Business Strategy Concepts Lecture Notes

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