Strategy #5

IT Architecture and IT Infrastructure are Metaphors Architecture - the relationship between planning and building Infrastructure - examples of infrastructure - highways, railroads, utilities, etc. Often IT Architecture and IT Infrastructure are used interchangeably. What does viewing them as metaphors tell us?

Components of an Infrastructure Hardware Software –Operating systems, compilers, utilities, development software, etc –Shared applications, e.g. Communications Databases

IT Architecture A set of policies and rules that governs the use of IT and plots a direction for the future conduct of business A good architecture must cope with both business uncertainty and technological change. Therefore it is tied to business requirements A good architecture evolves, is documented, and is accessible to managers. This implies something about relationships among a firm’s leaders

Architecture and Infrastructure An agreed upon architecture is necessary for a firmwide infrastructure to: –achieve compatibility among various systems –specify policies and mechanics for delivering the IT strategy –describe the technological model of the organization –cut through multi-vendor chaos and move toward vendor independence

IT Architecture Competency It is rare that IT capabilities are the unanticipated sources of value (UPS). More often, they are constraining. IT architecture competency, “…is the ability of a firm to create a mutually reinforcing pattern of evolving, tightly aligned business strategy and IT capability.”

Development Sequence for IT Architecture Define the firm’s strategic objectives Define key IT capabilities for enabling those objectives Define the policies and technical choices for developing the IT capabilities

Four IT Architecture Stages Application Silo Architecture Focuses on individual applications Benefits and risks –Goal is local optimization –Full functionality in support of business units or by geography –Accumulation of legacy systems with problems of integrating systems and maintenance –Increased complexity and reduced flexibility for future development

Four IT Architecture Stages Standardized Technology Architecture Established technology standards to limit complexity Benefits and risks –IT efficiency and cost control –Improved IT maintainability, reliability, and security –Resistance by managers who believe that business prerogatives should trump technological needs –Difficult choices in deciding when exceptions should occur –Difficult choices with respect to infrastructure investment

Four IT Architecture Stages Rationalized Data Architecture Identification and standardization of a key subset of the firm’s data Benefits and risks –Associated with process standardization which provides process predictability and efficiency –Potential for developing new products and services based on core processes –Technical risk involved in data extraction from legacy systems –Implementation risk from process change and centralization

Four IT Architecture Stages Modular Architecture Stage Process optimization via data and process standardization Benefits and risks –Reusable process modules –Strategic agility –Local customization with links to standard processes –If modules are introduced before standardization is in place it could lead to chaos

Comparison of Architecture Stages

Relationship between Stages and Business Strategy

IT Governance IT governance specifies the framework for decision rights and accountabilities to encourage desirable behavior in the use of IT. Desirable behavior is consistent with the organization’s mission, strategy, values, norms, and culture Who makes decisions Who has inputs to the decisions Who is accountable

Major IT Decisions IT Principles IT Architecture IT Infrastructure strategies Business Applications IT Investment and Priorities

IT Governance Archetypes Business Monarchy IT Monarchy Feudal Federal IT Duopoly Anarchy

Approaches to Governance

IT Governance CSFs Transparency Actively designed Infrequently redesigned Education about IT governance Simplicity Process for handling exceptions Governance designed at multiple organizational levels Aligned incentives

Lock-in When the costs of switching from one brand to another are substantial, you face lock-in – Note the relationship to the bargaining power of suppliers and buyers in the Competitive Forces model Switching costs are ubiquitous Mass market switching costs = size of market * individual switching cost

Value of an Installed Customer Base Total switching costs = customer switching costs + supplier switching costs To make it worthwhile for a customer to switch, you must offer more than the customer’s switching cost A supplier can make an offer such that the discounted cash flow from the customer is > the total switching costs The value of your customer base = total switching costs + thee value of your competitive advantages (lower cost or superior features)

Types of Lock-in Contractual commitments Durable purchases Brand-specific training Information and databases Specialized suppliers Search costs Loyalty programs

The Lock-in Cycle

Lock-in Strategy for Buyers Bargain hard at the outset Keep your options open Watch out for creeping lock-in

Lock-in Strategy for Sellers Invest to build an installed customer base –Fight for new customers –Consider the entire life cycle –Sell to influential customers Encourage customer entrenchment –By design –Through loyalty programs Leverage your customer base –Sell complementary products –Set differential prices –Control cycle length