L2 - ANALYTICAL TOOLS IN STRATEGIC MANAGEMENT

Learning Objectives

Understand the relationship between IS/IT and business strategy
Explain IS/IT strategy within the context of an organisations environment
Understand strategy process model
Understand and apply strategic tools and techniques to determine IS strategy


IS/IT STRATEGY V BUSINESS STRATEGY

IS Strategy determines how IT is applied within an organisation. It should ensure that
the IT deployed supports business strategies and that the appropriate resources and
processes are in place for the deployment to be effective. Note that in reality there is
some overlap between elements of IS and IT strategy. For example, it can be argued
that the selection of optimal portfolio of software is an aspect of both IS and IT strategy.
For this reason a convention preferred by many authors refer to both elements together
(IS/IT strategy). The relationship between these elements is indicated in Figure 1. It is
evident that elements can be considered to be hierarchical. Here, business information
strategy should be driven by the objectives of the business strategy, by its information
needs. IS functionality, delivered by BIS applications, should in turn be driven by the
information requirements of the organisation, and finally IT strategy is the
implementation of IS strategy through the delivery of IT infrastructure. Such a model is
useful for debate. For example, does this model represent reality in most organisations?

Information
requirements
Macro
Environment
Micro
environment
Figure 1. Relationship between business strategy and IS/IT strategy
IT
Strategy
Business
Strategy
IS
Strategy
Information
Strategy
Internal resource
analysis
IS strategy
objectives
Corporate
objectives
Information
requirements


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Do organisations have separate information, IS and IT strategies? What are the benefits
and disadvantages of this approach? Although the top-down approach implies strong
control of IS and alignment with business strategy, it may have limited responsiveness in
taking advantage of opportunities provided by IS. If IS strategy development identifies a
business opportunity it is difficult to feed this back up the hierarchy to be incorporated
into the business strategy.


IS/IT STRATEGY AND AN ORGANISATIONS ENVIRONMENT

All organisations operate within an environment that influences the way in which they
conduct business. Strategy development is strongly influenced by considering the
environment the business operates in. Environmental influences can be broken down
into the immediate competitive environment (micro-environment) that includes customer
demand and behaviour, competitor activity, marketplace structure and relationships with
suppliers and partners. The wider environment (macro-environment) in which a
company operates includes economic development and regulation by governments in
the forms of law and taxes together with social and ethical constraints such as the
demand for privacy. For IS/IT strategy, the most significant environmental influences are
those of the immediate marketplace that is shaped by the needs of customers and how
services are provided to them through competitors and intermediaries and via upstream
suppliers.


THE ENVIRONMENT AND THE MODERN MANAGEMENT IMPERATIVES

Licker (1997) refers to seven modern management imperatives summarised as the
'seven R's of strategy'. These highlight how an organisation must compete by using
information systems strategy to respond to its external environment. Each of the seven
R's is described below together with how IS can be used to respond to the influence.

Reach; This recognises that businesses increasingly compete globally rather than
locally or within national boundaries. As a result organisations need the ability to
compete with everyone else, regardless of geographic constraints. IS/IT both allows
global competition and is required to compete; organisations need information and the
tools to process it to allow quick, accurate response, any time and anywhere; global
competition implies information networks and inter-organisational systems

Reaction; Customers are becoming ever more demanding and customers will make
their views known and wish to have them respected. This means that organisations
need quick customer feedback on products and services in order to offer what
customers are demanding. IS/IT is needed to access and interpret customer feedback. It
can be used to keep track of customers, products and projects - it is particularly
important to bring order to the data to facilitate fast and accurate response so that
managers will be able to anticipate customer needs because they understand the
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customer. A consequence of this is that software needs to be flexible and quickly
developed;

Responsiveness; The process of turning an idea into a product or service that can be
marketed is shortening, global reach means that there will be a greater probability that a
competitor will be able to offer a good or service that more closely meets customers'
requirements. The response to this situation is to shorten the concept-to-customer cycle
time so that the organisation can tailor goods and services to meet customers' specific
needs. There needs to be a rapid movement of product ideas to the market.
Organisations need IS/IT to help manage this process: efficiency and speed as well as
accuracy and reliability are required and information needs to be relevant and well
formatted.

Refinement; Greater customer sophistication and specificity mean that customers are
more able than ever to distinguish fine differences between products and compare them
with their needs and desires. More customer sophistication means increased turbulence
in the market, so more information and the tools to manage and manipulate it are
needed. Customers are better at communicating precise requirements which means that
niche markets appear, grow and disappear rapidly. As a result increased breadth of
information is required to create and market products. Also, customers respond well to
systems that respond well to them.

Reconfiguration; As a consequence of changing customer needs and preferences,
may be necessary to re-engineer work patterns and organisational structures to change
the structure of work and workflow from idea to product or service. As business
processes need to evolve and adapt to market needs, there is a impact on information
resource requirements needed for organisational learning (crossing functional
boundaries). Complex work structures generate complex data and management support
systems are needed to help manage continually work patterns and structures. Also, new
architectures (e.g. client-server) allow decentralisation of IS/IT and greater customer
responsiveness.

Redeployment; Changing an organisations configuration may require the
reorganisation and redesign of the financial, physical, human and information resources
that are required to create and market a product or service. Rapid redeployment of
resources is required to meet customer needs. An organisation needs to be able to
visualise complex arrangements for resources and models to manage them. Therefore,
it is necessary to maintain detailed, relevant information on resources at all times and be
able to redeploy them. Information itself has become a competitive resource, as well as
allowing more control over other resources.

Reputation; An organisation's reputation will be determined, at least in part, by the
satisfaction that a customer experiences. This will be enhanced when the product or
service meets or exceeds expectations and requirements. Therefore, an organisation
needs to pay attention to the quality and reliability of its products or services and
processes by which they are produced. IS/IT can be used to support product
development, testing, marketing and customer post-sales service. It can also help to
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reduce the gap between expectation and performance. Organisations need to enhance
the quality and reliability of the product, and information systems can help in such areas
as quality benchmarks, measurement and group-based control techniques.

STRATEGY PROCESS MODEL

A strategy process model provides a framework that gives a logical sequence to follow
to ensure inclusion of all key activities of strategy development. Models are used to
structure strategy formulation and development for a range of business areas whether
corporate strategy (Lynch, 2000), marketing (McDonald, 1999; Smith, 2001), logistics
(Hughes et al., 1998) or IS (Ward and Griffiths, 1996; Robson, 1997). A review of the
strategy process models developed by these different authors indicates the common
features summarised in Figure 2





























Continuous internal and external environment scanning or analysis is required to
assess internal strengths and weaknesses and external opportunities and threats.

Clear statement of objectives is needed and a vision of the future direction of the
organisation is required.
Strategic analysis

External
environment
Internal resources



Strategic objectives

Vision
Mission
Objectives



Strategic definition

Option
generation
Option
evaluation
Option
selection



Strategic implementation

Planning Execution Control

Figure 2. A generic strategy process model
Chaffey (2002)
Monitoring,
Evaluation &
response
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Strategy development can be broken down into formulation of different strategic
options and then selection.


After strategy development, enactment of the strategy occurs as strategy
implementation.

Control is required to detect problems and adjust the strategy accordingly.

In addition, the models suggest that these elements, although generally sequential, are
also iterative and require reference back to previous stages. Such a strategy framework
can be applied to each of the different strategies related in Figure 1, whether business
strategy, information strategy, IS strategy or IT strategy. Each should have a situation
analysis, objective setting, option selection and implementation stage. Note the use of
arrows in Figure 2 is to indicate that each stage is not discrete, but rather involves
referring backwards or forward to other strategy elements. Each strategy element will
have several iterations. Kalakota and Robinson (2000) recommend a dynamic strategy
process specific to e-business in which the business is responsive to its environment.


TOOLS FOR STRATEGIC ANALYSIS

The tools commonly used in BIS strategic analysis are:

Porter and Millar's five forces
model
A model for analysing the different external
competitive forces that affect an organisation and
how information can be used to counter them
Porters competitive
strategies
Assesses how external competitive forces can be
harnessed
Nolans stage model An evolutionary maturity model to assess the
current development of information systems within
an organisation
McFarlans strategic grid A model for assessing the current and future
applications portfolio within an organisation
Value chain analysis A tool for analysing the value-adding of
information within an organisation. Note that value
chain or value stream analysis can also be used
to assess value-adding activities outside an
organisation.
Critical Success Factors
(CSF) analysis
A model assessing those factors within an
organisation that are required to achieve strategic
objectives
Table 1. Tools for BIS strategic analysis


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PORTER AND MILLAR'S FIVE FORCES MODEL

Porter and Millar's five forces model is a model for analysing the different external
competitive forces that affect an organisation and how information can be used to
counter them. The five forces are: rivalry between existing competitors, threat of new
entrants, threat of substitutes, the power of buyers and the power of suppliers. This
model originated in 1985 and has remained one of the classic tools by which an
organisation can assess its current competitive position in relation to a number of
external factors:

Rivalry between existing competitors; This will determine the immediate competitive
position of the business and will depend principally on the number of firms already in the
industry and the maturity of the industry itself. For example, a mature or declining
industry will probably experience a high degree of rivalry, since survival is the key issue
at stake.
Threat of new entrants; A new entrant to an industry will cause the existing competitive
situation to be disrupted. This has been evident in many countries over the last few
years, where many of the formerly nationalised industries that were then privatised are
now facing competition that they have never faced before.


















Threat of substitutes; The substitutes in question already exist within the industry, but
because of differentiation they are not quite perfect substitutes for each other. The
danger here, therefore, is that a company may lose market share if a rival can supply a
substitute that more closely matches the needs of certain customers.

Power of buyers; The phrase 'the customer is king' is never more true than here where
buyers, especially in a business area where there are relatively few of them, can exert
power by threatening to switch their purchasing to an alternative supplier. This is also
true for businesses where the items being purchased are particularly high-value items.

Bargaining power
of customers
Threat of
new entrants
Rivalry between
competitors
Threat of
substitutes
Power of
suppliers
The business
and its
external threats
Figure 3. Porter and Millar's five forces model2
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Power of suppliers; This may appear a little odd given the previous point, since a
business is going to be the customer to its suppliers. However, there are still competitive
pressures to be addressed. For example, in a situation where a material is in short
supply, a business is going to be at risk from its competitors bidding up material prices
and suppliers selling to the highest bidder. An illustration of this is the worldwide
shortage of PC memory chips in the early 1990s, where computer manufacturers
effectively had to endure a large hike in prices if they were still to manufacture and sell
personal computers.

Figure 3 illustrates how the five forces outlined above provide the main external
pressure on the successful operation of a typical business. These five forces can exert a
profound influence on how business is conducted. If the model is to be used
successfully, it will require a thorough analysis of the industry under consideration. Of
itself, the resulting information will not automatically generate a business strategy for the
organisation. However, it will create a vivid picture of the market environments within
which the organisation is operating and provide some pointers towards avenues of
further investigation. From an information systems strategy perspective, the tool
provides further pointers towards how IS can be used to affect one or more of the five
forces. Each one of the five forces will be taken and an illustration of how IS can be
used to benefit the business will be given:

Rivalry between existing competitors. The greater the extent of rivalry within the
industry, the higher the costs that will be incurred by a business as it seeks to
compete with its rivals. In addition, industry rivalry will be profoundly influenced by
the positioning of its products in both the industry and product lifecycle. In a
declining industry, for example, collaborative efforts between industry rivals may
help reduce costs or raise the profile of the industry.

Threat of new entrants. Businesses such as the financial services industry are
competing increasingly on the basis of quality and service, and information systems
are one enabler in this process. Investment in systems that support these two
aspects of competition can deter potential entrants if they themselves have to make
a significant investment in such systems before they can hope to compete
successfully.

Threat of substitutes. The threat here is greater if the substitute products are a close
alternative. In the shape of CAD/CAM and computer-integrated manufacturing, IS
can be used to speed up development of new products and therefore reduce the
ability of competitors to provide products that are acceptable substitutes.

Power of buyers. IS can be used to lock customers into a company's products and
so reduce the risk of the customer switching to a rival. For example, a business
specialising in organising corporate travel may locate terminals at its main corporate
customers so that they will be more likely to book flights, hotels and car hire with that
company rather than a competitor.

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Power of suppliers. If a supplier believes that its customers will always buy from it
because there are few perceived alternatives, it is in a position to exert upward
pressure on prices and to dictate trading terms to the customer rather than the other
way round. Through external databases and now the Internet, IS can help
businesses identify equipment and raw material suppliers much more efficiently than
before and so reduce the bargaining power of suppliers.

The value of this model is that it encourages an organisation to look at itself in the
context of its external environment.


PORTER'S COMPETITIVE STRATEGIES

Related to his work on the five forces, Porter proposed three different competitive
strategies that could be used to counter these forces, of which the organisation may be
able to adopt one (Porter, 1980). Once a competitive strategy has been identified, all
marketing efforts can be applied to achieving this and IS can help support the aim.

Overall cost leadership; Firm aims to become the lowest-cost producer The strategy
here is that, by reducing costs, one is more likely to retain and reduce the threat posed
by substitute products. An example of how this be achieved is to invest in systems that
support accurate sales forecasting for projected materials requirements so that good,
long-term deals can be struck with suppliers, thus reducing materials costs.

Differentiation; Creates a product perceived by industry-wide as being unique. By
being able to tailor products to specific customers' requirements or by offering an
exceptional quality of service, the risk of customers' switching is reduced.

Focus or niche; This involves identifying and serving a target segment very well (buyer
group, product range, geographic market). In this strategy, the firm seeks to achieve
either or both of 'cost leadership' and 'differentiation'.

There is also a possible undesirable outcome:

Stuck in the middle; The firm is unable to adopt any of the above approaches and
therefore is ultimately at the mercy of competitors that are able to offer these
approaches.


MCFARLAN'S STRATEGIC GRID

This model is used to indicate the strategic importance of information systems to a
company now and in the future. It is sometimes referred to as an applications portfolio
model since it assesses the current mix of business information systems within an
organisation.

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This matrix model was developed by McFarlan and McKenney (1993) to consider the
contribution made currently by information systems and the possible impact of future IS
investments. It is suggested in the original model that any business will occupy one of
the segments in the matrix (Figure 4).

The strategic segment indicates that
the business depends on both its
existing IS and its continued
investment in new IS to sustain
continued competitive advantage. The
turnaround segment suggests that,
while a business in this position does
not currently derive significant
competitive benefits from its current
IS, future investment in this area has
the potential to positively affect the
business's competitive position. On
the other hand, a business operating
in the factory segment, while
depending on its current IS to operate
competitively, does not envisage
further IS investment having a positive
impact on its competitive position.
Finally, a business in the support
segment does not and believes it will
not derive significant competitive advantage from information systems.

Note that it is not likely to be the aim for every company to move to a high strategic
importance for IS. In some industries such as manufacturing, it is unlikely that IS will
ever attain high importance. In others, such as retailing, it may become more
improvement. Given the varying significance of IS in different industries, there are a
number of ways in which this model can be applied:

Across industries for analysing the strategic importance that particular industries
attach to IS;
Within an industry, different competitors can be plotted according to the relative
significance they attach to IS.
Within a company, different departments within an organisation can be classified
and goals set in relation to the future planned importance of IS.

This model has been criticised by Hirscheim et al. (1988) as being too simplistic, since
most companies have information systems that fall into all four categories. Ward and
Griffiths' (1996) modified matrix provides a useful variation on this model by categorising
information systems and their business contribution in terms of an applications portfolio.
This model recognises that the information systems used by a single company will not fit
into a single quadrant on such a matrix, but rather there will be a portfolio of IS, some of
which may lie in different quadrants.

High






Turnaround


Strategic




Low


Support




Factory

Low High

Strategic importance of current IS

Figure 4. McFarlans strategic grid
McFarlan and McKenney (1993)
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m
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t
a
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e

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f


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l
a
n
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e
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VALUE CHAIN ANALYSIS

This is an analytical framework for decomposing an organisation into its individual
activities and determining the value added at each stage. In this way, the organisation
can assess how effectively resources are being used at the various points on the value
chain. Michael Porter's value chain is a framework for considering key activities within
an organisation and how well they add value as products and services move from
conception to delivery to the customer. The relevance for information systems is that for
each element in the value chain, it may be possible to use IS to increase the efficiency
of resource usage in that area. In addition, IS may be used between value chain
activities to increase organisational efficiency.

Value chain analysis makes a distinction between primary activities, which contribute
directly to getting goods and services closer to the customer (physical creation of a
product, marketing and delivery to buyers, support, servicing, sale), and support
activities, which provide the inputs and infrastructure that allow the primary activities to
take place. Figure 5 shows the distinction between these activities. Primary activities
can be broken down into five areas:


Inbound
logistics
Sales and
marketing
Services Operations
Outbound
logistics
Procurement
Administration and infrastructure
Human resources management
Product technology/development
Value added
cost = margin
Figure 5. Michael Porter's internal value chain model


Inbound logistics; Receiving, storing and expediting materials to the point of
manufacture of the good or service being produced.

Operations; Transforming the inputs into finished products or services.

Outbound logistics; Storing finished products and distributing goods and services to
the customer.

Sales and marketing; Promotion and sales activities that allow the potential customer
to buy the product or service.

Service; After-sales service to maintain or enhance product value for the customer.

Secondary activities fall into four categories:
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Corporate administration and infrastructure; This supports the entire value chain and
includes general management, legal services, finance, quality management and public
relations.

Human resource management; Activities here include staff recruitment, training,
development, appraisal, promotion and rewarding employees.

Technology development; This includes development of the technology of the product
or service, the processes that produce it and the processes that ensure the successful
management of the organisation. It also includes traditional research and development
activities.

Procurement; This supports the process of purchasing inputs for all the activities of the
value chain. Such inputs might include raw materials, office equipment, production
equipment and information systems.

It is probably easier to see how IS can be applied within this model than in the five
forces model that we looked at earlier. For example, sales order processing and
warehousing and distribution systems can be seen to be very relevant to the inbound
and outbound logistics activities. Similarly, accounting systems have an obvious
relevance to administration and infrastructure tasks. What is perhaps less clear is how
IS can be used between value chain elements. The case at the end of this section on
applying the value chain to a manufacturing organisation helps illustrate the use of IS to
provide linkages between some of the value chain elements.

How can an organisation have a positive impact on its value chain by investing in new or
upgraded information systems? Porter and Millar (1985) propose the following five-step
process:

Step 1. Assess the information intensity of the value chain (i.e. the level and usage of
information within each value chain activity and between each level of activity). The
higher the level of intensity and/or the higher the degree of reliance on good quality
information, the greater the potential impact of new information systems.

Step 2. Determine the role of IS in the industry structure (for example, banking will be
very different from mining). It is also important to understand the information linkages
between buyers and suppliers within the industry and how they and competitors might
be affected by and react to new information technology.

Step 3. Identify and rank the ways in which IS might create competitive advantage (by
affecting one of the value chain activities or improving linkages between them). High-
cost or critical activity areas present good targets for cost reduction and performance
improvement.

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Step 4. Investigate how IS might spawn new businesses (for example, the Sabre
computerised reservation system spawned a multi-billion-dollar software company which
now has higher earnings than the original core airline business).

Step 5. Develop a plan for taking advantage of IS. A plan must be developed that is
business-driven rather than technology-driven. The plan should assign priorities to the
IS investments (which, of course, should be subjected to an appropriate cost-benefit
analysis).




SUMMARY

Business strategy will embrace business decisions, the broad objectives and direction of
the organisations and how it might cope with changes, in other words, where the
business is going and why. IS has an impact on this and provides potential for
competitive advantage. Since business strategies have the potential to be subjective to
sudden unpredictable changes, the IS and IT strategies that are needed to support
changing business strategies must themselves be capable of adaptation and change if
they are to continue to reflect the existing business strategy at any time. This is to
suggest that IS strategy must be embedded in an organisations business strategy and
be a fundamental part of it.


REFERENCES

P. Bocij et al, Business Information Systems, Prentice Hall, 2003
J. Ward & J. Peppard, Strategic Planning for IS, John Wiley & Sons, Ltd, 2002
M. Earl, Management Strategies for IT, Prentice Hall, 1989
W. Robson, Strategic Management & Information Systems, Pitman Publishing, 1997