1 MODULE 7 : Making the Case for Networked Business Matakuliah: J0422 / Manajemen E-Corporation Tahun: 2005 Versi: 1 / 2

2 Learning Outcomes  In this chapter, we will study:  Comparing Industrial and Network Economic, there was scale and scope of Industrial and Network.  Business model that consist of concept, capabilities, and value.  Scenario Based Approach to Validation concept for making networked business.

3 Outline Topic  Changing Economics.  Linking Strategy to Execution to Results.  Developing the Business case for IT.

4 Content The valuation of New Economy players represents a bet by the world’s financial markets that a few companies will leverage the Internet to fundamentally change the competitive game in their industries. It is a gamble that powerful, low-cost business models will emerge, that new businesses will rise from dis- intermediated value chains, and that some companies will exert such influence that they will generate extraordinary long-term shareholder returns. [While] we cannot predict the winners of the e-races… we can be sure that the winners will be few and the losers will be many.

5 Changing Economics Comparing Industrial and Network Economics  Industrial Economies of Scale and Scope  Economies of scale – the ability to produce and distribute products and services faster, better, and cheaper than competitors can – by building specialized plants, creating specialized jobs, and hiring specialized workers.  Economies of scope – the ability to leverage an existing business infrastructure to produce and distribute new products or launch new businesses – were limited to enhancements in products design or features.

6 Changing Economics Comparing Industrial and Network Economics  Network Economies of Scale and Scope  Network Economies of scale are achieved when a “community” of firms uses a common infrastructure and capability to produce and distribute products and services faster, better, and cheaper.  Network Economies of scope are achieved when a “community” of firms uses a common infrastructure and capabilities to launch new products and services, enter new markets, or build new businesses.

7 Changing Economics

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10 The business model consists of:  A Concept that defines the opportunity and strategy.  Capabilities that identify the resources required to exploit the opportunity and execute the strategy.  A value proposition that identifies the benefits returned to all stakeholders and the results executives have achieved or expect to achieve. Linking Strategy to Execution to Results

11 Linking Strategy to Execution to Results

12 Linking Strategy to Execution to Results  Analyzing Performance Drivers  Business concept  Capabilities (Operating and innovating, Managing and Learning, Leading and Engaging)  Value (Financial drive and market performance)  Scenario Based Approach to Validation (Table 4.1)

13 Linking Strategy to Execution to Results  Business Concept  A firm business concept defines the opportunities a firm will pursue and its strategy for capturing a dominant position in its industry and markets.  Opportunity analysis includes a market assessment, analysis of product/service offerings and pricing, assessment of competitive and industry dynamics, and plans for evaluation and growth of the business.  The business concept frames the assumptions used to forecast revenues.

14 Linking Strategy to Execution to Results  Capabilities (Operating and innovating, Managing and Learning, Leading and Engaging)  Capability analysis begins with an assessment of resource requirements and availability (including leadership, people, partners, expertise, time and money).  Analysis of an organization’s capabilities frames the assumptions used to forecast costs.  Operating and innovating capabilities include: The core processes through which an organization converts inputs to outputs that create value for customers, suppliers, and partner (e.g., procurement, product development) The processes through which an organization continuously improves existing operations and launches new products, services, and businesses e.g., new product development The IT infrastructure that supports these processes (e.g., distributed information processing and transaction systems)

15 Linking Strategy to Execution to Results  Managing and learning capabilities include : The processes through which a firm plans, budgets, and monitors performance The organization design (e.g., units and divisions, reporting structure, authority structure, and governance) Information, knowledge management, and decision-making processes The IT infrastructure that supports these processes (e.g., management reporting and business intelligence system)  Leading and engaging capabilities include : Human resource management system Alliance and partnership management Customer and supplier relationship management systems The IT infrastructure that support these processes (e.g., communication infrastructure and tools such as and voice mail).

16 Linking Strategy to Execution to Results  Value refers to: The benefits delivered to investors and other stakeholders in an organization. Value analysis begins with an assessment of the subjective and objective benefits delivered to customers, suppliers, partners, and employees. These benefits, in combination with an organization’s concept and capabilities, create the assets that drive financial and market performance.

17 Linking Strategy to Execution to Results Table 4-1: A Scenario-Based Approach to Valuation Step 1: Define the purpose for the value assessment (e.g., seeking funding, buying a company, investing in an established business). Step 2: Pick a point in the future when you expect your business strategy to deliver value (most venture capitalists choose 3-5 years, but you may wish to shorten the timeframe). Step 3: Analyze the business concept and strategy and forecast market size, your share, and revenues. Identify yearly changes that reflect how your firm and the market would reach this future state. List key assumptions used in constructing revenue forecasts. Talk with others and adjust assumptions. Step 4: Analyze the capabilities and resources required to reach the future state and forecast the cost of building those capabilities and acquiring resources. Identify yearly costs and resources that will be required by you, your partners, suppliers and customers. List key assumptions used in constructing cost forecasts. Talk with others and adjust assumptions. Step 5: Based on this analysis, construct estimates of financial performance and market value that reflect the "most likely" assumptions. Clearly state the performance drivers that form the foundation for the assumptions in your model. Scenario Based Approach to Validation (Table 4.1)

18 Linking Strategy to Execution to Results Step 6: Factor in the uncertainty in your assumptions by developing several scenarios that represent upper and lower bounds on key variables in your forecasts. Most plans include scenarios that reflect the "most realistic," "best case," and "worst case." However, additional scenarios may be needed. Test the sensitivity of your forecasts based on changes in key assumptions. Step 7: When appropriate, validate your model by using alternative approaches, such as Discounted Cash Flow and Comparable Company Analysis. Step 8: Discuss the value analysis scenarios you have constructed with others and critique the findings and assumptions—not just once—but ona regular basis. Keep in mind that this analysis is based on highly uncertain business judgments. As a result, it is important to stay informed of what is happening in the market and industry, your company and with your community. Use the analysis as a baseline and update it often based on what you learn as you execute strategy and conduct business. Finally, be sure to set up a dynamic and broad-based measurement system that collects real-time metrics of company and industry performance. Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information and Strategy Management. Burr Ridge Scenario Based Approach to Validation (Table 4.1)

19 Developing the Business Case for IT  Benefits from investments in infrastructure  Benefits from doing business on a Networked Infrastructure

20 Developing the Business Case for IT Categories of BenefitsGoals and Measures InternalExternal Type I: Benefits from Investments in a Networked IT Infrastructure Functionality and FlexibilityImprove infrastructure performance; increase the functionality and range of strategic options that can be pursued Sample Measures: Decrease the cost and/or improve the performance of internal IT operations; enable new IT applications to be created at lower cost, in less time, and with less risk; expand the range of internal IT initiatives Create an efficient, flexible online/offline platform for doing business with customers, suppliers, and partners Sample Measures: Decrease the cost and/or improve the performance of doing business online; decrease the time, cost and risk of launching new online business initiatives; expand the reach of existing IT enabled businesses and the range of business opportunities that can be pursued. Type II: Benefits from Doing Business on a Networked IT Infrastructure CommerceImprove internal operating efficiency and quality Sample Measures: Internal process performance and work flow improvements; cost savings or cost avoidance; increased quality; decreased cycle time Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels Sample Measures: Supply chain or distribution channel performance improvements; cost savings or cost avoidance for the organization and its customers, suppliers, or partners; decrease time to market or just-in-time order replenishment; enable new channels to market and/or extend the reach and range of existing channels Content / KnowledgeImprove the performance of knowledge workers and enhance organizational learning Sample Measures: Enable individuals to achieve and exceed personal performance goals; increase the speed and effectiveness of decision making; increase the ability of the organization to respond quickly and effectively to threats and opportunities Improve the performance of knowledge workers in customer, supplier, and partner organizations; add “information value” to existing products and services; create new information-based products and services Sample Measures: Provide information to customers, suppliers, and partners that enables better decision-making; charge a price premium for products and services based on information value-added; launch new information-based products and services; increase revenue per users and add new revenue streams CommunityAttract and retain top talent; increase satisfaction, engagement, and loyalty; create a culture of involvement, motivation, trust, and shared purpose Sample Measures: Length of time to fill key positions; attrition rate, trends in hiring and retaining top talent (over time, by industry, by region) Attract and retain high quality customers, suppliers, partners, and investors; increase external stakeholders satisfaction, engagement, and loyalty Sample Measures: Customer, supplier, partner satisfaction and lifetime value; average revenues per customer and trend over time; level of personalization available and % that use it; churn rate

21 Developing the Business Case for IT Table 4-3: Comparing the Three Eras of IT Evolution Since it was first introduced in organizations, IT has progressed through three eras. During the Mainframe Era, IT was primarily used to automate back office activities. During the Microcomputer Era, IT savvy individuals used personal computers, spreadsheets, and word processing to support decision making and individual work. The Network Era began with early client-server technologies where attempts were made to integrate the islands of automation that arisen during the first two eras and, in the process, to streamline and integrate core IT-enabled business processes. The commercialization of the Internet, browsers, and the World Wide Web, enabled full realization of anywhere, anytime, anyplace computing that is transforming global business, society, and policy. As technology evolved, so too did the benefits and impacts. Yet, the benefits of earlier eras did not go away when we transitioned to a new era. Instead, new opportunities emerged. Timeframe Mainframe Era 1950s to 1970s Microcomputer Era 1980s & Early 1990s Network Era 1990s to present Dominant Technology Mainframe, stand-alone applications, databases Stand-alone microcomputer and end- user tools (e.g., word processing, spreadsheets) Client-server, Internet, browser and hypertext “Data Management”“Information Management”“Knowledge Management” Organization Metaphor HierarchyEntrepreneurial Organization Networked Business Community “Centralized Intelligence”“Decentralized Intelligence”“Shared Intelligence” Primary IT RoleAutomate back-office activities Provide information and tools to improve decision making and knowledge worker performance Transform organizations and markets to create business value Typical UserIT specialistsIT literate business analystsEveryone Location of UseComputer roomDesktopEverywhere Planning ProcessYearly budgetingIndividual expense Business development and strategic planning JustificationCost savings Increased decision quality and personal performance Business value ImplementationIndependent projectsAd-hocStrategic initiatives

22 Chapter Summary  The challenge of integrating new technologies into the “legacy” of computers, networks, and systems already in place within companies adds to the problem.  To achieve the grand vision of the network economy, a new approach to building businesses and measuring performance is needed.  Executives should consider the following questions as they attempt to forecast the value of digital business strategies and the ability of their organizations to execute them: How well do you understand the link between your strategies, the capabilities and infrastructure built to execute those strategies, and the value created for all stakeholder (e.g., customers, suppliers, partners, etc.) What are the key performance drivers for your business, including revenue and cost drivers? How do the benefits delivered to stakeholders create financial, physical, and intangible assets? What are the key areas where a change in strategy or an improvement in infrastructure and organizational performance could create significant short-term and long-term-value?