Chapter 5

CHAPTER 5 IS/IT Strategic Analysis: Determining the Future Potential

Learning ObjectivesCriteria for effective planningBusiness strategic and IS/IT strategic analysis methodsValue ChainStrategic option generatorResource life cycle analysis

Determining the Future PotentialHistorically, IT used to optimize performance of main operational activity of the businessEmphasis has been on:Internal processes and operations.Key processes in the organizationInternal critical success factors.Firm rather than the industry.

Current Patterns

IT Improvement Zone

Possible Outcomes

Strategic Perspective for Applications The changing content of the application portfolio should reflect the evolving strategic themes.

Aligning IS/IT Investment BusinessDevelopment of business strategies is best carried out if you consider the organization as a group of (strategic) business units. This enables the market/product relationship to determine strategic thinking and functional/organization aspects become secondary, ensuring that external strategy drives internal strategy. The portfolio of products and/or customers can be analyzed to identify how each grouping contributes to or makes demands on resources available.Provides the sharpest focusGeneric strategy concepts can be best applied to business units (low cost, differentiation and niche).To achieve more effective strategic decision-making.

Criteria for Effective PlanningSituation analysis and competitive assessmentEvaluation of strategic optionsDynamic allocation of resources

The purpose of strategic planning is to add value to the firm by adding new customers, new products or services, new markets, new locations, or new breakthrough technology. If the plan does not add value, it is worthless

Value Chain AnalysisThe concept of Value Chain Analysis is described by Michael Porter who notes that: Every firm is a collection of activities that are performed to design, produce, market, deliver and support its products or services. All these activities can be represented using a value chain. Value chains can only be understood in the context of the business unit.

Value Chain AnalysisThe value chain of the business unit is only one part of a larger set of value-adding activities in an industry- the industry value chain or value systemThe value chain of any firm needs to be understood as part of the larger system of related value chains

The External Value Chain

Paper Industry Value Chain

Forest Products Manufacturers

Wood

Hammermill Companies

Fine & Printing Paper Manufacturers

Industrial & Packaging Paper Manufacturers

Other Product Manufacturers

Merchants & Distributors

Retailers

Printers & Publishers

Consumers of Fine and Printed Papers

Other use of wood

Other forms of packaging

IS and Value ChainInformation systems are used to enable better information exchanges through the industry value chain, significant benefits can be obtained from the improved links. These benefits should enable a firm to spend more of its business energy in outperforming its real competitors rather than competing with its trading partners for profit.

Information Systems and The Value Chain

SUPPLY

CONVERSION

PRODUCT & SERVICES LOGISTICS

CONSUMPTION

Operational information exchange to enable matching of supply and demand

Informing the market to create demand

Gathering information to understand demand

Resource Life Cycle Analysis (RLC)To analyze relationships with customersCan determine not only when opportunities (and threats) exist for improved or new information exchanges but also which specific applications should be developedShould be viewed from one end only (customer or supplier)=> RLC model could be a customer or supplier RLC

Resource Life-Cycle AnalysisRequirementsEstablish requirements To determine how much of a resource is requiredSpecify To determine a resources attributes

AcquisitionSelect source To determine where customers will buy a resourceOrder To order a quantity of a resource from the supplierAuthorize and pay for To transfer funds or extend creditAcquire To take possession of a resourceTest and accept To ensure that a resource meets specifications

StewardshipIntegrate To add an existing inventoryMonitor To control access and use of a resourceUpgrade To upgrade a resource if conditions changeMaintain To repair a resource, if necessary

RetirementTransfer or dispose To move, return or dispose of inventory as necessaryAccount for To monitor where and how much is spent on a resource

Strategic Option GeneratorDefine Strategic TargetsDefine Strategic TrustSelect Alternatives

Strategic Option GeneratorStrategic Targets:Suppliers anyone supplying essential resources. It may be necessary to subset them either by the nature of what they supply or their strength, or their ability to exert pressure on you and other customers.Customers this could include the consumers as well as direct customers. The customers should be segmented in terms of what they buy or how much.Competitors who dell very similar product or services should be supplemented by actual or potential new entrants into the market and threatening substitute products and services should be included as competition.

Strategic ThrustsDifferentiation ensuring that superior quality is delivered and perceived, leading to obtaining a premium priceCost being cheaper or enabling suppliers or customers to reduce their costs and thereby preferring to conduct business with the firmInnovation introduce a new product, service, process or way of doing business that transforms the relationships and competitive forces in the industry. Growth enable volume or expansion in geography or increased flexibility of production and distribution to meet different segments needs.Alliance forcing agreements, joint ventures or joint investments in systems to prevent new entrants or competitors achieving advantage.

Strategic IS Opportunities

IS/IT Opportunities Analysis: QuestionsSuppliers Can we use IS/IT to:Gain leverage over our suppliers?Reduce buying costs?Reduce the suppliers costs?Be a better customer and obtain a better service?Identify alternative sources of supply?Improve the quality of products/services purchased?

IS/IT Opportunities Analysis: QuestionsCustomers Can we use IS/IT to:Reduce customers cost and/or increase their revenue?Increase our customers switching costs?Increase our customers knowledge of our products/services?Improve support/service to customers and their needs?Identify new potential customers?

IS/IT Opportunities Analysis: QuestionsCompetitors Can we use IS/IT to:Raise the entry cost of potential competitors?Differentiate products/services?Reduce our costs/Increase competitors costs?Alter the channels of distribution?Identify/Establish a new market niche?Form joint ventures to enter new markets?

Select AlternativesOffensiveDefensive

Federal Express Analysis Using the Strategic Option Generator Strategic Advantage

TargetSupplierCustomerCompetitorsThrustDifferentiationCostInnovationGrowthAllianceModeOffensiveDefensiveDirectionUseProvideExecution

UPS Analysis Using the Strategic Option Generator Strategic Analysis

TargetSupplierCustomerCompetitorsThrustDifferentiationCostInnovationGrowthAllianceModeOffensiveDefensiveDirectionUseProvideExecution

Internal Value ChainThe purpose of Internal Value Chain analysis is to divorce what the company does from how it does it. Two types of business activity:Primary activities; those that enable it to fulfill its role in the industry value chain and hence satisfy its customers. They must be linked together effectively.Support activities; those which are necessary to control and develop the business over time and thereby add value indirectly.

Primary ActivitiesInbound logistics Procuring, receiving and warehousing raw materials.Operations Machining, assembly and manufacturing products.Outbound logistics Getting the product to the customer.Marketing and sales Advertising, marketing and selling.Service Providing customer support and product repairs.

Support ActivitiesProcurement: The purchasing of materials used to create value for the firm.Technology Development: Any technology used to support the firms value chain activities.Human Resource: The Activities surrounding the Recruiting, Hiring, Training and compensation of an organizations employees.Firm Infrastructure: The activities and functions that support a firms ability to create value such legal, accounting, management, strategy, etc.

Cont..The term, Margin implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organization is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.

Value Chain: An Example

Alternative Value configuration ModelsThe traditional value chain model was essentially based on manufacturing/retail view of industry and works well for physical goods. But does not really represent what the business does or its relationships with customers and suppliers in many other businesses.2 alternatives: Value Shops and Value Networks

Alternative Value configuration Models Value ShopsBusinesses that essentially are problem solving delivering value by producing solutions for clients. Characterized by intense and extensive information exchanges both in setting up the business transaction and delivery of the solution.Each solution is unique and the client is normally involved in both the design and implementation of the solution. Figure 5.7 on page 266 shows an example.Objective: satisfy the customer requirements, by bringing together the appropriate knowledge and resources from inside the firm or by using other external resources.Example, advertising agencies and professional services organizations

Alternative Value configuration ModelsValue NetworksBusinesses that provide exchanges and mediation between buyers and sellers, enabling relationships to be established. They earn revenue from either or both in their use of the firms network everyones a customer. Figure 5.8 on page 268 suggest how this model differs from the other two.Example, insurance companies, banks, telecommunications companies and airlines

Value Chain: Service Business (Value Shop)

Knowledge application

Problem specification

Business acquisition

Marketing the capability

Execute solution

Configuration solution

Allocation of resources

Resource value management

Resource value management

Client value chain

C

L

I

E

N

T

S

Support activities

Infrastructure, technology, human resources, administration, etc.

Primary activities

External resources

External resources

Value Chain: Service Business (Value Network)

Support activities

Infrastructure, technology, human resources, administration, etc.

Other resources

NetworkInfrastructure developmentOperation and maintenance

Core technologies

- Marketing- Pricing- Contracts- Performance- Capability

Service development and operations

Service delivery

- Security, standards controls- Transaction and revenue management- Availability- Information provision, etc.

(a) Core services (all customer groups)

(b) Value-added services

(designed for particular customer groups)

Service contractors

Suppliers

All customers

Buyer/Seller segments (a)

(b)

(c) etc.

The Use of Value Chain AnalysisThe main objective is to represent the main activities in the business and their relationships in terms of how they add value so as to satisfy the customer and obtain resources from suppliers. The information that flows throughout the industry and how critical that information is to the functioning of the industry and the success of the firms in it, by determining where and when that information is available, who has it and how it could be obtained and turned to advantage or used against the firm.

The Use of Value Chain AnalysisThe information that is or could be exchanged with customers and suppliers throughout the chain to improve the performance of the business or lead to mutually-improved performance by sharing the benefits.How effectively the information flows through the primary processes and is used by them:Within each activity to optimize performanceTo link the activities together and avoid unnecessary costs and missed opportunities; andTo enable support activities to contribute to the value-adding processes, not hinder them.

'Natural' and 'Contrived' Value Chains. The natural chain describes the (unattainable) optimum structure for the industrys value-adding processes and information flows, based on what needs to be done.The contrived value chain shows how things are currently done. Look at table 5.4 on page 271.Purpose in Analyzing the Value ChainAnalyzing the value chain in information terms to reduce the existing complexity either inherent in the current information relationships or caused by them.Identify new, often faster, options for information flow to where it enables the value-adding processes to be performed more effectively and at the ideal time.

Natural VS. Contrived Value ChainsContrived value chain represents how things are done by resources in the industry organization:Driven by organization structures, historical evolution and compromiseIs often very complex, confused and messy, and poorly understoodContains many reconciliation activities and reacts slowlyCan take many forms, is continuously being modified to meet business changes

Natural VS. Contrived Value ChainsNatural value chain represents what has to be done to succeed in market requirements:Based on value-adding activities and the resources needed to carry them outDefines essential interrelationships and dependencies and the ideal way to achieve business purposesContains few reconciliation activities and responds quicklyUsually only one ideal exists, and it does not change significantly or frequently

Business Re-engineering and the Value Chain Most of the successful business re-engineering initiatives have also had an external drive or focus, ensuring that internal changes deliver perceived improvements to the customers. Almost by definition, the starting point for determining what to change, why and how to change, is an understanding of the value adding processes in the industry and/or the firm.

Actions to improve business performance (by using business re-engineering):Eliminate unnecessary processes.Rationalize the rest to ensure the value adding processes are optimizedIntegrate to improve responsiveness and reduce unnecessary effort and errorAutomate where technology can deliver further improvements.

It is important to adopt a value-chain driven approach to understanding how the business works and hence can be improved via a combination of business re-engineer and new IS.

IS list application portfolio matrix IS application future potential information need process identify identify portfolio matrix Portfolio Analysis IS value chain value chain link resource life cycle model IS/IT , supplier inventory superstore supplier due stockless JIT cost stock monitor supplier shelf In using the value chain in IS strategy we consider:Information flows, Information exchange, Information links, Demand information, Supply information. IS/IT IS/IT value chain supplier supper store inventory supplier supply super store inventory concept Stock Rate concept just in time concept just in time cost stock stock rate manage stock stock monitor stock information flow industry ( industry) supplier supplier distributor Retailer Consumer consumer distributor information supplier information customer supplier activity information flow primary activities information flow IS/IT activity value chain activities identify primary activities activities competitive advantage Primary Activities 1) Research 2) Development 3) Manufacture 4) Marketing and Sales Information Flow Value Added (Value Chain) IS/IT Information Flow 1. Marketing and Sales ( Retailer Customer ) Prescribers ( ,) Information Flow Information Provide Information () stock Supply search Prescribers Patient ( ) feedback Feedback 2. Marketing and Sales ( Distributor Agents) Wholesalers and Agents Demand Forecasts and Orders , Inventory Demand3. 3 3a , 3b , 3c Internal Process Information Flow Information Flow Information Marketing and Sales Development Research( R&D marketing (R&D) )It is important to start with an understanding of the overall external value chain and how it affects the internal value adding processes. The way the chain works should change from whatever contrived state it has reached throughout evolution to something more like the natural view of the chain. (Optimum Structure) Value Added Value Chain Activities Optimum Value Chain ( (ideal) Optimum Value Chain Value chain optimum natural value chain