luftman chapter 2 part 1

5/22/2018 Luftman Chapter 2 Part 1

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; CHAPTER,A, j : ::&

IT Strotegy" Strategy is the craft of the warrior. Commanders must enoct the craft, and troopers

should know this Way."-Mryenaoro Musnsur (1584-1645)" If we do not learn from historlt, we shall be compelled to relive it. True, btrt if we do notchange the fttture, we shall be compelled to endure it, and that coLtld be worse."

-AlvrN TorpleR

Preview of ChoplerThe effective management of IT organizations in the dynamic businessenvironment of the 21st century demands that senior IT managers work withsenior functional (e.g., marketing, R&D, finance) managers to develop ITstrategies that are aligned with the firm's business strategy for sustainablecompetitive advantage. IT management must be continuously aware of theopportunities to transform the firm. The process for developing strategy mustdemonstrate the opportunity for IT to enable or drive business strategy, andoperational effectiveness and efficiency. This chapter will discuss the concept ofStrategic Alignment as the key framework for creating effective IT strategiesand review in detail the steps management should consider in creating alignedIT-business strategies. Alignment addresses both how IT is in harmony with thebusiness. and how the business should. or could, be in harmony with IT.

Whol we willexomine in this chopler:* The influence of the 21't century business environment on IT strategyffi Some definitions of strategy in general. and IT strategy in particular& The role of IT strategv in your firmK The concept of Strategic Alignment and the Strategic Alignment ModelK The processes and considerations involved in developing an IT strategy

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Introduction H zs--l lnfuoduction

ement plays a pivotal role, as they haveacross functional and process Uorrrau.i"r.ternal partners and customers. In this role,IT technologies can be integrated into thetechnologies and architect uresal and strategic plansre discussed, and

corporate-wide implications.5 es of the technologies in question and theerstand that alignment is about the evo_I and how the organization can lever_process that is enabled or inhibited bv aday. Recent research into the iu"toru iiu,

Inhibitors12J456

Senior executive support for ITIT involved in strategy developmentIT understands the businessBusiness-IT partnershipWell-prioritized IT proj ectslT demonstrates leadership

ITlbusiness lack close relationshipsIT does not prioritize wellIT fails to meet commitmentsIT does not understand businessSenior executives do not support ITIT management lacks leadership


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;; 1e6oy's Business EnvironmentTo better understand why the alignment of business strategy and IT strategy is criticnot just for competitive advantage, but for business survival. organizations needunderstand the forces that shape the business environment. Today's business enviroment can be best characteized as one of increasing globalization. increased competive pressure, frequent mergers, rapidly changing technology, and evolving patternsconsumer demand. Change is now the norm rathel than the exception. Organizatiomust learn to quickly adapt to these changes or face extinction (at worst) or assimition (at best) by competitors who can emerge anywhere in the world. In short, the prdictability of the business environment has dramatically declined while its complex(the number of connections to other organizations) has simultaneously acceleratdue to the proliferation of technology and its ability to enable netu,orked organiztions and individuals.

Competitive advantage in this turbulent environment is no longer about havithe best products or the lowest prices, but about having:. IJnsurpassed relationships with one's customers and supplierso Unique and adaptable business processeso The ability to harness the information and knowledge of the firm's employees tocontinuously create new, hard to duplicate products and serr.icesOrganizations need to become "change leaders" merely to survive in the 21't cetury business environment.l

'Zb taaa CHAPTER 2 IT Strategycan ultimately co-adapt to changing circumstances. IT strategies that focus merelytechnology and ignore the partnership and communications aspects of the business-relationship inevitably fail. Alignment is an ongoing process.

;; Strotegy-o DefinitionThe word strategy is derived from Greek, where it means "the art of the general." Unrecently, even in the English language, strategy was a military term. It has only besince the 1960s that the business world has adopted the term.Strategies are business decisions taken at particular points in time by differepeople in response to sets of perceived environmental factors. Strategy is about makinchoices that include:. The selection of business goalso The choice of products and services to offer. The design and configuration of policies that determine how the firm positionsitself to compete in its marketso The appropriate level of scope and diversity (e.g.. specialization)o The design of organization structure, administrative systems. and policies used to

define and coordinate workThe integration and coordination of the choices make them a str ategy. Integratioand coordination of the choices is key to survival of the enterprise.6 In essence,organization's strategy reconciles how to apply its resources for maximum impaagainsl its competitors.Another definition of strategy is offered by Drucker: "Every organization operateon a Theory of the Business-a set of assumptions as to what its business is,


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Strategy-a Definition ffi27{lil:EE,S$8a'AA FIGURE 2.I - Visioh; M ss on1 qnd stfategi'

Analvsis

Mission (What)

objectives, how it defines and measures lesults. who its customers are, and what its cus-tomers value and pay for. A business strategy converts lhis Theory of the Busine'ts intoaction by enabling an organization to achieve its goals in an increusingly unpreclictableb us ines s env ir onment."1The formulation of strategy can be thought of as having three key elements-vision, strategy, and mission-.*n of which has an important relationship to time andthe level of analysis required to articulate each element (Figure 2-1):

1. Vision (,,where Do we want To Go?"). Effective strategies begin with the cre-ation of a vision-a concise, measurable statement of where the company wantsto go and what it aspires to be. Ideally, this vision should be clear, compelling, and"""iting to everyone in the firm. There is ample research to show that visionary"o-puni"r-companies that are widely admired in their industry groups for hav-ing made a sustained significant impact-have substantially outperformed theirp"""r, in the ratio of cuilulative stock returns to the general market' Some excel-ient examples of visionary companies include Wal-Mart, Amazon, GE" Dell.cisco. Miciosoft, and SABRE to name but a few. visionary companies often use

How Important Is "The Yision Thing"?Although the concept of creating and nurturing a corporate "vision" may seemto be aiademic, it ii instructive to note the response of financial analysts toAT&T's recent strategic woes that have led to the proposed sale

of its BaskingRidge, NJ corporate f,eadquarters facilities, its failure to develop DSL servicesaftei accluiring Northpoini Communications in early 2001, potential layoffs of30% of the stalf of some business units, and the announced sale of its broad-band cable facilities.Said one industry analyst: " Michael Armstrong (AT&T's CEO) does not havea clear vision that is able io be executed for the long haul. He may have a cLearvision qt times, but it's very short term ... we had no faith in the fulttre direction ofthe firm."7o

Time


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28 s ,x q CHAPTER 2 IT Strotegytheir vision-*hn1,,*. call ,,BHAGs,, (short for ,,Big Harrand plonounced ,,bee_hags',)_to stimulate progress anhallenge people to achieve lomett irrg tney may have inttiall

fi T"r.ilJ. X- e GE, ra ck we r ch e s t a b r is h e rl ;l,ffi ffiT l?l'J:,:?l:. :ffi :li,lrtn. "Besome #I or #2 in every market we serve and"; "t:?iJJtll:""::l' company ro have the speed and agirity of a smali enterprise,,

:,1,:'Ji: #', #]lt',, "-.,, s t o ckh ord _prrseals

n decision makinginitiative and allernatir e responsesCommunicable: Is easy to communicate; can be successfu'y explained within fiveMeasurable: Stakeholders will crearry see that they have attained the eoar

Some Real-Life Examples of Visions For IT StrategyExample I:o Anyone can get anyany time, un))*h.r", :.ii:-1' "1 gl"bal level) at. The end user does n currty constraintsof the data. Maintain data in only one master place rvithin tt " orgurrirutio,. Implement systems to enhance "ni rr", productivity' Systems are able to support competitive business demands with immediateresponse to quickly changing business needs' Information Systems adds aiompetitive edge to the company,s product lineExample 2:e Have delighted customers (users)r Proactively address business needs. Provide competitive advantage to the company' Be recognized in the industry as a world-clu* iofo.-ution Systemsorganization' Have Information systems employees with a passion and commitment,p"opJ: who cary rhe fire and lbve their job. Provide enterprise_wide business solutions


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srrategy a i,telinition ffi 29r Flave a superior functioning team. Simplify, standardize, automate, and integrate

Example 3: We will have Business Systems that:. Take advantage of global "sameness". Are purchased whenever practicalr Have integrated data that is entered only oncer Provide consistent definitions of information. Support functional and cross-functional business processes. Deliver the right information, at the right place, at t]ne right time, in the rightformat. Are flexible enough to support changing environmentso Can be accessed by office, home, and mobile workers. Provide capabilities to external customers and suppliers

2. Strategic Objectives ("How will we achieve this vision?"). Strategic objectivesarticulate how the vision (or BHAG) will be accomplished over the time periodidentified in the vision. Effective strategies use mechanisms of phased implementa-tion or checkpoints to allow for "midcourse corrections" and also incorporate mea-surements or benchmarks to check the effectiveness of the strategy and its imple-mentation. Most importantly, an effective strategy is aligned with the mission andcore values of the company and provides the "architectural bridge" between themission of the company and the vision. The elements of the strategy architecture willbe described in the section of this chapter titled "The Strategic Alignment Model".

Some Examples of Strategic Ohjectives Developedby Different Companiesr Implement solutions in partnership with the business units. BusinessSponsor and Champions each project (business-requested project, not infra-structure projects) by business management to ensure that business issuesdrive technical solutions.. Align information systems projects and priorities with business prioritiesand direction. Likewise, the strategic direction of the company will detsr-mine the strategic direction of Information Systems. Provide responsiveness and flexibility to address changing business require-ments rather than simply utilizing technology. Meet external customer requirements and assist in solving out customers'business issuesr Maximize productivity and reduce costs throughout the businessr Provide real information for business decisions (as opposed to endlessamounts of data). Information must be available anytime (24 hour access),anywhere in the world, in any way (flexible forrnats), for any one (withsecurity). Support worldwide information requirements and business objectives

3. Mission ("What are we?"). Strategy formulation is not a single step or a stand-alone process, but begins with the mission of the IT function, the reasons the ITfunction exists. A mission statement for Information Technology is a concise


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JU grrr CHAPTER 2 lTSrnzreg.tstatement of what business the group is in. It is a statement of why theInformation Technology group exists and the purpose and function it providesfor the company. The company mission should be reviewed to identify ideas orthemes for the IT mission. The mission of fhe company defines why it exists, whatits purpose is, and what its core values are. These core values are relatively stableover time and provide an undellying system of shared beliefs and principles thatguide the behavior of the organization as a business entity. IT strategies that areformulated that are inconsistent with the mission or the core values of their com-pany run a very high risk of failure.9

To realize business value, an effective business strategy coordinates the choicesmade by management that address the "fit" of these choices to the external envi-ronment and aligns these choices with its internal processes, organization, resouroes,and competencies (including technological competencies). Effective business strat-egy is also not static-it must continuously change to reflect changes in the businessenvrronment.Some Examples of Information Systems Missions Developedby Different Cornpanies. "The mission of Information Systems, in partnership with the businessunits, is to facilitate the availability of timelv and accurate informationneeded to manage the day-to-day and strategic direction of the com-pany by the deployment of systerns and tools. This inforrnation lvillassist the company in achieving its objectives and becoming one of thetop-ten in the marketplace"r "The mission of lnformation Systems in partnership with the businesscommunity is to develop, implement. and rnaintain worldwide businesssystem solutions that provide securg collection, storage, and access toinformation. We will accomplish this by matching the business require-

ments with the appropriate technology". "The mission of Information Systems is to develop, implement, andmaintain high-cluality efficient and effective business systems that pro-vide the information needed to support the daily operation and strate-gic business direction of the business at a level supelior to the competi-tion with customer satisfaction as the end goal"o "Our mission is to facilitate improvements in operating efficiency andeffectiveness by deiivering worldwide integrated trusiness systems andservices. We will drive or enable business strategies to ensure that ourcontributions provide the highest value to the corporation"

;?; tt StrotegyIT strategy is therefore a set of decisions made by IT and functional senior manage-ment that either enable or drive the business strategy. It leads to the deployment oftechnology infrastructure and human competencies that will assist the organizationin becoming more competitive. IT strategy must be concerned not just about tech-nology choices, but also about the relationship of technology choices to businessstrategy choices. The selection of appropriate technologies can, in many situations,have substantial influence on or even drive the transformation of the businessstrategy. As will be extensively discussed in the chapter on "The value of IT"


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IT Strategy ;ffi 31(Chapter 14), it iS not the technology alone that brings these benefits. It is the busi.ness processes that are changed Uy ieveraging information technology that providethe business value. Thal ir *nv a stiong tt-business partnership is critical' Neither ITnor the business can do it alone' Their strategies must be aligned'

Wal-Mart Integrates Its Yalue ChainDiscount giant Wal-Mart has developetional efficiency between itself and itswants to do trusiness as a supplier to Wfor electronic information exchange' Thitive advantage over its rivals' In responsand GE Lighting decided to coordinate thethesevendorsreceivedailysalesinformationabouttheirproductsineachstoreand, in Tesponsel "ao contin'ously replenish Wal-Mart,s shelves with their prod-uctsonan,.as-needed,,basis.In-turn,P&GandGE,LightingsupplyWal-Martwith electro'i" ,rrilfing and billing information. Both parties henefit from thisarrangement:

1. Inventory costs are lowered for P&G and GE Lighting2. Wal-Mart needs fewer staff to handle invoices and shipping3.Wal-Martisassureditssupplyofproductisalwaysontheshelfforcustomels4. Wal-Mart', ".,,io,,'"" "utt t"up ihe savings passed on thanks to the opera-tional efliciencies

Source: Davenport. T', "Information Ecology"l l

ThedevelopmentofanalignedlTstrategyiscriticalintoday.sbusinessenviron-ment for several reasons:1. Regardless of whether the businessbusiness is information-based' Infonizations with their customers, suppeffectivelY comPevolving needs.with their suppli Baxter Healthcare) candramatically im position these firms toeater the organization's

e external environment (i'e', its customers'ng itsbusi-es for

2. The ubiquity of IT in manufacturing anthe market ""1;; ;i;hysical proJucts and processes less important ha.n theknowledgeandinformationembeddedinthem'Thisphenomenon,called..dema-terialization,,, describes a situation that faces all firms today. Competitors canemerge tro- uny fart of the globe' thanks to the presence of microprocessorhardware urra ,oit*u.", and ne-tworks. Even third world countries have access to


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3l2ffi cHAPTER2 IT Strategyinformation technology. making it more important than ever for firms to

overnight delivery and reliability'

Cisco Becomes'5Net Ready" for Competitive Advantage

sorrrce: Hartman and Sifonis. Ne t Ready-strategies for' success in the E-conom-v' McGraw


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IT Strategy ;;? 334. Business processes are coordinated activities that involve people, procedures, andtechnology.la Organizations make choices about which parts of their operations(i.e., processes) they will handle internally and which processes they will out-iorrr." according to one theory of why firms exist.ls Make-or-buy decisions arecentral to the formulation of strategy as they affect not only the internalprocesses an organization chooses to focus on, but also the external partnershipsind alliances it will need to outsource. The costs associated with coordinatinginternal activities (processes) can be dramatically reduced by the deployment ofIT because of its ability to bridge large distances and reduce the number ofprocess steps and personnel. The coordinating potential of IT is evident in collab-orative groupware technologies, knowledge management portals, and the grow-ing use of data interchange technologies. See the sidebars on Cisco, Wal-Mart'

and Baxter for excellent examples of how the coordinating power of IT can beleveraged for competitive advantage.lT ond Business Tronsformotion

Baxter/American Hospital Supply Set The Standard for Coordinationfor Competitive AdvantagIn the mid-1970s American Hospital Supply Corporation (AHSC) introducedthe first system that allowed its hospital customets to electronically order sup-plies by telephone.This system, called'ASAP," allowed hospital purchasing man-igers to enter orders try touch telephone. As ASAP evolved, purchasing man-agers could directly enter orders into AHSC's computers through terrninals, PCs,oi th"it own mainframe computers. ASAP automatically reserved inventory andgenerated packing lists for each customer. AHSC managed to achieve significantidvantage over its competitors, thanks to the customized information flow gener-ated via ASAP.In 1985 Baxter Tiavenol acquired AHsc and partnered with GEInformation Services to ueate a new version of ASAP that became the forerun-ner of Web-based e-marketplaces for medical supplies.ASAP has now evolved tothe point where many of AHSC's former competitors now participate in what hasbecome an electronic infrastructure for the hospital industry. Baxter's IT strategyhas deliberately focused on the value of the information related to each interac-tion with the customer, to the point where Baxter provides services to hospitalsto manage their Own inventory ("vendor-managed inventory") because Baxterunderstands the needs of the customer better than the customers themselveslThrough seryice excellence, Baxter has also raised the costs to the customer ofswitching to another service to an unacceptably high level'

In the formulation of an IT strategy, Information Technology can drive businesstransformation as well as enable transformation. The evidence that IT can transformbusiness has been amply documented .z'r2'74,1'7 In the role of transformation driver lheIT strategy becomes the business strategy; offering novel and competitively differenti-ating ways of doing business. In its role as transformation driver IT can create and""ptoit new markets, link customers more tightly to the firm, and define new standardsof operational excellence for the industry. Examples of firms that have used IT as atraniformation driver (in this case, Web-enabling their businesses) include Dell, Cisco'and Amazon.com-all of whom have established the operational process "bar" over


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^.-

J4 ssrr CHAPTER 2 IT Srrategywhich all potential competitols must now lump to even consider competing imarkets' Another. earlier example rf IT as a transformation clrir ,-r is theGroup-formerly the American Airreservatron system for American Aiinformation from other airlines eventbooking system for the airline ancl trwhere the value of its information conexceeded the value of American's flwas formed as a company independelished as an industry standard.In its role as an enabler of trand processes. span organization s to lnterconnectbridge geographicar disrances can :T:ffil#:r.qe a critical supportinu role in the impleAn excellent example of IT as an enaof IT to track packages: supporting its rvernight package deliver-l This process in

s evere comp etitive dis advantage. An othel 3Hffi i: :i?rf lj :H,?"t::i::'ffi1LISA Today's use of new communications technologies anJ graphics infomationnow a national nervspaper. L-S,1 lodnl, @ucing, printing, and distr.rburins a dail- nership through the deplor ment;f IT.hibitor to business transformation. Thistion occur.s through several mechanisms:t When the IT strategy is not alignerl with the business strateg\'tJust as sound bumust take into acco tionin_e in the marketpinternal arrangemegy must arso renect t;'::'J,:l:,':iir:ffifconfiguration of its ernal IT infrastructure and architecture.lt over-emphasis by IT management.ancl business managetlletlt ort tecltnology:misdirect the focus of transfolmation away from chan"ging ancl transJormingcal busines_s processes to the implementation of technJlo-ey infrastr.ucture forown sake' Part of this is due to communications issues betrveen the differenttures" of management. Schein believes that there are three "sub-cultures of magement" in companies that each have their own pelspectives on how the firmoperates and how it should be run:1et The "executive" culture is focused on maintaining an organization,s financhealth and deals with boards of directors, investois, and markets. The ,,exective" culture is focused outside the organization and as they are promotedroles of increasing scope. they become more impersonal, seeing people as acost rather than as an asset to the organization.' The "engineering" culture represents the people who work with the varioustechnologies of the organization and howihoie technologies are to be usedEngineers, whose focus is outside the organization, share common educatiowork, and job experiences. The "engineeiing" culture tries to clesign humanout of any business processes ancl sees them as a source of potential error.t The "operator" culture evolves locally in an olgani zationor business unit ais based on human interaction. Their focus is in"ward-towards each other-rather than outward. The "operator" culture believes that it best understandthe "real" workings of the organi zationand may use their learning ability tothwart management's efforts to improve productivity. These cultures often


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Srraregic Alignmenr ffi 35don't communicate well and frequently operate at cross-purposes. Davenportalso points out that companies also tend to focus too narrowly on technologywhen trying to manage information.ll. Failure of IT and business management to recognize that effective use of ITrequires business process change: leading proponents of IT's value as an enablerof transformational change also stress that sustainable competitive advantage isonly achieved when IT is used in conjunction with business process change.2, 11 It

is important to also remember that business process change includes changes tothe human component of processes: E Slvqtegic Alignmenl

EA{,CA'AAr{tgg

The concept of strategic alignment stresses the harmoniiation of the goals and imple-mentation plans of IT with the goals and organizational structure of the business. Since1985, one of the major concerns of key business leaders has been the alignment of busi-ness goals and IT goals. Today's IT executives must concern themselves not just withtechnology, but also must understand the strategic goals of the business in a dynamicand uncertain environment. IT executives must also understand how their organiza-tions are positioned within an equally dynamic and uncertain technology marketplaceso that their choices of technology support the delivery of services and products to sup-port the strategic choices of the business that will enhance competitive advantage.Strategic alignment refers specifically to the coordination of an organization's externalbusiness and IT goals and its internal business and IT organizational infrastructures.Earlier in this chapter, the integrative and coordination characteristics of strategy wereintroduced. Strategic alignment specifically addresses the processes of coordinationamong the internal and external domains of business and IT. This chapter emphasizesthe importance of the Henderson-Venkatraman Strategic Alignment Model20 (seeFigure 2-2) as an architecture for the formulation of a viable IT strategy.

BusinessBusiness strategy

ITIT strategy

, TechnologySCODC,r', r r--\SYstemic lr g.overnancecompetencres

Organizational IT InfrastructureInfrastr cture Functional integrationHenderson, J.C. and N Venkatt tman, Strategic Alignment: Lever ging Information Technology forTransforming Organizations.IBl Systems Journal, 32(1). 1993.

IT Infrastructure


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36 6 a a E CHAPTER2 IT Strategy;; 511qtegic FitThe concept of strategic alignment is based on two fundamental assumptions:

1. Strategic Fit. Any strategy must address both the external enr ironment ainternal environment of an organization. Strategic choices made to addressenvironments (or "domains") must be consistent-they must "fit" each othethey must be dynamic; that is, the strategic choices must be ones thamenable to change. The external domain is concerned ri'ith those strchoices and decisions that relate to:a. The Scope of the Firm's Business. Its customers, products. markets, acompetitors. As an example: for USAA, its customers would be currenformer U.S. armed forces officers and warrant officers and their depenits products would include life and property and casualty insurance. ba

services, financial (asset management) services, various bu,ving servicesautomobiles, jewelry, etc.); its markets would be U.S. armed forces persstationed anywhere in the world; and its competitors would include finservices companies such as Prudential, Tiavelers, and Met Life.

b. The Distinctive Competencies. This includes both the core competeand critical success factors that provide competitive advantage. Core ctencies are those activities that differentiate the organization from itspetitors. It is the reason why customers choose a particular organizationits competitors. It is why competitors fear another firm. Critical success fdescribe those activities the organization must do to succeed.Again, as an example, USAA's unparalleled knowledge of its policyers and its ability to integrate this customer knowledge across its producto provide seamless and reliable service to policyholders at all times atinctive competencies. Its customers have consistently rated USAA amomost esteemed companies for decades. This is due, in large part, to its ustanding of the culture of its customers (i.e., military servicemen and woas well as to USAA s ability to not merely respond to. but anticipate cusneeds (e.g., a policyholder's dependent turning 16 years of age will pUSAA to ask if the dependent needs auto insurance coverage), thanks todistinctive competence in the use of technology.c. The Governance of the Firm. The impact of regulatory agenciesstrategic choices, how and who makes decisions regarding strategieplans, and how its partnerships and alliances are managed are all impconsiderations.

Governance is becoming increasingly important as companies palliances and partnerships to obtain additional competencies and capabiliticompetitive advantage (e.g., Ford Motor Company is aggressively pualliances with Internet portals such as Yahoo and AOL to boost its onlinsales). Companies that are in highly regulated industries such as pharmaceand healthcare can, in turn, be strategically constrained by regulatory rements or changes to existing regulations (e.g., the federal regulations govelectronic signatures and records in the pharmaceutical industry can imposstraints on the choices of technologies available to IT managers).These external concerns are reflected in the Strategic Alignment(Figure 2-2).In contrast. the internal domain is concerned with choices and decabout the firm's:


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The StrategicAlignment Moaet ffi 37o Administrative (organizational) structure. whether the firm has chosen aunctional, matrix, decentralized.structure or some forcussion of the typesdents are referredture, Design andTheory and Des. Critical Business processes. Theties or tasks; that is, those activitie(e.g., marketing, R&D, manufactu

Theanageon advanced degrees ,""*:i,.," :Xfi::l']::accordingly varu-e these skil[ ;h cs and willresource activities f. g , ,""r"iti"g, her humanassessing) are also conlsidered. on, culture,2. The Dynamic Nature of strategic Fit. A firm,s competitors will eventually imi_ate any strategic choice, thereby rendering t.-po;;;if competitive advan_age obtained from a specific technol


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JU : r I g CHAPTER 2 IT Straregyor office productivity software (e.g., the Microsoft Office suite). Similarlysuite of critical applications should include those that har e a direct impafocus on the critical dimensions of competitive positioning: customer intimproduct excellence, or process excellence. An example of a critical applicasuite would be the customer order management, warehouse management.invoicing systems that Amazon deploys to manage orders from its customersb. Systemic Competencies. Analogous to a firm's distinctive business compcies, these are technology capabilities (e.g., connectivity. customer informathat can have a major positive impact on the execution of the firm's busstrategy or support ongoing initiatives. For USAA, its competencies s ith reto interconnecting customer information databases for seamless access b1'serepresentatives to work with policy holders exclusively b1, telephone provUSAA with a critical competitive advantage. Systemic competencies arbedrock upon which strategic options should be founded.c. IT Governance. Analogous to the choices of business strategic allianceexternal relationships (e.g., vendors and consultants), these are choices andsions about the relationships and alliances that will be pursued to obtain kecompetencies. IT governance also determines how decisions are maderespect to the prioritization of IT initiatives and how funds are aliocated toinitiatives. For example: the establishment of a Steering Committee u ith busand IT management representatives to prioritize IT initiatives is a fairlv comform of IT governance in many companies. Although often or-eriooked as acal component of IT strategy, the establishment of effective IT governance manisms is a prerequisite for consistent decisions about the deplovment of ITthe formulation and implementation of IT strategy. The topic of IT governwill be extensively covered in Chapter 11.As with the internal domain of the business, the internal IT strategv domain

cerned with decisions and choices that affect:a. IT Architecture. The principles that guide choices and decisions abouselection of technology (hardware, software) and infrastructure as wethe structures and models used to define data and information. networks, a

cations, and systems. These principles drive the creation of policies and standthat govern technology infrastructure choices and are analogous to the chmade by the business with respect to its administrative structure. For examCisco and Dell decided that the IT architecture for their own systems-inclutheir internal administrative systems such as payroli-would be based oInternet.b. IT Organizational Processes. The activities and tasks that are critical toperation of the IT organization such as systems development or IT opera(e.g., data center) management. These activities are analogous to the criticalness processes that define and support the strategic initiatives and identity ofirm. The 38 IT processes are covered in Chapter 5.

c. IT Skills. The acquisition and development of the people needed to maoperate, and design the IT infrastructure of the firm. This is analogous tfirm's key business skills. Other human resource considerations, specific(e.g., hiring, firing, retention, training, assessing) are also considered.

These twelve components of strategic alignment are summarized inTable 2-2.It cannot be overstressed that, in its formulation of an IT strategy, IT managneeds to be concerned with both the external and internal domains of strategic aligIT strategy has traditionally focused only on the internal domain of IT infrastructu


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Fun c ti on al In te gr at i on ffi39TABLE 2-2 Stroteg omponenls3I. Business StrategY1. Business Scope Includes the markets, products, services, groups of crtstomers/clients, andIocations where an enterprise competes as well as the competitors and potential competitorsthat affect the business environment.2. Distinctive Competencies The critical success factors and de afirm with a poteniial competitive edge. This includes brandproduct development, cosl and pricing structure' and sales3. Business Governance How companies set the relationship between management,stockholders. and the Uouia of directors. Also included are ho* the company is affected byt-"-"in-""t iegulations, and how the firm manages its relationships and alliances withstrategic Partners.II. Organization Infrastructure and Processes1. Administrntive stucture The way the firm organizes its businesses' Examples-include ,centralized. decentralized, matrix, horizontal, vertical, geographic, federal,

and functional'5. processes How the firm's business activities (the work performed by employees) operateoino*. Major issues include value added activities and process improvement.6. Skilts H/R considerations such as how to hire/fire, motivate, train/educate, and instillcorporate culture.III. IT StrategYTTechnologyScopeTheimportantinformationapplicationsandtechnologies.8. Systemic Competencies Those capabilities (e'g., access to information.that is important tothe creation/achievement of a company's straiegies) that distinguishes the IT services'9. IT Governance How the authority for resources, risk, conflict resolution, and responsibilityioi f1' r. shared among Urrii.r".. pu.in"tr, IT management, and service providers' Projectselection and prioritization issues are included here'IV. IT Infrastructure and Processesl0.Architecture Thetechnology priorities, policies, and choices that allow applications'soft*ur", networks, hardware, ind data management to be integrated into a cohesiveplatform.11. Processes Those practices and activities carried out to develop and maintain applicationsand manage IT infrastructure.

12. Skilts IT human resource considerations such as how to hire/fire, motivate, train/educate'and culture.'zaaaag$e3

processes and the components of thesimperative of an outward-looking focbusiness and IT marketplace. Tiaditionto meet the needs of business. Another, relMaturity Assessment Model (discussed in the next chapter)-will be referenced withregard to mechanisms of IT strategy implementation capability'3

E Sunclionql lntegrolionA second, and equally important dimension of strategic alignment is the concept offunctional integration. fdeatty, the choices made in the IT strategic domain will shapeand support thJ business' strategic choices. Given the potential of IT to offer competi-tive business advantage, the linklage among the externally focused choices made by IT


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{[f arrr CHAPTER 2 IT Strategymanagement and the strategic choice made by senior business management needs tobe explicitly accounted for. In the Strategic Alignment Model, the link"age between theIT strategy domain and the business strategy domains is called strategic integration.In similar fashion, the internal domains of business and IT.r""J to be integratedsuch that the capabilities of the IT infrastructure support the requirements and expec-tations of the business' organizational struct.,.t" und p.ocesses. This level of linkage iscalle d o p e r ati o nal int e g r ati o n.Figure 2-2 illustrates the Strategic Alignment Model and the relationships amongthe domains of strategic fit and functional integration. Ideally, any IT strategy planningprocess needs to take into account both these dimensions.? Plonning lT StrofegyThe objective of the remainder of this chapter will be to describe a process that can beused by IT management to envision and plan an aligned IT strategy. The process isheavily grounded in the concepts underlying the Strategic Alignment model and hasthe objective of providing the tools and techniques to assist IT Lanagement in formu-lating an IT strategy that can enable or drive the transformation of the business. As anaid to students, Appendix A of this chapter includes a case study of a fictitious financialservices organization. This case study will be used in this chapter and the chapters onStrategic Alignment maturity and IT governance to illustrate how to use the frame-works and concepts discussed in these chapters.At a high level, the model in Figure 2-3 describes the IT strategy formulationprocess using the context of the Strategic Alignment Model framework.At a high level, the IT strategy formulation process can be described as asequence of activities that transforms the current alignment state to the envisionedfuture alignment state. The future alignment state hai the required condition that itenables sustainable competitive advantage. In addition, the benefits obtained fromthis envisioned future state of strategic alignment must be amenable to measurementin business terms.The process of transforming the firm's state of strategic alignment-and the con-sequent formulation of IT strategy-is done through the foil&ing set of activities,some of which are iterative. It must be stressed that these activities require the activecommitment and participation of senior business and IT management to be effective.One important precondition for success before using these techiiques, however, is thatfirms should have developed or be in the process of developing a vision and strategythat defines and communicates where the firm is headed. tcteaity. the creation of thisvision and strategy should involve the IT organization and its senior management.Organizations that actively involve IT staff in the development of a vision and itrategyfor future markets, products, and services strengthen the degree of strategic alignmeltamong business and IT and better prepare their firms for acceptan"" of th. p.o""r,innovations that must necessarily follow in order to successfully compete in ioday,s

turbulent markets.l4' 3;; lt Strotegy Plonning Activities1. obtaining An Executive champion/sponsor. It cannot be emphasized toostrongly that the sponsorship of a senior executive is essential to the successfulformulation of IT strategy. The first step in the formulation of a viable IT strategyis obtaining the sponsorship of a senior business executive for the effoit(Figure 2-4). Establishing harmony among IT and business strategies is a key


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,^-42 tttz CHAPTER2 lTSrraregvzaaq,{9.ac , f -GURF 2:'lbtglning on Execulive Sponsor/ChqmFion:

7objective of the firm; h_aving the right senior executive sponsor is essential forsuccessful IT strategy formuration. Ideally, the champio;;p;;r"r- should havemany of the following attributes;

' The Long view: An in-depth understanding of the effect the change willhave on the organization' sensitivity: The capacity to fully appreciate and empathize with the personarissues major change raises' scope: The capacity to understand thoroughly the size of the group to beaffected by the change


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IT StrategY Planning Activities-

t^zrea 45

tives. They typically are the source oensuring cross-organizational change2.FormingtheTeam.ITmanagementshouldformateamofseniordecision-makersfrom the "orp.** ii Jnd (if applicable) business unit IT organizationsas well as senior b;;;;;t managemeniito* the business units. Minimally, thecorporate clo and ,;;;;;*" diiisionalor business unit cIO's should be part ofthis team. tt is atso siri.rgty ,""o*mended that the team include the corporateSystemsarchitectifthe.).lstructureaccommodatesthisrole.Itisstrongly recommended constrained in size to about a dozenmembers for effectiverl I the team and the sponsor/championmust quickly establish a joint unders ing and commitment to the goals andobjectives of IT strategy formulation3. Describing the'.As'Is" State' Thisfirm in terms of the comPonents oFigure 2-5 and Table 2-2)'The'As-IUolfr tne business strategy and organ

as well as the domains that pertain to tinfrastructure and processes)' AnFinancial Resources Managementment firm) is provided in the examplbar earlier in this chapter titled' 'Standard for Coordination for Compe-titive Advantage'"The.As-Is,,becomesabaselineforseniorbusinessandlTmanagementforarticula [.?tl:well as usiness'As-Is" ed. Forand ITexample,ITgovernanceisacomponentofstrategicalignmentthatisveryimpor-tant to the effectJe "r"".,tio' of an aligned IT'strat-gy, yet this component isoftenaSourceof.misalignmentthroughtheeffectsofcultureongovelnancemechanisms.


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44 z a e a CHAPTER 2 IT SrrategyS.daxaggzgaa , ll9URE 2-6,', p.erfiorming ihe sWoT inorris.

Ansoff product-market analvsis

The creation of the ,As_Is,,is bes

egy.ities is designed to generate a detailed

pany values and culture, lead to the creaIT strategy.The SWOT,s objective is to recom

)T,.-analysis is formed by two importantcomponents from the ,,as_is,' description of the fiim:

achievement of a company's strategies and that distinguish the IT services ofhe firm.Planning team on the strengths of the firm is essen-strategy, because these differentiatin g p o s s i bilities ofto generate sustainable competitiv; advantage. A


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IT StrategY PlanningActivni" ffi 45. Ability to control distribution of products. Abiliti to drive or influence industry standards. Ability to innovate (and continuously innovate)r Brand and reputationr Customer intimacy and customer knowledge. E,nabling of new strategies. First to market or proprietary productso Price and cost leadershiP. Proprietary technologY. Skilled employeesTlte,,Weaknesses,,componentofthesWoTanalysiscomesfrom,observationofthe existing business a d I:r%"J:"#:?iii:ii:l weaknesses (gup') wil arso

(the "To-Be" state) and th sor current state). As with sthat need to be recognized ate concerned with tho cpositioning and its uflti,y to compete effectively. Some examples of the weak-nessestheStrategicPlanningTeamneedstocataloginthisexerciseinclude:. Ability to withstand risk. AdequatelY trained staff. Change management. DecrJasing demand for products or services. Inadequate finances. Narrow product line (or a product line that's too broad). Obsolete products, facilities or processeso Poor brand image or qualitY. Poor skills. Price and cost laggards. Vulnerability to price changes or suppliers. Weak market share or distribution system. Weak management team om external

ey will influ-the Ansoffof IndustrYProfitability (see Figure 2-7 )'zt' zz

5. The ,,opportunit;rr; "o-porrent of the swoT analysis is completed by using theAnsoff Matrix-a modei that examines the competitive positioning of a firmbased on the relationship between new and current products (or services) in new

-/Ansoff product-market analYsis


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46 aeatSGgnagaa]ata

CHAPTER 2 IT StraregyFIGURE 2-8 The Ansotf Product/Market Motrix.

Presentmarket

Newmarket

PresentproducLMarketpenetratlon

1

Marketdevelopment3.

Neq'productProductdevelopment

2.

Diversification4.

Ansoff, I., Strategies for Diversification,Harvard Business RevieU September-October 1957. pp

and current markets. The Ansoff Matrix (iliustrated in Figure 2-8) is esuseful in examining growth strategies and becomes the starting point instrategy planning process for examining strategic alternatives and the eimpact of IT on these strategies.As seen in Figure 2-8, each quadrant of the Ansoff Matrix can be deas a different market positioning strategy for the company (Table 2-3)examining each of these market positioning strategies, senior IT manaand its business counterparts should consider the following questions regrowth strategies:r Where should we look for the next wave of profitable growth opportand where might they lead?o How should we select from the several different opportunities betoday?TABLE 2-3 Ansoff Mqlrix Positioning Strolegies2rMarket Positioning Strategy Strategy Objectives/ImplicationsMarket Penetration(current products, current markets)

Market Development(current products, new markets)

Product Development(new products, current markets)

Diversification(new products, new markets)

. IJse where there is still potential for anproduct/service in the current marketplao Deepen and broaden relationships withcustomers to sell more of what the orgacurrently sells to them. Taking existing products/services into ageographical or market sectoro Developing understanding of where exiproducts or services may meet the needcustomerso Useful for selling new products/servicesstrong existing customer base; Reintermo Anticipating the needs of the existing cubase by building greater customer intima. High risk.'new business' approach wherorganization does not have the strengthknown customer base or track record innew product/serr ice. Defining new markets or market nichesinnovative new products'aaae g3t ta


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I

FIGURE 2-9

IT Strategy PlanningActiriti,t ffi 47. What defines our business boundaries, and what is the measure of leadership

that we strive to attain?. Is it time to consider redefining fundamentally some of the elements of ourcore business, and how should we go about doing that?

E,ach quadrant of the Ansoff Matrix should be populated to comprehensivelyexamine strategic options available to the firm. As an active paltnel in establish-ing an aligned iT-business strategy, IT management must play an active, crediblerJ" in foimulating IT strategic options appropriate to each quadrant. To do this,IT management should use established credible methods, models, or frameworksto help guide ana stimulate thinking about various strategy options.Ai only one example of a strategic method or framework that can be used toexplore strategic options for the Ansoff Matrix, the "Delta Model"23 is especiallyur"frrl as a method that examines strategic options around the basis of how a firmcompetes-either through "Best Product," "system Lock-in," or "customerEconomics" (making it e;sier for the customer to do business with the firm)' The,,Delta Model" envisions these strategic options as the apexes of a triangle (seeFigure 2-9). Afirm's decision to position its business strategy close to a particularap"ex of the triangle (e.g., "Customer Solutions") will demand specific responsesin the domains of IT strategy and related IT infrastructure and processes that will"fit" the required changes in the firm's organizational infrastructure' For exam-ple, the firm's decision to position itself near the "Customer Solutions" apex ofth" D"ltu Model implies an IT strategy that will enhance linkages to customers-anticipating customer needs and working jointly with customers to develop newproducts and services that meet specific customer needs'IT strategies that enable this strategic positioning would be oriented towardsintegrated Sipply Chain Management ("SCM") and Customer RelationshipMariagement i;inlt"; or collaborative planning and forecasting using Web-based technologies. Supply chain transpalency (allowing customers to scheduleproducts on a "make to otier" basis) might be one outcome of this straJegic posiiion u, would vendor-managed invent rry allowing the supplier to manage thecustomer's warehouse and inventory, thus enabling the supplier to gain invalu-able knowledge about the customer's needs'

. ., :rr... tr.a: - ... ,. : : . .- .

Competition based on sYsterneconomics: comPlementor lock-in,competitor Iock-out, proprietary standard

Customer solutionsCompetition based on customereconomics: reducing customercosts or increasing Profits

Best productsCompetition based on Producteconomics: Iow cost ordifferentiated position

System lock-in

Soulce: Wilde and Hax, Sloan Management Review, Winter 1999


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48 ry CHAPTER 2 IT StrategyThe Delta Model is only one of many models, frameworks, and methods thatcan be used by IT management as tools to assist in the generation of possible ITstrategies. Some selected examples of other models and frameworks are includedin this text in Table 2-4 for reference, but the reader should recognize that theseare merely a fraction of the models available for use to address real-world strate-gic issues. Before using any model or framework it is recommended that the

model or framework be thoroughly researched from the original source (i.e., theoriginal book, research paper, or other source). Excellent sources of frameworksand models include peer-reviewed journals such as Sloan Management Review,IBM Systems Journal, Harvard Business Review, MIS Quarterly, CaliforniaManagement Review,Academy of Management Review, Communications of theAssociation of Information Systems, and publications of similarly high academicreputation. Books by respected management or strategy authors (e.g.. Mintzberg,Porter, Drucker, to name but a very few) are also excellent sources for frame-works and models that can assist the process of exploring strategic options.

FRAMEWORKOR MODELCLASSIFICATION(Business or IT strategyissue being addressed)

NAMEOFFRAMEWORKOR MODEL AUTHOR(S) APPLICA,BILITYBusiness Strategy BCG Matrix26 Boston ConsultingGroup

Porter

Strickland, ThompsonHamel

Hartman, Sifonis

Poirier

Hagel, Singer

Carnegie-Mellon,Software EngineeringInstituteGoleman

Allows a multidivisional organizationto manage its portfolio of businesses byexamining the relative market shareposition and the industry growth rate ofeach divisionIdentifying and thinking aboutthe fundamental ways in which anorganization may competeClassifies types of strategies by market " --,target and product focus iExamines the question ofwhether an organization canre-invent its strategyCategorize e-business strategiesby examining criticality to the business vs."newness" of strategy or practiceExamines internal and externalfactors influencing the evolution andoptimization of supply chains through fourstagesModel for building an e-businessbased on information as the principalgenerator of valueModel for integrating and maturingorganizational workforce practicesCharacteristics of Ieadership stylesin organizations and their impact

E-Business Strategy

Genericcompetitivestrategies2TTypes of competitiveadvantage beingpursued2SReinventing corestrategies29

E-Business valuematrix3oStages of supplychain optimization3l

Building aninfomediarvbusiness32'People CapabilityMaturity Model(PCMM)33Six leadershipstyles at a glance34

Human Resources

(continues on the next page)

luftman chapter 2 part 1

Documents

alignment of business

drive business strategy

firms business strategy

business survival

strategy developmentit

definitions of strategy

strotegy strategy

strategy mustdemonstrate