The Extended Enterpise - Utrecht University 3a EE2006.ppt.pdf · The Extended Enterpise Lecture 3,...

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September 20, 2006 Extended Enterprise 1

The Extended Enterpise

Lecture 3, part I

Ronald Batenburg

IT value and firm performanceStrategic AlignmentBusiness IT Alignment


A case study: does e-procurement add value and increase performance?

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Cathay Pacific Case study – Starting pointsCXeBuy electronic procurement system:– Electronic catalogues– Electronic marketplaces– Transmit information with supplier websites

14-month implementationAmbition: “(…) to build the most efficient purchasing process and capability in the industry (…)”To be applied for >400 suppliers, >4,000 different items in 5 spend categories:– In-flight service– Cargo– Information technology– Marketing– Office supplies

>200 system users and approvers


Cathay Pacific Case study - Problems

What are the actual benefits?– Cost savings– Efficiency gains

Do we live up to the expectations to be “Asia’s leading business airline”?Concern about wrong dot-com investmentsHow to redeploy staff and resources?How to measure the full benefits, ROI, payback?

… as a direct consequence of the CXeBuy implementation

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Cathay Pacific Case study – Cost benefit analysis

BenefitsInventory reduction (US$10 mio)Automation non-technical purchases (US$385 mio)Leverage corporate buying powerImproved information on expenditure and supplier performanceIntegrated requisition to-to-payment processEasier to userFaster order fulfillment

Costs19 external consultants and Oracle specialists8 Cathay staff8 PWC staff

[Full-time for 9-14 months]Hard and softwareInternal and external communication


Cathay Pacific Case study – How to measure

Let user departments voluntarily assess the impact of CXeBuyon their operations, using the 6 Aberdeen key business benefits– Overestimation, subjective– Unreliable data– Administrative burden, too much time– No “before and after impact”, not a full picture

Balanced Score Card to assess 4 objectives/KPIs– No measurement at the process level

Conclusion:“(…) CXeBuy should not be assessed as a stand-alone system, and

that the timing of such an valuation exercise would not serve any meaningful purpose and could pose risk to the smooth global deployment of the solution”

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Initiator of a fundamental topic in IS/IT:the relation between IT and firm performance

Brynjolfsson, E. (1993) The Productivity Paradox of Information Technology. Communications of the ACM, 35(12), 66-77

Brynjolfsson, E., Hitt, L.M. (1995) Paradox lost? Firm-Level Evidence on the Returns to Information Systems Spending. Management Science, 42(2), 541-558

Brynjolfsson, Erik and Hitt, Lorin (August 1998) Beyond the Productivity Paradox, Communications of the ACM, 41(8), 49-55.

Brynjolfsson, E., Hitt, L.M. (2000) Beyond Computation: Information Technology, Organizational Transformation and Business Performance. The Journal of Economic Perspectives, 14(4), 23-48


Research on IT-value is diverse

High productive plantsComputer-controlled machinery

1994Kelley

Negative net gross marginal product

High-tech1996Morrison

Increase productivityComputerization1997Muhkopadhyay et al

Positive value of banksIT2003Navarrette & Pick

Increase firm’s productivity

IT1995Brynjolfsson & Hitt

Increase firm’s productivity

% employees using computers

1996Greenan & Mairesse

No change in output per worker

Computers1987Roach

Year If firms spend invest in:

The result is:Author

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‘Real’ estimations of IT payoffs are difficult to make because of:How to measure ‘IT’?How to measure ‘value’?Mixed/blurred effects due to hidden and intangible assets/costs (start-up/sunk costs)Fixed/blurred effects due to slowly changing organizational practices (‘time lags’)Fixed/blurred effects due to multi-level complications

Venkatraman, N. (1989) Strategic orientation of Business Enterprises: the Construct, Dimensionality and, Measurement. Management Science, 35(8), 942-962

Research on IT-value is complicated


So how to measure IT-value?Econometric approach– Measure financial objective measures …

• Sales growth position• Market share gains• Net profit position• Return on corporate investment• Return on sales• Financial liquidity position

– … and measure these relative to competition or over timeBehavioral approach– Measure executive perceptions directly– Measure at multiple process-levels

• Operational processes• Tactical processes• Strategic decisions

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The studies of Brynjolfsson & Hitt (1995, 2000)

“How do computers contribute to business performance and economic growth?”

Not through computational capability alone …… but through complementary innovation

1. Invent and innovate on the one hand:– New processes– New procedures– New organizational structures

2. Reduce and cut on the other:– Costs of coordination– Costs of communication– Costs of information processing

“INTANGIBLE COST/BENEFITS”

“TANGIBLE COST/BENEFITS”


The Brynjolfsson & Hitt’s model

More decentralization

More Human Capital

IT investments

Delegation and teamwork

Increased skills and education

Decreased rule-based jobsLess vertical

integrationSmaller firm size

Productivity and market

value

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Brynjolfsson & Hitt: data and method• Data:

1. Cross sectional survey among most of the Fortune 1000 firms in 1995-1996

• Response rate appr. 28% (N=380)

• One respondent (executive) per firm

2. Statistics about Fortune 1000 firms between 1987-1994 (N=4,578)

• Research question 1: are ∆ IT and ∆ IT-value positively related?

• Research question 2: is the relationship between ∆ IT and ∆ IT-value influenced by ‘complementary innovation’?


Answer to research question 1

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Answer to research question 2


Measuring IT-value requiresa Value Proposition

Understand IT-value through process/system analysis

Demonstrate IT-value through process/system redesign(“Don’t Automate, Obliterate”, Michael Hammer in HBR

1990)

1. Input processes (supplier relations)2. Throughput processes (internal organization)3. Output processes (customer relations)

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IT-value 1: improving ‘Input processes’(supplier/supply chain management)

Innovations:Eliminating paperworkReducing data entry and errorsReduced procurement timeReduced spoilageAutomated replenishmentsEnable segmentation and category management

Costs reductions:Reduced waiting (idle) timeReduce buffer inventoriesReduced purchase prices


IT-value 2: improving ‘Throughput processes’(internal/operational management)

Innovations:– Job rotation, team work and flexibility– Concurrent engineering– Less management layers– Eliminate inert work processes and procedures– Organizational learning

Costs reductions:– Reduced assets, inventories– Reduced labor costs (less employees, higher

productivity)

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IT-value 3: improving ‘Output processes’(customer relationship management)

Innovations:Service improvementResponsive (‘JIT’) deliveryBuild-to-order propositionCustomization, ’shopping experience’Order monitoring

Cost reduction:Lower levels of inventoryLess distribution channelsLess communication (complaints, questions)


Back to e-procurement (1)IT-value from e-procurement is:– Not only achieved through ‘Input processes’– Not only achieved through cost reduction

Cost reduction

Innovation

OutputThroughputInput

AND: Balance all e-procurement benefits through alignment

SO: Localize and specify e-procurement benefits

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So what is alignment?

“The extend to which business strategies were enabled, supported and stimulated by information strategies” (Broadbant & Weill, 1993)“If the business plan links or refers to the IT plan and vise versa” (Kearns, 1997)“A realized IS/IT strategy that is consistent with business needs, a flexible and issue-oriented strategy formulation process, with concurrent processes taking place at different organizational levels” (Ward & Peppard, 2001)“Any attempt to increase IT business value mustconsider the extent to which IT is aligned with the business strategy” (Tallon, Kraemer, Gurbaxani, 2000)


The study of Tallon, Kraemer & Gurbaxani (2000)

Tallon, P., Kraemer, K.L., Gurbaxani, V. (2000), Executives’ Perceptions of the Business Value of Information Technology: A Process-Oriented Approach. Journal of Management Information Systems, 16(4), 137-165

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Tallon, Kraemer & Gurbaxani’s Model (1):Strategic Alignment implies mutual determination

Business

Strategy

IT

Strategy

IT opportunities, (re)allocation

towards critical processes

business opportunities,

allocation towards IT capabilities

Strategic Alignment


Tallon, Kraemer & Gurbaxani’s Model (2):Strategic Alignment implies mutual coordination

Business

Strategy

IT

Strategy

Operations focus

Strategic positioning

Efficiency ReachEffectiveness Structure

•Reduce costs

•Increase productivity

•Speed

•Enhance organizational effectiveness

•Extend existing market

•Extend geographic reach

•Change industries

•Change market practices

Strategic Alignment

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Tallon, Kraemer & Gurbaxani’s Hypothesis:Dual alignment implies more IT value


Tallon, Kraemer & Gurbaxani’sData and method

• Mailed survey to 1,500 Fortune 1000 US companies in 1998

• One respondent (executive) per firm

• Response rate 20.3% (N=304)

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Tallon, Kraemer & Gurbaxani’s measurements of Strategic Alignment

Current Goals for IT investmentsWhat are your current goals for IT? Please evaluate the following statements.

Do not agree - Agree CompletelyIn our organization . . . 1 2 3 4 5 6 7IT should reduce our costs and increasequality and speedIT should enhance the effectiveness ofour overall performanceIT should extend our market andgeographic reachIT should help us to change industryand market practices

No Support - Strong SupportStrategic Alignment 1 2 3 4 5 6 7Does the IT strategy support youbusiness strategy?


Tallon, Kraemer & Gurbaxani’smeasurements of IT-value

IT Business ValueHow does IT boost company performance in the following areas? Restrict your appraisal to valuealready realized rather than value expected in the future.

Low Impact High ImpactDoes Information Technology . . . 1 2 3 4 5 6 7

Process Planning and SupportPPS1 Improve internal communication and coordinationPPS2 Strengthen strategic planningPPS3 Enable your company to adopt new organizational structuresPPS4 Improve management decision makingPPS5 Streamline business processesSupplier Relations (Inbound Logistics)SR1 Help your corporation gain leverage over its suppliersSR2 Help reduce variance in supplier lead timesSR3 Help develop close relationships with suppliersSR4 Improve monitoring of the quality of products / servicesSR5 Enable electronic transactions with suppliersProduction & OperationsPO1 Improve production throughput or service volumesPO2 Enhance operating flexibilityPO3 Improve the productivity of laborPO4 Enhance utilization of equipmentPO5 Reduce cost of tailoring products or services

…

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Tallon, Kraemer & Gurbaxani’sKey Results


Back to e-procurement (2)IT-value from e-procurement is:– Not only achieved through a ‘good’ IT-strategy or

business strategy, but their mutual determination– Not only achieved through by one single

IT/business strategy, but a dual focus

AND: align e-procurement towards multiple process levels

SO: align e-procurement towards multiple strategies

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How to realize Business IT Alignment?

Henderson, J.C., Venkatraman, N. (1993) Strategic Alignment: Leveraging Information Technology for Transforming Organizations. IBM Systems Journal, 32(1), 4-16

Venkatraman, N., Henderson, J.C., Oldach, S. (1993) Continuous Strategic Alignment: Exploiting Information Technology Capabilities for Competitive Success. European Management Journal, 11(2), 139-149


Venkatraman, Henderson & Oldach’sModel of Strategic Alignment

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4 routes to Strategic Alignment

1. ‘Strategic Execution’ (cost center focus)2. ‘Technology Potential’ (technology

leadership focus)3. ‘Competitive Potential’ (product leadership

focus)4. ‘Service level’ (customer satisfaction focus)

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Scheper’s modelthe Strategic Alignment Model Extended

Monitoring&

Control

Organization& Processes

People &Culture

InformationTechnology

Strategy &Policy

• The business domain contains of more than dimensions than strategy and organizational processes

• Business-IT alignment is about multi-dimensionalalignment and adaptation

• A model should contain elements that are measurable – as performance indicators

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Scheper’s Hypothesis

1. Given that the maturity of all business dimensions are equally measured …

2. … and the ‘multi-dimensional balance’between business maturities is basically measured by a factor called (business/IT) alignment…

3. … then it should be expected that organizations with higher alignment scores significantly outperform their competitors and improve their performance over time


Step 1: defining maturity levels

Network orientedIntegratedIsland

automation‘Scattered’Information Technology

Human Capital Management

Human resource Management

Personnel policyPersonnel administration

People & Culture

Network orientedSystem orientedProcess orientedAd-hoc orientedOrganization &

Processes

Chain controlManagement controlFinancial controlCost controlMonitoring &

Control

Network orientedSystem orientedProcess orientedAd-hoc orientedStrategy &

Policy

IVIIIIII

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Assumptions behind Scheper’sAlignment concept

• All business dimensions have proven, realistic and generic minima and maxima as ends of a reliable 4-level cumulative maturity scale

• Alignment can be indicated at all four levels as a ‘common ground’ for all business dimensions

• In principle, alignment is more important than the average or sum maturity over all business dimensions

• The business dimension with the highest maturity score sets the target and ‘should-be’ maturity level for all other business dimensions


1

1

11

5

5

5

55

1

12

34

5

3

3

23

3

0

1

2

3

4

5strategy & policy

organization & processes

monitoring & controlpeople & culture

information technology ABCD

Alignment measurement variations

A B C D Alignment orderMULTIDIMENSIONAL ALIGNMENT APPROACHsum_maturities / max_maturity_difference 2,25 5,25 3,75 14,00 A,C,B,Dsum_maturities / stdev_maturies 5,03 11,74 9,49 31,30 A,C,B,Davg_maturities / max_maturity_difference 0,45 1,05 0,75 2,80 A,C,B,Davg_maturities / stdev_maturies 1,01 2,35 1,90 6,26 A,C,B,Doverall alignment threshold score 1,00 1,00 1,00 2,00 A/B/C,DBUSINESS-IT ALIGNMENT APPROACHIT_maturity / sum_differences_IT_others 0,31 0,06 0,50 3,00 B,A,C,DIT_maturity / avg_differences_IT_others 1,25 0,25 2,00 12,00 B,A,C,DIT alignment threshold score 5,00 1,00 5,00 3,00 A,D,B/D

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Back to e-procurement (3)IT-value from e-procurement is:– Bridging the IT and business domain, and the

strategic and operational level, simultaneously by choosing a suitable cross-cutting route

– Aligning IT with other business dimensions as well, i.e. strategy/policy, monitoring/control, organization/processes, people/culture

AND: implement e-procurement creating multi-dimensional alignment (and hence better IT-value)

SO: adopt e-procurement recognizing its multidisciplinary implications as alignment


Finally, to think about:

“We have been asked on numerous occasions: ‘Whichalignment perspective is the best?‘. As researchers andobservers of strategic management phenomena, we donot believe that there is one universally-superior modeto formulate and implement strategy. If there were, itwould not be strategic as all firms would adopt it.”

(Venkatraman, Henderson & Oldach’s, 2000: 147)

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