Business Strategy

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CHAPTER 2

AN OVERVIEW OF BUSINESS STRATEGY CONCEPTS & THE IS/IT STRATEGY

IMPLICATIONS

Strategic Planningfor Information

Systems

John Ward and Joe Peppard

Third Edition

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Learning Objectives:-

1. Evolution of strategic planning in organizations

2. Strategic framework

3. Business planning process

4. Business planning tools & techniques

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• CHAPTER 1 – Evolution of IS/IT.

• IS strategies MUST BE developed within the context of corporate and business strategic planning processes.

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IS/IT

Achievement of business objectives/goals

Maximize ROI

Enabling strategic use of information

Gain competitive advantage Repel competitive Threat

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PLANNING INVOLVEMENT

IS Managers

Business Managers

• Formal approaches to business planning – 1950s

• Evolved to cater for changes of the dynamic business environment

IS managers should understand the

corporate perspective of the

world

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Strategic Planning in Organization

• The formal approaches to business planning started in 1950s.

• They have evolved since in order to take account of technological, economics, social and political changes.

• They will continue to evolve in response to the dynamics of the business environment.

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Evolution of Strategic Planning

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Evolution of Strategic Management MaturityEff ectivness

Of StrategicDecision Making

INCREASING

VALUE SYSTEM

Create theFuture

ThinkStrategically

Predict the Future

Meet Budget

Phase 4Strategic

Management

Phase 3Externally Orientated

Planning

Phase 2Forecast – Based

Planning

Phase 1Financial Planning

- Supportive Value System and Climate

-“Dynamic” Allocation of Resources

- Reinforcing Management Processes

- Evaluation of Strategic Options

-“Static”Allocation ofResourcesFocus

- Widespread Strategic Thinking Capability

- Situation Analysis and Competitive Assessments

- Gap Analysis- Annul Budgets- Functional

- Strategically Focused Organisation

- Multi- Year Budgets

- Well – Defi ned Strategic Framework

Create theFuture

ThinkStrategically

Predict the Future

Meet Budget

Phase 4Strategic

Management

Phase 3Externally Orientated

Planning

Phase 2Forecast – Based

Planning

Phase 1Financial Planning

- Supportive Value System and Climate

-“Dynamic” Allocation of Resources

- Reinforcing Management Processes

- Evaluation of Strategic Options

-“Static”Allocation ofResourcesFocus

- Widespread Strategic Thinking Capability

- Situation Analysis and Competitive Assessments

- Gap Analysis- Annul Budgets- Functional

- Strategically Focused Organisation

- Multi- Year Budgets

- Well – Defi ned Strategic Framework

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The Evolving Nature of Strategic Planning in Organisations

• In 1980, a model was developed to describe the increasing maturity of strategic planning in organisations. The model consists of 4 phases.

• In phase 1, the focus is on cash flow and annual financial planning.

It involves simple techniques to develop medium term budgets.

The focus of the management is to reduce everything to a single financial issue – meeting the budget.

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Cont…

• In phase 2, the focus is on trying to predict, or forecast, what is likely to happen within a 5 years horizon.

Historical performance analysed and projected into the future using internal trends and external parameters such as economic and market research data.

It forecasts sales and market growth and predicts the effects on income and expenses and changes to the balance sheet.

Plans are still quantitative and internally oriented, focusing on what is targeted and the resources available.

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Cont…

• In phase 3, the organisation starts to look outside itself an concentrate on understanding the nature of competition in its industry, and positions itself to gain advantage.

Managers try to shift company’s product portfolio to more attractive market sectors.

• In phase 4, the organization is driven by innovation and becomes capable of creating its own business environment.

Thus, the organisation gains a leading role in the industry. Obviously, the leadership will require continuing innovation.

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Strategic Planning in Organizations

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What is Strategy?

• A strategy is a collection of statements that express or propose a means through which an organization can fulfill its primary purpose or mission– A chosen strategy must focus and coordinate the firm’s

activity from the top down toward accomplishing its mission– Developing a strategy begins with:

• a thoughtful understanding of the firm’s mission• analysis of the environment• a detailed assessment of how various business units interact

• Strategy (text book)“An integrated set of actions aimed at increasing long-term well-

being and strength of enterprise relative to competitors”

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Why Are Strategies Needed?

To proactively shape how a company’s business will be conducted

To mold the independent actions and decisions of managers and employees into a coordinated, company-wide game plan

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Relationship of Strategies to Plans

• Strategy is a collection of statements that expresses or proposes a means through which an organization can fulfill its mission– Identifies the goal or objective– Insights

• Plan is a detailed description of how an organization can accomplish its mission– Lays out in detail the steps necessary for the

organization to accomplish the goal– Plans turn insights into actions

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Missions vs. Strategic Visions

• A mission statement focuses on current business activities -- “who we are and what we do”– Current product and

service offerings– Customer needs being

served– Technological and

business capabilities

A strategic vision concerns a firm’s future business path -- “where we are going”

Markets to be pursuedFuture technology-product-customer focusKind of company that management is trying to create

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What is a Strategic Plan?

Where firm is headed -- Strategic vision and business mission

Short and long term performance targets -- Strategic and financial objectives

Action approaches to achieve targeted results -- A comprehensive strategy

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Establishment of Strategy

There are essentially three processes that can contribute to the establishment of a strategy:

1. Strategic thinking – creative, entrepreneurial insight into the ways the enterprise could develop.

2. Strategic planning – systematic, comprehensive analysis

to develop a plan of action.

3. Opportunistic decision-making – effective reaction to

unexpected threats and opportunities.

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Thinking Strategically : The Three Big Strategic Questions

1. Where are we now?

2. Where do we want to go?

Business(es) to be in and market positions to stake out?

Buyer needs and groups to serve?

Outcomes to achieve?

3. How do we get there?

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Company Experiences, Know-how, Resource Strengths

and Weaknesses,

and Competitive Capabilities

A Company’s Strategy is Partly Planned Planned andand Partly ReactivePartly Reactive

Abandoned strategy

features

Planned StrategyNew initiatives plus ongoing strategy features continued from prior periods

Adaptive reactions to

changing circumstances

Reactive Strategy

Actual Company Strategy

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The Strategic Framework

• Any organization in stages 3 and 4 of the model will need to consider most aspects of the FW (see page 71) to succeed.

• Three layers factors:-1. The external environment

2. Pressure groups and stakeholders

3. Internal business planning

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A Strategic FW

• The external environment– Economic/ Social / Political / Legal / Ecological /

Technological

• Pressure groups and stakeholders– Shareholders / Competitors / Customers/Suppliers /

Government / Unions / Employees / “The public” / Media / Financial Institutions

• Internal business strategizing and planning– “SBU” / Objectives / Situation analysis / Future

strategies

Page 71 - Text

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A Strategic Framework

Objectives Where are we now?Strengths & Weaknesses

Identify future strategies

Value System

Threats and Opportunities

Evaluate

Select

Implement

Analysis ofInternal resourcesand competencies

Feedback

MonitorAnd Control

Organizational Values

Management Values

Market analysisCompetitive analysisPEST analysisIndustry analysis

Share Holders

Allocation of Created Wealth

Customers

Public

PRESSURE GROUPS

Media Shareholders Competitors Suppliers Government

Unions

Customers

Public

Financial Institutions

Employees

STAKEHOLDERS

Suppliers Unions Employees Government

- Demanding recognition and rapid management response

Demanding ‘fair share’ of created wealth -

Technological

Political

EXTERNAL ENVIRONMENT - More rapid change and increasingly global influences

Monitoring Signals from the Environment Economic Social

Ecological Legal

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The External Environment• PEST (Political, Economic, Social and

Technological )Analysis

Political:Government type and stability Freedom of press, rule of law and levels of bureaucracy and corruption Regulation and de-regulation trends Social and employment legislation Tax policy, and trade and tariff controls Environmental and consumer-protection legislation Likely changes in the political environment

Economic:Stage of business cycle Current and project economic growth, inflation and interest rates Unemployment and labor supply Labor costs Levels of disposable income and income distribution Impact of globalization Likely impact of technological or other change on the economy Likely changes in the economic environment

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Socio-Cultural:Population growth rate and age profile Population health, education and social mobility, and attitudes to these Population employment patterns, job market freedom and attitudes to work Press attitudes, public opinion, social attitudes and social taboos Lifestyle choices and attitudes to these Socio-Cultural changes

Technological Environment:Impact of emerging technologies Impact of Internet, reduction in communications costs and increased remote working Research & Development activity Impact of technology transfer

Firms can draw conclusions as to the significant forces of change operating within the environment.

PEST Analysis is a useful tool for understanding the “big picture” of the environment in which firms are operating, and the opportunities and threats that lie within it.

By understanding the environment, firms can take advantage of the opportunities and minimize the threats.

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Pressure Groups & Stakeholders

Pressure Groups:Pressure Groups: • Make demands of the organization;Make demands of the organization;• Demand their existence and effects be acknowledged;Demand their existence and effects be acknowledged;• Expect appropriate responses from mgmt to satisfy their Expect appropriate responses from mgmt to satisfy their particular interest;particular interest;

Stakeholders:Stakeholders:•Have a direct financial interest in the organization and demand Have a direct financial interest in the organization and demand a fair share of the wealth created;a fair share of the wealth created;•Expect some form of material and financial benefit;Expect some form of material and financial benefit;

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Pressure Groups:Pressure Groups: • MediaMedia• ShareholdersShareholders• CompetitorsCompetitors• SuppliersSuppliers• GovernmentGovernment• UnionsUnions• CustomersCustomers• PublicPublic• Financial InstitutionFinancial Institution• EmployeesEmployees

Stakeholders:Stakeholders:• ShareholdersShareholders• CustomersCustomers• PublicPublic• SuppliersSuppliers• UnionsUnions• EmployeesEmployees• GovernmentGovernment

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Internal Business Strategy Formulation and Planning

Objectives Where are we now?Strengths & Weaknesses

Identify future strategies

Value System

Market analysisCompetitive analysisPEST analysisIndustry analysis

Threats and Opportunities

Evaluate

Select

Implement

Analysis ofInternal resourcesand competencies

Feedback

MonitorAnd Control

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Business Strategy Formulation

• Identify, evaluate, and decide strategies to be pursued;• Establish how to achieve the strategies by planning for the

required actions and by effective development and use of resources;

• Determine scope: – Whole organization versus – Strategic Business Unit (SBUs): a unit that sells a distinct set of

products & services, serves a specific set of customers and competes with a well-defined set of competitors;

– Can be reconciled by considering the enterprise strategy as combination of achievement of corporate objectives via SBU contributions;

– Reflect Corporate/SBU relationship and possible inter-SBU relationships

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Business Planning Process Elements

1. Objectives

2. Situation Analysis

3. Future Strategies

• Described by reference to profitability, growth, market share, customer satisfaction, new product development, employment, social responsibility, etc.

• Changes from year to year, evolve quite significantly over a period of time;

• Reflect values of organization, management, and major stakeholders;

• Values are expressed in terms of MISSION or VISION statement– Long term aims and purpose;

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Types of Objectives Required

Financial ObjectivesStrategic Objectives

Outcomes focused on improving long-term, competitive business position

Outcomes focused on improving financial performance

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Situation Analysis• Where are we now ?• Consists of two essential elements:

– looking inside the organization;– looking outside the organization.

INTERNAL• Resources available in the

organization;• Financial health of the organization;• Employees, skills, training,

experience, motivation, resulting business competencies;

• Physical assets, age, technology, usefulness;

• R & D• The organization, its structure and

relationships, attitudes and culture, and effectiveness of operational and management processes, and its ability to change the circumstances;

EXTERNAL

• Market segments, and within them, identifying competitors (current & potential);

• Market shares within segments – increase share or increase the total size of market;

• The organization’s position in the product life cycles

• An examination of all current and potential competitors to understand their current and potential strategies, Strengths & Weaknesses;

• Future competitive actions – concerning potential substitute products and thrusts into new markets;

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S.W.O.T Analysis

• Strengths: attributes of the organization that are helpful to achieving the objective.

• Weaknesses: attributes of the organization that are harmful to achieving the objective.

• Opportunities: external conditions that are helpful to achieving the objective.

• Threats: external conditions that are harmful to achieving the objective.

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Creative Use of SWOTs: Generating Strategies

• How can we Use each Strength?

• How can we Stop each Weakness?

• How can we Exploit each Opportunity?

• How can we Defend against each Threat?

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TOWS analysis • Strengths and Opportunities (SO) – How can you use your

strengths to take advantage of the opportunities?

• Strengths and Threats (ST) – How can you take advantage of your strengths to avoid real and potential threats?

• Weaknesses and Opportunities (WO) – How can you use your opportunities to overcome the weaknesses you are experiencing?

• Weaknesses and Threats (WT) – How can you minimize your weaknesses and avoid threats?

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Business SWOTBusiness Strengths:

· Technical innovation· Reputation· Product quality· Market position· Employees with long tenure· High values· Customer relationships· Flexible

· Use of Web technology· Worldwide company growth· Vendor-managed inventory· Smaller lot sizes· Business process improvement

· Profitability· Cost competition· Continuous improvement· Silos by department· Lack of competitive information· Global presence· Communication· Reactive, firefighting· Execution of projects· Strategic planning, focus· Internal controls and metrics· Customer satisfaction metrics

· Seasonality of product· Larger competitors· Reverse auctions on Web· Legislature changes· Federal funding changes· Economic uncertainty· Consumers desires changing· Price pressures· EPA and environmental regulations· International competition

Business Opportunities:

Business Weaknesses:

Business Threats:

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IS SWOT

• Business application

• Technical infrastructure

• People, organization, culture

• Processes

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Application Strengths and WeaknessesStrengths

· They work· Customized· Handles volume, throughput· Relatively stable· Interface broker· Warehouse functionality· Web-based functionality· Electronic EDI· Scalable costs

· Not designed for current business· Manufacturing functionality weak· Information access· Data integrity· Size/volume limitations· Visibility to costs, profit· Architecture out of date· Risk· Not flexible, requires programming· Customized, not best practice· Warehouse, shipping systems· Interfacing data· Ease of use, “green screen”· Standard ERP functionality lacking· CRM lacking· International· Fragile· Not real-time· Tools· Costs relative to functionality

Weakness

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Technical Infrastructure Analysis

Strengths

· Reliable· Standard PC hardware/software

environment· Up-to-date technology· Security, firewalls, UPS, anti-virus· Standard network components· Management tools· Internet cost-effective WAN· Gigabit Ethernet backbone

Weakness

· Large, complex server infrastructure

· Microsoft Office 97· Potential limitations of Internet for

WAN· Gauntlet firewall· Server failover· Some single points of failure· SAN

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IT Organization, Culture

Strengths

· Knowledgeable people· Have made improvements· Fun environment· Strong IS values· Institutional skills· Upper management

commitment· Customer service focus· Resources allocated per

division· Flexibility

· Leadership· Decision making· Trust, respect· Too many meetings· Organizational structure

· Accountability· Teamwork

- Managers, span of control- No project management- Clarity in roles- Business analyst role- Worldwide coordination- Skill set capacity

Weakness

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IS Process AnalysisStrengths

· Some documented policies, procedures

· Job descriptions· System change log, SCR

process· Project management framework· Partial disaster recovery

process

Weakness

· Informal processes, inconsistent, undocumented

· Project management not implemented

· Complete test system, process· Documentation· User training· Prioritizing· Governance, overall steering

committee· Business continuance plan· Communication

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Future Strategies

• This can provide both defensive mechanism against possible future threat and capability to exploit the opportunities by identifying the pressure groups and the stakeholders;

• Future options can be discovered by undertaking scenario planning to identify ‘discontinuities’ and predict the potential implications or bring in outside experts to facilitate ‘breakthrough thinking’;

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Future Strategies

• Future possible strategies are evaluated against criteria, such as the following :– The risks – financial and managerial; and likely

responses of main competitors;– The degree to which the organization needs to create new

capabilities to be offensive or improve control to be defensive;

– Appropriateness of current organization structure to achieve intended strategies;

– The ability of the organization to implement the strategy in terms of ability, resources, processes and culture;

– The implications for customers and trading partners;– Requirement for alliances or joint ventures to enable or

secure strategies;

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Strategy Implementation

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EMERGENTSTRATEGY

INTENDEDSTRATEGY

REALISEDSTRATEGY

plans

UnrealizedStrategies

Imposedchanges

New opportunities

Unexpected constraints or options

Failedimplementation

Realities of Strategy Development

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Strategy Tools and Techniques

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Business Planning Tools & Techniques

• The Boston Consulting Group Business Matrix (Product Portfolio)

• Policy/portfolio matrices

• Competitive Forces and Competitive Strategies

• Industry Analysis

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Product Life Cycles &Product Portfolios

Boston Consulting Group

Star

Cash Cow

Wild Cator?or

Problem Child

Dog

FUNDS$’000

High

Low

High Low

Market Growth&

Cash Use

Market Share & Cash Generation

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IS/IT Support for Wildcat Products

• Low market share, high growth market

• Focus on:– Product and/or process development

or– Customer identification, segmentation

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IS/IT Support for Star Products

• High market share, high growth market

• Focus on:– Identifying customers & requirements

and/or– Business innovation to meet market– requirements & differentiate

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IS/IT Support for Cash Cow Products

• High market share, low growth market

• Focus on:– Keeping costs low

and– Control of business relationships & activities $ $ $

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IS/IT Support for Dog Products

• Low market share, low growth market

• Focus on:– Reducing costs or securing customers to

improve profit performance– Very little innovation as line may be

discontinued

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Threat ofNew entrants

BargainingPower ofSuppliers

BargainingPower ofBuyers

Threat of SubstituteProducts or Services

RivalryAmongExistingCompetitors

Industry CompetitiveForces

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Factors Affecting the Impact of Competitive Forces

• New entrants will be inhibited by:– Capital requirement– Patents and specialist skills required– Distribution channels available– Achieved/required economics of scale and

resultant cost advantages– Number and size of existing rivals and intensity

of competition– Differentiation and brand establishment/loyalty– Access to raw materials/critical resources, etc.

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Factors Affecting the Impact of Competitive Forces

• Substitute product/service:– Customer awareness of need and means of

satisfaction– Customer sensitively to value for money and

ability to compare– Existing loyalty of customers-impact of

‘industry’ promotion– Ability to differentiate product etc.

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Factors Affecting the Impact of Competitive Forces

• Competitive rivalry will be intensified by:– Market growth slow (or in decline)– Small number of similar sized competitors

dominate– High fixed costs and/or high exit barriers for all

rivals– Overcapacity, and/or capacity increments are

large units– Commodity-like, undifferentiated products, etc.

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Factors Affecting the Impact of Competitive Forces

• Buyers’ power will be increased by:– Concentrated/few buyers making high volume

and/or high value of purchases– Low switching costs across suppliers– Price sensitive and many alternative sources of

supply– Weak brand identities, products not differentiated– Buyers capable of backward integration due to

low ‘entry’ costs, etc.

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Factors Affecting the Impact of Competitive Forces

• Suppliers’ power will be increased by:– Few suppliers-high switching costs for rivals and

suppliers deal with many small customers– Potential substitute suppliers/resources not easily

available– Supplied goods make up large part of firms’ costs– Suppliers capable of forward integration or bypass

to customers, etc.

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Implications for IS/IT Strategy• The opportunities and threats that IS/IT can offer and

pose will vary over time in an industry, partly due to the role IS/IT can play and partly due to the economic and competitive situation of the industry.

• IS/IT innovation can stimulate new industry growth or, in some cases, hasten the decline of certain industries.

• IS/IT can be immediate impact and obvious.• But, in other, the effects are secondary and require

other changes in business economics and social behavior or parallel developments in other fields before the become fully effective.

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Industry Analysis

• How can IS/IT affect nature & value of product or service and it’s life cycle?– Electronic financial and business services, e.g.

Banks

– Online publishing, e.g. online journals

– Recruitment services via Internet

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Industry Analysis (Cont.)

• How can IT affect demand, extend markets geographically, or provide new distribution channels?– Direct financial services

– Online marketing, e.g. Amazon

– Auctions & financial markets

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Industry Analysis (Cont.)

• How can IT affect the cost base of key processes or change the balance between flexibility & standardization?– Publishing, from preparation of materials by

authors to the final printing process.

– Automated warehousing/tracking

– Document digitization, for back-office process

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How IS/IT Has Affected Competitive Forces: The airline Industry

1. How can IS/IT build barriers?

By increasing IT entry cost for reservation systems

By tying in distribution channels (travel agencies)

By sharing capacity and ticketing costs via alliances and integrated systems

2. How can IS/IT build in switching cost for customers?

By linking purchasing and remittance systems to reduce overheads of customer

Discount/volume packages to discourage piecemeal purchase

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How IS/IT Has Affected Competitive Forces: The airline Industry

3. How can IS/IT change the basis of competition?

Lower costs: optimize yield per aircraft

Differentiate service: reconfiguring aircraft due to demand

Niche/focus service into high yield sectors (e.g. business travel)

Low-cost/low-price ‘no frills’ service with online direct booking, bypassing agents

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How IS/IT Has Affected Competitive Forces: The airline Industry

4. How can IS/IT change the balance of power in supplier/customer relationship?

Agent is constantly aware of seat availability of competing airlines

Airline can readily promote unsold capacity via chosen agents or direct to customers via online booking with variable pricing based on sales patterns

5. How can IS/IT generate new products/services?

Integrated travel package to high mileage business customers, bypassing agencies

New routes/schedules to cater for demand

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Impact of Competitive Forces and Potential IS/IT Opportunities

Key force impacting the industry

Business implications Potential IS/IT effects

Threat of new entrants

Additional capacity Reduced pricesNew basis for

competition

Provide entry barriers/reduce access by

- exploiting existing economies of scale

- differentiate products/services- controls distribution channels- segment markets

Buyer power high

Forces prices downDemand higher qualityRequire service

flexibilityEncourage competition

Differentiate products/services and improve price/performance

Increase switching costs, of buyersFacilitate buyer product selection

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Impact of Competitive Forces and Potential IS/IT Opportunities

Key force impacting the industry

Business implications Potential IS/IT effects

Supplier power high

Raises prices/costsReduced quality of

supplyReduced availability

Supplier sourcing systemsExtended quality control into suppliersForward planning with supplier

Substitute products threatened

Limits potential market and profit

Price ceilings

Improve price/performanceRedefine products and services to

increase value Redefine market segments

Intense competition from rivals

Price competitionProduct developmentDistribution and

service criticalCustomer loyalty

required

Improve price/performanceDifferentiate products and services in

distribution channel and to consumerGet closer to the end-consumer-

understand the requirement

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Generic Strategies: low-cost

• IS/IT implications:– Deal with basic business information process efficiently

and link them together

– Flexibility system increases the cost of development and operation=> simple systems, often standard packages implemented w/o change

– Integration can reduce the opportunities to improve the efficiency of any particular process

– Information is not seen as a key resource for exploitation, but as an overhead cost to be processed efficiently with minimum additional IS/IT overhead

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Generic Strategies: Differentiation Strategy

• IS/IT implications:– Flexible systems to extract information from an integrated

database or comprehensive data warehouse =>sophisticated systems and user tailoring rather than standard solutions

– If mismanaged this can lead to unnecessary spending on IS/IT=> ask the following issues:

• Find out more about customer requirements

• Monitor customer perception of service

• Enable rapid and accurate response to customer queries

• Provide a range of delivery options to meet customer needs

• Reduce new product introduction lead times

• Enable knowledge sharing across the organization to facilitate innovation

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Generic Strategies:Niche/Focus Strategy

• IS/IT implications:– Identifying the target market, and developing a

unique base of information about the selected market and its needs

– Establishing a specialist process via system to produce a clear cost advantage or distinctive customer value proposition

– Linking the organization via systems into the business processed of customers to increase switching costs and establish potential barriers to re-entry from general market servers

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CONCLUSION

• IS Strategies must be developed within the context of business strategic planning processes.

• Thus, the investment in IS/IT throughout an organization can be directed towards the achivement of business objectives