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?
IS/IT Opportunities Analysis: Questions
• 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?
IS/IT Opportunities Analysis: Questions
• 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
Alternative Value ‘configuration’ Models
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
Alternative Value ‘configuration’ Models
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.