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 Week1: Individual/Multiple Silos Operational Systems (e.g., ?) Administrative Support Systems (e.g., ?) Week 2: Integration of Systems Seamless information flow across systems (e.g.,?) This week: Strategic role of IT Enable/Support/Enhance chosen business strategies Help shape new business strategies Operational Systems (e.g., TPS) Admin. Support Systems (MIS, ES, DSS) Integration - ERP

Headlines Survey shows majority of Data Warehouse projects either fail to meet expectations or are abandoned. In all, 41% of the 142 companies surveyed by the Cutter Consortium, an IT consulting and market-analysis firm, have failed data warehouse projects, and only 15% call their data warehousing efforts to date a major success. (44% failed to meet expectations) 49% of the surveyed companies have at least one data warehouse in use and 70% are building one

Productivity Paradox Is the evidence of evolving role of IT consistent with productivity gains at an aggregate level of the economy? IT Productivity Paradox Our productivity does not seem to increase proportional to our investment in IT 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)

What makes an IS “successful”? Does it add value to enterprise? Cut costs (efficient) Improve quality (effective) Does what it should do (efficacious) Provide opportunities (enable) Usable (emulate business processes)

IT Project Success What are the 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

“Implementation” failures Why do systems fail? 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

So What? What is the likelihood that recent advances in information technology will significantly affect your business? Is the information technology infrastructure within your organization adequate to support your strategic initiatives? Does it enable you to pursue new strategies? Does it emulate the best practices in the industry? Does it do what it needs to do?

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

What is a business model? What is your value proposition? What is your value configuration? How will you measure performance?

What is a business model? Key Drivers of Value? Who are Customers/ Suppliers/Competitors? What Activities Needed to Deliver Value? Distinctiveness? Value Proposition Financial Customer Satisfaction Internal Processes Growth & Learning Performance Value Configuration What Profit Site? How Add Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

What is a business model? Key Drivers of Value? Who are Customers/ Suppliers/Competitors? What Activities Needed to Deliver Value? Distinctiveness? Value Proposition Financial Customer Satisfaction Internal Processes Growth & Learning Performance Value Configuration What Profit Site? How Add Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

Value Proposition Key Drivers of Value? Who are Customers/Suppliers/Competitors? Sounds like competitive forces analysis

Things to Remember in the “New Economy” “Best beats first, even if it takes a long time” (Jim Collins, Built to Last) VisiCalc  Lotus 1-2-3  Excel Apple’s Newton Message Pad  PalmPilot Knowledge products defy law of scarcity Information is costly to produce, easy to replicate Also have “network” effect – value increases as base of users increase Time to market is key factor

Value Proposition What Activities Needed to Deliver Value Value Proposition What Activities Needed to Deliver Value? Three different value models Find Solve Evaluate Execute Choose Shop Network M A R G I N Chain

Value Chain What is basic premise of value chain? Inbound Logistics Operations Outbound Logistics Marketing & Sales After-sales Service Firm Infrastructure Human Resources Management Technology Development Procurement M A R G I N What is basic premise of value chain? Value created by transforming inputs into products

Value Chain Structure Critical Activities Critical Linkages M A R G I N Value Chain Structure Critical Activities Transform inputs into products Also identify activities that provide infrastructure support Critical Linkages Internal linkage: Information shared across activities within firm Tend to be sequential flows between activities External linkage: Information shared across activities between different firms Extended value chain

Competitive Forces Analysis M A R G I N Value Chain Analysis Understand Industry Strategy Activities of the organization Identify the activities and linkages along value chain that are critical Add value by focusing on those critical activities and linkages Lower cost by increasing efficiency, scale or capacity IT very effective at enabling lower cost Competitive Forces Analysis

Value Chain Use Directly applicable to manufacturing activities M A R G I N Value Chain Use Directly applicable to manufacturing activities Mass vs customized Less applicable when intangible products R&D Key question – where are you positioned in the extended value chain?

Value Shop What is basic premise of value shop? Firm Infrastructure Human Resources Management Infrastructure Support Technology Development Procurement Problem Finding & Acquisition Problem Solving Choice Simon’s Problem Solving Model Control/ Evaluation Execution What is basic premise of value shop? Value created by providing solutions to customer problems

Value Shop (cont’d) Value creation based on: Find Solve Evaluate Execute Choose Value creation based on: Information asymmetry between firm and client Firm has information client needs Rely on intensive information to solve a customer problem Firm has standardized information acquisition process Cyclical, iterative solution process Can be resolved by non-experts Need experts to recognize unique cases

Value Shop (cont’d) Key driver is value, not cost Find Solve Evaluate Execute Choose Key driver is value, not cost “Value” depends on quality of professionals assigned to client projects Learning across projects is critical Need for “knowledge base” Examples of Value Shops?

Value Network What is basic premise of value Network? Firm Infrastructure Human Resources Management Technology Development Procurement Network promotion and contract management Invite and select customers to join network Initialize, manage and terminate contracts Service provisioning Establish, maintain and terminate links Billing for value received Infrastructure operation Maintain and run physical and information network What is basic premise of value Network? Value created by providing intermediary services

Value Network (cont’d) Value derived from scale and capacity Each additional participant adds value Metcalfe’s law – value = N2 Value of new service dependent on who else adopts it What was value of first fax machine? Some examples of value networks?

Combinations of Value Models Find Solve Evaluate Execute Choose M A R G I N

What is a business model? Key Drivers of Value? Who are Customers/ Suppliers/Competitors? What Activities Needed to Deliver Value? Distinctiveness? Value Proposition Financial Customer Satisfaction Internal Processes Growth & Learning Performance Value Configuration What Profit Site? How Add Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

Components of Value Configuration Profit Site -- definition 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 What is the profit site for Cisco?

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

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

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

Components of Value Config – cont’d How to sustain value? Complementary Assets Model Imitability: extent to which an innovation can be copied, substituted, or leapfrogged by competitors Complementary assets: all other capabilities needed to exploit the innovation Brand name, manufacturing, marketing, distribution channels, service, reputation, installed base of products, relationships (with customers or suppliers), etc.

Complementary Assets Model I Difficult to make money II Holder of complementary assets makes money High Imitability IV Inventor makes money III Party with both technology and assets or with bargaining power makes money Low Freely Available or Unimportant Tightly Held and Important Complementary Assets

Complementary Assets Model Where would Internet-based strategies typically be found? If I am in cell III: What happens if someone imitates my product? What happens as my product becomes obsolete? Where would a product with Intellectual Property protection fall? I Difficult to make money II Holder of complementary assets makes money High Imitability IV Inventor makes money III Party with both technology and assets or with bargaining power makes money Low Freely Available or Unimportant Tightly Held and Important Complementary Assets

Question Name three companies that are key players in e-business What is the competitive advantage of each? Is the competitive advantage sustainable?

What is a business model? Key Drivers of Value? Who are Customers/ Suppliers/Competitors? What Activities Needed to Deliver Value? Distinctiveness? Value Proposition Financial Customer Satisfaction Internal Processes Growth & Learning Performance Value Configuration What Profit Site? How Add Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

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

What is 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 “infrastructure”

Strategic Fit Alignment between Strategy (external) and Infrastructure (internal) Assumptions: 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 the strategic role and management of IT Ability to leverage IT on a continual 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 -- agree? Need for a framework for conceptualizing and directing the strategic role and management of IT Strategic Alignment Model (Henderson and Venkatraman)

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

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

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 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 ?

Lessons from the Strategic Alignment Model Need for IT external and internal domains Understand strong/weak domains and 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.

Backup Not covered in class

Tektronix What is the “business model”? What is their core competency? What combination of: Revenue model Commerce strategy Pricing model Strategy? Cost vs Differentiation Broad vs Focused What is their core competency?

Tektronix: What is their Value Configuration Model Find Solve Evaluate Execute Choose Shop Network Resolve Customer Problem Facilitate Customer Relationships M A R G I N Chain Improve Internal Efficiencies

Tektronix – cont’d Do they have a competitive advantage? What is the basis for the advantage? Is it sustainable? Is the business model based on: What they can be great at? A viable economic engine Their core values

Apply the Strategic Alignment Model to analyze the enterprise-wide initiative at Tektronix Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills 7c

What impact did the enterprise-wide system have on the structure and culture of the Tektronix organization? Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills 7b

Apply Porter’s Strategic Positioning Framework to Tektronix 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

Cisco What is the “business model”? What is their core competency What combination of: Revenue model Commerce strategy Pricing model Strategy? Cost vs Differentiation Broad vs Focused What is their core competency

Cisco: What is their Value Configuration Model Find Solve Evaluate Execute Choose Shop Network Resolve Customer Problem Facilitate Customer Relationships M A R G I N Chain Improve Internal Efficiencies

Cisco – cont’d Do they have a competitive advantage? What is the basis for the advantage? Is it sustainable? Is the business model based on: What they can be great at A viable economic engine Their core values

Apply the Strategic Alignment Model to analyze the enterprise-wide initiative at Cisco Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills 6d

What impact did the enterprise-wide system have on the structure and culture of the Cisco organization? Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills 6c

Apply Porter’s Strategic Positioning Framework to Cisco 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

Apply the Strategic Alignment Model Business Strategy Scope Competencies Governance IT Strategy Scope Competencies Governance Business Infrastructure Structure Processes Skills IT Infrastructure Infrastructure Processes Skills 6d

Complementary Assets Model Resulting Strategies Run Innovate to reduce imitability or develop CA Block Create entry barrier with Intellectual Property or threats of retaliation Team-up Develop CA with: Strategic alliance Joint venture Acquisition Run Run Or Team-up High Imitability Block Block Or Team-up Low Freely Available or Unimportant Tightly Held and Important Complementary Assets

Run Strategy: Two types of innovation Sustaining innovation: Make product or service better based on metrics in mainstream market Walkman evolved to portable CD player Disruptive innovation: New product or service is actually worse based on mainstream metrics iPod eliminated portable CD players

Innovation Christensen cites numerous instances where companies failed to react to disruptive changes Seeing the disruption coming was not the problem Organizations did not have capability to react in a way that enabled them to keep pace with the required changes

What is needed to perform activities that underpin customer value? Resources: things and assets that can be acquired. Flexible: asset acquired for one task may be used on another Processes: procedures developed to accomplish a task. Designed to be inflexible to ensure consistency and promote efficiency Process developed to accomplish one task may not be used to accomplish another Values: criteria by which employees make decisions about priorities Organizational structure & culture?

What limits a firms ability to react? Established companies develop RPV (resource/ process/value) models focused on sustaining innovations Processes and values focused on introducing improved products to gain competitive edge. Disruptive innovations: Could not be handled by routine processes Had lower profit margins (did not fit the values of the organization) Were not suited for existing “best” customers Evolved in emerging markets that were surrendered by established companies PC market initially ignored by IBM

Three options to create new capabilities Acquisition Create new capabilities internally Spin-out ventures

Acquisitions If acquired companies processes and values are basis for success, cannot easily integrate into parent organization. HP and Compac merger? If acquired companies resources are basis for success, then can integrate Cisco Banks Oracle & Peoplesoft?

Create new capabilities If acquire new resources, should not use same processes and values GM invested $60 billion in resources. Ended up with state-of-the-art resources supporting antiquated processes Processes and values define how resources are combined to create value Toyota innovated development, manufacturing and supply-chain processes with little additional resource investment Processes are hard to change!!!

Spin-out ventures “A separate organization is required when the mainstream organization's values would render it incapable of focusing resources on the innovation project” A threatening disruptive technology requires a different cost structure to be profitable and competitive The current size of the opportunity is insignificant relative to the growth needs of the mainstream organization

Complementary Assets Model Resulting Strategies What strategy are you going to pursue in your IBP? Run Run Or Team-up High Imitability Block Block Or Team-up Low Freely Available or Unimportant Tightly Held and Important Complementary Assets