TIM 158 Lecture 3 IT Impact on Business Models Key Learning Objectives Understand that IT can impact the business model through its effects on strategy and/or organizational capabilities Learn how to analyze the potential of IT to create strategic opportunities Understand how to evaluate IT as a potential source of strategic risk

Today’s lecture 1.Analyzing the impact of IT 2.The role of IT in strategy 3.Limits and risk for IT 4.Performing a strategy audit 5.How does strategy evolve? Business Case Assignment

We can analyze the impact of IT on the business model by considering the two key dimensions of a business model –Strategy –Capabilities The next two slides give the examples of IBM and Medtronic Analyzing IT Impact

IT Impact Map: IBM Path to Business Transformation

IT Impact Map: Medtronic (MDT) Path to Business Transformation

Opportunities Can IT change basis for competition? Can IT change balance of power among buyers and suppliers? Can IT build or reduce barriers to entry? Can IT increase or decrease switching costs? Can IT add value to existing products and services or create new ones?

Can IT change basis for competition? Doing more than just automation –American Hospital Supply Corporation –American Airlines Tech give-aways Self-service Charles Schwab –High quality but scalable

Can IT change balance of power among buyers and suppliers? AHSC and Johnson & Johnson Global Healthcare exchange Unexpected evolution to small number of trusted marketplaces

Can IT build or reduce barriers to entry? Initially the cost to develop a proprietary network or transaction system was a significant barrier to entry Now the value of information generated from the network is more valuable barrier –E.g. loyalty programs, loyal communities

Can IT increase or decrease switching costs? Ideally make a system easy to start, hard to stop using Classic examples use customer information as a lock-in Intuit Quicken/Turbotax

Can IT add value to existing products and services or create new ones? Information-enabled services in many industries, eg vehicle computer systems Airline information systems include maintenance, booking, in-flight entertainment etc.

Today’s lecture 1.Analyzing the impact of IT 2.The role of IT in strategy 3.Limits and risk for IT 4.Performing a strategy audit 5.How does strategy evolve?

Seeking Out Low-cost Customers Standardizing a Custom Service Reducing the Personal Element in Service Delivery (promote self-service) Reducing Network Costs (hub and spoke) Taking Service Operations Off-line Competitive Strategies (Overall Cost Leadership)

Making the Intangible Tangible (memorable) Customizing the Standard Product Reducing Perceived Risk Giving Attention to Personnel Training Controlling Quality Note: Differentiation means being unique in brand image, technology use, features, or reputation for customer service. Competitive Service Strategies (Differentiation)

Strategic Focus Competitive Use of Information On-line (Real time) Off-line (Analysis) External (Customer) Creation of barriers to entry: Reservation system Frequent user club Switching costs Data base asset: Selling information Development of services Micro-marketing Internal (Operations) Revenue generation: Yield management Point of sale Expert systems Productivity enhancement: Inventory status Data envelopment analysis (DEA) Competitive Role of Information

IT Significance Information Technology can change the way that an organization (business or public sector) competes. As the foundation for organizational renewal. As a necessary investment that should help achieve and sustain strategic objectives. As an increasingly important communication network among employees and with customers, suppliers, business partners and even competitors.

Strategic Roles of Information Systems Lower Costs Differentiate Innovate Promote Growth Develop Alliances Improve Quality and Efficiency Build an IT Platform Support (enable) other Strategies

Common example of Strategic IT: Using Information to Categorize Customers Coding grades customers on how profitable their business is. Routing is used by call centers to place customers in different queues based on customer code. Targeting allows choice customers to have fees waived and get other hidden discounts. Sharing data about your transaction history with other firms is a source of revenue.

Today’s lecture 1.Analyzing the impact of IT 2.The role of IT in strategy 3.Limits and risk for IT 4.Performing a strategy audit 5.How does strategy evolve?

Anti-competitive (Barrier to entry) Fairness (Yield management) Invasion of Privacy (Micro-marketing) Data Security (Medical records) Reliability (Credit report) Limits in the Use of Information

Risks Can emerging technologies disrupt current business models? Are we too early or too late to exploit IT opportunity? Does IT lower entry barriers? Does IT trigger regulatory action?

Categories of Strategic Risk

Today’s lecture 1.Analyzing the impact of IT 2.The role of IT in strategy 3.Limits and risk for IT 4.Performing a strategy audit 5.How does strategy evolve?

Strategy Audit of Company Market/Channel position –Who are customers? –How to reach them Product position –What products/services to offer –Features, price Value chain/value network position –Role with respect to suppliers, producers, distributors, partners Boundary Position –What won’t you do?

Product/Market Positioning in the US Retail Financial Services Industry, 1990

Strategic Vision Service Concept What are important elements of the service to be provided, stated in terms of results produced for customers? How are these elements supposed to be perceived by the target market segment, by the market in general, by employees, by others? How do customers perceive the service concept? What efforts does this suggest in terms of the manner in which the service is designed, delivered, marketed?

Strategic Vision Operating Strategy What are important elements of the strategy: operations, financing, marketing, organization, human resources, control? On which will the most effort be concentrated? Where will investments be made? How will quality and cost be controlled: measures, incentives, rewards? What results will be expected versus competition in terms of, quality of service, cost profile, productivity, morale/loyalty of servers?

Strategic Vision Service Delivery System What are important features of the service delivery system including: role of people, technology, equipment, layout, procedures? What capacity does it provide, normally, at peak levels? To what extent does it, help insure quality standards, differentiate the service from competition, provide barriers to entry by competitors?

Strategic Alignment Model Ideally, all four quadrants align to create value

Today’s lecture 1.Analyzing the impact of IT 2.The role of IT in strategy 3.Limits and risk for IT 4.Performing a strategy audit 5.How does strategy evolve?

Strategic Shifts Strategy changes over time Flow of information makes this possible –Enhancement (improve existing) –Expansion (launch new) –Extension (new business or business model) –Exit (drop product/category/market/channel)

Options for Evolving Strategy

McFarlan’s Strategic Grid

Business Case Assignment Individual Assignment, posted on class website Due Thursday April 28 Optional early draft Thursday April 14

Business Case Assignment A business case is an argument why an organization should make a change, usually including spending money to get there It includes a description of the business problem or opportunity, the costs and benefits of each alternative solution, and the recommended solution for approval.

Assignment Scenario You are the CIO (Chief Information Officer) for UCSC. The university has just learned that there will be an estimated 10% state funding cut in 2014, on top several years of cuts. However, the university does have some one-time funds available to spend strategically. You have been tasked with identifying how Information or IT can be utilized to help reduce the deficit that the University is facing. Your report will go to the Chancellor and the Board of Regents. You task Select an area for analysis, and produce a business case for a proposed change that will benefit the University.

Options for focus Self-service opportunities Admission and/or enrollment systems Partnerships with other universities or companies Scheduling of university services Transportation systems Payments and transactions Teaching channels and methods Research commercialization Utilization of social networks or online communities Any other area you think of! Your idea should either increase revenue or decrease costs in the long term, but could cost money to set up You are not expected to know exact numbers for costs etc. but the estimates should be realistic. Use charts and tables wherever appropriate.

Outline 1.Executive Summary –Issue –Recommendation –Justification 2.Problem Definition –Problem statement –Alternatives available –Summary of Preferred Alternative 3.Recommended action –Organizational Impact –Impact on University mission and other services –Risks –Technology Migration Plan 4.Project Overview: A plan for the transformation –Goals and objectives of transformation –Success metrics –Major Project Milestones 5.Cost Benefit Analysis –Impacts on revenue –Impacts on costs –Comparisons with alternatives

Details This is a writing assignment 10 pages – 12 point font, 1.5 spaced, including figures/tables etc. Submit a hard copy in class and an electronic copy to the instructor and TA

Basics Grammar and spelling matter – even for great ideas! There are NO excuses for spelling mistakes in today’s world Avoid repetition Use subject headers appropriately 40

41 Basics Think about your audience. – Who are they? – Why are they reading this? – What do they want to find out? Make it easy for them

42 Basics Citations and references 1.Use quotes when you quote. 2.Use a numbering system so that the reader can easily find the source of your information. 3.Using a bibliography at the end of your document, include the Author, date, title and location of your source – An html address is not sufficient – that ONLY gives the location

43 Making a case for change Make a structured argument for your recommendation. Here is a good technique for persuasive writing, known as the Minto Pyramid Principle: S: Situation – Where are we now C: Complication – What has changed Q: Question – What should we do? A: Answer – We need to… This technique can be used for speeches, documents, presentations, etc. These are NOT section headers – and often work better integrated subtly

S: Situation This should be something everyone agrees on Establishes that you know what you are talking about, and the relevance of the situation. This part is facts, not opinion E.g. Japan is one of the world’s largest economies. Approximately 30% of their power comes from nuclear power plants. 44

C: Complication Something has happened to upset the status quo. A recent event or discovery The audience should instantly see that is raises a question E.g. A massive earthquake then resulting tsunami have caused damage to some of Japan’s nuclear plants. The fallout may cost lives and environmental damage, and will damage confidence in nuclear power. 45

Q: Question The question should be obvious from the complication This should lead to an answer E.g. How should Japan plan for an economical, safe energy future? 46

A: Answer The answer is your main point. Summarize first, then break down to details The main body should all support this answer E.g. Japan should build 50 foot walls around their northern coastline, while investing in geothermal power stations for energy growth 47

Logical arguments Your answer should actually address the question that was asked Start with the main point and break down the parts of it “Japan should build 50 foot walls around their northern coastline, while investing in geothermal power stations for energy growth” – Why 50 feet? – Why northern? – Why geothermal? 48

Types of logical arguments Deductive – Premises – Inference – Conclusion Start with a premise. If all the premises are true then the conclusion must hold. Inductive – Premises provide evidence – Open to debate 49