Making the Case for Networked Business Chapter 4

Making the Case for Networked Business

Chapter 4

Example of Industrial Economies of Scale

In the early 1900s, Ford Motor Company executives demonstrated that industrial technologies and management principles could enable the company to dramatically lower the cost and increase the output of cars in its assembly plants.

Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th

Edition, Irwin McGraw Hill, 2002

Example of Industrial Economies of Scope:

Because of the specialized nature of the technology and processes used, Ford Motor Company executives found that economies of scope were limited. The decision to introduce new products, like trucks, required that new plants be built. In fact, assembly plants were closed for several weeks each summer to enable new models of cars or trucks to be built in existing plants.



Network Economies of Scale and Scope



Source: A pplegate, L ynda M ., Robert D. A usti n, and F . W arren M cF arl an, Corporate I nformation Strategy and M anagement. B urr R idge, I L : M cG raw-H il l/I rwi n, 2002.

0% 20% 40% 60% 80% 100%% of Buyers/Sellers Involved in Market

Mar

ket M

aker

Val

ue-A

dd

ed

Market makers must capture 80% or more of a market to begin to generate value

Market makers are spending money, but not yet generating significant value.

0% 20% 40% 60% 80% 100%% of Buyers/Sellers Involved in Market

Mar

ket M

aker

Val

ue-A

dd

ed

Market makers must capture 80% or more of a market to begin to generate value

Market makers are spending money, but not yet generating significant value.

C hapter 4 F igure 4-3

D ave Perry’s V iew of H ow N etwork Economies E nable M arket M akers to C reate V alue

Source: A pplegate, L ynda M ., Robert D. A usti n, and F . Warren M cF arl an, Corporate I nformation Strategy and M anagement. B urr Ridge, I L : M cGraw-H ill/I rwi n, 2002.

PerformanceDrivers

FinancialResults

MarketResults

Revenue Drivers

Cost Drivers

I ntangible AssetsEmployee LoyaltyCustomer LoyaltyPartner LoyaltyBrand and I mage

Tangible/ Financial AssetsNet Working Capital Capital Expenditures (CAPEX)

I ntangible AssetsI nvestor Loyalty

C hapter 4 F igure 4-4

L inking Strategy to E xecution to Resul ts

A Scenario-Based Approach to Valuation

Step 1: Define the purpose for the value assessment Step 2: Pick a point in the future when you expect your business strategy to deliver value

Step 3: Analyze the business concept and strategy and forecast market size, your share, and revenues.

Step 4: Analyze the capabilities and resources required to reach the future state and forecast the cost of building those

capabilities and acquiring resources. Step 5: Based on this analysis, construct estimates of financial

performance and market value that reflect the "most likely" assumptions.



A Scenario-Based Approach to Valuation

•Step 6: Factor in the uncertainty in your assumptions by developing several scenarios that represent upper and lower bounds on key variables in your forecasts.

Step 7: When appropriate, validate your model by using alternative approaches, such as Discounted Cash Flow and Comparable Company Analysis.

Step 8: Discuss the value analysis scenarios you have constructed with others and critique the findings and assumptions—not just once—but on a regular basis.



The IT Business Value Score Card

Categories of Benefits

Goals and Measures

Internal External

Type I: Benefits from Investments in a Networked IT Infrastructure

Functionality and Flexibility

Improve infrastructure performance; increase the functionality and range of strategic options that can be pursued

Sample Measures: Decrease the cost / improve the performance of internal IT operations; new IT applications to be created at lower cost, in less time, and with less risk; expand the range of internal IT initiatives

Create an efficient, flexible online/offline platform for doing business with customers, suppliers, and partners

Sample Measures: Decrease the cost / improve

the performance of doing business online; decrease the time, cost and risk of launching new online business initiatives;


Categories of Benefits

Goals and Measures

Internal External

Commerce Improve internal operating efficiency and quality

Sample Measures: Internal process performance and work flow improvements; cost savings or cost avoidance; increased quality; decreased cycle time

Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channelsSample Measures: Supply chain or distribution channel performance improvements; cost savings or cost avoidance for the organization and its customers, suppliers, or partners; decrease time to market or just-in-time order replenishment; enable new channels to market and/or extend the reach and range of existing channels


Categories of

Benefits

Goals and Measures

Internal External

Content / Knowledge

Improve the performance of knowledge workers and enhance organizational learning

Sample Measures: Enable individuals to

achieve and exceed personal performance goals; increase the speed and effectiveness of decision making; increase the ability of the organization to respond quickly to threats and opportunities

Improve the performance of knowledge workers in customer, supplier, and partner organizations; add “information value” to existing products and services; create new information-based products and services

Sample Measures: Provide information to customers,

suppliers, and partners that enables better decision-making; charge a price premium for products and services based on information value-added; launch new information-based products and services; increase revenue per users and add new revenue streams


Categories of

Benefits

Goals and Measures

Internal External

Community

Attract and retain top talent; increase satisfaction, engagement, and loyalty; create a culture of involvement, motivation, trust, and shared purpose

Sample Measures: Length of time to fill key positions; attrition rate, trends in hiring and retaining top talent (over time, by industry, by region)

Attract and retain high quality customers, suppliers, partners, and investors; increase external stakeholders satisfaction, engagement, and loyalty

Sample Measures: Customer, supplier, partner satisfaction and lifetime value; average revenues per customer and trend over time; level of personalization available and % that use it; churn rate

Comparing the three eras of IT Evolution

TimeframeMainframe Era1950s to 1970s

Microcomputer Era1980s & Early

1990s

Network Era1990s to present

Dominant Technology

Mainframe, stand-alone applications,

databases

Stand-alone microcomputer and end-user tools (e.g.,

word processing, spreadsheets)

Client-server, Internet, browser

and hypertext

“Data Management”“Information

Management”“Knowledge

Management”

Organization Metaphor

HierarchyEntrepreneurial

Organization

Networked Business

Community

“Centralized Intelligence”

“Decentralized Intelligence”

“Shared Intelligence”

Primary IT Role

Automate back-office activities

Provide information and tools to improve decision making and knowledge worker

performance

Transform organizations and markets to create

business value

Comparing the three eras of IT Evolution

Typical User IT specialistsIT literate business

analystsEveryone

Location of Use

Computer room Desktop Everywhere

Planning Process

Yearly budgeting Individual expense

Business development and

strategic planning

Justification Cost savingsIncreased decision

quality and personal performance

Business value

Implementation

Independent projects

Ad-hocStrategic initiatives

TimeframeMainframe Era1950s to 1970s

Microcomputer Era

1980s & Early 1990s

Network Era1990s to present

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002.

Time

Decreased cost to break even

0

$(-)

$(+)

Decreased time to break even

Re

turn

on

In

ve

stm

en

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Time

Decreased cost to break even

0

$(-)

$(+)

Decreased time to break even

Re

turn

on

In

ve

stm

en

t

Time

Re

turn

on

In

ve

stm

en

t

Decreased initial investment

0

$(-)

$(+)

Decreased time to decommit

Time

Re

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In

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Decreased initial investment

0

$(-)

$(+)

Decreased time to decommit

Time

0

$(-)

$(+)

Re

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Increased cumulative benefit from IT portfolio

Decreased initial investments

Time

0

$(-)

$(+)

Re

turn

on

In

ve

stm

en

t

Increased cumulative benefit from IT portfolio

Decreased initial investments

Chapter 4 Figure 4-5

Benefits of Investments in Infrastructure

Documents

Making the Case for Networked Business Chapter 4