Making the Case for Networked Business Chapter 4

Example of Industrial Economies of Scale In the early 1900s, Ford Motor Company executives demonstrated that industrial technologies and management principles could enable the company to dramatically lower the cost and increase the output of cars in its assembly plants. Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

Example of Industrial Economies of Scope : Because of the specialized nature of the technology and processes used, Ford Motor Company executives found that economies of scope were limited. The decision to introduce new products, like trucks, required that new plants be built. In fact, assembly plants were closed for several weeks each summer to enable new models of cars or trucks to be built in existing plants. Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

Network Economies of Scale and Scope Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

A Scenario-Based Approach to Valuation Step 1: Define the purpose for the value assessment Step 2: Pick a point in the future when you expect your business strategy to deliver value Step 3: Analyze the business concept and strategy and forecast market size, your share, and revenues. Step 4: Analyze the capabilities and resources required to reach the future state and forecast the cost of building those capabilities and acquiring resources. Step 5: Based on this analysis, construct estimates of financial performance and market value that reflect the "most likely" assumptions. Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

A Scenario-Based Approach to Valuation Step 6: Factor in the uncertainty in your assumptions by developing several scenarios that represent upper and lower bounds on key variables in your forecasts. Step 7: When appropriate, validate your model by using alternative approaches, such as Discounted Cash Flow and Comparable Company Analysis. Step 8: Discuss the value analysis scenarios you have constructed with others and critique the findings and assumptions—not just once—but on a regular basis. Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

The IT Business Value Score Card Categories of Benefits Goals and Measures InternalExternal Type I: Benefits from Investments in a Networked IT Infrastructure Functionality and Flexibility Improve infrastructure performance; increase the functionality and range of strategic options that can be pursued Sample Measures: Decrease the cost / improve the performance of internal IT operations; new IT applications to be created at lower cost, in less time, and with less risk; expand the range of internal IT initiatives Create an efficient, flexible online/offline platform for doing business with customers, suppliers, and partners Sample Measures: Decrease the cost / improve the performance of doing business online; decrease the time, cost and risk of launching new online business initiatives;

The IT Business Value Score Card Categories of Benefits Goals and Measures InternalExternal CommerceImprove internal operating efficiency and quality Sample Measures: Internal process performance and work flow improvements; cost savings or cost avoidance; increased quality; decreased cycle time Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels Sample Measures: Supply chain or distribution channel performance improvements; cost savings or cost avoidance for the organization and its customers, suppliers, or partners; decrease time to market or just-in-time order replenishment; enable new channels to market and/or extend the reach and range of existing channels

The IT Business Value Score Card Categories of Benefits Goals and Measures InternalExternal Content / Knowl edge Improve the performance of knowledge workers and enhance organizational learning Sample Measures: Enable individuals to achieve and exceed personal performance goals; increase the speed and effectiveness of decision making; increase the ability of the organization to respond quickly to threats and opportunities Improve the performance of knowledge workers in customer, supplier, and partner organizations; add “ information value ” to existing products and services; create new information-based products and services Sample Measures: Provide information to customers, suppliers, and partners that enables better decision-making; charge a price premium for products and services based on information value- added; launch new information-based products and services; increase revenue per users and add new revenue streams

The IT Business Value Score Card Categories of Benefits Goals and Measures InternalExternal CommunityAttract and retain top talent; increase satisfaction, engagement, and loyalty; create a culture of involvement, motivation, trust, and shared purpose Sample Measures: Length of time to fill key positions; attrition rate, trends in hiring and retaining top talent (over time, by industry, by region) Attract and retain high quality customers, suppliers, partners, and investors; increase external stakeholders satisfaction, engagement, and loyalty Sample Measures: Customer, supplier, partner satisfaction and lifetime value; average revenues per customer and trend over time; level of personalization available and % that use it; churn rate

Comparing the three eras of IT Evolution Timeframe Mainframe Era 1950s to 1970s Microcomputer Era 1980s & Early 1990s Network Era 1990s to present Dominant Technology Mainframe, stand-alone applications, databases Stand-alone microcomputer and end- user tools (e.g., word processing, spreadsheets) Client-server, Internet, browser and hypertext “ Data Management ” “ Information Management ” “ Knowledge Management ” Organization Metaphor Hierarchy Entrepreneurial Organization Networked Business Community “ Centralized Intelligence ” “ Decentralized Intelligence ” “ Shared Intelligence ” Primary IT Role Automate back-office activities Provide information and tools to improve decision making and knowledge worker performance Transform organizations and markets to create business value

Comparing the three eras of IT Evolution Typical UserIT specialists IT literate business analysts Everyone Location of UseComputer roomDesktopEverywhere Planning Process Yearly budgetingIndividual expense Business development and strategic planning JustificationCost savings Increased decision quality and personal performance Business value ImplementationIndependent projectsAd-hocStrategic initiatives Timeframe Mainframe Era 1950s to 1970s Microcomputer Era 1980s & Early 1990s Network Era 1990s to present