BA572 – Week # 4 Strategic Alignment of IT with Business Strategy

BA572 – Week # 4Strategic 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

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?

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” failuresWhy do systems fail?

• 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

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?


ValueConfiguration

Value Proposition

Performance

What Profit Site?How Add Value?Which Customers?How Price Value?Who to Charge for Value?How Provide Value?How Sustain Value?

Key Drivers of Value?Who are Customers/ Suppliers/Competitors?What Activities Needed to Deliver Value?Distinctiveness?

FinancialCustomer SatisfactionInternal ProcessesGrowth & Learning


ValueConfiguration

Value Proposition

Performance




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?

Three different value models

Chain

Shop Network

Find Solve

Evaluate Execute

Choose

Value Chain

• What is basic premise of value chain?– Value created by transforming inputs into products

Inbound Logistics

Operations

Outbound

Logistics

Marketing & Sales

After-sales

Service

Firm Infrastructure

Human Resources Management

Technology DevelopmentProcurement

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

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– Mass vs customized

• Less applicable when intangible products– R&D

• Key question – where are you positioned in the extended value chain?

Value Shop

Problem Finding & Acquisition

Problem Solving

Control/ Evaluation

Execution

Choice

Firm InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Simon’s Problem Solving Model

InfrastructureSupport

• What is basic premise of value shop?– Value created by providing solutions to customer

problems

Value Shop (cont’d)

• 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

Find Solve

Evaluate Execute

Choose

Value Shop (cont’d)

• 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?

Find Solve

Evaluate Execute

Choose

Value Network

Network promotion and contract management

• Invite and select customers tojoin network

• Initialize, manage andterminate contracts

Firm InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Service provisioning Establish,

maintain andterminate links

Billing forvalue received

Infrastructure operation

Maintain andrun 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


ValueConfiguration

Value Proposition

Performance




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?

• 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


• Source of Revenue– Markup– Commission– Advertising– Referral– Production (direct to

consumer)• Software

– Subscription– Fee-for-Service


Components of Value Config – cont’dHow 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

IDifficult to

make money

IIHolder of

complementaryassets makes

money

IVInventor

makes money

IIIParty with bothtechnology and assets or with

bargaining powermakes money

Imita

bilit

y

Low

Hig

h

Freely Availableor Unimportant

Tightly Heldand 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?

IDifficult to

make money

IIHolder of

complementaryassets makes

money

IVInventor

makes money

IIIParty with bothtechnology and assets or with

bargaining powermakes money

Imita

bilit

y

Low

Hig

h




Question

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


ValueConfiguration

Value Proposition

Performance




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• 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

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 ModelFour Domains of Strategic Choice

ScopeCompetenciesGovernance

StructureProcesses

Skills

ScopeCompetenciesGovernance

InfrastructureProcesses

Skills

Strategy(External)

Infrastructure(Internal)

Business Information Technology

Need to recognize how decisions in one domain affects the other domains

Functional Integration

StrategicFit

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)

Business StrategyScope

CompetenciesGovernance

Business InfrastructureStructure

ProcessesSkills

IT StrategyScope


IT InfrastructureInfrastructure

ProcessesSkills

• 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

Strategy Domains

• Business– 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.)

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

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




ProcessesSkills

IT StrategyScope



ProcessesSkills

Top Mgmt’s Role?

IT Mgmt’s Role?

Performance Criteria for assessing IT based on ___?

Risk?

Technology TransformationBusiness 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




ProcessesSkills

IT StrategyScope



ProcessesSkills

Top Mgmt’s Role?

IT Mgmt’s Role?


Risk??

Service LevelProviding 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




ProcessesSkills

IT StrategyScope



ProcessesSkills

?Top Mgmt’s Role?

IT Mgmt’s Role?


Risk?

Competitive PotentialIT 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




ProcessesSkills

IT StrategyScope



ProcessesSkills

?

Top Mgmt’s Role?

IT Mgmt’s Role?


Risk?

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?

Can we put these models together?

Profit SiteSource of RevenueCommerce ModelValue/ScopePricing Strategy




ProcessesSkills

IT StrategyScope



ProcessesSkills

EnvironmentCompetitive Forces & Complementary Assets

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

Backup

• Not covered in class

Tektronix

• What is the “business model”?– 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

Chain

Shop Network

Find Solve

Evaluate Execute

Choose

Improve Internal Efficiencies

Resolve Customer Problem Facilitate Customer

Relationships

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




ProcessesSkills

IT StrategyScope



ProcessesSkills

7c

What impact did the enterprise-wide system have on the

structure and culture of the Tektronix organization?


ProcessesSkills


ProcessesSkills

7b

Apply Porter’s Strategic Positioning Framework to Tektronix

• Start with the right goal






Cisco

• What is the “business model”?– 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

Chain

Shop Network

Find Solve

Evaluate Execute

Choose

Improve Internal Efficiencies

Resolve Customer Problem Facilitate Customer

Relationships

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




ProcessesSkills

IT StrategyScope



ProcessesSkills

6d

What impact did the enterprise-wide system have on the

structure and culture of the Cisco organization?


ProcessesSkills


ProcessesSkills

6c

Apply Porter’s Strategic Positioning Framework to Cisco

• Start with the right goal






Apply the Strategic Alignment Model




ProcessesSkills

IT StrategyScope



ProcessesSkills

6d

Complementary Assets ModelResulting 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

RunRunOr

Team-up

BlockBlock

OrTeam-up

Imita

bilit

yLo

wH

igh




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 ModelResulting Strategies

• What strategy are you going to pursue in your IBP?

RunRunOr

Team-up

BlockBlock

OrTeam-up

Imita

bilit

yLo

wH

igh




Documents

BA572 – Week # 4 Strategic Alignment of IT with Business Strategy