BA572 – Week # 4 Strategic Alignment of IT with Business Strategy Jim Coakley, Ph.D., V.T. Raja, Ph.D., Oregon State University

Review

Transcending/Evolving Role of IT Individual/Multiple Silos (Week # 1) Operational Systems (e.g., ?) Administrative Support Systems (e.g., ?) Integration of Systems (Week # 2) Seamless information flow across systems (e.g.,?) Strategic role of IT (Weeks 3 and 4) Enable/Support/Enhance chosen business strategies Help shape new business strategies Operational Systems (e.g., TPS) Admin. Support Systems (MIS, ES, DSS) Integration - ERP

Productivity Paradox Is the evidence of evolving role of IT consistent with productivity gains at an aggregate level of the economy? IT Productivity Paradox 75% of large-scale IT projects failed (e.g.,?) Reasons? Productivity Paradox: Failed large-scale IT projects: (e.g., Bank of America – Trust Accounting System; Greyhound Reservatioin/Scheduling system; Denver International Airport Baggage Tracking System)

“Implementation” failures System: Lack of user involvement!!!!! Insufficient training of end-users Inadequate infrastructure in place Run over time and budget Inadequate systems integration testing Conversion problems -- data People: natural resistance to change Politics: IT can change basis of power

IT Project Success Key factors for successful project? End-user involvement Involvement does not guarantee success, but lack of involvement guarantees failure User-designer communication gap Top management support Ensures funding and management support Appropriate level of complexity and risk Management of the implementation process Alignment of IT with business strategy

Strategy? Strategy Formulation Strategy Implementation Decisions pertaining to competitive, product-market choices Strategy Implementation Choices that pertain to the structure and capabilities of the organization to execute its product-market choices Strategy - Decisions pertaining to different components of business model (Afuah – Tucci) and the relationship across components

Conceptual Framework from Afuah-Tucci Key Drivers of Value? Who are Customers? What Activities Needed to Deliver Value? Distinctiveness? Key Environment Internet IT Performance Business Model What Profit Site? What Customer Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

Components of a Business Model Profit Site Location in a value configuration vis-à-vis customers, suppliers, rivals, potential new entrants, complementors and substitutes Look at value configuration, competitive forces, complementary assets model

Components of a Business Model – cont’d Value & Scope Cost vs Differentiation Broad vs Focus Commerce Strategy B2C B2B C2B C2C or P2P B2E

Components of a Business Model – cont’d Pricing Strategy Menu/Fixed 1v1 Bargaining 1vM Auction Mv1 Reverse Auction Barter – exchange good and services

Components of a Business Model – cont’d Source of Revenue Commission Advertising Markup Production (direct to consumer) Software Referral Subscription Fee-for-Service

Strategic Fit Assumptions: Strategic fit is inherently dynamic Economic performance is directly related to: the ability of management to create a strategic fit between the position of an organization in the competitive product-market arena and the design of an appropriate administrative structure to support its execution Strategic fit is inherently dynamic Strategic Alignment is not an event – but a process of continuous adaptation and change Strategic choices in the external and internal domains should be consistent The choices made by one organization (if fundamentally strategic), will over time evoke imitative actions, which necessitate subsequent responses.

IT as a Critical Lever A critical lever for attaining this dynamic capability is the organizational capabilities to: Conceptualize and direct strategic role/management of IT Leverage IT on a continuous basis to achieve sustainable competitive advantage No single IT application – however sophisticated and state of the art it may be – could deliver a sustained competitive advantage Need for a framework for conceptualizing and directing strategic role/management of IT Strategic Alignment Model (Henderson and Venkatraman)

Role of IT in Business Strategy Jim Collins: “Good to Great: Why Some Companies Make the Leap … and Others Don’t” Conducted 84 interviews across 11 companies that leaped from mediocrity to greatness (returns 3 times general stock market) 80% of executives did not mention technology as one of top five factors in the companies transformation Yet every company was considered a pioneer in the use of information technology to support their business

Role of IT in Business Strategy Great companies: First build a culture of discipline (values) Create a business model based on: What they can be great at A viable economic engine Their core values Then, use information technology to enhance those variables – not to replace them

Observed characteristics of well-aligned companies (2004 Survey by Deloitte Consulting LLP ) Executive agreement on the role of IT – where and how IT adds value Executive agreement on the priorities and focus areas for IT Follow through and delivery on IT expectations

2004 Survey by Deloitte Consulting LLP (Advertising Supplement in CIO Magazine)

Deloitte Consulting measured alignment of: IT operational goals to corporate business goals IT spending with corporate priorities IT operations to IT strategy IT org/gov with corporate org/gov Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Deloitte Consulting – 2004 Survey Strategic Alignment Model (SAM) - 1993 Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills

Strategic Alignment Model Four Domains of Strategic Choice Need to recognize how decisions in one domain affects the other domains Scope Competencies Governance Scope Competencies Governance Strategy (External) Strategic Fit Structure Processes Skills Infrastructure Processes Skills Infrastructure (Internal) Business Information Technology Functional Integration

Strategy Domains Business IT Scope: What business are you in? Distinctive Competencies: What do you do well to distinguish yourself from your competitors? Governance: What external business relationships do you depend on? IT Scope: What information technologies support or create strategic business opportunities? IT Competencies: What characteristics of IT create business advantage? IT Governance: What external relationships does IT depend on (outsourcing, vendors, etc.) IT Strategy: Example: Primis (McGraw-Hill Inc.) custom edition of textbooks IT Scope: Electronic Imaging Technology Systemic Competence: Superior level of clarity of imaging (an attribute of IT strategy) to guarantee high-quality printing (an attribute of business strategy) and flexible binding capability (IT strategy matches with Business Strategy); Overall – supports business need of offering customized textbook to interested customers IT Governance: Joint ventures and long-term agreements with Eastman Kodak and R.R. Donnelley & Sons Co., to obtain the requisite competencies.

Infrastructure Domains Business Structure: Organizational structure Processes: What are key business processes? Skills: What HR needed to accomplish specific competencies? IT Infrastructure: Hardware, Software, Database, Networks Processes: Development, Maintenance, Operations Skills: What skills required to maintain architecture and execute the processes?

How to use the Strategic Alignment Model Building Blocks: Strategic Fit Functional Integration and Cross-Domain Relationship Identify your strongest and weakest domain Need to develop communication with and increase understanding of weaker domains Understand relationship between domains when change in strategy occurs Building blocks: Strategic Fit (Between external business domain and internal business domain – same for IT domains); Functional Integration – Need to integrate business and IT domains. SAM calls for cross-domain relationships. (Effective management of IT requires a balance among the choices made across all four domains). Some examples of some dominant cross-domain relationships are discussed next.

Strategy Execution IT is an Expense Business Strategy is the driver of both Business and IT Infrastructures Priority is to improve business processes, which places focus on changing business infrastructure. IT focus is on application development, driven by need to support business infrastructure Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? Top Mgmt’s Role: Strategy Formulator; IT Mgmt’s Role: Strategy Implementor; Performance measure based on financial parameters reflecting a cost center focus. Risk: IT reacts to support business processes – not viewed as a strategic resource E.g. Use automation – Marginal benefits for business due to IT Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills

Technology Transformation Business Strategy Drives Need to Develop IT Strategy Assume: Business strategy and infrastructure are aligned IT strategy needs to define technologies integral to business strategy Focus is aligning IT strategy and IT infrastructure Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? Top Mgmt’s Role: Technology visionary; IT Mgmt’s Role: Technology Architect; Performance Metric: Based on technology leadership – often utilizing a bench-marking approach Risks: IT is not integrated – IT infrastructure lags and does not adequately support business infrastructure Example: American Express Travel Related Services Co., Inc. Bus Strategy: Provide quick approval of purchased made by charge card (w/o any preset spending limit) Provide copies of receipts to cardholders Technology Strategy: Scope/Competenices: Expert Systems, Optical Scanning, Storage and Laser-Printing System; Governance: Make vs. Build (Build expert systems; Purchase Optical Scanning, Storage and Printing Systems) Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills ?

Service Level Providing IT services Information is a core product or service Business strategy and IT strategy may be aligned Focus is to enable business infrastructure by fitting IT infrastructure to IT strategy Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? ? Top Mgmt’s Role – Prioritizer (Articulate how best to allocate the scarce resources both within the firm and the IT marketplace) IT Mgmt’s Role – Leadership – Make the internal service business succeed within the operating guidelines from top management. Performance Measure – Based on customer satisfaction obtained with qualitative and quantitative measurements using internal and external benchmarking (end-user-needs surveying, service-level contracting) Risks: May lose sight of business strategy; IT viewed as a service function independent of business strategy. Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills

Competitive Potential IT Enables Strategic Opportunities Assume: IT strategy and infrastructure are aligned IT strategy necessary to build distinctive core competency Business infrastructure needs to evolve to fit new business opportunities enabled by IT Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Top Mgmt’s Role? IT Mgmt’s Role? Performance Criteria for assessing IT based on ___? Risk? Top Mgmt’s Role: Business Visionary – How emerging IT would impact business strategy. IT Mgmt’s Role: Catalyst – Identifies and interprets trends in the IT environments to assist the business managers to understand potential effects of IT on business. Performance Criteria – Based on business leadership with qualitative and quantitative measurements pertaining to product leadership such as market share, growth, or new product introduction. Risk: Large IT investments; Change organizational structure to address info flow problems; Re-train employees with new IT. Examples: Nike – ERP – New product introduction (18 months before SAP; After SAP – expected to be around 3 months) Baxter Health Care – Exploitation of its IT position - Software service to healthcare marketplace – Joint venture with IBM (Spectrum project) Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills ?

How does Strategic Alignment model differ from Traditional Linkage? Introduces IT external domain Management challenge: Selection of appropriate alignment perspectives (not just ensuring IT is linked with business requirements) Diverse roles of business and IT executives Criteria for Performance Assessment Business Executives Business visionary, Technology visionary, Prioritizer IT Executives Resource optimizer, Technology architect, Change Catalyst, Executive Leadership Criteria for Performance Assessment – Cost Center, Technology Leadership (Benchmarking Approach), Profit Center (Market share, Growth, New Production), Investment/Service Center

Management Implications Link between Business Strategy and IT Infrastructure can only derive its logic within the context of: the two alignment perspectives that have business strategy as the driver (Strategy Execution and Technology Transformation) Direct link between IT Strategy and IT Infrastructure has no straightforward logic If direct link is forced – significant probability of failure of investments made to transfer business processes, because of an inability to provide the information necessary to execute the processes.

Lessons from the Strategic Alignment Model Need for IT external and internal domains Understand strong/weak domains and cross-domain relationships Different roles of business and IT executives Re-conceptualize assessment of the performance of IT Which alignment perspective is best? If there is one universally superior perspective – would the strategic benefit be sustainable? Maintaining alignment is a process (inherent dynamic nature) Focus of fit will change as strategies evolve

Can we put these models together? Profit Site Source of Revenue Commerce Model Value/Scope Pricing Strategy

Environment Competitive Forces & Complementary Assets Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance With the advent of Internet – Strategy and Competitive Advantage have given way to some new terminology at dot-coms; Porter says these terminology are destructive in some sense e.g., Business Models – Loose conception of how a company does business and generate revenue (Exceedingly low bar to set for building a company). Generating revenue is a far cry from true economic value, and no business model can be evaluated independently of industry structure. E-business and E-Strategy – such terms – encourage managers to view their Internet operations in isolation from the rest of the business – could lead to simplistic approaches to competing using the Internet – and increase the pressure for competitive imitation. Established companies fail to integrate the Internet into their proven strategies and thus never harness their most important advantages. Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills

Mar, 2001 What was going on in the economy? All time high of 11,723 in Jan 2000 Hovering above 11,000 in early 2001 What were the major IT issues? Properties/Limitations of Transactions over the Internet “Strategy and the Internet” What was Porter’s major message?

Strategy and the Internet (Porter) We need to “…see the internet for what it is: an enabling technology…” (pg 64) The “…greatest impact [of the internet] has been to enable the reconfiguration of existing industries that had been constrained by high costs for communicating, gathering information, or accomplishing transactions.” (pg 66) “The great paradox of the Internet is that its [benefits] also make it more difficult for companies to capture those benefits as profits.” (pg 66)

Principles for Internet Strategy (Porter) Strategic Positioning Start with the right goal Deliver a unique value proposition Develop a distinctive value chain configuration Make trade-offs for robust strategy Fit all elements of company to the strategy Maintain continuity of direction Right goal: Superior long-term ROI. (Price > Cost); Volume and market share leadership do not necessarily imply profits. Unique value proposition: Strategy is not a quest for the universally best way of competing (others would then copy); Strategy is not an effort to be all things to every customer. Distinctive Value Configuration: Tailored to its unique value proposition. Trade-offs: Abandon or forego some product features, services, or activities – maintain distinctiveness – do not be all things to all customers. Fit – Internal and External Linkages (Company’s activities – mutually reinforcing); It is harder to imitate “fit”. Rivals can copy one activity or product feature fairly easily, but will have much more difficulty duplicating a whole system of competing. Continuity of direction – Frequent corporate “reinvention” is usually a sign of poor strategic thinking and a route to mediocrity. Continuous improvement is a necessity, but it must always be guided by a strategic direction.