CONSIDERATIONS INSTRATEGY DEVELOPMENTMODULE 03

Strategic ConsiderationPerceive potential business opportunities and possible threats or pitfalls.

Attempt to redirect their efforts to maximize their advantages.

Reevaluate their situations periodically

Elements of a strategyMission statement Environmental assessmentStatement of objectivesExpression of strategyMaintenance processesPerformance assessment

FORMULATE THE IT MISSION

Elements of a strategy-MISSIONThe first and most important step in formulating a strategy is to state the organizations mission and purpose.

It is an enduring statement that express the purpose of an organization.

It is an unique fundamental statement that differentiates one firm from the others of its kind.

The Mission of Information SystemsTransaction Processing Systems

Productivity measureManagement Information Systems

Getting right information to the right person at the right timeInformation Systems

Improve performance of the people by using IT.

Examples of mission statements"Provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return." Merck

"To enable people and businesses throughout the world to realize their full potential."Microsoft

"Organize the world's information and make it universally accessible and useful."Google

Elements of a strategy-MISSIONThe mission statement should describe the organizations business and indicate who its customers are. The customers needs and the organizations capabilities and resources must be considered. The IT mission should be stated in terms of meeting the needs of the customer and in terms of services the IT organizations can provide.

PORTER AND MILLARS ProcessAccess information intensityDetermine the role of IT in the industry structureIdentify and rank the ways in which IT can create competitive advantageInvestigate how IT might spawn new businessDevelop a plan for taking advantage of IT

BENETTON SPA ITALIAN FASHION RETAILERInformation intensity - Products have low information content but its cloth design production and marketing processes are highly information intensiveRole of IT in the industry structure - 20 percent of new fashion ideas depend on previous fashion ideas leverage by recording its previous fashion. (laser disc based computer database assessed by personal computers via internet - reduction in time spent in design , and increased response time)

BENETTON SPA ITALIAN FASHION RETAILERIdentification of ways for use of IT

Innovative investment of IT in Production and marketing processes led to :Quick response to changes in fashion trendsAbility to provide overnight adjustments of production via highly computerized manufacturing environmentAllows its worldwide licensees to receive items two or three weeks after orderingThis was three times faster than the major competitor.

BENETTON SPA ITALIAN FASHION RETAILERPlans for taking advantage of IT :

Delay production of garments until the order is placed thereby eliminating excess inventory. Flexibility offered by computerized manufacturing systems allows quick responseDelete slow selling items from its product lines and expand the production to fast selling clothesE.g based on the information received from each stores immediately after each sale the company dye their sweaters to match demand

Elements of a strategy- Environmental assessment

The process of visualizing and understanding the opportunities and threats is called analysis of environment.

Environmental analysis attempts to take into account the important trends impacting or likely to impact the organization.

These trends may be political, economic, legal, technological, or organizational.

Focus of environmental analysisExternal strategic thrust area - visualize the competitive environment.Internal strategic thrust areas

visualize the activities across the value chain.

VISUALIZING COMPETITIVE FORCESFive force theory by Michael Porter (1979).it views an industry as consisting of firms jockeying for preferred positions while being impacted by

he bargaining power of suppliers , the bargaining power of customers, the threat of new entrants, the threat of substitute products or services.The rivalry among the firms

These forces, affecting all competitors, must be contended with strategically by the firm if it is to grow and prosper.

INDUSTRY ATTRACTIVENESS

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Threat of New EntrantsHigh Economies of ScaleHigh Prdt. Diffn./ Brand EquityHigh Capital RequirementsHigh Switching CostsHigh cost of accessing Distribution ChannelsHigh Absolute Cost Advantages(Experience, Technology, IPR, RM)High Expected RetaliationHigh Level of Government ProtectionBarrier to entry is High When .

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Absolute Cost Advantages:Superior production TechniquesPast experiencePatents/ Secret ProcessesControl over resources (labour/material/equipment)Access to cheaper sources of funding (existing companies represent lower risk than established ones?)

Economies of Scale:Cost reduction throu mass prod stadzed outputDiscounts on bulk purchases of inputsSpreading fixed cost over large volumeScale economies in advertisingMinimum Efficient Scale of Entry

Commercial Jet Aircraft Industry3 players (Airbus Industries, Boeing and McDonnel Douglas)Explanation high barriers to entry (enormous cost of development, scale economies enjoyed by incumbents)Eg MD-11 wide bodied introduced in late 80s cost $1.5 billion development costs: Implies that MCD will have to sell more than 200 units to break even representing 13% of the industrys for that type f aircraft between 1990-2000.For MD-12 (comparable to Boeing 747) develp costs exced 5 billion. Breakeven 400-500 units: Approximately 10-1 years of production Add to this another 5-6 years of negative cash flows during development.Such high development costs act as deterrant to entry

Yet Airbus which entered in 80s was he first one to do so since 60s. However this is an unusual case (co received substantial subsidies from the governments of Germany, France, Spain and Britain to help it overcome barriers)

Source Hill & jones page 71 Strategy in Action 3.2

Note: How much is a billion $ . Reliance compare

Suppliers are likely to be powerful if:Bargaining Power of Suppliers

Few Firms Dominate Supplier IndustryFew Substitutes for Supplier Prdts. (SP)Buyer Not an Imp Customer for SupplierSP important (price/quality) to BuyerSP is Highly DifferentiatedSP Has High Switching CostsHigh Threat of Forward Integration by SLow Threat of Backward Integration by Buyer

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Example Computer Industry

Buyer groups are likely to be powerful if:Bargaining Power of Buyer

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Threat of Substitute Products Close Substitutes are Available Low Switching Cost High Price Value Performance of Substitutes High Profitability of producers of substitutes

High When

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substitute products Products with improving price/performance tradeoffs relative to present industry products

Cutthroat competition is more likely when:Rivalry Among Existing Competitors

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Southwest. So intense was the rivalry among airlines in 1990-92 that the cumulative losses of the industry was a stagering 7.1 billion more than what the industry made in the last 50 years.Concentration RatioHerfindhal HI=10000 Sum Si2 where Si is market share of ith firm. HI in excess of 1800 are thought to be characterize industries with low rivalry

How the Internet Influences Industry StructureThreat of substitute products or services.Bargaining power of suppliers.Rivalry among existing competitors.Barriers to entry.Buyers.Bargaining power of channels.Bargaining power of end users.

Barriers to entry()Reduces barriers to entry such as the need for a sales force, access to channels, and physical assets anything that Internet technology eliminates or makes easier to do reduces barriers to entry.()Internet applications are difficult to keep proprietary from new entrants.()A flood of new entrants has come into many industries.

BuyersBargaining power of channels

(+)Eliminates powerful channels or improves bargaining power over traditional channels.Bargaining power of end users

()Shifts bargaining power to end consumers()The proliferation of Internet approachescreates new substitution threats.()Reduces switching costs.

Bargaining power of suppliers(+/)Procurement using the Internet tends to raise bargaining power over suppliers, though it can also give suppliers access to more customers.()The Internet provides a channel for suppliers to reach end users, reducing the leverage of intervening companies.()Internet procurement and digital markets tend to give all companies equal access to suppliers, and gravitate procurement to standardized products that reduce differentiation.()Reduced barriers to entry and the proliferation of competitors downstream shifts power to suppliers.

Threat of substitute products or services(+)By making the overall industry more efficient.()The proliferation of Internet approaches creates new substitution threats.

Rivalry among existing competitors()Reduces differences among competitors as offerings are difficult to keep proprietary.()Migrates competition to price.()Widens the geographic market, increasing the number of competitors.()Lowers variable cost relative to fixed cost, increasing pressures for price discounting.

External thrust areasIdentifying potential strategic opportunities due toChanging industry environment.

Recent actions of the competitors.

Changing relations among suppliers , potential business combinations and many more.

Basic questions to be answered by firmsWhat is happening external to the firm that may influence our opportunities to gain competitive advantage?How can we capitalize on external factors through the use of information technology

Internal Thrust areas An inward lookProcess of looking at the firms internal functions to capitalize on emerging technologyThe basic issues are :

HOW can these systems be augmented or enhanced to improve the firms posture in the marketplace?WHAT new technology can be employed in these processes?WHAT innovative actions will permit the firm to utilize internal resources to maximize its competitive position?

Prominent Applications of the Internet in the Value Chain

Firm Infrastructure (General management , accounting, finance, strategic planning)Human Resource Management(recruiting, training, development) Technology Development(R&D, product and process improvement)Procurement(purchasing of raw materials, machines and supplies)Inbound Logistics(raw material handling and ware -housing)Operations

(machining,Assembling,testing)Outbound Logistics(Warehousing and distribution of finished goods)Marketing&Sales(advertising, promotion, pricing, channel relations)After-SalesService( installation repair,parts)Web distributed supply chain management

Firm InfrastructureWeb-based, distributed financial and ERP systemsOn-line investor relations (e.g., information dissemination, broadcast conference calls)

Human Resource ManagementSelf-service personnel and benefits administration.Web-based training.Internet-based sharing and dissemination of company information.Electronic time and expense reporting.

Technology DevelopmentCollaborative product design across locations and among multiple value-system participants.Knowledge directories accessible from all parts of the organisation.Real-time access by R&D to on-line sales and service information.

ProcurementInternet-enabled demand planning; real-time available-to-promise / capable-to-promise and fulfilment.Other linkage of purchase, inventory, and forecasting systems with suppliers.Automated requisition to pay.Direct and Indirect procurement via marketplaces, exchanges, auctions, and buyer-seller matching.

Inbound LogisticsReal-time Integrated scheduling, shipping, warehouse management, demand management and planning, and advanced planning and scheduling across the company and its suppliers.Dissemination throughout the company of real-time inbound and in-progress inventory data.

OperationsIntegrated information exchange, scheduling, and decision making in in-house plants, contract assemblers, and component suppliers.Real-time available-to-promise and capable-to-promise information available to the sales force and channels.

Outbound LogisticsReal-time transaction of orders whether initiated by an end consumer, a sales person, or a channel partner.Automated customer-specific agreements and contract terms.Customer and channel access to product development and delivery status.Collaborative integration with customer forecasting systems.Integrated channel management including information exchange, warranty claims, and contract management (versioning, process control)

Marketing and SalesOn-line sales channels including web sites ad marketplaces.Real-time inside and outside access to customer information, product logs, dynamic pricing, inventory availability on-line submission of quotes, and order entry.On-line product configurations.Customer-tailored making via customer profile.Push advertising.Tailored on-line access.Real-time customer, feedback through web surf opt-In / opt-out marketing and promotion response tracking.

After-Sales ServiceOn-line support of customer service representatives through e-mail, response management, billing integration, co-browse, chat, call me now, voice-over-IP, and other uses of video streaming.

Customer self-service via web sites and intelligent service request processing including updates to billing and shipping profiles.

Real-time field service access to customer account review, schematic review, parts availability and ordering, work-order update, and service parts management.

Strategic Thrusts Differentiation CostInnovationGrowthAllianceTimeImproved Internal efficiencyCustomer oriented approach

Formulation of statement of Objectives and strategy

Elements of a strategy- Statement of objectivesThe information resulting from environmental scanning permits strategists to accomplish two tasks: Develop the objectives they intend to achieve, and formulate the course of action, or strategy expression, to be used as a guide in the attainment of the objectives.

Statement of strategyIncludes:

Overall long range strategy to achieve the objectivesDetailed strategies for each business or functional area

TYPES OF STRATEGY

Functional Strategy The purpose is to support the firms business goals and objectives.

This is accomplished through development of functional goals and objectives that are congruent with those of the firm.

Each function in the firm develops a functional strategy. The collection of all the functional strategies and business strategies describes the complete strategy for the firm.

Stand-Alone Strategiesdevelop a specific strategy for dealing with a unique opportunity or threat.

Specific or stand-alone strategies are developed outside the normal planning cycle in response to competitive or industry developments.

Stand-alone strategies can be considered ad hoc actions to deal with currently emerging opportunity or threats.

An example of a stand-alone strategy for the IT function would be the announcement of a new technology product by a vendor.

Business strategyHave revenue and profit objectivesHow the organization hopes to accomplishDeals how the organizations hope to achieve these goalsCoordinates the functions of a business to the business objectives

REQUIREMENTS OF A STRATEGY STATEMENT is primarily a vehicle for focusing management attention on strategic aspects of the firms business. is also a means of communication to those who must review and approve the strategy and those who use it as guidance as their actions. The document must be available to those responsible for initiating adjustments to it. These adjustment take into account more current inputs from the environment or business.

REQUIREMENTS OF A STRATEGY STATEMENT-Contd..

Information must be added regarding

the environment, the basis on which the goals and objectives were selected, the assumptions on which they depend, the risks present, and the options or flexibilities that are available and responsible

Strategy IngredientsCourse of actionAssumptionsRisksOptionsDependenciesResourcesFinancial projectionsAlternatives

Strategy Ingredients- Course of actionsThe Actions should :Lead to realize the objectives.Be consistent with other long - range interests of the firmBe preferred over alternative possible strategies.

Strategy Ingredients-Assumptionslook for options that are available within this strategy.ascertain how long the options are valid and upon what considerations the selections should be made. consider whether any of the options add some cost or expenses and if so, how much is added.

Strategy Ingredients-Assumptions Assumptions that exercises significant influence over the strategy are :

technical capabilities, functional support activities, andpotential competitive reactions. The test of the assumption is their credibility. The maintenance of the strategy requires the tracking of these assumptions.

Strategy Ingredients-RiskRisk will always be present, and in fact should be one of the major parts of the IT functional strategy.

Questions such as What is the nature of the risk in the strategy? and What is their potential impact?

should be answered.

Strategy Ingredients-Dependencies

One technical strategy may depend on another technical strategy to produce capability or a process for use by the former.

What are the key dependencies of the strategy? What is their nature? and How and in what ways are they significant to the strategy? are some questions IT managers must answer.

Strategy Ingredients-Resources & Alternativesmust identify resources required to carry out the actions, and must present financial projections of revenue, cost, expenses, profit, and capital required to implement the strategy.Alternatives that were rejected in the selection of the strategy, and the reasons for rejecting them, should be retained for the future reference.

Steps in Strategy DevelopmentWell-developed strategy statements take time. The strategist must take time to understand the environment and the area of opportunity or concern. The written statements of the environmental analysis should be concise and sharply focused.

The statement of the opportunity or threat should highlight its relevance to the firms future.

Steps in Strategy Development.Environment analysis might include an estimate of future computing costs, anticipated computing loads, technical advancement expected in telecommunication or processing capability, special feature conditions and other features that are relevant.

Steps in Strategy DevelopmentObjectives are set and modified, if necessary, during the iterative strategy development process. Stand alone strategies may need to identify several possible objective.

Steps in Strategy Development.To exercise a reasonable choice among the alternative strategies, selection criteria should measure the basic, long range effects on the firm or on the IT function.

The effects may be viewed in terms of profit and revenue, Investment resources required, degree of risk, technological capability exploited, competitive reactions, and other factors that are involved in each individual case.

Steps in Strategy Development.The best strategy should be selected by using the criteria to measure the effect that could be expected from each position. Upon approval from senior executives these strategy statements will be incorporated into the strategic and tactical plans of the firm.

Steps in Strategy Development.

The process of incorporation may require minor changes because this process may be iterative as well.

Strategic control

STRATEGY MAINTENANCEPERFORMANCE ASSESMENT

THE RELATIONSHIP OF STRATEGY AND PLANNING ELEMENTSNATURE OF THE BUSINESSTHE ENVIRONMENTGOALS AND OBJECTIVESSTRATEGY STATEMENTSTRATEGIC PLANOPERATING PLANPERFORMANCE ASSESMENTSTRATEGY MAINTENANCE

Elements of a strategy-STRATEGY MAINTENANCEStrategy maintenance is the process of reviewing the environment and reassessing the course of action in light of changing events. The extent to which strategy maintenance proceeds is a direct result of the volatility experienced in the environment.

Strategic maintenance processDocument the areas where change may take place.Track actual developments against assumptions, dependencies, and risks in the strategy.Identify deviations from the the strategyCarefully reexamine and update the entire strategy

IT Strategy Issues Business aspectsTechnical issues Organizational concern Financial matters Personnel considerations

The Business AspectsBusiness goals may include increased market share, improved customer service, lower production costs, or many other objectives of central importance to the corporation.To the extent that IT organization is involved in attaining the firms objectives, the IT managers must include this involvement in the functions strategy statement. They must ensure that the functions actions are in line with the long-term goals and objectives of the firm. This involvement must be tested through an interactive review between the IT managers and their superiors.

Technical issues The IT manager is responsible for providing leadership in attaining advantage for the firm through the use of the technology. The strategy should reveal the practical utilization of advanced technology in support of the firms goals and objectives. This utilization must be consistent with reasonable risks and available or attainable resources

Organizational ConcernsMany changes, while important to senior executives, are resisted by nearly everyone else for a variety of reasons.

The firm needs training and education in the subtitles associated with technology introduction.

Not everyone appreciates the IT role, and many managers in the firm do not fully understanding the contribution, or potential contribution, of the IT function.

Wise IT managers will take specific actions to remedy, these deficiencies.

Financial MattersFinancial constraints bound the range of opportunities for the IT organization as they do for most other functions. These resources constraints force iteration in the process of developing the business strategy for the firm. These constraints also cause successive revisions in the functional strategy for the IT organization

Personnel ConsiderationsNo functional strategy is complete without action plans that relate to the management task of recruiting, training, and retaining a base of skilled people.

These personnel considerations are intimately related to technical issues, because strong technical people develop solid technical strategies and advanced technical strategies attract strong people.

Skilled people and advanced technical resources provide some necessary conditions for making major productivity improvements.

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Absolute Cost Advantages:Superior production TechniquesPast experiencePatents/ Secret ProcessesControl over resources (labour/material/equipment)Access to cheaper sources of funding (existing companies represent lower risk than established ones?)

Economies of Scale:Cost reduction throu mass prod stadzed outputDiscounts on bulk purchases of inputsSpreading fixed cost over large volumeScale economies in advertisingMinimum Efficient Scale of Entry

Commercial Jet Aircraft Industry3 players (Airbus Industries, Boeing and McDonnel Douglas)Explanation high barriers to entry (enormous cost of development, scale economies enjoyed by incumbents)Eg MD-11 wide bodied introduced in late 80s cost $1.5 billion development costs: Implies that MCD will have to sell more than 200 units to break even representing 13% of the industrys for that type f aircraft between 1990-2000.For MD-12 (comparable to Boeing 747) develp costs exced 5 billion. Breakeven 400-500 units: Approximately 10-1 years of production Add to this another 5-6 years of negative cash flows during development.Such high development costs act as deterrant to entry

Yet Airbus which entered in 80s was he first one to do so since 60s. However this is an unusual case (co received substantial subsidies from the governments of Germany, France, Spain and Britain to help it overcome barriers)

Source Hill & jones page 71 Strategy in Action 3.2

Note: How much is a billion $ . Reliance compare*

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Example Computer Industry*

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substitute products Products with improving price/performance tradeoffs relative to present industry products*

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Southwest. So intense was the rivalry among airlines in 1990-92 that the cumulative losses of the industry was a stagering 7.1 billion more than what the industry made in the last 50 years.Concentration RatioHerfindhal HI=10000 Sum Si2 where Si is market share of ith firm. HI in excess of 1800 are thought to be characterize industries with low rivalry