BA572 – Week # 4 Strategic Alignment of IT with Business Strategy

BA572 – Week # 4Strategic Alignment of IT with Business Strategy Jim Coakley, Ph.D., V.T. Raja, Ph.D., Oregon State University

Review

Transcending/Evolving Role of IT • Week1: • Individual/Multiple Silos • Operational Systems (e.g., ?) • Administrative Support Systems (e.g., ?) • Week 2: • Integration of Systems • Seamless information flow across systems (e.g.,?) • This week: Strategic role of IT • Enable/Support/Enhance chosen business strategies • Help shape new business strategies

Headlines • Survey shows majority of Data Warehouse projects either fail to meet expectations or are abandoned. • In all, 41% of the 142 companies surveyed by the Cutter Consortium, an IT consulting and market-analysis firm, have failed data warehouse projects, and only 15% call their data warehousing efforts to date a major success. (44% failed to meet expectations) • 49% of the surveyed companies have at least one data warehouse in use and 70% are building one

Productivity Paradox • Is the evidence of evolving role of IT consistent with productivity gains at an aggregate level of the economy? • IT Productivity Paradox • Our productivity does not seem to increase proportional to our investment in IT • Reasons?

What makes an IS “successful”? • Does it add value to enterprise? • Cut costs (efficient) • Improve quality (effective) • Does what it should do (efficacious) • Provide opportunities (enable) • Usable (emulate business processes)

IT Project Success • What are the key factors for successful project? • End-user involvement • Involvement does not guarantee success, but lack of involvement guarantees failure • User-designer communication gap • Top management support • Ensures funding and management support • Appropriate level of complexity and risk • Management of the implementation process

“Implementation” failuresWhy do systems fail? • System: • Lack of user involvement!!!!! • Insufficient training of end-users • Inadequate infrastructure in place • Run over time and budget • Inadequate systems integration testing • Conversion problems -- data • People: natural resistance to change • Politics: IT can change basis of power

So What? • What is the likelihood that recent advances in information technology will significantly affect your business? • Is the information technology infrastructure within your organization adequate to support your strategic initiatives? • Does it enable you to pursue new strategies? • Does it emulate the best practices in the industry? • Does it do what it needs to do?

Role of IT in Business Strategy • Great companies: • First build a culture of discipline • Create a business model based on: • What they can be great at • A viable economic engine • Their core values • Then, use technology to enhance those variables – not to replace them Efficient, Effective, Efficacious, Enable, Emulate

What is a business model? • What is your value proposition? • What is your value configuration? • How will you measure performance?

What is a business model? Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness? Value Proposition FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning Performance ValueConfiguration What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

Value Proposition • Key Drivers of Value? • Who are Customers/Suppliers/Competitors? • Sounds like competitive forces analysis

Things to Remember in the “New Economy” • “Best beats first, even if it takes a long time” (Jim Collins, Built to Last) • VisiCalc  Lotus 1-2-3  Excel • Apple’s Newton Message Pad  PalmPilot • Knowledge products defy law of scarcity • Information is costly to produce, easy to replicate • Also have “network” effect – value increases as base of users increase • Time to market is key factor

M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value PropositionWhat Activities Needed to Deliver Value?Three different value models Shop Network Chain

Firm Infrastructure Human Resources Management M A R G I N Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales After-sales Service M A R G I N Value Chain • What is basic premise of value chain? • Value created by transforming inputs into products

M A R G I N M A R G I N Value Chain Structure • Critical Activities • Transform inputs into products • Also identify activities that provide infrastructure support • Critical Linkages • Internal linkage: Information shared across activities within firm • Tend to be sequential flows between activities • External linkage: Information shared across activities between different firms • Extended value chain

Competitive Forces Analysis M A R G I N M A R G I N Value Chain Analysis • Understand • Industry • Strategy • Activities of the organization • Identify the activities and linkages along value chain that are critical • Add value by focusing on those critical activities and linkages • Lower cost by increasing efficiency, scale or capacity • IT very effective at enabling lower cost

M A R G I N M A R G I N Value Chain Use • Directly applicable to manufacturing activities • Mass vs customized • Less applicable when intangible products • R&D • Key question – where are you positioned in the extended value chain?

Value Shop Firm Infrastructure Human Resources Management InfrastructureSupport Technology Development Procurement Problem Finding & Acquisition Problem Solving Choice Simon’s Problem Solving Model Control/ Evaluation Execution • What is basic premise of value shop? • Value created by providing solutions to customer problems

Find Solve Choose Evaluate Execute Value Shop (cont’d) • Value creation based on: • Information asymmetry between firm and client • Firm has information client needs • Rely on intensive information to solve a customer problem • Firm has standardized information acquisition process • Cyclical, iterative solution process • Can be resolved by non-experts • Need experts to recognize unique cases

Find Solve Choose Evaluate Execute Value Shop (cont’d) • Key driver is value, not cost • “Value” depends on quality of professionals assigned to client projects • Learning across projects is critical • Need for “knowledge base” • Examples of Value Shops?

Value Network Firm Infrastructure Network promotion and contract management • Invite and select customers tojoin network • Initialize, manage andterminate contracts Human Resources Management Technology Development Procurement Service provisioning • Establish, maintain andterminate links • Billing forvalue received Infrastructure operation • Maintain andrun physical and information network • What is basic premise of value Network? • Value created by providing intermediary services

Value Network (cont’d) • Value derived from scale and capacity • Each additional participant adds value • Metcalfe’s law – value = N2 • Value of new service dependent on who else adopts it • What was value of first fax machine? • Some examples of value networks?

M A R G I N Find Solve Choose Evaluate Execute M A R G I N Combinations of Value Models

Components of Value Configuration • Profit Site -- definition • Location in a value configuration vis-à-vis customers, suppliers, rivals, potential new entrants, complementors and substitutes • Look at value configuration, competitive forces, complementary assets model • What is the profit site for Cisco?

Components of Value Configuration – cont’d • Value & Scope • Cost vs Differentiation • Broad vs Focus • Commerce Strategy • B2C • B2B • C2B • C2C or P2P • B2E

Components of Value Configuration – cont’d • Pricing Strategy • Menu/Fixed • 1v1 Bargaining • 1vM Auction • Mv1 Reverse Auction • Barter – exchange good and services

Components of Value Configuration – cont’d • Source of Revenue • Markup • Commission • Advertising • Referral • Production (direct to consumer) • Software • Subscription • Fee-for-Service

Components of Value Config – cont’dHow to sustain value? • Complementary Assets Model • Imitability: extent to which an innovation can be copied, substituted, or leapfrogged by competitors • Complementary assets: all other capabilities needed to exploit the innovation • Brand name, manufacturing, marketing, distribution channels, service, reputation, installed base of products, relationships (with customers or suppliers), etc.

Complementary Assets Model IDifficult to make money IIHolder of complementaryassets makesmoney High Imitability IVInventormakes money IIIParty with bothtechnology and assets or with bargaining powermakes money Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

Complementary Assets Model • Where would Internet-based strategies typically be found? • If I am in cell III: • What happens if someone imitates my product? • What happens as my product becomes obsolete? • Where would a product with Intellectual Property protection fall? IDifficult to make money IIHolder of complementaryassets makesmoney High Imitability IVInventormakes money IIIParty with bothtechnology and assets or with bargaining powermakes money Low Freely Availableor Unimportant Tightly Heldand Important Complementary Assets

Question • Name three companies that are key players in e-business • What is the competitive advantage of each? • Is the competitive advantage sustainable?

Role of IT in Business Strategy • Great companies: • First build a culture of discipline • Create a business model based on: • What they can be great at • A viable economic engine • Their core values • Then, use technology to enhance those variables – not to replace them Efficient, Effective, Efficacious, Enable, Emulate

What is Strategy? • Strategy Formulation • Decisions pertaining to competitive, product-market choices • Strategy Implementation • Choices that pertain to the structure and capabilities of the organization to execute its product-market choices • “infrastructure”

Strategic Fit • Alignment between Strategy (external) and Infrastructure (internal) • Assumptions: Strategic fit is inherently dynamic • Strategic Alignment is not an event – but a process of continuous adaptation and change

IT as a Critical Lever • A critical lever for attaining this dynamic capability is the organizational capabilities to: • Conceptualize and direct the strategic role and management of IT • Ability to leverage IT on a continual basis to achieve sustainable competitive advantage • No single IT application – however sophisticated and state of the art it may be – could deliver a sustained competitive advantage -- agree? • Need for a framework for conceptualizing and directing the strategic role and management of IT • Strategic Alignment Model (Henderson and Venkatraman)

Strategic Alignment ModelFour Domains of Strategic Choice Need to recognize how decisions in one domain affects the other domains ScopeCompetenciesGovernance ScopeCompetenciesGovernance Strategy(External) StrategicFit StructureProcessesSkills InfrastructureProcessesSkills Infrastructure(Internal) Business Information Technology Functional Integration

Observed characteristics of well-aligned companies (2004 Survey by Deloitte Consulting LLP ) • Executive agreement on the role of IT – where and how IT adds value • Executive agreement on the priorities and focus areas for IT • Follow through and delivery on IT expectations

2004 Survey by Deloitte Consulting LLP (Advertising Supplement in CIO Magazine)

Deloitte Consulting measured alignment of: • IT operational goals to corporate business goals • IT spending with corporate priorities • IT operations to IT strategy • IT org/gov with corporate org/gov Business StrategyScopeCompetenciesGovernance IT StrategyScopeCompetenciesGovernance Business InfrastructureStructureProcessesSkills IT InfrastructureInfrastructureProcessesSkills

Strategy Domains • Business • Scope: What business are you in? • Distinctive Competencies: What do you do well to distinguish yourself from your competitors? • Governance: What external business relationships do you depend on? • IT • Scope: What information technologies support or create strategic business opportunities? • IT Competencies: What characteristics of IT create business advantage? • IT Governance: What external relationships does IT depend on (outsourcing, vendors, etc.)

Infrastructure Domains • Business • Structure: Organizational structure • Processes: What are key business processes? • Skills: What HR needed to accomplish specific competencies? • IT • Infrastructure: Hardware, Software, Database, Networks • Processes: Development, Maintenance, Operations • Skills: What skills required to maintain architecture and execute the processes?

How to use the Strategic Alignment Model • Building Blocks: • Strategic Fit • Functional Integration • Identify your strongest and weakest domain • Need to develop communication with and increase understanding of weaker domains • Understand relationship between domains when change in strategy occurs

Strategy Execution IT is an Expense • Business Strategy is the driver of both Business and IT Infrastructures • Priority is to improve business processes, which places focus on changing business infrastructure. IT focus is on application development, driven by need to support business infrastructure Business StrategyScopeCompetenciesGovernance IT StrategyScopeCompetenciesGovernance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? Business InfrastructureStructureProcessesSkills IT InfrastructureInfrastructureProcessesSkills

Technology TransformationBusiness Strategy Drives Need to Develop IT Strategy • Assume: Business strategy and infrastructure are aligned • IT strategy needs to define technologies integral to business strategy • Focus is aligning IT strategy and IT infrastructure Business StrategyScopeCompetenciesGovernance IT StrategyScopeCompetenciesGovernance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? Business InfrastructureStructureProcessesSkills IT InfrastructureInfrastructureProcessesSkills ?

Service LevelProviding IT services • Information is a core product or service • Business strategy and IT strategy may be aligned • Focus is to enable business infrastructure by fitting IT infrastructure to IT strategy Business StrategyScopeCompetenciesGovernance IT StrategyScopeCompetenciesGovernance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? ? Business InfrastructureStructureProcessesSkills IT InfrastructureInfrastructureProcessesSkills

BA572 – Week # 4 Strategic Alignment of IT with Business Strategy