Search competitive opportunities to shape Strategy

Strategic Planningfor Information

Systems

John Ward and Joe Peppard

Third Edition

CHAPTER 5IS/IT Strategic Analysis: Determining the Future Potential

Learning Objectives

• Criteria for effective planning

• Business strategic and IS/IT strategic analysis methods– Value Chain– Strategic option generator– Resource life cycle analysis

Determining the Future Potential

• Historically, IT used to optimize performance of main operational activity of the business

• Emphasis has been on:– Internal processes and operations.– Key processes in the organization– Internal critical success factors.– Firm rather than the industry.

Current Patterns

IT Improvement Zone

Possible Outcomes

Strategic Perspective for Applications

The changing content of the application portfolio should reflect the evolving strategic themes.

Aligning IS/IT Investment Business

Development of business strategies is best carried out if you consider the organization as a group of (strategic) business units. – This enables the market/product relationship to

determine strategic thinking and functional/organization aspects become secondary, ensuring that external strategy drives internal strategy.

– The portfolio of products and/or customers can be analyzed to identify how each grouping contributes to or makes demands on resources available.

– Provides the sharpest focus– Generic strategy concepts can be best applied to

business units (low cost, differentiation and niche).– To achieve more effective strategic decision-making.

Criteria for Effective Planning

• Situation analysis and competitive assessment

• Evaluation of strategic options

• Dynamic allocation of resources

The purpose of strategic planning is to add value to the firm by adding new customers, new products or services, new markets, new locations, or new breakthrough technology.

If the plan does not add value, it is worthless

Value Chain Analysis

• The concept of Value Chain Analysis is described by Michael Porter who notes that: “Every firm is a collection of activities that are performed to design, produce, market, deliver and support its products or services. All these activities can be represented using a value chain. Value chains can only be understood in the context of the business unit”.

Value Chain Analysis

• The value chain of the business unit is only one part of a larger set of value-adding activities in an industry- the industry value chain or value system

• The value chain of any firm needs to be understood as part of the larger ‘system’ of related value chains

The External Value Chain

SupplierRaw materialsCapital goods

Agencies anddistributors

The business unit

Direct suppliersComponents

LabourServices Competitors

Expectdistributionchannels

Local distributionchannels

MARKET A

MARKET B

MARKET C

End Customers

Value and demand information

Cost and supply information

The External value chain

Paper Industry Value Chain

Forest Products Manufacturers

WoodFine & Printing

Paper Manufacturers

Industrial & Packaging Paper

Manufacturers

Other Product Manufacturers

Merchants & Distributors Retailers

Printers & Publishers

Hammermill Companies

Consumers of Fine and

Printed Papers

Other use of wood

Other forms of packaging

IS and Value Chain

• Information systems are used to enable better information exchanges through the industry value chain, significant benefits can be obtained from the improved links. These benefits should enable a firm to spend more of its business energy in outperforming its real competitors rather than competing with its trading partners for profit.

Information Systems and The Value Chain

SUPPLY CONVERSION PRODUCT & SERVICES LOGISTICS

CONSUMPTION

Operational information exchange to enable matching of supply and demand

Informing the market to create demand

Gathering information to understand demand

RESEARCH DEVELOPMENT MANUFACTURE MARKETINGAND

SALES

PRESCRIBERS

PATENTOFFICE

CLINICALTRAILS--PROVING

PROPERTIES

REGULATORYBODIES

INCLUDINGF & DA

WHOLESALERSAND AGENTS

GOVERNMENTAGENCIES

AND HEALTHINSURES

PATIENTS

DISPENSERS/PHAMARCIES

UNIVERSITY

RESEARCH

TRIALDETAILS

NEW CHEMICAL

ENTITIES

COMMERCIALIZED

DEVELOPMENTS REQUIREMENT

LITERATURE

PATENTRESULTS

CHEMICALENTITIESDETAILS PROPOSAL

PRODUCTAPPROVAL

PROCESSAPPROVAL

COSTSEXPENSES

MARGINSetc.

PRICEANDREGUL-ATION

(EXPORT)

2

54

INFLUENCERSGOODS

ORDERS

USAGES/REACTIONS

"EFFICACY"

INFLUENCERS

3

DRUGDETAILS

GOODS

PRESCRIPTION

AGENCIES

DEMOGRAPHICS

EPIDEMIOLOGY

DISEASE/MORBIDITY etc.

AREAS OF RESEARCHBASED ONTHERAPEUTIC

INDICATIONS

DEVELOPMENT OPPORTUNITIES

BY THERAPEUTIC AREA

RESEARCH AREAS

FOR PRODUCTDEVELOPMENT

1

3a3b

Value chain for a pharmaceutical company

6

SCHEDULES

Resource Life Cycle Analysis (RLC)

• To analyze relationships with customers• Can determine not only when

opportunities (and threats) exist for improved or new information exchanges but also which specific applications should be developed

• Should be viewed from one end only (customer or supplier)=> RLC model could be a customer or supplier RLC

Resource Life-Cycle AnalysisRequirementsEstablish requirements To determine how much of a resource is requiredSpecify To determine a resource’s attributes

AcquisitionSelect source To determine where customers will buy a resourceOrder To order a quantity of a resource from the supplierAuthorize and pay for To transfer funds or extend creditAcquire To take possession of a resourceTest and accept To ensure that a resource meets specifications

StewardshipIntegrate To add an existing inventoryMonitor To control access and use of a resourceUpgrade To upgrade a resource if conditions changeMaintain To repair a resource, if necessary

RetirementTransfer or dispose To move, return or dispose of inventory as necessaryAccount for To monitor where and how much is spent on a resource

Strategic Option Generator

• Define Strategic Targets

• Define Strategic Trust

• Select Alternatives

Strategic Option Generator• Strategic Targets:

– Suppliers – anyone supplying essential resources. It may be necessary to subset them either by the nature of what they supply or their strength, or their ability to exert pressure on you and other customers.

– Customers – this could include the consumers as well as direct customers. The customers should be segmented in terms of what they buy or how much.

– Competitors – who dell very similar product or services should be supplemented by actual or potential new entrants into the market and ‘threatening’ substitute products and services should be included as competition.

Strategic Thrusts• Differentiation – ensuring that superior quality is

delivered and perceived, leading to obtaining a premium price

• Cost – being cheaper or enabling suppliers or customers to reduce their costs and thereby preferring to conduct business with the firm

• Innovation – introduce a new product, service, process or way of doing business that transforms the relationships and competitive forces in the industry.

• Growth – enable volume or expansion in geography or increased flexibility of production and distribution to meet different segments needs.

• Alliance – forcing agreements, joint ventures or joint investments in systems to prevent new entrants or competitors achieving advantage.

Strategic IS OpportunitiesSUPPLIER CUSTOMER COMPETITORS

DIFFERENTIATION

COST

INNOVATION

GROWTH

ALLIANCE

STRATEGICTHRUST

STRATEGICTARGET

Framework for assessing strategic IS opportunities.Sources : Rackoff, Wiseman and Ullrich (1985)

IS/IT Opportunities Analysis: Questions

• Suppliers – Can we use IS/IT to:– Gain leverage over our suppliers?– Reduce buying costs?– Reduce the suppliers’ costs?– Be a better customer and obtain a better

service?– Identify alternative sources of supply?– Improve the quality of products/services

purchased?


• Customers – Can we use IS/IT to:– Reduce customers’ cost and/or increase their

revenue?– Increase our customers’ switching costs?– Increase our customers’ knowledge of our

products/services?– Improve support/service to customers and

their needs?– Identify new potential customers?


• Competitors – Can we use IS/IT to:– Raise the entry cost of potential competitors?– Differentiate products/services?– Reduce our costs/Increase competitors’

costs?– Alter the channels of distribution?– Identify/Establish a new market niche?– Form joint ventures to enter new markets?

Select Alternatives

• Offensive

• Defensive

TARGET

SUPPLIER CUSTOMER COMPETITOR

THRUST

Differential Cost Innovation Growth Alliance

OFFENSIVE DEFENSIVE

DIRECTION

USE PROVIDE

EXECUTION

STRATEGICADVANTAGE

Strategic Option Generator (Wiseman)

MODE

Federal Express Analysis Using the Strategic Option Generator

Strategic Advantage

Target

Supplier Customer Competitors

Thrust

Differentiation

Cost Innovation Growth Alliance

Mode

Offensive Defensive

Direction

Use Provide

Execution

UPS Analysis Using the Strategic Option Generator

Target

Supplier Customer Competitors

Thrust

Differentiation

Cost Innovation Growth Alliance

Mode

Offensive Defensive

Direction

Use Provide

Execution

Strategic Analysis

Internal Value Chain

• The purpose of Internal Value Chain analysis is to divorce what the company does from how it does it.

Two types of business activity:• Primary activities; those that enable it to fulfill its

role in the industry value chain and hence satisfy its customers. They must be linked together effectively.

• Support activities; those which are necessary to control and develop the business over time and thereby add value indirectly.

Primary Activities

• Inbound logistics — Procuring, receiving and warehousing raw materials.

• Operations — Machining, assembly and manufacturing products.

• Outbound logistics — Getting the product to the customer.

• Marketing and sales — Advertising, marketing and selling.

• Service — Providing customer support and product repairs.

Support Activities

• Procurement: The purchasing of materials used to create value for the firm.

• Technology Development: Any technology used to support the firms value chain activities.

• Human Resource: The Activities surrounding the Recruiting, Hiring, Training and compensation of an organizations employees.

• Firm Infrastructure: The activities and functions that support a firm’s ability to create value such legal, accounting, management, strategy, etc.

Cont..

• The term, Margin implies that organizations realize a profit margin that depends on their ability to manage the linkages between all activities in the value chain. In other words, the organization is able to deliver a product / service for which the customer is willing to pay more than the sum of the costs of all activities in the value chain.

Value Chain: An ExampleINFRASTRUCTURE - Legal, Accounting, Financial Management

HUMAN RESOURCE - Personnel, Pay, Recruitment, Training,MANAGEMENT Manpower Planning, etc.

PRODUCT AND TECHNOLOGY - Product and Process Design, R&D,DEVELOPMENT Production Engineering, IT, etc.

PROCUREMENT - Supplier Management, Funding, Subcontracting, Specification

INBOUNDLOGISTICSeg.

Quality ControlReceivingRaw Material Controletc.

OPERATION

eg.

ManufacturingPackingProduction ControlQuality ControlMaintainaceetc.

OUTBOUNDLOGISTICSeg.

Finished GoodsOrder HandlingDespatchDeliveryInvoicingetc.

SALES ANDMARKETINGeg.

Customer MgmtOrder TakingPromotionSales AnalysisMarket Researchetc.

SERVICES

eg.

WarrantyMaintenanceEducation/ TrainingUpgradeetc.

PRIMARY ACTIVITIES

VALUEADDED- COST= MARGIN

A manufacturing company's value chain. Many activities cross the boundaries, especiallyinformation based activities such as sales forecasting, capability planning, resource scheduling,pricing etc.

SUPPORT ACTIVITIES

Alternative Value ‘configuration’ Models

• The traditional value chain model was essentially based on manufacturing/retail view of industry and works well for ‘physical goods’. But does not really represent what the business does or its relationships with customers and suppliers in many other businesses.

• 2 alternatives: Value Shops and Value Networks


Value Shops• Businesses that essentially are ‘problem solving’

delivering value by producing solutions for clients. Characterized by intense and extensive information exchanges both in setting up the business transaction and delivery of the solution.

• Each solution is unique and the client is normally involved in both the design and implementation of the solution.

• Figure 5.7 on page 266 shows an example.• Objective: satisfy the customer requirements, by bringing

together the appropriate knowledge and resources from inside the firm or by using other external resources.

• Example, advertising agencies and professional services organizations


Value Networks• Businesses that provide exchanges and

mediation between buyers and sellers, enabling relationships to be established.

• They earn revenue from either or both in their use of the firm’s network’ everyone’s a customer’.

• Figure 5.8 on page 268 suggest how this model differs from the other two.

• Example, insurance companies, banks, telecommunications companies and airlines

Value Chain: Service Business (Value Shop)

Problem specification

Knowledge application

Business acquisition

Marketing the capability

Execute solution

Configuration solution

Allocation of resources

Resource value management

Resource value management

Client value chain

C

L

I

E

N

T

S

Support activities

Infrastructure, technology, human resources, administration, etc.

Primary activities

External resources

External resources

Value Chain: Service Business (Value Network)

Support activities

Infrastructure, technology, human resources, administration, etc.

Other resources

NetworkInfrastructure development

Operation and maintenance

Core technologies

- Marketing- Pricing- Contracts- Performance- Capability

Service development

and operations

Service delivery

- Security, standards controls- Transaction and revenue management- Availability- Information provision, etc.

(a) Core services (all customer

groups)

(b) Value-added services

(designed for particular customer

groups)

Service contractors

Suppliers

All customers

Buyer/Seller segments

(a)

(b)

(c) etc.

The Use of Value Chain Analysis

• The main objective is to represent the main activities in the business and their relationships in terms of how they add value so as to satisfy the customer and obtain resources from suppliers.

• The information that flows throughout the industry and how critical that information is to the functioning of the industry and the success of the firms in it, by determining where and when that information is available, who has it and how it could be obtained and turned to advantage or used against the firm.

The Use of Value Chain Analysis

• The information that is or could be exchanged with customers and suppliers throughout the chain to improve the performance of the business or lead to mutually-improved performance by sharing the benefits.

• How effectively the information flows through the primary processes and is used by them:– Within each activity to optimize performance– To link the activities together and avoid unnecessary

costs and missed opportunities; and– To enable support activities to contribute to the value-

adding processes, not hinder them.

'Natural' and 'Contrived' Value Chains.

• The natural chain describes the (unattainable) optimum structure for the industry’s value-adding processes and information flows, based on what needs to be done.

• The contrived value chain shows how things are currently done. Look at table 5.4 on page 271.

• Purpose in Analyzing the Value Chain– Analyzing the value chain in information terms to

reduce the existing complexity either inherent in the current information relationships or caused by them.

– Identify new, often faster, options for information flow to where it enables the value-adding processes to be performed more effectively and at the ideal time.

Natural VS. Contrived Value Chains

• Contrived value chain represents how things are done by resources in the industry organization:– Driven by organization structures, historical evolution

and compromise– Is often very complex, confused and ‘messy’, and

poorly understood– Contains many reconciliation activities and reacts

slowly– Can take many forms, is continuously being modified

to meet business changes

Natural VS. Contrived Value Chains

• Natural value chain represents what has to be done to succeed in market requirements:– Based on value-adding activities and the resources

needed to carry them out– Defines essential interrelationships and dependencies

and the ideal way to achieve business purposes– Contains few reconciliation activities and responds

quickly– Usually only one ideal exists, and it does not change

significantly or frequently

Business Re-engineering and the Value Chain

Most of the successful business re-engineering initiatives have also had an external drive or focus, ensuring that internal changes deliver perceived improvements to the customers. Almost by definition, the starting point for determining what to change, why and how to change, is an understanding of the value adding processes in the industry and/or the firm.

Actions to improve business performance (by using business re-engineering):

– Eliminate unnecessary processes.– Rationalize the rest to ensure the value adding processes are optimized– Integrate to improve responsiveness and reduce unnecessary effort and error– Automate where technology can deliver further improvements.

• It is important to adopt a value-chain driven approach to understanding ‘how the business works’ and hence can be improved via a combination of business re-engineer and new IS.