business strategy concepts lecture notes
TRANSCRIPT
Business Strategy Concepts and the Implications for IT Strategy
Sudhir Tandon
22/09/01
Agenda
• Evolution of Strategic Management
• Strategic Information Management
• Why has IT/IS become more strategic in nature?
• Strategic IS/IT vs. Traditional IS/IT
• What is IS/IT strategy ?
• IS Strategy vs. IT Strategy
Agenda
• Alignment of IS/IT with Business
• Strategic Alignment Model
• Case Study
Evolution of Strategic Management
• Phase 1 - Financial Focus– Annual Budgets– Inward looking
• Phase 2 - Forecast Based Planning– 3-5 year horizon– Forecast based– Gap analysis– Plans are still internally oriented
Evolution of Strategic Management
• Phase 3 - Externally oriented planning– Competitive assessment– Evaluation of the Product Market Relationships– Dynamic allocation of resources
• Phase 4 - Strategic Management– Strategically Focussed Organisation– Driven by Innovation– Creating the Future
Implications for IT Strategy
• IT planning is normally in phase 1 even if the organisation is in phase 2 or 3
• In case of recession companies have to look for short term financial survival - IT, which requires 8-12 months to deliver takes a back seat
• Companies can move back from 4 to 3
Strategic Information Management
• 3 Important ideas related to SIM1. Development and support of the strategic
management process• aiding in collection of strategic information
(competitor info., market intelligence, industry database)
• aiding in the strategic planning process (strategic database access)
Strategic Information Management
2. Developing Systems in support of
business operations
3. Competing through information
SIM is defined as IS/IT strategies which significantly improve information use in order to enhance performance and coordinate activities across functional and business unit lines, as well as interactions with external entities, in pursuit of competitive advantage
Why has IS/ IT become more Strategic in Nature?
• The cost of maintaining existing systems and the significant investment in time and money required to develop new systems.
• IS/IT increasingly affects Corporate Strategy as it impacts the choice of options open to a company
• Helps develop strategic business scenarios through expert systems and monitor the same through EIS
• IS/IT affects the organization structure. Reduced reliability on middle management due to availability of information
•
Why has IS/ IT become more Strategic in Nature?
• Impacts the organization’s interfaces with the external environment i.e. suppliers, customers etc.
• Impact of change management on the people
Strategic IS/IT vs. Traditional IS/IT
• External Focus
• Differentiation• Sharing the benefits• Business Driven
Innovation• Incremental/
Prototyping approach
• Focus on Internal Processes
• Cost Reduction• Localised Benefits• Technology-led
Development• Black box approach
What is IS/IT strategy?
IS/IT strategy involves creating a structured framework for Information Systems need, together with IT solutions
IS StrategyDemand Oriented
Application Focussed
IT StrategySupply Oriented
Technology Focussed
Infrastructure
Services
Needs
Priorities
Business Strategy
IS Strategy: Mainly concerned with aligning IS development with business needs and with seeking strategic advantage from IT. It represents the demand side.
IT Strategy: Mainly concerned with the technology which is going to be used, the enabling mechanism. It represents the supply side
Business and IS -Why is ALIGNMENT so
important?
Despite working on different levels, IT and businessexecutives must communicate better in order for companiesto experience the benefits of technology- InformationWeek, September 1998
But often alignment is not the reality …
42% : business and IS strategy are NOT properly aligned8% : no opinion/don’t know50%: OK!
IBM’s Advanced Business Institute finds in a survey of 800 US companies (representing 15 different industries) that:
Source: Enablers and Inhibitors, InformationWeek 1998
6 most important factors in alignment
• Senior executive support
• IS management’s involvement in strategy development
• IS’ understanding of the business
• Existence of partnership between business and IS/IT leaders
• Level of priorization of IS projects
• IS/IT management’s leadership abilities
Source: Enablers and Inhibitors, InformationWeek 1998
HOW to identify IS opportunities(or strategic use of IS)
Using business planning techniques ...
Using business planning techniques to create alignment w/
IS strategy
• Competitive Forces
• Boston Matrix
• Critical success factors
• Generic business strategies
• The Value Chain
• SWOT Analysis
Competitive ForcesNew
entrants
SubstituteProducts
Suppliers Buyers/Customers
Direct Competitors
Bargaining Power of Suppliers
Threat of Newentrants
Threat of substituteproducts or services
Bargaining power of Competitors
Alignment:Implications for IS Strategy? ASK:
New entrants
Direct Competitors
SubstituteProducts
Suppliers Buyers/Customers
Source: W&G p.85/86 (Tables 2.3/2.4)
How can IS/IT buildbarriers to entry?
How can IS/IT change
the basis of competition?
How can IS/ITchange balance ofpower w/ suppliers?
How can IS/IT buildin switching costs
for customers?How can IS/IT
change balance ofpower w/ customers?
How can IS/ITgenerate new products
services?
Key force BusinessImplication
IS/IT Opportunities
NewEntrants
Additional Capacity Reduced Prices New basis for
Competition Need for substantial
resources
Provide Entry Barriers by: Exploiting existing
economies of Scale Differentiate products Building Loyalty/ high
switching costs Control distribution
channelsBuyer powerhigh
Force Prices down Demand higher
quality Higher Service levels Undercutting
Building Loyalty/ highswitching costs
Lower Costs Facilitate product
selection/ customizeproducts & service
Differentiate products
Key force BusinessImplication
IS/IT Opportunities
SupplierPower High
Raises Costs Reduced quality Reduced availability
Use SCM to reduce costof selling for supplier
Forward Planning Backward Integration Apply EDI for cost
reductionSubstituteproductsthreat
Limits potentialmarket and price
Building Loyalty/ highswitching costs
Lower Costs Facilitate product
selection/ customizeproducts & service toincrease value to customer
Key force BusinessImplication
IS/IT Opportunities
IntenseCompetitionfrom rivals
Price competition Product development Distribution and
service critical
Reduce costs improveprice performance
Use information todifferentiate
Segment Markets andtailor to meet theirrequirements
Get closer to endcustomer
Competitive AdvantageTo 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). Enterprises, through their strategies, can influence the five forces and the industry structure, at least to some extent. There are three basic strategic stances that enterprises can adopt.
Generic Business Strategies
• Low cost
• Differentiation
• Niche/Focus
Alignment -Implications for IS/IT Strategy? ASK
Differentiation: How can IS/IT help- meet customer requirements?- monitor customer perceptions?- achiever faster delivery?- improve quality control?- foster R&D?
Low cost: How can IS/IT help- avoid overhead costs?- link business processes effectively?
Niche/focus: How can IS/IT help- identify target markets?- get unique information on target market?- distinguish products from general offers?
Potential IS/IT Areas
Low Cost DifferentiationProductdesign andDevelopment
Product Engineeringsystems
Integrated Systems forManufacturing
Professional Workstations CAD Email
Project ControlSystems
R&D Databases
Operations Inventory Mgt. System Process Control System Labour Control System Procurement System
CIM Quality Assurance
system Quality Monitoring
for Suppliers
Potential IS/IT Areas
Low Cost DifferentiationMarketing Streamline Distribution
System Campaign monitoring
system Customer Mailer
System Enquiry Monitoring
system
Customer Database Market Intelligence
System POS displays and
kiosks Competition Analysis Telemarketing
Sales andService
Inventory Mgt. Systemfor Spares
Order ProcessingSystem
Service Control System Field sales
Call Centre Diffrential Pricing Dealer Support E-sales
Boston Matrix
STAR
WILD CAT
or
PROBLEM CHILD
CASHCOW
DOG
Mar
ket G
row
th
Market ShareHigh
High
LowLow
Source: W&G, p. 68
Alignment:Implication for IS Strategy?
Mar
ket G
row
th
Market ShareHigh
High
LowLow
Source: W&G, p. 71
Product/process developmentIdentification of customersEffective information exchanges
Support customer focus: understand demand!Promote growth, variety, volumeBusiness innovation satisfy/differentiate
Business producti- vityControl customers and suppliers DEFEND Position!!!
Niche? or
Forget it!
Infrastructure - Legal, Accounting, Finance
Human Resource Management - Recruitment, TrainingProduct and Technology Development - R&D, IT, Process design etc.
Procurement - Vendor evaluation, Subcontracting
Inbound Logistics
ServicesOperationsSales and Marketing
Outbound Logistics
Value Added -Cost=
Margin
Support Activities
Primary Activities
A manufacturing company’s Value Chain
Value Activities
• Primary Activities– Inbound Logistics - Receive, store and
distribute inputs e.g. material handling, warehousing
– Operations - production activities to create the product such as machining, packaging, testing
– Outbound logistics - store and distribute to the market incl. order processing, vehicle scheduling
Value Activities
• Primary Activities– Marketing and Sales - activities associated with
providing a means by which buyers can purchase the product e.g. advertising , selling, merchandising, promotion
– Service - installation, repair, spare parts maintenance, training
Value Activities
• Support Activities– Procurement - Purchasing inputs– Technology Developments– Human Resources– Infrastructure
A Company gains Competitive advantage when they perform these activities
•at a lower cost than the competitors
•in a way that permits diffrentiation
By analysing the value chain of the company we can see whether either the physical or information processing component of IS/IT can transform the value chain to the organisation’s advantage
The value activities are interdependent and connected by linkages. Linkages exist when the way in which one activity is performed affects the cost or effectiveness of other activities
Implications for IT
• Can IS/IT contribute to performing an activity more quickly or more efficiently or perhaps at a cheaper cost than before ?
• Can IS/IT improve information flow through the primary activities
• Can IS/IT be used to affect how support activities assist primary activities
The value chain is a valuable way of identifying where better information and systems are needed, especially to show where integration through systems could provide potential advantage over competitors (or reduce current disadvantage)
The Value System
• While IS/IT may be used in the performance of value activities or in linking these activities, the value chain of a firm is itself part of a larger industry value chain called the Value System
• The Value System is made up of our value chain, competitors value chain, supplier’s value chains and the customer’s value chain
Business Unit
Export distribution
channels
Suppliers of components
Distributors
Competitors
Agencies and distributors
SuppliersRM, CG
EndCustomers
Value and Demand Information
Cost and Supply Information
The Value System
Sales
Suppliers
I/b O/B Sales Ser
I/B
invoices
invoices
Customers
Tech. queries
payment
orders
Std returns
POs
Distributors
Excise, Tax
Linking Value Chains
SWOT Analysis
Strengths•High Labour Productivity•Industrial Peace•Access to technology•financial Stability
Threats•Competition from international players•New technologies•Labour unrest
Opportunities•Diversification into new markets•economic liberalization•Change in government policies
Weaknesses•Limited Product range•lack of R& D•Lack of skills for new prod. Identification•frustration at the lower levels
SWOT Analysis
• Based on the SWOT Analysis a company profile is developed
• SWOT analysis is expected to highlight the direction of desired changes
• SWOT Analysis provides the basis for the identification of Key Result Areas and Business Objectives
KRAs and Business Objectives
• Profitability– Achieve from our existing activities a net return on net
worth of atleast 20 %
– Earn in the next 3 years a PBIT of Rs. 500, Rs. 550, Rs. 700 crs.
• Diversification– By 2003 diversify into Services Business with a break
even
– By 2004 create an infrastructure for backward integration
KRAs and Business Objectives
• Systems Improvement– Ensure all systems for financial controls are in
place and uniform for all SBUs of the company– Implement a system for Customer Relationship
Management in the next 12 months
Critical Success Factor Analysis
• CSFs are the things that must go right for any business to achieve the business objectives in each area
• CSFs are related to the KRAs and the Business Objectives
• CSFs can be defined at the organizational level, SBU level, departmental or managerial level
Critical Success Factor Analysis
Overview• Purpose: to foster interpretation of objectives,
tactics, operational activities in terms of key information needs and the strengths and weaknesses of existing systems
• Very powerful, versatile technique• Widely used• Can be used at different levels of analysis
– industry level, organizational level, BU level, individual (see p. 187 W&G)
What are CSFs?
For any business, the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization (Rockart, 1979)
CSFs are the key areas where things must go right for the business to flourish!
W&G, p.186
Mea- sures
CSFs ?
Approach: CSFs are defined relative to business objectives ...
• Step 1: Identify and rank objectives• Step 2: Identify CSFs against each
objective– ca. 5-8 CSFs per objective
• Step 3: Consolidate CSFs across objectives, prioritize according to ranking of associated objectives, (develop measures)
• Step 4: Develop tactics• Step 5: Consider importance of
information or systems in achieving the CSFs considered
– e.g. By performing a SWOT analysis of existing systems against the CSFs.
Objectives? Priority
of CSFs?
IS Impor- tance?
That’s all folks