strategy?
Provide effective, efficient, responsive and flexible systems to meet the current and future business and legislative needs

Components of IT Strategy
IT application strategy Technology management strategy IT management strategy

Application Strategy
Identify business areas which need IT intervention Select, prioritize and decide about investment and approach for implementation Evaluation based on present and future importance of the application

Strategic Grid

P r e s e n t

Factory: Cost reduction Quality primarily engineered by IT in consultation with business users

Strategic Top level involvement in IT

Support Local improvements incremental cost saving initiated by end users with IT

Turn Around Exploit emerging strategic opportunities Driven by business

Technology Strategy
Planning and selection of technology components and tools Considerations:

Skills available Cost Resources available

IT Management Strategy
Challenges

High employee turnover Quality and reliability of bespoke products Risks due to system failure Heightened expectations of business users Trend High service level requirements Managing cultural changes among IT staff and users

Information Management maturity Model

Level Breakaway Organization Information maturity Prescriptive, realtime pattern-based strategies with situational context

Differentiating

Business Process Integration

Process automation and workflow Task integration

Prediction, Contextual business rules, patterns

Master data management, Dashboard, Scorecards Production reporting, Data warehouses. Governance, Spreadsheets

Competitive

Foundational

Adhoc

Command and Control;

How Information Gives You Competitive Advantage Michael E. Porter and Victor E. Millar

Strategic Significance of IT
Information Technology is changing the way companies operate It is affecting the entire process by which companies create their products It is reshaping the product itself

Value Chain
Technologically and economically distinct activities a company performs to do its business Value activities A business is profitable if the value it creates exceeds the cost of performing the value activities To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost perform them in a way that leads to differentiation

Value Activities
Nine generic categories Primary activities

Receipt from suppliers Physical creation of the product Marketing Delivery to buyers After sale support Procurement Human resources management Technology development Firm infrastructure (general management, legal, accounting)

Support activities

Value System
Value chain of suppliers + Value chain of the firm + Value chain of the channels + Value chain of the buyer Cost reduction / Differentiation in any / all of these may lead to competitive advantage

Competitive Scope
Breadth of a companys activities Four key dimensions
1. 2. 3. 4.

Segment scope Vertical scope (degree of vertical integration) Geographical scope Industry scope (range of related industries in which the company operates)

Broad scope can allow the company to exploit interrelationships between the value chains serving different industry segments, geographies or related industries Narrow scope allows focused customization of value chain for a particular segment and thus derive advantage

IT and the Value Chain

Information technology transforms the way value activities are performed and the linkages between them (Exhibit III) Also affects competitive scope and reshapes the way products meet buyer needs

IT and the Value Chain Contd.

Every activity has a physical and information processing component Massive amount of data can be processed, stored and retrieved at a very fast pace at a very low cost due to information technology Transforms physical processing too computer-controlled machine tools

IT and the Value Chain Contd.

IT affects the linkages too. Drug store providing terminals to customers for easy ordering and invoicing Effect on competitive scope coordination of value activities across remote geographies

Transforming the Product

Historically, a products physical component is more important for the buyer than its information component But service supported by sound data makes the product more attractive for customers Expanding information content in product as in dishwashers and automobiles Emergence of information as a product

Information Intensity
See Exhibit IV

IT is Changing Rules of Competition

IT changes the industry structure and in so doing alters the rules of competition IT provides new ways to outperform rivals and thus provides competitive advantage IT spawns new businesses often from existing operations

Changing the Industry Structure

Five competitive forces (Exhibit V) Information technology can alter each of these Empower the buyer with more information and make services quick and available round the clock to make it attractive for buyer Make high investments in technology as in Banks to create barriers to entry Through flexible computer-aided design and manufacturing, reduce threat of substitutes Electronic databases as substitutes for library research Boundaries between suppliers and buyers are blurring electronic integration Since scale is not important automation, barriers to entry are falling in many industries Automation no longer leads to inflexibility flexible manufacturing systems Falling cost of product design has created opportunities to serve small niche markets Lethal potential of IT: Transparent fares allow airlines customers to shop around

Creating Competitive Advantage

Lowering cost: Insurance under-writing: optimal offer by a computer model reducing no of insurers and documentation Enhancing differentiation: Digital Equipments artificial intelligence system, XCON for decision rules to develop custom computer configurations dramatic reduction in order filling time and increase in accuracy Changing competitive scope: Dow Jones pioneered page transmission technology linking its 17 printing plants in US to produce a truly national newspaper Creating interrelationship among industries

Spawning New Business

1. By making new business technologically feasible:

Blending of imaging and telecommunications technology to support facsimile services such as Federal Expresss Zapmail American Airlines made SABRE available to other airlines new revenue stream IRCTC e-commerce site

2. By creating derived demand for new products: Western Unions Easylink services 3. By creating new businesses within old ones: use of barcode scanners in supermarkets market research data

Competing through IT
Five steps
1. 2.

3.

Assess information intensity - existing and potential intensity of products and processes Determine role of IT in the industry structure how IT would affect in future: would it change the five forces or boundary itself: would there be a new definition of industry? Identify and rank the ways in which IT might create competitive advantage.
1. 2. 3. 4. 5. 6. 7. What are the value activities that are likely to be affected most in terms of cost and differentiation? How would IT affect the competitive scope? Can IT help the company serve new segments? Or woyld the technology allow narrowing scope and hence focused advantage in niche segments? Would IT allow new competitors to enter niche markets? Would IT provide leverage to expand globally? Would IT facilitate interrelationships? Can the company bundle more information with the product?

Competing through IT Contd,

4.
1. 2.

Investigate how IT might spawn new business

Could the company sell some information generated? Do we have some information processing capacity that could help start a new business? Does IT make it feasible to produce new products?

3.

5.
1.

Develop a plan to take advantage of IT

Strategic investments necessary in hardware, software and new product development Organizational changes Functional managers should own information technology initiatives. IS would manage the technology architecture, standards

2. 3.

Business IT Alignment

What is Business IT Alignment?

Capability of IT to deliver what business needs Ability to play a strategic role in shaping a new business strategy Achieved by ability to absorb new technology opportunities for business benefits Requires IT to transform from back office support function to strategic differentiator

Strategic Alignment Model

S t r a t e g y C a p a bi lit ie s Opportunities Priorities Position Value People Processes Controls Tools Technology Culture Opportunities for process improvement Technology changes Risk management Project priorities

People Processes Governance Infrastructure Culture

Strategic Grid
An assessment method to check the alignment of IT with the strategic goals of the firm Two key dimensions to assess an organizations IT initiatives

Impact on business operations Impact on strategy

Oversight and governance need to be defined accordingly

Strategic Grid

I m p a c t o n O p e r a ti o n s

Factory: Cost reduction Quality primarily engineered by IT in consultation with business users

Strategic Top level involvement in IT

Support Local improvements incremental cost saving initiated by end users with IT

Turn Around Exploit emerging strategic opportunities Driven by business

Can IT Support and Drive Strategy?

Can IT change the basis of competition? Can IT change the nature of relationships and the balance of power among buyers and customers? Can IT build or reduce barriers to entry? Can IT decrease switching costs? Can IT add value to existing products and services or create new ones?

Can IT Change the Basis of Competition?

At its core ITs function is to automate activities But while automating IT can inform and transform And in this IT can transcend business boundaries A streamlined value chain can produce better efficiencies Timely information produced better coordination and control IT enabled products and services new players in the market (eg) American Hospital Supply Corporation, American Airlines

Can IT Change the Nature of Relationship and Balance of Power in Buyer Seller Relationship?
AHSC rose to power within the hospital supplies industry by streamlining channels, dramatically decreasing cost, improving order accuracy and increasing speed of order fulfillment Customers encouraged channel consolidation Sensing risk of exclusion, suppliers put their catalogs online With electronic links with suppliers, AHSC customers could directly order from supplier inventory, which enabled further reduction in cost and cycle time for all members of online market This neutral third party distributor created such a significant shift in the balance of power that in 1985, it was bought by Baxter Healthcare, a hospital supplier A few years later, responding to market pressure, Baxter was forced to spin off the supply chain business to ensure neutrality

Does Internet Shift Power from the Suppliers to Channel Players and Buyers?
During late 90s, internet based channel players flooded the market By 2004, many of them were struggling / closed As neutral channel players faltered, established players rushed in (eg) Global Healthcare Exchange (GHX) launched by five of the largest healthcare suppliers (with 70% of all products and services for hospitals and doing business with 90% of the hospitals) ; within months, more than half the independent players disappeared

Can IT Build / Reduce Barriers to Entry?

Proprietary systems of AHSC and AA provided initial entry barrier. But more sustainable advantage came from the information generated by the technology and the value of the loyal community of customers and suppliers Internet, being low cost and shared, does not provide advantage to any one player Competitive advantage should come from building proprietary capabilities such as loyal customer community or quick response In such a scenario, first mover advantage may turn a disadvantage also

Case Study: Amazon.com

1995: The company was started in a modest way Quickly became no.1 online book seller Within two years, sales: $ 148 m and customer base: > 2 m 1998: replicated the success in online music and video stores 1999 2000: spent $ 500 m in sophisticated order fulfillment capability Knowledge management infrastructure was created to understand needs of individual customers to personalize services Late 2000: Customer base: > 25 m 2001: internet stocks crashed. Need to reinvent business from retail product sale to services model for quicker profitability Understood the need for taking ownership of physical inventory 2004: established relationship with a number of brick-and-mortar retailers to avoid creation of equivalent capability redefined business from e-tailer to online / offline logistics service provider

Can IT Raise / Lower Switching Cost?

Internet has lowered switching cost Price comparisons being easy, customer loyalty is rare in Internet economy But some companies have succeeded in creating switching cost on the Internet too (eg) Intuit, which allowed customer to store personal information in their financial services software. Data have to be reentered, if the customer moves to a different product. Intuit quickly became market leader in the market segment with 80% market share and 90% retention rate, competing against giants like Microsoft Services such as bill payment. Banking online, tax calculation and payment, managing portfolio of investments were all added Intuits online version of TurboTax gained over 80% market share in a highly competitive market

Can IT Add Value to the Existing Products or Create New Ones?

Grocery stores selling information to market research firms Information component in products is increasing as in automobiles Total transformation of product in books, magazines, music, video and games

IT Impact on Strategic Risk

Can emerging technologies disrupt current business models? Are we too early / too late to exploit an IT opportunity? Does IT lower entry barriers? Does IT trigger regulatory issues?

Can emerging technologies disrupt current business models?

Key features of disruptive technologies

Evolve significantly faster than the dominant technology in the industry Enables new products, services, pricing, business models that change the basis of competition Trigger regulatory changes or significant customer dissatisfaction with the status quo

These may be viewed as threats or opportunities, depending on which side you are (eg) emergence of minicomputers and PCs Responding to risk: IBM example, p 50 - 52

Are we too early / too late to exploit an IT opportunity?

Ability to identify the right time to enter with an organization to suit the need Allied issues

How much to invest? How long? How do we sustain cash flows? When would the pay-off start?

Does IT lower entry barriers?

Wide-spread availability of Internet with low cost open standard technologies may bring the barrier down

Does IT trigger regulatory issues?

IT successes may invite complaints of unfair competition Baxter was forced to spin off hospital supply business after its acquisition of AHSC

Assessing IT-enabled Business Opportunities - I

What business are we in? Who are our customers, suppliers and business partners? What value do we provide to these key constituencies? (incl. employees and owners) What are the competitive dynamics and balance of power within the industry? Can IT be used to create value and change the basis of competition?

Assessing IT-enabled Business Opportunities - II

Who are the biggest competitors today? Who will they be in future? How easy / difficult for the new players to enter into our markets, offering a unique value proposition and / or substitute products and services How easy / difficult would it be for customers, suppliers or partners to switch?

Assessing IT-enabled Business Opportunities - III

How efficient / effective are our processes? How easy / difficult is it for customers, suppliers and partners to do business with us? Could we continuously improve our products / services and the way we do our business?

Assessing IT-enabled Business Opportunities - IV

Are there any disruptive changes looming on the horizon? Are we in a position to capitalize on these changes? What is the risk / return profile and the window of opportunity? Do we want to lead the industry or a fast follower?

Assessing IT-enabled Business Opportunities - V

Will changes in related industries (or even unrelated industries) influence our industry? Could we extend into new products / markets? Do we have processes in place to understand and manage risks?

Challenges in Business IT alignment

1. Well articulated business strategy 2. Uniform communication of strategy to all levels 3. ITs ability to capture end-user requirements with speed

Inhibitors of Business IT Strategy Alignment 1. Desire of business leadership to take IT along in strategy formulation and execution 2. ITs ability to understand business 3. Communication gap between business and IT 4. ITs ability to deliver 5. Management support to IT in application prioritization, development process and budgetary requirements

Business IT Alignment at Three Levels

1. Knowledge of business needs 2. Application development process 3. Management of technology achieved by 1. Planned development of infrastructure 2. Anticipating future needs 3. Driving for results

Strategies for Achieving Business IT Alignment

Recognition of strategic role of IT by Management Good communication between CEO and CIO CIOs involvement in strategic management of business Cross rotation of IT managers in business functions Hiring candidates with business experience into IT function

Strategies for Achieving Business IT Alignment (Contd.)

Create an IT architecture to suit the business processes Use IT innovations such as SOA to derive better business advantage Improve operational level performance of IT through frameworks such as ITIL Implementation of IT governance for better management of IT resources to provide service at acceptable levels and keep the IT staff motivated and involved in business

Business IT Alignment Techniques

1. Cross-functional Steering Committee to keep the projects on track and deliver business benefit 2. Joint Application Development (JAD) 3. IT champion in user departments 4. User advocate / subject matter expert in IT 5. Sabbatical for IT staff in user function 6. Making IT staff part of strategy groups 7. Co-authoring of papers and presentations by user and IT 8. Joint training for users and IT on non-technical topics

IT Strategy and Business Maturity

Control IT resources

Solve business problems

Partne r with IT culture

Differ entiat e with IT

Extending the Enterprise

Network Emerging Organizational Form

In pre-Internet economy, sharp boundaries between organization and market Network form of an organization blurs the boundary between the two Typical organizational hierarchies have well-defined authority and control; markets do not have enduring relationship Network falls between the two cross-enterprise collaboration No command and control mechanism; but relationships are more enduring than typical markets cross-enterprise collaboration emerges when two or more firms voluntarily agree to integrate human, financial, or technical resources in an effort to create a new, more efficient, effective, or relevant business model The parties to a network agree to forego the right to pursue their own interests at the expense of others Trust is one of the defining elements of a network form of governance, and the network form of governance is therefore not reducible to a hybridization of market and hierarchical forms, which, in contrast, are premised on a more adversarial posture Traditional forms of organization do not have the adaptability and flexibility of network organization Successful collaboration requires the development of new skills, mindsets, and corporate architectures.

Network Organization Imperatives

Each potential participant of a business network has its own strategies, models, and processes for the present and the future. Therefore the network should create a joint business logic that matches or complements each company's strategic objectives This means that each partner in the network should reveal its true strategic goals concerning its cooperation, after which the network may jointly make decisions over the target for the network. Often takes a considerable amount of time to build a sufficient level of trust between the parties before strategic intentions are articulated and communicated and actions are taken accordingly

Emerging Extended Enterprise Models

Based on ownership and governance

Network within a corporation Alliance Community

Trust Need of the Inter-firm Networks

Process-based: emerging from transactions in an interdependent environment Affiliation-based: feeling of identity within a group Infrastructure-based: tied to organizational and social structures Trust is transferable from a trusted party to an unknown party through provision of endorsement / verifiable evidence

Obstacles for Building Trust

different units of network members may not share a common view of the benefits of joining the network. strategic advisability for partnering may be marred by short-term needs to generate income widespread adoption of short-term management through increasing shareholder value may be a major stumbling block in the road of many networks

Steps Towards Building a Successful Network Organization

Choice of a leader / coordinator Should be from the focal company that which provides critical core competence in the new service concept Joint business model: both top-down and bottom-up approaches

Top-down: alignment of corporate goals to suit the new business model Bottom-up: aligning the business processes to business model

Business model and context (synthesis from Osterwalder & Pigneur, 2002 and e-factors, 2002)

CSOFT Ontology

Ann Becker S., The Role of Business Models in Developing Business Networks, Electronic Commerce: Concepts, Methodologies, Tools, and Applications, Volume 1 ,IGI Global @ 2008 citation

Potential Benefits from a Virtual Community

Increase purchasing intention. A virtual community containing a wide range of information and options for customers can reduce customers' risk perception involved in making a purchase. Current customers sharing their positive opinions can also influence potential customers to make purchases. Access to customer opinions. A virtual community can provide valuable feedback to the company about its products and services, and how these compare with rival companies. Greater ability to meet customers' demands. A virtual community can connect companies to their customers in order to work together in developing products that meet customers' needs. Additional sources of revenue. A virtual community provides a means for the company to gather detailed information on customer profiles. This information could be used to attract advertisers or sold to marketing companies. Alternatively, if the community is of substantial value to the customer, the company could charge subscription or membership fees. Lower customer service costs. A virtual community can help reduce the costs associated with customer service personnel as community spirit could prompt members to help each other with product advice and thus save on customer service costs otherwise incurred by the company.

NASDAQ Case Study

Have the Rules of Strategy Changed with Internet?

It makes strategy more vital than ever Porter In our quest to see how the Internet is different, we have failed to see how the Internet is the same Porter Virtual value chain (as value chain for physical flow of goods) - value-adding steps for information (gathering, organizing, selecting, synthesizing, and distributing)

Michael Hammers Prescription for Customer Economy

make yourself easy to do business with sell through, not to, your distribution channels; push past your boundaries in pursuit of efficiency; lose your identity in an extended enterprise These are directly facilitated by the Web initiatives

Things to Consider in an EC Initiative

the source and target (business, consumer, government) the focus (internal or external or both) whether the objective is efficiency or effectiveness go it alone versus partnership proactive versus reactive approach targeting one-time versus ongoing customers physical versus virtual goods single good/service versus package

Strategic IT Planning (SITP)

Strategic planning is the systematic examination of opportunities and threats in the business environment so that you are in a position to identify those opportunities that should be exploited and those threats that should be avoided George Steiner

Strategic Planning Process

You want to be here Best practices

Gap Assessment

IT strategy

Current IT support You are here

SITP Explained
The core purpose of SITP lies in identifying future directions of investments in information technology and systems to assist the organization realize its business goal (Tuebner and Mocker) Planning is a process by which deployment of resources (people, money, hardware / software etc.) is decided based on the strategic direction, importance of current operation and the returns each investment is going to produce in terms of cost saving, customer satisfaction or competitive advantage (3 Cs)

Strategic IT Planning Methods

Top down analytical approach

Identify and agree on business objective Define critical success factors (CSF) Arrive at information systems portfolio that supports / enables these factors

Bottoms up evaluative approach: Emphasis on current systems graded by business value and technical quality and options are exercised

Bottoms-up Evaluative Approach

Lo P e r c e i v e d v a l u e Hi Divest Reassess

Renew

Maintain and Enhance

Creative Approach
Explore external factors too for innovation

Challenges in Developing and Executing SITP

Continuous improvement of applications and infrastructure Lack of joint ownership between business and IT

SITP Approaches Business Systems Planning Approach

Developed and promoted by IBM Focus on data and processes; based on these an information architecture is proposed Identify missing systems Prioritize for development

SITP Approaches Critical Success Factor Approach

Focus on important managerial issues Identify the information needs for the CSFs

SITP Approaches Stages of Growth Approach

Six stages of IT adoption as identified by Richard Nolan
Maturity Data Administration Integration Control IT as a resource: IT projects deliver expected results Shared data and common systems. Users are made accountable for the success of systems Of processes and systems with support for innovation Disjointed applications lead to sub optimization of resources, cost over run and delayed delivery requiring management intervention to discipline Automation demands: multiple stand-alone applications Computerization of routine processes like payroll, FA

Expansion Initiation

SITP Approaches Value Chain Analysis

All the generic activities are examined to determine how they can be improved to lower cost / increase value and how this can be achieved using IT

Hi B u s i n e s c r i t i c a l i t y

SITP Approaches Value Matrix

Operational excellence Resource optimization Time to market Breakthrough New market expansion Customer value creation

Routine applications HR, Finance

Experimentation led applications (eg) mobile commerce

Lo

Innovation Useful for application prioritization

Hi

SITP Approaches Linkage Analysis

Suitable for e-business Identifies inter-organizational linkages, their shortcomings and then plans for their reinforcement Five steps

Innovate to focus on revenue generation than cost control Invest in technology Understand who wields power among the various players and build electronic linkages Manage across supply and distribution channels Improve information across the network thro electronic channels

The method advocates use of information technology to redefine network affiliation and restructure the industrial space

SITP Approaches Scenario Planning

Several possible scenarios are crafted for the future A team complies possible future events that may have influence over outcome of each scenario Identify business strategy for the shortlisted scenarios Envisage IT applications needed for each of these strategies

Integrated Planning Approach

Combines elements of different methods

Perform business analysis to understand critical areas Identify potential IT projects to serve these areas Rank projects on 3C principle

Typical Content of SITP

a) b) c)
a) b)

Executive summary Objectives of SITP Basic structure

Data model Process diagram

d) e) f) g) h) i) j) k) l) m) n) o) p) q) r)

Identified application portfolio Applications available off-the-shelf / to be developed Recommended implementation plan Budget HR Plan skill requirement, recruitment and training plan Organization plan Change management plan for process changes Technical architecture hardware, networks, software, data base, interfaces Migration plan Project calendar Policies for project management, systems development and package selection Security plan Cost benefit analysis Risk management Projection of possible future requirements and comparison of past IS performance

Why Does SITP Fail?

Inadequate resources (financial, technical, human) for implementation Lack of user involvement during implementation Inadequate analysis of information needs Failure to anticipate changes in external environment (architecture should be made flexible enough to allow mid-course correction) Resistance to change fear of loss of job, authority etc. Poor choice of technology No ownership of SITP Lack of management support Communication issues ITs inability to understand business requirements Poor IT leadership Line managers fail to appreciate long term goals and do not support SITP

Implementation Best Practices

1. Strong implementation team 2. Clarity of expectations 3. Ownership by stakeholders 4. Process-driven approach 5. Proper monitoring / review 6. Addressing root causes of slippages 7. Proof-of-concept approach 8. Documentation of requirements 9. Change management 10.Involving users in implementation team

Enterprise IT Architecture
Establish alignment between business strategy and IT strategy Develop strategic IT plan Enterprise IT Architecture Application Development