CHAPTER 5

IS/IT Strategic
Analysis: Determining
the Future Potential
 Learning Objectives
• Criteria for effective planning
• Business strategic and IS/IT strategic
analysis methods
– Value Chain
– Strategic option generator
– Resource life cycle analysis
Determining the Future Potential

• Historically, IT used to optimize

performance of main operational activity of
the business
• Emphasis has been on:
– Internal processes and operations.
– Key processes in the organization
– Internal critical success factors.
– Firm rather than the industry.
Current Patterns
IT Improvement Zone
Possible Outcomes
Strategic Perspective for Applications

The changing content of the application portfolio should reflect the evolving
strategic themes.
 Aligning IS/IT Investment 
Business
Development of business strategies is best carried out if you
consider the organization as a group of (strategic)
business units.
– This enables the market/product relationship to
determine strategic thinking and functional/organization
aspects become secondary, ensuring that external
strategy drives internal strategy.
– The portfolio of products and/or customers can be
analyzed to identify how each grouping contributes to or
makes demands on resources available.
– Provides the sharpest focus
– Generic strategy concepts can be best applied to
business units (low cost, differentiation and niche).
– To achieve more effective strategic decision-making.
Criteria for Effective Planning
• Situation analysis and competitive
assessment
• Evaluation of strategic options
• Dynamic allocation of resources

The purpose of strategic planning is to add value to the firm by adding

new customers, new products or services, new markets, new locations, or
new breakthrough technology.
If the plan does not add value, it is worthless
 Value Chain Analysis
• The concept of Value Chain Analysis is
described by Michael Porter who notes
that: “Every firm is a collection of activities
that are performed to design, produce,
market, deliver and support its products or
services. All these activities can be
represented using a value chain. Value
chains can only be understood in the
context of the business unit”.
 Value Chain Analysis
• The value chain of the business unit is
only one part of a larger set of value-
adding activities in an industry- the
industry value chain or value system
• The value chain of any firm needs to be
understood as part of the larger ‘system’ of
related value chains
 The External Value Chain

Supplier
Raw materials
Capital goods Local distribution
channels

The business unit

Agencies and MARKET A
distributors MARKET B
MARKET C
Direct suppliers End Customers
Components
Labour
Services Competitors
Expect
distribution
channels

Value and demand information

Cost and supply information
The External value chain
 Paper Industry Value Chain
Hammermill
Companies

Printers &
Publishers
Other use
of wood

Consumers
Fine & Printing of Fine and
Wood Forest Products Merchants &
Paper Retailers Printed
Manufacturers Distributors
Manufacturers Papers

Industrial &
Other Product
Packaging Paper
Manufacturers
Manufacturers
Other forms
of packaging
 IS and Value Chain
• Information systems are used to enable
better information exchanges through the
industry value chain, significant benefits
can be obtained from the improved links.
These benefits should enable a firm to
spend more of its business energy in
outperforming its real competitors rather
than competing with its trading partners for
profit.
Information Systems and The
Value Chain
Informing the market
to create demand

Operational information exchange to enable

matching of supply and demand

Gathering
information to
understand
demand
SUPPLY CONVERSION PRODUCT & CONSUMPTION
SERVICES
LOGISTICS
 AGENCIES

DEMOGRAPHICS
EPIDEMIOLOGY
DISEASE/MORBIDITY etc.
3b 3a 3
RESEARCH AREAS DEVELOPMENT OPPORTUNITIES AREAS OF RESEARCH
BASED ON BY THERAPEUTIC AREA FOR PRODUCT
THERAPEUTIC DEVELOPMENT INFLUENCERS
INDICATIONS
PRESCRIBERS PRESCRIPTION
1

DRUG
6
DETAILS
UNIVERSITY
RESEARCH DEVELOPMENT MANUFACTURE MARKETING
RESEARCH SCHEDULES AND USAGES/REACTIONS
NEW CHEMICAL COMMERCIALIZED SALES PATIENTS
DEVELOPMENTS REQUIREMENT "EFFICACY"
ENTITIES
LITERATURE
TRIAL
PRODUCT COSTS PRICE
CHEMICAL DETAILS
APPROVAL EXPENSES AND
ENTITIES PATENT G
DETAILS RESULTS PROCESS MARGINS REGUL-
PROPOSAL APPROVAL etc. ATION INFLUENCERS O
2 GOODS O
CLINICAL REGULATORY GOVERNMENT D
PATENT TRAILS-- BODIES AGENCIES WHOLESALERS DISPENSERS/ S
OFFICE PROVING INCLUDING AND HEALTH AND AGENTS PHAMARCIES
PROPERTIES F & DA INSURES

(EXPORT) ORDERS
4 5

Value chain for a pharmaceutical company

 Resource Life Cycle Analysis
(RLC)
• To analyze relationships with customers
• Can determine not only when
opportunities (and threats) exist for
improved or new information exchanges
but also which specific applications should
be developed
• Should be viewed from one end only
(customer or supplier)=> RLC model could
be a customer or supplier RLC
 Resource Life-Cycle Analysis
Requirements
Establish requirements To determine how much of a resource is required
Specify To determine a resource’s attributes

Acquisition
Select source To determine where customers will buy a resource
Order To order a quantity of a resource from the supplier
Authorize and pay for To transfer funds or extend credit
Acquire To take possession of a resource
Test and accept To ensure that a resource meets specifications

Stewardship
Integrate To add an existing inventory
Monitor To control access and use of a resource
Upgrade To upgrade a resource if conditions change
Maintain To repair a resource, if necessary

Retirement
Transfer or dispose To move, return or dispose of inventory as necessary
Account for To monitor where and how much is spent on a resource
 Strategic Option Generator
• Define Strategic Targets
• Define Strategic Trust
• Select Alternatives
 Strategic Option Generator
• Strategic Targets:
– Suppliers – anyone supplying essential resources. It
may be necessary to subset them either by the nature
of what they supply or their strength, or their ability to
exert pressure on you and other customers.
– Customers – this could include the consumers as well
as direct customers. The customers should be
segmented in terms of what they buy or how much.
– Competitors – who dell very similar product or
services should be supplemented by actual or
potential new entrants into the market and
‘threatening’ substitute products and services should
be included as competition.
 Strategic Thrusts
• Differentiation – ensuring that superior quality is
delivered and perceived, leading to obtaining a premium
price
• Cost – being cheaper or enabling suppliers or customers
to reduce their costs and thereby preferring to conduct
business with the firm
• Innovation – introduce a new product, service, process
or way of doing business that transforms the
relationships and competitive forces in the industry.
• Growth – enable volume or expansion in geography or
increased flexibility of production and distribution to meet
different segments needs.
• Alliance – forcing agreements, joint ventures or joint
investments in systems to prevent new entrants or
competitors achieving advantage.
Strategic IS Opportunities
SUPPLIER CUSTOM ER COM PETITORS

DIFFERENTIATION

COST

INNOVATION

GROWTH

ALLIANCE

STRATEGIC STRATEGIC
THRUST TARGET
Framework for assessing strategic IS opportunities.
Sources : Rackoff, Wiseman and Ullrich (1985)
 IS/IT Opportunities Analysis:
Questions
• Suppliers – Can we use IS/IT to:
– Gain leverage over our suppliers?
– Reduce buying costs?
– Reduce the suppliers’ costs?
– Be a better customer and obtain a better
service?
– Identify alternative sources of supply?
– Improve the quality of products/services
purchased?
 IS/IT Opportunities Analysis:
Questions
• Customers – Can we use IS/IT to:
– Reduce customers’ cost and/or increase their
revenue?
– Increase our customers’ switching costs?
– Increase our customers’ knowledge of our
products/services?
– Improve support/service to customers and
their needs?
– Identify new potential customers?
 IS/IT Opportunities Analysis:
Questions
• Competitors – Can we use IS/IT to:
– Raise the entry cost of potential competitors?
– Differentiate products/services?
– Reduce our costs/Increase competitors’
costs?
– Alter the channels of distribution?
– Identify/Establish a new market niche?
– Form joint ventures to enter new markets?
 Select Alternatives
Strategic Option Generator (Wiseman)

• Offensive SUPPLIER
TARGET
CUSTOMER COMPETITOR

• Defensive THRUST
Diff erential Cost Innovation Grow th Alliance
MODE
OFFENSIVE DEFENSIVE
DIRECTION
USE PROVIDE
EXECUTION

STRATEGIC
ADVANTAGE
Federal Express Analysis Using
the Strategic Option Generator
Target

Supplier Customer Competitors

Thrust

Differentiation Cost Innovation Growth Alliance

Mode

Offensive Defensive

Direction

Use Provide

Execution

Strategic Advantage
UPS Analysis Using the Strategic
Option Generator
Target
Supplier Customer Competitors
Thrust
Differentiation Cost Innovation Growth Alliance

Mode
Offensive Defensive
Direction
Use Provide
Execution

Strategic Analysis
 Internal Value Chain
• The purpose of Internal Value Chain analysis is
to divorce what the company does from how it
does it.
Two types of business activity:
• Primary activities; those that enable it to fulfill its
role in the industry value chain and hence satisfy
its customers. They must be linked together
effectively.
• Support activities; those which are necessary to
control and develop the business over time and
thereby add value indirectly.
 Primary Activities
• Inbound logistics — Procuring, receiving and
warehousing raw materials.
• Operations — Machining, assembly and
manufacturing products.
• Outbound logistics — Getting the product to
the customer.
• Marketing and sales — Advertising, marketing
and selling.
• Service — Providing customer support and
product repairs.
 Support Activities
• Procurement: The purchasing of materials used
to create value for the firm.
• Technology Development: Any technology
used to support the firms value chain activities.
• Human Resource: The Activities surrounding
the Recruiting, Hiring, Training and
compensation of an organizations employees.
• Firm Infrastructure: The activities and functions
that support a firm’s ability to create value such
legal, accounting, management, strategy, etc.
 Cont..
• The term, Margin implies that
organizations realize a profit margin that
depends on their ability to manage the
linkages between all activities in the value
chain. In other words, the organization is
able to deliver a product / service for which
the customer is willing to pay more than
the sum of the costs of all activities in the
value chain.
Value Chain: An Example
SUPPORT ACTIVITIES

INFRASTRUCTURE - Legal, Accounting, Financial Management

HUMAN RESOURCE - Personnel, Pay, Recruitment, Training,

MANAGEMENT Manpow er Planning, etc.
PRODUCT AND TECHNOLOGY - Product and Process Design, R&D,
DEVELOPMENT Production Engineering, IT, etc.
PROCUREMENT - Supplier Management, Funding, VALUE
Subcontracting, Specification ADDED
INBOUND OPERATION OUTBOUND SALES AND SERVICES - COST
LOGISTICS LOGISTICS MARKETING = MARGIN
eg. eg. eg. eg. eg.

Quality Control Manuf acturing Finished Goods Customer Mgmt Warranty

Receiv ing Packing Order Handling Order Taking Maintenance
Raw Material Production Despatch Promotion Education/
Control Control Deliv ery Sales Analy sis Training
etc. Quality Control Inv oicing Market Research Upgrade
Maintainace etc. etc. etc.
etc.

PRIM ARY ACTIVITIES

A manufacturing company's value chain. Many activities cross the boundaries, especially
information based activities such as sales forecasting, capability planning, resource scheduling,
pricing etc.
 Alternative Value ‘configuration’
Models
• The traditional value chain model was
essentially based on manufacturing/retail
view of industry and works well for
‘physical goods’. But does not really
represent what the business does or its
relationships with customers and suppliers
in many other businesses.
• 2 alternatives: Value Shops and Value
Networks
 Alternative Value ‘configuration’
Models
Value Shops
• Businesses that essentially are ‘problem solving’
delivering value by producing solutions for clients.
Characterized by intense and extensive information
exchanges both in setting up the business transaction
and delivery of the solution.
• Each solution is unique and the client is normally
involved in both the design and implementation of the
solution.
• Figure 5.7 on page 266 shows an example.
• Objective: satisfy the customer requirements, by bringing
together the appropriate knowledge and resources from
inside the firm or by using other external resources.
• Example, advertising agencies and professional services
organizations
 Alternative Value ‘configuration’
Models
Value Networks
• Businesses that provide exchanges and
mediation between buyers and sellers, enabling
relationships to be established.
• They earn revenue from either or both in their
use of the firm’s network’ everyone’s a
customer’.
• Figure 5.8 on page 268 suggest how this model
differs from the other two.
• Example, insurance companies, banks,
telecommunications companies and airlines
 Value Chain: Service Business
(Value Shop)
Support activities
Infrastructure, technology, human resources, administration, etc.

External
resources C
Knowledge Problem Business
application specification acquisition L

Marketing E
the capability
N

External T
resources Configuration Allocation of Execute
solution resources solution S

Resource value Resource value Client value

management management chain
Primary activities
 Value Chain: Service Business
(Value Network)
Support activities
Infrastructure, technology, human resources, administration, etc.
- Marketing All
Service - Pricing (a) Core services customers
contractors Other resources - Contracts (all customer
- Performance groups)
- Capability

Network Service
Infrastructure Service
development
development delivery
and operations
Operation and Buyer/Seller
maintenance segments
(a)
- Security, standards
controls (b) Value-added
- Transaction and services (b)
revenue management
Suppliers Core technologies - Availability (designed for
- Information (c)
particular customer
provision, etc. etc.
groups)
The Use of Value Chain Analysis
• The main objective is to represent the main
activities in the business and their
relationships in terms of how they add value
so as to satisfy the customer and obtain
resources from suppliers.
• The information that flows throughout the
industry and how critical that information is to
the functioning of the industry and the success of
the firms in it, by determining where and when
that information is available, who has it and how
it could be obtained and turned to advantage or
used against the firm.
The Use of Value Chain Analysis
• The information that is or could be
exchanged with customers and suppliers
throughout the chain to improve the
performance of the business or lead to mutually-
improved performance by sharing the benefits.
• How effectively the information flows through
the primary processes and is used by them:
– Within each activity to optimize performance
– To link the activities together and avoid unnecessary
costs and missed opportunities; and
– To enable support activities to contribute to the value-
adding processes, not hinder them.
 'Natural' and 'Contrived' Value
Chains.
• The natural chain describes the (unattainable)
optimum structure for the industry’s value-adding
processes and information flows, based on what
needs to be done.
• The contrived value chain shows how things
are currently done. Look at table 5.4 on page
271.
• Purpose in Analyzing the Value Chain
– Analyzing the value chain in information terms to
reduce the existing complexity either inherent in the
current information relationships or caused by them.
– Identify new, often faster, options for information flow
to where it enables the value-adding processes to be
performed more effectively and at the ideal time.
 Natural VS. Contrived Value
Chains
• Contrived value chain represents how things are
done by resources in the industry organization:
– Driven by organization structures, historical evolution
and compromise
– Is often very complex, confused and ‘messy’, and
poorly understood
– Contains many reconciliation activities and reacts
slowly
– Can take many forms, is continuously being modified
to meet business changes
 Natural VS. Contrived Value
Chains
• Natural value chain represents what has to be
done to succeed in market requirements:
– Based on value-adding activities and the resources
needed to carry them out
– Defines essential interrelationships and dependencies
and the ideal way to achieve business purposes
– Contains few reconciliation activities and responds
quickly
– Usually only one ideal exists, and it does not change
significantly or frequently
 Business Re-engineering and the
Value Chain
Most of the successful business re-engineering initiatives have also had
an external drive or focus, ensuring that internal changes deliver perceived
improvements to the customers. Almost by definition, the starting point for
determining what to change, why and how to change, is an understanding
of the value adding processes in the industry and/or the firm.

Actions to improve business performance

(by using business re-engineering):
– Eliminate unnecessary processes.
– Rationalize the rest to ensure the value adding processes are optimized
– Integrate to improve responsiveness and reduce unnecessary effort and error
– Automate where technology can deliver further improvements.

• It is important to adopt a value-chain driven approach to understanding

‘how the business works’ and hence can be improved via a combination
of business re-engineer and new IS.