Business Strategy Concepts Lecture Notes

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Business Strategy Concepts and the Implications for IT StrategySudhir Tandon 22/09/01

Agenda Evolution of Strategic Management Strategic Information Management Why has IT/IS become more strategic in nature? Strategic IS/IT vs. Traditional IS/IT What is IS/IT strategy ? IS Strategy vs. IT Strategy

Agenda Alignment of IS/IT with Business Strategic Alignment Model Case Study

Evolution of Strategic Management Phase 1 - Financial Focus Annual Budgets Inward looking

Phase 2 - Forecast Based Planning 3-5 year horizon Forecast based Gap analysis Plans are still internally oriented

Evolution of Strategic Management Phase 3 - Externally oriented planning Competitive assessment Evaluation of the Product Market Relationships Dynamic allocation of resources

Phase 4 - Strategic Management Strategically Focussed Organisation Driven by Innovation Creating the Future

Implications for IT Strategy IT planning is normally in phase 1 even if the organisation is in phase 2 or 3 In case of recession companies have to look for short term financial survival - IT, which requires 8-12 months to deliver takes a back seat Companies can move back from 4 to 3

Strategic Information Management 3 Important ideas related to SIM 1. Development and support of the strategic management process aiding in collection of strategic information (competitor info., market intelligence, industry database) aiding in the strategic planning process (strategic database access)

Strategic Information Management2. Developing Systems in support of business operations 3. Competing through informationSIM is defined as IS/IT strategies which significantly improve information use in order to enhance performance and coordinate activities across functional and business unit lines, as well as interactions with external entities, in pursuit of competitive advantage

Why has IS/ IT become more Strategic in Nature? The cost of maintaining existing systems and the significant investment in time and money required to develop new systems. IS/IT increasingly affects Corporate Strategy as it impacts the choice of options open to a company Helps develop strategic business scenarios through expert systems and monitor the same through EIS IS/IT affects the organization structure. Reduced reliability on middle management due to availability of information

Why has IS/ IT become more Strategic in Nature? Impacts the organizations interfaces with the external environment i.e. suppliers, customers etc. Impact of change management on the people

Strategic IS/IT vs. Traditional IS/IT External Focus Differentiation Sharing the benefits Business Driven Innovation Incremental/ Prototyping approach Focus on Internal Processes Cost Reduction Localised Benefits Technology-led Development Black box approach

What is IS/IT strategy?IS/IT strategy involves creating a structured framework for Information Systems need, together with IT solutions IS StrategyDemand Oriented Application Focussed Infrastructure Services Needs Priorities

Business Strategy

IT StrategySupply Oriented Technology Focussed

IS Strategy:

Mainly concerned with aligning IS development with business needs and with seeking strategic advantage from IT. It represents the demand side. Mainly concerned with the technology which is going to be used, the enabling mechanism. It represents the supply side

IT Strategy:

Business and IS Why is ALIGNMENT so important?Despite working on different levels, IT and business executives must communicate better in order for companies to experience the benefits of technology - InformationWeek, September 1998

But often alignment is not the reality IBMs Advanced Business Institute finds in a survey of 800 US companies (representing 15 different industries) that:

42% : business and IS strategy are NOT properly aligned 8% : no opinion/dont know 50%: OK!

Source: Enablers and Inhibitors, InformationWeek 1998

6 most important factors in alignment Senior executive support IS managements involvement in strategy development IS understanding of the business Existence of partnership between business and IS/IT leaders Level of priorization of IS projects IS/IT managements leadership abilitiesSource: Enablers and Inhibitors, InformationWeek 1998

HOW to identify IS opportunities

(or strategic use of IS) Using business planning techniques ...

Using business planning techniques to create alignment w/ IS strategy Competitive Forces Boston Matrix Critical success factors Generic business strategies The Value Chain SWOT Analysis

Competitive ForcesNew entrantsThreat of New entrants

SuppliersBargaining Power of Suppliers

Direct Competitors

Buyers/ CustomersBargaining power of Competitors

Threat of substitute products or services

Substitute Products

Alignment: Implications for IS Strategy? ASK:New How can IS/IT build entrants barriers to entry?How can IS/IT change balance of power w/ suppliers?

Suppliers

Direct Competitors

How can IS/IT change the basis of competition?

Buyers/ CustomersHow can IS/IT build in switching costs for customers? How can IS/IT change balance of power w/ customers?

How can IS/IT Substitute generate new products services? Products

Source: W&G p.85/86 (Tables 2.3/2.4)

Key force New Entrants

Business Implication Additional Capacity Reduced Prices New basis for Competition Need for substantial resources

IS/IT Opportunities

Buyer power high

Provide Entry Barriers by: Exploiting existing economies of Scale Differentiate products Building Loyalty/ high switching costs Control distribution channels Force Prices down Building Loyalty/ high switching costs Demand higher quality Lower Costs Higher Service levels Facilitate product selection/ customize Undercutting products & service Differentiate products

Key force

Business Implication Reduced availability

IS/IT Opportunities Use SCM to reduce cost of selling for supplier Forward Planning Backward Integration Apply EDI for cost reduction Building Loyalty/ high switching costs Lower Costs Facilitate product selection/ customize products & service to increase value to customer

Raises Costs Supplier Power High Reduced quality

Substitute products threat

Limits potential market and price

Key force

Business Implication

IS/IT Opportunities

Intense Price competition Reduce costs improve price performance Competition Product development Use information to from rivals Distribution andservice critical differentiate Segment Markets and tailor to meet their requirements Get closer to end customer

Competitive AdvantageTo gain competitive advantage over its rivals, a firm must either provide comparable value to the customer, but perform activities more efficiently than its competitors (lower cost), or perform activities in a unique way that creates greater buyer value and commands a premium price (differentiation). Enterprises, through their strategies, can influence the five forces and the industry structure, at least to some extent. There are three basic strategic stances that enterprises can adopt.

Generic Business Strategies Low cost

Differentiation Niche/Focus

Alignment Implications for IS/IT Strategy? ASKLow cost: How can IS/IT help - avoid overhead costs? - link business processes effectively? Differentiation: How can IS/IT help - meet customer requirements? - monitor customer perceptions? - achiever faster delivery? - improve quality control? - foster R&D? Niche/focus: How can IS/IT help - identify target markets? - get unique information on target market? - distinguish products from general offers?

Potential IS/IT AreasLow Cost DifferentiationProduct Product Engineering Project Control design and systems Systems Development Integrated Systems for R&D Databases Manufacturing Professional Workstations CAD Email Operations Inventory Mgt. System Process Control System Labour Control System Procurement System CIM Quality Assurance system Quality Monitoring for Suppliers

Potential IS/IT AreasLow CostMarketing Streamline Distribution System Campaign monitoring system Customer Mailer System Enquiry Monitoring system Inventory Mgt. System for Spares Order Processing System Service Control System Field sales

Differentiation Customer Database Market Intelligence System POS displays and kiosks Competition Analysis Telemarketing Call Centre Diffrential Pricing Dealer Support E-sales

Sales and Service

Boston MatrixHighWILD CAT

Market Growth

STAR

or PROBLEM CHILD

CASH COW

DOG

Low High Market Share

Low

Source: W&G, p. 68

Alignment: Implication for IS Strategy?High

Market Growth

Support customer focus: understand demand! Promote growth, variety, volume Business innovation satisfy/differentiate Business productivity Control customers and suppliers DEFEND Position!!!

Product/process development Identification of customers Effective information exchanges

Niche? or

Low High

Market Share

Forget it!

Low

Source: W&G, p. 71

Support ActivitiesInfrastructure - Legal, Accounting, Finance Human Resource Management Recruitment, Training Product and Technology Development R&D, IT, Process design etc. Procurement - Vendor evaluation, Subcontracting Inbound Outbound Sales and Operations Services Logistics Logistics Marketing

e u l a V d e A = t s o C n i g r a M

Primary Activities A manufacturing companys Value Chain

Value Activities Primary Activities Inbound Logistics - Receive, store and distribute inputs e.g. material handling, warehousing Operations - production activities to create the product such as machining, packaging, testing Outbound logistics - store and distribute to the market incl. order processing, vehicle scheduling

Value Activities Primary Activities Marketing and Sales - activities associated with providing a means by which buyers can purchase the product e.g. advertising , selling, merchandising, promotion Service - installation, repair, spare parts maintenance, training

Value Activities Support Activities Procurement - Purchasing inputs Technology Developments Human Resources Infrastructure

A Company gains Competitive advantage when they perform these activities at a lower cost than the competitors in a way that permits diffrentiation

By analysing the value chain of the company we can see whether either the physical or information processing component of IS/IT can transform the value chain to the organisations advantage The value activities are interdependent and connected by linkages. Linkages exist when the way in which one activity is performed affects the cost or effectiveness of other activities

Implications for IT Can IS/IT contribute to performing an activity more quickly or more efficiently or perhaps at a cheaper cost than before ? Can IS/IT improve information flow through the primary activities Can IS/IT be used to affect how support activities assist primary activities

The value chain is a valuable way of identifying where better information and systems are needed, especially to show where integration through systems could provide potential advantage over competitors (or reduce current disadvantage)

The Value System While IS/IT may be used in the performance of value activities or in linking these activities, the value chain of a firm is itself part of a larger industry value chain called the Value System The Value System is made up of our value chain, competitors value chain, suppliers value chains and the customers value chain

The Value SystemSuppliers RM, CG

DistributorsAgencies and distributors Business Unit

End CustomersExport distribution channels

Suppliers of components

Competitors

Cost and Supply Information

Value and Demand Information

invoices Excise, Tax SalesStd returns

Linking Value Chains

Suppliers

invoicespayment

POs

I/b

O/B Sales Ser

orders

Tech. queries

I/BCustomers

Distributors

SWOT AnalysisStrengths Weaknesses High Labour Productivity Limited Product range Industrial Peace lack of R& D Access to technology Lack of skills for new prod. Identification frustration at the lower levels financial Stability Opportunities Threats Diversification into new markets Competition from international players economic liberalization New technologies Change in government policies Labour unrest

SWOT Analysis Based on the SWOT Analysis a company profile is developed SWOT analysis is expected to highlight the direction of desired changes SWOT Analysis provides the basis for the identification of Key Result Areas and Business Objectives

KRAs and Business Objectives Profitability Achieve from our existing activities a net return on net worth of atleast 20 % Earn in the next 3 years a PBIT of Rs. 500, Rs. 550, Rs. 700 crs.

Diversification By 2003 diversify into Services Business with a break even By 2004 create an infrastructure for backward integration

KRAs and Business Objectives Systems Improvement Ensure all systems for financial controls are in place and uniform for all SBUs of the company Implement a system for Customer Relationship Management in the next 12 months

Critical Success Factor Analysis CSFs are the things that must go right for any business to achieve the business objectives in each area CSFs are related to the KRAs and the Business Objectives CSFs can be defined at the organizational level, SBU level, departmental or managerial level

Critical Success Factor Analysis

Overview Purpose: to foster interpretation of objectives, tactics, operational activities in terms of key information needs and the strengths and weaknesses of existing systems Very powerful, versatile technique Widely used Can be used at different levels of analysis industry level, organizational level, BU level, individual (see p.187 W&G)

What are CSFs?For any business, the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization (Rockart, 1979) CSFs are the key areas where things must go right for the business to flourish!W&G, p.186

Approach: CSFs are defined relative to business objectives ... Step 1: Identify and rank objectives Step 2: Identify CSFs against each objective ca. 5-8 CSFs per objective

Objectives? CSFs ?

Priority Meaof CSFs? sures

Step 3: Consolidate CSFs across objectives, prioritize according to ranking of associated IS Impor- objectives, (develop measures) tance? Step 4: Develop tactics Step 5: Consider importance of information or systems in achieving the CSFs considered e.g. By performing a SWOT analysis of existing systems against the CSFs.

Thats all folks