Chapter 3 E-Business strategy formulation Strategic management of E-Business.

Chapter 3

E-Business strategy formulation

Strategic management of E-Business

Important trends enabled by IT and Internet Ability to re-engineer supply chains

Use of information to smooth out inefficiencies & bottlenecks, & thus achieve efficiency & effectiveness gains

Ability to re-engineer relationships with customers

Manipulate large amounts of information about customer to identify trends, preferencesImprove decision making about delivering on customer value proposition

Ability to use Internet to disseminate information throughout organisation

Results in more efficient internal operations

Why focus on e-business planning?

Strategy vital to achieving benefits of these trends

IT adopting more strategic role

Concern about delivery of business valueTo realise value, need to undertake strategic analysis of possibilities of IT and Internet

‘High stakes’ with IT investmentsNeed to recognise and manage risk, and weigh this against the achievement of organisational objectives

Why focus on e-business planning?

Proportion of capital expenditure on IT 50% capital equipment expenditure in some organisations and in some industries

Future of business now inextricably linked to IT

Why focus on e-business planning?

Challenges

How to leverage connectivity, speed, and accessibility created by Internet and associated technologies to extend/enhance/enable our business vision?

To be successful (viable) long term, must identify where profitability lies

Must develop coherent strategies by which to exploit potentialities of I/IS/IT to deliver value to customers and shareholders

SISP*defined

‘...planning for the effective long-term management and optimal impact of information, information systems, and information technology…’

(Ward & Griffiths 1996, p.6)

*SISP: Strategic Information Systems Planning

Objectives of planning IS/IT/ e-commerce requirements

Ensure that focus of all IT investments (including Internet-based technologies) is on delivery of business goals and objectives

Ensure all stakeholders (especially senior management team) understand what IT and Internet can achieve

Increase their commitment to deploy IT to enable achievement of organisational objectives

Objectives of planning IS/IT/e-commerce requirements

Develop appropriate resourcing levels for IT and e-commerce

Establish priorities for IT investments

What is business strategy?

Plan that integrates organisation’s goals, policies, actions into integrated whole

Direction organisation takes in order to compete effectively and meet stakeholder expectations

Requires vision (challenging desired future state for organisation) and mission (reason for existence, overriding purpose

Business, IS, and IT strategies

(Ward & Peppard 2002)

Business Strategy

IS StrategyDemand oriented

Application focused

IT StrategySupply oriented

Technology focused

IT impact& potential

Establish direction and objectives

Articulate information requirements and systems needed to deliver thatinformation

Identify technological infrastructure required

Impacts of Internet on planning

Business Strategy

IS Strategy

IT StrategyHas a major effect of Internet(and hype!) been to elevate strategic thinking about technologyto the level of business strategy?

Implicationsof

Internet

Objectives of e-business planningTo ensure that IT and e-commerce support and enhance achievement of business objectives

To achieve cost-effective investment in IT and

e-commerce for measured business benefitsControlling expenditures and ensuring delivery of value from IT

To protect existing information and IT assetsReduce maintenance costs

To prioritise IT investments according to ability to support achievement of business objectives

To gain commitment and understanding of senior executives with respect to the role of IT in the organisation

Who should be involved?

Specialist planners

Senior executives

Senior IS management

Representatives from different

functions

Trading partners?Major customers?

Problems of NOT planning

competitors gain competitive advantage

business goals unachievable due to systems limitations

organisational information resource not adequately exploited

systems not integratedduplication of effortinaccuracypoor management information

lack of commitment from senior executives

new systems fail to deliver business benefits

lack of focus on business needs

technologies become a constraint on business

no means of prioritising appropriate resource levels for IS/IT

Problems of NOT planning

Framework for e-business strategy formulation

Understanding long term goals and vision for organisation

Its ‘strategic intent’ (Broadbent & Weill 1997)

Understand external environment

Identify potential synergies and economies of scale through similarities between business units

Appreciate impacts of Internet on organisation and industry

Appreciate the strategic context

Understand external and internal IT environments

Recognising key IT trends in industryAppreciate how competitors and business partners are using ITUnderstand internal strengths and weaknessesRecognise capabilitiesPerform audit of IT infrastructure, IT skills and IT management

Appreciate the strategic context

High level strategicvisioning and thinking

Articulate business and IT maxims

Business maxims: high level statements about competitive position, how value created for customers, intentions regarding growth and development, its position of use of resources, etc.

IT maxims: statements about how information and IT will be valued and deployed in the organisation

Defining key parametersfor IT

Role of IS/ITstrategic enabler (opportunistic) or support?

Sourcing of IS/ITInsourced, selectively sourced, or outsourced?

Structure of IS/IT deptDecentralised, federal, or centralised?

View of IT infrastructureEnabling or utility view?

Decisions about parameters should be aligned with business strategy

Complementary views of strategy

View presented so far regards strategy as developed from understanding of nature of competition, industry and organisational structure and competitive response

But strategy can be articulated based on understanding of internal resources, capabilities and competencies, and access to external resources etc., which can be harnessed as sources of competitive advantage

Each perspective offers valuable insights into strategies that an organisation can adopt

Tools to support strategy formulation

SWOT analysis

Product and service lifecycles

PEST analysis

Competitive forces analysis

Value chain analysis

Critical success factor analysis

Business technology audit

Gap analysis

SWOT analysis

Strengths, WeaknessesAnalyse internal capabilities, skills

Look to exploit strengths for advantageConsider weaknesses and minimise potential disadvantage

Opportunities, ThreatsExternal analysis to identify opportunities for exploitation, threats to be minimised or countered

SWOT analysis can provide understanding of IT resource requirements and future developments

SWOT Analysis

RetreatProtect1. …

2. …

StrenghtenAttack1. …

2. …

1. …

2. …

1. …

2. …

Self

Environment

WeaknessesStrengths

Oppor

- tunities

Threat

s

Industry and product lifecycles

Product and service portfolios

Product lifecycle – emergence

demand is uncertain

market ill-defined

I/IS/IT focus:

market research

product development

Product lifecycle – growth

need major investment to meet growth in demand

marketing

production

new product development

revised supplierrelationships

I/IS/IT focus:

support growth

must not inhibit ability to satisfy demand

create barriers to entrytie in suppliers and customers

high investment needed

Product lifecycle – growth

competition increasessupply starts to exceed demand

fight to retain market share

Product lifecycle – maturity

I/IS/IT focus:

defensive strategyunderstand competition

increase productivitymore efficient, effective use of resources

build up customer switching costs

better management of supply and distribution channels

Product lifecycle – maturity

cost effective in serving market

I/IS/IT focus:

detailed and accurate management infodemand forecastsprofitability of customers, productscost controls

Product lifecycle – decline

Product and service lifecycle

Help managers think creatively about whether or not they have information needed to manage wildcats, rising stars, cash cows and dogs effectively

Helps to identify gaps in existing information provision

PEST Analysis

Political/legalGovernment legislation, taxation, industrial relations, privacy, environmental protection requirements, etc.

EconomicStage of economic cycle, unemployment, inflation, interest rates, relative affluence of society

SocioculturalLifestyle changes, demographic characteristics, income distribution, consumer preferences, etc.

PEST Analysis (cont.)

TechnologicalRate of technological innovation, rate of infusion and diffusion with respect to technology

Consider key environmental influences, drivers of change and how these might change over time

For e-businesses, consider how technological change is driving changes in other areas

Consider role of IT in exploiting of mitigating against the effects of these changes

Threat of new entrants

Barriers to entry will be high if

economies of scale are extremely important

capital requirement of entry is high

access to distribution channels is difficult

patents or specialist skills are required

there are a large number of existing rivals

existing rivals are large and strongly positioned

competition in the industry is intense

product offerings in the industry are highly differentiated

high brand loyalty exists

access to raw materials or other critical resources is difficult

Threat of new entrants (cont.)

How has the Internet,

vastly increased connectivity,

and improved communication channels

impacted the

threat of new entrants?

Threat of new entrants (cont.)

Threat of new entrants

New entrants meanadditional capacity

reduced prices

new basis for competition

IS/IT canreduce costs

increase rate of product / service innovation and development

better control distribution and supply channels

achieve better match between products and customers

Bargaining power of suppliers

Supplier power is likely to be high

few suppliers

switching costs are high

there is a possibility of the supplier integrating forward

brand of a supplier is powerful

suppliers’ customers are of little importance to the supplier

How has the Internet,

vastly increased connectivity,

and improved communication channels

affected the

bargaining power of suppliers?

Bargaining power of suppliers

Supplier power high

If supplier power is high

prices/costs will tend to be higher

quality of supply will tend to be lower

there will tend to be reduced availability of supply

IS/IT can

use supplier sourcing systems

help to extend quality control into suppliers

enable forward planning with suppliers through interorganisational systems including the use of EDI and/or Internet technologies

Bargaining power of buyers

Buyer power is likely to be high when

there are few buyers

there are alternative sources of supply

component or material cost is a high percentage of total cost

there is a threat of backward integration by the buyer if satisfactory prices or suppliers cannot be obtained

How has the Internet,

vastly increased connectivity,

and improved communication channels

affected the

bargaining power of buyers?

Bargaining power of buyers

Buyer power high

If buyer power is high

prices forced down

higher quality demanded

service requirements higher and more flexible

higher competition in industry

IS/IT can help by

differentiating products/services

improving price/performance

increasing switching costs of buyers

facilitating buyer product selection

Threat of substitution may take many forms:

actual or possible substitution of one product for another

a new process may render a product superfluous

substitutes may be thought of as competing for discretionary expenditure

‘doing without’ can also be thought of as a substitute

Threat of substitution

How has the Internet,

vastly increased connectivity,

and improved communication channels

impacted on the

threat of substitution?

Threat of substitution

Threat of substitute products

The threat of substitute products

tends to limit the potential market and profit

tends to put a ceiling on prices

IS/IT can reduce the effects by

helping to improve price/performance

helping to enhance products and services to increase value

improving rate of innovation

identifying new customer needs

Competitive rivalry will be intensified if

market growth is slow or in decline

a small number of similar sized competitors dominate

there are high fixed costs and/or there are high industry exit barriers for all rivals

there is over-capacity in the industry

Rivalry within industry

How has the Internet,

vastly increased connectivity,

and improved communication channels

impacted on

competitive rivalry?

Rivalry within industry

Intense competition from rivals leads to

aggressive competition on price

competition regarding product development

distribution and service being critical factors in customer choice

the need for customer loyalty

IS/IT can reduce the effects by

helping to improve price performance

helping to differentiate products and services

helping the firm ‘get closer to the end consumer’

understand the requirements or needs of the ‘end consumer’

Rivalry within industry

Using competitive forces

identify / analyse significant players in each force

determine nature / strength of impact of each player

devise strategy to exploit / defend / neutralise impacts

identify opportunities for IS/IT to support / implement / manage strategy

Value chain analysis (internal)

Value chain analysis enables consideration of internal activities and processes, thus understanding where costs are incurred, and where value is added

Examines organisation in terms of primary activities (core business processes) and support activities

Internal value chain analysis

External value chain analysis

Important device for ensuring that managers receive information they need to monitor achievement of corporate goals and objectives

CSFs require information to monitor achievement in key result areas

CSFs may require systems enhancements or new systems

Critical success factor analysis

Critical success factor analysis

CSFs and the value chain

Business-technology audit

Provides managers with an assessment of business value of IS, against an assessment of their technical quality

Business value: value judgement about contribution an IS makes to achievement of business goals and objectives

Technical quality: assessment of age, amount spent on maintenance, ease of maintenance, required infrastructure, risk

Business-technology audit

Gap analysis

Aims to identify and then help remedy gaps that exist between skills, knowledge, competencies, capabilities that an organisation requires to be successful, and resources an organisation currently has

Combining the tools

Portfolio of systems

At end of strategy formulation process, organisation should be clear on

business goals and objectivese-business goals and objectiveshow IT used to support achievement of goals and objectivesState of existing portfolio of systemsWhere strengths and weaknesses liePrioritised set of new systems, required refurbishments

Portfolio of systems (cont.)

Application portfolio analysis helps to ‘map’ balance required of new investments and maintenance of existing investments

Portfolio of systems needs to be aligned with business strategy

Application portfolio analysis

Matching portfolio against strategy

Circumstances dictate change in portfolio