Strategic management of E-Business Chapter 3 E-Business strategy formulation

Why focus on e-business planning? Important trends enabled by IT and Internet Ability to re-engineer supply chains Use of information to smooth out inefficiencies & bottlenecks, & thus achieve efficiency & effectiveness gains Ability to re-engineer relationships with customers Manipulate large amounts of information about customer to identify trends, preferences Improve decision making about delivering on customer value proposition Ability to use Internet to disseminate information throughout organisation Results in more efficient internal operations

Why focus on e-business planning? Strategy vital to achieving benefits of these trends IT adopting more strategic role Concern about delivery of business value To realise value, need to undertake strategic analysis of possibilities of IT and Internet ‘High stakes’ with IT investments Need to recognise and manage risk, and weigh this against the achievement of organisational objectives

Why focus on e-business planning? Proportion of capital expenditure on IT  50% capital equipment expenditure in some organisations and in some industries Future of business now inextricably linked to IT

Challenges How to leverage connectivity, speed, and accessibility created by Internet and associated technologies to extend/enhance/enable our business vision? To be successful (viable) long term, must identify where profitability lies Must develop coherent strategies by which to exploit potentialities of I/IS/IT to deliver value to customers and shareholders

SISP*defined ‘...planning for the effective long-term management and optimal impact of information, information systems, and information technology…’ (Ward & Griffiths 1996, p.6) *SISP: Strategic Information Systems Planning

Objectives of planning IS/IT/ e-commerce requirements Ensure that focus of all IT investments (including Internet-based technologies) is on delivery of business goals and objectives Ensure all stakeholders (especially senior management team) understand what IT and Internet can achieve Increase their commitment to deploy IT to enable achievement of organisational objectives

Objectives of planning IS/IT/e-commerce requirements Develop appropriate resourcing levels for IT and e-commerce Establish priorities for IT investments

What is business strategy? Plan that integrates organisation’s goals, policies, actions into integrated whole Direction organisation takes in order to compete effectively and meet stakeholder expectations Requires vision (challenging desired future state for organisation) and mission (reason for existence, overriding purpose

Business, IS, and IT strategies Business Strategy IS Strategy Demand oriented Application focused IT Strategy Supply oriented Technology focused IT impact & potential Establish direction and objectives Articulate information requirements and systems needed to deliver that information Identify technological infrastructure required (Ward & Peppard 2002)

Impacts of Internet on planning Business Strategy IS Strategy IT Strategy Has a major effect of Internet (and hype!) been to elevate strategic thinking about technology to the level of business strategy? Implications of Internet

Objectives of e-business planning To ensure that IT and e-commerce support and enhance achievement of business objectives To achieve cost-effective investment in IT and e-commerce for measured business benefits Controlling expenditures and ensuring delivery of value from IT To protect existing information and IT assets Reduce maintenance costs To prioritise IT investments according to ability to support achievement of business objectives To gain commitment and understanding of senior executives with respect to the role of IT in the organisation

Who should be involved? Senior IS management Specialist planners Representatives from different functions Senior executives Trading partners? Major customers?

Problems of NOT planning competitors gain competitive advantage business goals unachievable due to systems limitations organisational information resource not adequately exploited systems not integrated duplication of effort inaccuracy poor management information lack of commitment from senior executives

Problems of NOT planning new systems fail to deliver business benefits lack of focus on business needs technologies become a constraint on business no means of prioritising appropriate resource levels for IS/IT

Framework for e-business strategy formulation

Appreciate the strategic context Understanding long term goals and vision for organisation Its ‘strategic intent’ (Broadbent & Weill 1997) Understand external environment Identify potential synergies and economies of scale through similarities between business units Appreciate impacts of Internet on organisation and industry

Appreciate the strategic context Understand external and internal IT environments Recognising key IT trends in industry Appreciate how competitors and business partners are using IT Understand internal strengths and weaknesses Recognise capabilities Perform audit of IT infrastructure, IT skills and IT management

High level strategic visioning and thinking

Articulate business and IT maxims Business maxims: high level statements about competitive position, how value created for customers, intentions regarding growth and development, its position of use of resources, etc. IT maxims: statements about how information and IT will be valued and deployed in the organisation

Defining key parameters for IT Role of IS/IT strategic enabler (opportunistic) or support? Sourcing of IS/IT Insourced, selectively sourced, or outsourced? Structure of IS/IT dept Decentralised, federal, or centralised? View of IT infrastructure Enabling or utility view? Decisions about parameters should be aligned with business strategy

Complementary views of strategy View presented so far regards strategy as developed from understanding of nature of competition, industry and organisational structure and competitive response But strategy can be articulated based on understanding of internal resources, capabilities and competencies, and access to external resources etc., which can be harnessed as sources of competitive advantage Each perspective offers valuable insights into strategies that an organisation can adopt

Tools to support strategy formulation SWOT analysis Product and service lifecycles PEST analysis Competitive forces analysis Value chain analysis Critical success factor analysis Business technology audit Gap analysis

SWOT analysis Strengths, Weaknesses Opportunities, Threats Analyse internal capabilities, skills Look to exploit strengths for advantage Consider weaknesses and minimise potential disadvantage Opportunities, Threats External analysis to identify opportunities for exploitation, threats to be minimised or countered SWOT analysis can provide understanding of IT resource requirements and future developments

SWOT Analysis Strengths Weaknesses Self Environment … … … Attack Strenghten Oppor- tunities Threats … Protect Retreat

Industry and product lifecycles

Product and service portfolios

Product lifecycle – emergence demand is uncertain market ill-defined I/IS/IT focus: market research product development

Product lifecycle – growth need major investment to meet growth in demand marketing production new product development revised supplier relationships

Product lifecycle – growth I/IS/IT focus: support growth must not inhibit ability to satisfy demand create barriers to entry tie in suppliers and customers high investment needed

Product lifecycle – maturity competition increases supply starts to exceed demand fight to retain market share

Product lifecycle – maturity I/IS/IT focus: defensive strategy understand competition increase productivity more efficient, effective use of resources build up customer switching costs better management of supply and distribution channels

Product lifecycle – decline cost effective in serving market I/IS/IT focus: detailed and accurate management info demand forecasts profitability of customers, products cost controls

Product and service lifecycle Help managers think creatively about whether or not they have information needed to manage wildcats, rising stars, cash cows and dogs effectively Helps to identify gaps in existing information provision

PEST Analysis Political/legal Economic Sociocultural Government legislation, taxation, industrial relations, privacy, environmental protection requirements, etc. Economic Stage of economic cycle, unemployment, inflation, interest rates, relative affluence of society Sociocultural Lifestyle changes, demographic characteristics, income distribution, consumer preferences, etc.

PEST Analysis (cont.) Technological Rate of technological innovation, rate of infusion and diffusion with respect to technology Consider key environmental influences, drivers of change and how these might change over time For e-businesses, consider how technological change is driving changes in other areas Consider role of IT in exploiting of mitigating against the effects of these changes

Threat of new entrants Barriers to entry will be high if economies of scale are extremely important capital requirement of entry is high access to distribution channels is difficult patents or specialist skills are required there are a large number of existing rivals existing rivals are large and strongly positioned

Threat of new entrants (cont.) competition in the industry is intense product offerings in the industry are highly differentiated high brand loyalty exists access to raw materials or other critical resources is difficult

Threat of new entrants (cont.) How has the Internet, vastly increased connectivity, and improved communication channels impacted the threat of new entrants?

Threat of new entrants New entrants mean IS/IT can additional capacity reduced prices new basis for competition IS/IT can reduce costs increase rate of product / service innovation and development better control distribution and supply channels achieve better match between products and customers

Bargaining power of suppliers Supplier power is likely to be high few suppliers switching costs are high there is a possibility of the supplier integrating forward brand of a supplier is powerful suppliers’ customers are of little importance to the supplier

Bargaining power of suppliers How has the Internet, vastly increased connectivity, and improved communication channels affected the bargaining power of suppliers?

Supplier power high If supplier power is high prices/costs will tend to be higher quality of supply will tend to be lower there will tend to be reduced availability of supply IS/IT can use supplier sourcing systems help to extend quality control into suppliers enable forward planning with suppliers through interorganisational systems including the use of EDI and/or Internet technologies

Bargaining power of buyers Buyer power is likely to be high when there are few buyers there are alternative sources of supply component or material cost is a high percentage of total cost there is a threat of backward integration by the buyer if satisfactory prices or suppliers cannot be obtained

Bargaining power of buyers How has the Internet, vastly increased connectivity, and improved communication channels affected the bargaining power of buyers?

Buyer power high If buyer power is high prices forced down higher quality demanded service requirements higher and more flexible higher competition in industry IS/IT can help by differentiating products/services improving price/performance increasing switching costs of buyers facilitating buyer product selection

Threat of substitution Threat of substitution may take many forms: actual or possible substitution of one product for another a new process may render a product superfluous substitutes may be thought of as competing for discretionary expenditure ‘doing without’ can also be thought of as a substitute

Threat of substitution How has the Internet, vastly increased connectivity, and improved communication channels impacted on the threat of substitution?

Threat of substitute products The threat of substitute products tends to limit the potential market and profit tends to put a ceiling on prices IS/IT can reduce the effects by helping to improve price/performance helping to enhance products and services to increase value improving rate of innovation identifying new customer needs

Rivalry within industry Competitive rivalry will be intensified if market growth is slow or in decline a small number of similar sized competitors dominate there are high fixed costs and/or there are high industry exit barriers for all rivals there is over-capacity in the industry

Rivalry within industry How has the Internet, vastly increased connectivity, and improved communication channels impacted on competitive rivalry?

Rivalry within industry IS/IT can reduce the effects by helping to improve price performance helping to differentiate products and services helping the firm ‘get closer to the end consumer’ understand the requirements or needs of the ‘end consumer’ Intense competition from rivals leads to aggressive competition on price competition regarding product development distribution and service being critical factors in customer choice the need for customer loyalty

Using competitive forces identify / analyse significant players in each force determine nature / strength of impact of each player devise strategy to exploit / defend / neutralise impacts identify opportunities for IS/IT to support / implement / manage strategy

Value chain analysis (internal) Value chain analysis enables consideration of internal activities and processes, thus understanding where costs are incurred, and where value is added Examines organisation in terms of primary activities (core business processes) and support activities

Internal value chain analysis

External value chain analysis

Critical success factor analysis Important device for ensuring that managers receive information they need to monitor achievement of corporate goals and objectives CSFs require information to monitor achievement in key result areas CSFs may require systems enhancements or new systems

Critical success factor analysis

CSFs and the value chain

Business-technology audit Provides managers with an assessment of business value of IS, against an assessment of their technical quality Business value: value judgement about contribution an IS makes to achievement of business goals and objectives Technical quality: assessment of age, amount spent on maintenance, ease of maintenance, required infrastructure, risk

Business-technology audit

Gap analysis Aims to identify and then help remedy gaps that exist between skills, knowledge, competencies, capabilities that an organisation requires to be successful, and resources an organisation currently has

Combining the tools

Portfolio of systems At end of strategy formulation process, organisation should be clear on business goals and objectives e-business goals and objectives how IT used to support achievement of goals and objectives State of existing portfolio of systems Where strengths and weaknesses lie Prioritised set of new systems, required refurbishments

Portfolio of systems (cont.) Application portfolio analysis helps to ‘map’ balance required of new investments and maintenance of existing investments Portfolio of systems needs to be aligned with business strategy

Application portfolio analysis

Matching portfolio against strategy

Circumstances dictate change in portfolio