Week 1 Friday July 21 Introduction Strategic grid

Week 1 Friday, July 21 • Introduction • Strategic grid, business model • Opportunities and Threats: Porter’s Five Forces Model • Strategy and strategic planning • IT Doesn’t Matter Article EMBA 226 • College of Business Administration • California State University, Sacramento 1

What This Class is About… • Information technology (IT) has become a major driving force of today’s businesses. As an enabler (facilitator) and integrator, IT has opened many strategic opportunities and provided the means to seize competitive advantages in marketplaces. The topics covered throughout this course will emphasize IT’s prominent role in business strategy. EMBA 226 • College of Business Administration • California State University, Sacramento 2

Introductions • What is your view on IT in business? EMBA 226 • College of Business Administration • California State University, Sacramento 3

Which is the Most Versatile Hand Tool? Vise Saw Tape measure Pipe wrench Pliers Flat bladed screwdriver Hammer Bubble level EMBA 226 • College of Business Administration • California State University, Sacramento 4

Flat Bladed Screwdriver • • • Screw Hammer Chisel Pry bar Punch holes Set nails Stir liquids Putty knife Score and cut And the list goes on… EMBA 226 • College of Business Administration • California State University, Sacramento 5

IT is Similar to a Flat Bladed Screwdriver • IT provides the means for businesses to do something better! – Leverages other resources – Enables and enhances business processes – Facilitates efficiency and effectiveness – Seizes competitive advantages – Levels the playing field – Small businesses can look and behave like big businesses – Extends the business beyond its boundaries – Strategic alliances, strategic outsourcing, supply chain management – And the list goes on… EMBA 226 • College of Business Administration • California State University, Sacramento 6

What You Should Take Away from This Class 1. Place IT solutions in the strategic grid – Match the solution to the business 2. Businesses do not adopt technology for technology’s sake 3. Focus on the business and not the technology 4. IT leverages other resources and processes 5. IT introduces organizational change 6. IT integrates the enterprise 7. Knowledge is an organizational resource EMBA 226 • College of Business Administration • California State University, Sacramento 7

IT Leverages Other Resources CRM leverages Relationship Marketing EMBA 226 • College of Business Administration • California State University, Sacramento 8

IT Leverages Other Resources Business Intelligence EMBA 226 • College of Business Administration • California State University, Sacramento 9

IT, the Great Integrator Enables and enhances business process EMBA 226 • College of Business Administration • California State University, Sacramento 10

IT Allows a Business to Seize Competitive Advantages Price Competition EMBA 226 • College of Business Administration • California State University, Sacramento 11

IT Allows a Business to Seize Competitive Advantages Convenience EMBA 226 • College of Business Administration • California State University, Sacramento 12

IT Allows a Business to Seize Competitive Advantages Customization EMBA 226 • College of Business Administration • California State University, Sacramento 13

IT the Great Equalizer: IT Evens the Playing Field Which of these businesses is larger? EMBA 226 • College of Business Administration • California State University, Sacramento 14

Extends the Business Beyond Its Boundaries Horizontal integration EMBA 226 • College of Business Administration • California State University, Sacramento 15

Extends the Business Beyond Its Boundaries Vertical integration EMBA 226 • College of Business Administration • California State University, Sacramento 16

Supply Chain Management Inter-Organizational IT • Coordinating suppliers – From EDI (electronic data interchange) to the Internet • Establishing close and tight relationships – Loose integration – ad hoc and occasional – Close integration – formal exchange of information between businesses – Tight integration – sharing a business processes (e. g. , UPS) • Becoming a customer-centric value chain (virtual enterprise) – Risk sharing – Supply chain (suppliers) vs. demand chain (distributors and retailers) EMBA 226 • College of Business Administration • California State University, Sacramento 17

Rules, Enabling, Business Models and IT Adoption… EMBA 226 • College of Business Administration • California State University, Sacramento 18

IT and Business: Two Golden Rules • IT does not (directly) increase productivity • Businesses do not adopt new technology for technology’s sake – What value does it add to the business? – How does it support the business’ strategy, goals and objectives? – Can it be linked to competitive advantage? – What’s the bottom line? EMBA 226 • College of Business Administration • California State University, Sacramento 19

IT and Business Briefly… • IT enables fundamental changes in the way work is done • IT enables the integration of business functions at all levels within and between organizations • IT causes shifts in the competitive climate of many industries (i. e. , breakthrough technology) • IT presents new strategic opportunities for organizations that reassess their mission and goals • Successful application of IT requires changes in management and organization structure EMBA 226 • College of Business Administration • California State University, Sacramento 20

IT and Business (cont. ) • A major challenge exists for management to lead their organizations through the transformation necessary to prosper in the globally competitive environment EMBA 226 • College of Business Administration • California State University, Sacramento 21

Business Model • Defines how an enterprise interacts with its environment to define a unique strategy, attract the resources and build the capabilities to execute it • Creates values for all stakeholders Inputs Processes Outputs Simply put, the business model defines how inputs are converted to outputs EMBA 226 • College of Business Administration • California State University, Sacramento 22

IT and the Business • Adoption of IT must be within the capabilities of the business • There must be a clear vision of how technology will be used for a clear profitable gain • A proposed IT solution must take into account organizational factors – Strategic grid EMBA 226 • College of Business Administration • California State University, Sacramento 23

Business Models and IT Adoption For example… Two successful grocers taking two different approaches to business EMBA 226 • College of Business Administration • California State University, Sacramento 24

Peapod EMBA 226 • College of Business Administration • California State University, Sacramento 25

Peapod EMBA 226 • College of Business Administration • California State University, Sacramento 26

Peapod Virtual store EMBA 226 • College of Business Administration • California State University, Sacramento 27

EMBA 226 • College of Business Administration • California State University, Sacramento 28

Select by flavor Select by brand EMBA 226 • College of Business Administration • California State University, Sacramento 29

EMBA 226 • College of Business Administration • California State University, Sacramento 30

Running total Shopping basket EMBA 226 • College of Business Administration • California State University, Sacramento 31

Check Out: Pick a Delivery Date EMBA 226 • College of Business Administration • California State University, Sacramento 32

Enter Account EMBA 226 • College of Business Administration • California State University, Sacramento 33

Peapod Due to the nature of the merchandise (i. e. , highly perishable, low profit margin), customer expectations and the high cost of fuel, logistics becomes an major concern EMBA 226 • College of Business Administration • California State University, Sacramento 34

Suppliers maintain Peapod’s inventory Peapod receives the order Peapod assembles the order Customer sends order via Web Peapod bills the customer’s credit card Peapod delivers the order Customer receives order EMBA 226 • College of Business Administration • California State University, Sacramento 35

Raley's Foods "Bricks and mortar" retailer EMBA 226 • College of Business Administration • California State University, Sacramento 36

Raley's Foods Limited web shopping EMBA 226 • College of Business Administration • California State University, Sacramento 37

Business Model Discussion… • Define the business model • Identify the market segments, opportunities and threats • What role does IT play in the business model? • What is the effect of IT in the business model? • How does IT impact the business? EMBA 226 • College of Business Administration • California State University, Sacramento 38

Opportunities and Threats “Crisis” (weiji) “Opportunity” (jihui) Opportunities grow out of crises (Necessity is the mother of invention -- Plato) How does the business capitalize on its threats? EMBA 226 • College of Business Administration • California State University, Sacramento 39

Strategy and Four Models and Frameworks • • Strategic Grid Porter’s Five Forces Model Richard Nolan’s Stages Theory Strategic Alignment EMBA 226 • College of Business Administration • California State University, Sacramento 40

1. Strategic Grid EMBA 226 • College of Business Administration • California State University, Sacramento 41

Strategic Grid Management of IT depends on how the business views IT High Impact on Existing Business Operations Low Factory Operational IT Current IT important but future IT developments are unlikely to improve competitive advantage Support Basic elements IT has little relevance to existing or future success Low Strategic IT plan, initiatives Existing and future IT developments critical to success Turnaround Gradual adoption Existing IT is unimportant but future developments are crucial to survival Impact on Strategy (future competitive environment) High Mc. Farlan and Mc. Kinney (1983) EMBA 226 • College of Business Administration • California State University, Sacramento 42

Placing a Business in a Quadrant • How important does management feel the current IT systems are to the business? • How important does the business think future developments in IT will be for the business? Planning a future for IT EMBA 226 • College of Business Administration • California State University, Sacramento 43

Strategic Grid Quadrants: • Support – goals target local improvements and incremental cost savings (e. g. , office automation) • Factory – designed to reduce costs and improve performance of the core operations – Automation and computerize functions • Turnaround – designed to exploit emerging strategic opportunities – Integration of the organization • Strategic – commitment to use IT to enable both core operations and core strategy – IT an integral part of strategy EMBA 226 • College of Business Administration • California State University, Sacramento 44

2. Porter’s Five Forces Model EMBA 226 • College of Business Administration • California State University, Sacramento 45

Porter’s Five Forces Model Forces that Shape Strategy How will the business Potential Entrants react to threats (and opportunities)? Threat of new entrants Industry Competitors Bargaining power of suppliers Customers and Buyers Suppliers Bargaining power of buyers Rivalry among existing firms Substitutes Threat of substitute products or services EMBA 226 • College of Business Administration • California State University, Sacramento 46

Contending Forces • The state of competition depends on the five forces • The collective strength of these forces determines the ultimate profit potential of an industry – Strongest force or forces determine the profitability of an industry and are of greatest importance in strategy formulation EMBA 226 • College of Business Administration • California State University, Sacramento 47

1. Threat of Entry • New entrants bring new capacity, desire to gain market share, and often substantial resources • Barriers: – Economies of scale – Product differentiation Seriousness of the threat depends on the – Capital requirements barriers and the – Cost disadvantages independent reaction of the of size incumbents – Access to distribution channels – Government policy EMBA 226 • College of Business Administration • California State University, Sacramento 48

Power of Buyers and Sellers • Suppliers – Can exert bargaining power on participants by raising prices or reducing the quality of the goods and services • Buyers – Can force down prices, demand higher quality or more service, and play competitors against each other EMBA 226 • College of Business Administration • California State University, Sacramento 49

2. Suppliers are powerful if… • Dominated by a few companies • Products is unique or well differentiated, or has built-up switching costs • Not obligated to content with other products for sale to the industry • Poses a credible threat of integrating forward into the industry’s business • Industry is not an important customer (of the supplier group) EMBA 226 • College of Business Administration • California State University, Sacramento 50

3. Buyers are powerful if… • Concentrated or purchases in large volumes • Products/services are standard or undifferentiated • Products form a component of its product and represent a significant fraction of its cost • Earns low profits, which create great incentive to lower its purchasing costs • Industry’s product is unimportant to the quality of the buyer’s products or services • Industry’s product does not save the buyer money • Pose a credible threat of integrating backward to make the industry’s product EMBA 226 • College of Business Administration • California State University, Sacramento 51

4. Threat of Substitutes • Substitutes limit the potential of an industry, particularly profits • Industry must upgrade the quality or differentiate the product/service • Substitutes that deserve the most attention are those that: – Subject to trends improving their price-performance trade-off – Produced by industries earning high profits EMBA 226 • College of Business Administration • California State University, Sacramento 52

5. Rivalry Among Competitors Jockeying for Position Intensity depends on… • Competitors are numerous or roughly equal in size and power • Industry growth is slow, precipitating fights for market share • Product/service lacks differentiation or switch costs • Fixed cost are high or the product is perishable • Capacity normally augments in large increments • Exit barriers are high • Rivals are diverse in strategies, origins and “personalities” EMBA 226 • College of Business Administration • California State University, Sacramento 53

Strategy Formulation • Strategy depends on the company’s strengths and weakness relative to the threats • Strategic plan may… – Position the company so its capabilities provide the best defense against competitive forces – Influence the balance of forces through strategic moves – Anticipate and respond to shifts in factors underlying forces to exploit change EMBA 226 • College of Business Administration • California State University, Sacramento 54

Approaches to Strategy • Positioning the company so it is the least vulnerable to its competitive forces • Taking the offensive and alter the market • Exploiting industry evolution (change) How can IT make a difference? EMBA 226 • College of Business Administration • California State University, Sacramento 55

• “How Competitive Forces Shape Strategy, ” Michael E. Porter, Harvard Business Review, March-April 1979. EMBA 226 • College of Business Administration • California State University, Sacramento 56

3. Nolan’s Stages Theory EMBA 226 • College of Business Administration • California State University, Sacramento 57

Nolan's Stage Theory • All organizations go through four stages for IT adoption – Introduction – Contagion IT is recognized as a resource – Control – Integration EMBA 226 • College of Business Administration • California State University, Sacramento 58

Nolan's Stages Theory An organization’s experience with adopting IT Integration Investment in IT Control Contagion IT Resource Introduction Diffusion Stage 1 Stage 2 Stage 3 EMBA 226 • College of Business Administration • California State University, Sacramento Stage 4 Time 59

4. Strategic Alignment EMBA 226 • College of Business Administration • California State University, Sacramento 60

IT’s Role In Business: Strategic Alignment Model Coalignment Strategic Information External Business strategy Business scope, competencies, business governance IT strategy Technology scope, competencies, IT governance Organizational infrastructure Administrative infrastructure, Internal processes, skills Business domain IS infrastructure Applications infrastructure, processes, skills Functional Integration EMBA 226 • College of Business Administration • California State University, Sacramento IT domain 61

In a Nutshell… Business Vision IT Alignment Strategy Business networks Process Reengineering (Competitive Advantage) (Control, enhancing, leveraging) Capabilities IT infrastructure Alignment Value EMBA 226 • College of Business Administration • California State University, Sacramento 62

A Few More Factors to Consider IT Planning Dilemma Investments in IT EMBA 226 • College of Business Administration • California State University, Sacramento 63

What Does It Take to Become Strategic? IT for competitive advantage IT to compete Basic IT for operations EMBA 226 • College of Business Administration • California State University, Sacramento 64

IT Planning Dilemma Which should come first? Enabling technologies Organization Strategic Plan Should the strategic plan specify the technologies to adopt? Should an IT strategic plan precede an organizational strategy? ? Information Technology Strategic Plan EMBA 226 • College of Business Administration • California State University, Sacramento Direction 65

Introducing IT into the Organization Inductive Change Top-Down Deductive Change Bottom-Up Mission Statement Context Strategic Plan Strategy Initiatives Tactical Plan Policy Operational Plan Implementation & Adoption How does an organization introduce changes in IT? EMBA 226 • College of Business Administration • California State University, Sacramento 66

Strategy and Threats Opportunities Strategy How does the business capitalize on its threats? EMBA 226 • College of Business Administration • California State University, Sacramento 67

What are strategy and strategic planning? EMBA 226 • College of Business Administration • California State University, Sacramento 68

Strategy • “The essence of strategy formulation is coping with competition. ” Michael Porter, 1979 EMBA 226 • College of Business Administration • California State University, Sacramento 69

What is Strategy? • Strategy is the pattern of missions, objectives, policies, and significant resource utilization plans stated in such a way as to define what business the company is in (or is to be in) and the kind of company it is or is to be. It defines: – The product line, markets and market segments for which products are to be designed – The channels through which these markets will be reached – The means by which the operation is to be financed – The profit objectives EMBA 226 • College of Business Administration • California State University, Sacramento 70

What is Strategy? Cont. – The size of the organization – The image which it will project to employees, suppliers and customers Bullen and Rockart, 1981 EMBA 226 • College of Business Administration • California State University, Sacramento 71

What is Strategy? • Defines the revenue and growth potential of the organization • Focuses attention and resources on a specific set of goals and the projects required to achieve them Applegate, Austin and Mc. Farlan EMBA 226 • College of Business Administration • California State University, Sacramento 72

Strategy Vision Introspect Mission Purpose Strategy Achievement A strategy incorporates the vision and mission of the business EMBA 226 • College of Business Administration • California State University, Sacramento 73

Strategy • Vision statement reflects the organization’s future aspirations and direction • Mission statement represents the “intents” or “purpose” of the organization • Strategy embodies the “image, ” customers (markets), business model and measure of achievement – IT as an enabler to proactively implement change (i. e. , innovate competitive pull) or reactively adapt to change (i. e. , Porter’s 5 force model, technology push) EMBA 226 • College of Business Administration • California State University, Sacramento 74

Strategic Management Strategic Planning Management Control Operational Control EMBA 226 • College of Business Administration • California State University, Sacramento 75

Strategic Planning Should… • Be forward looking • Focus on external factors and opportunities, and their impact on the business • Specify the direction the business should take – Markets to pursue, image to project, business model • Be long-term – Depending on the industry, 2 to 5 years • Formal vs. informal – Extent to which is documented and the frequency of planning EMBA 226 • College of Business Administration • California State University, Sacramento 76

Levels of Management • Strategic Planning – "Strategic planning is the process of deciding on objectives of the organization, on changes in these objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources. " • Management control – "Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization's objectives. " EMBA 226 • College of Business Administration • California State University, Sacramento 77

Levels of Management (Cont. ) • Operational control – "Operation control is the process of assuring that specific tasks are carried out effectively and efficiently. " Anthony, 1965 EMBA 226 • College of Business Administration • California State University, Sacramento 78

Gaining a Competitive Advantage with IT • IT alone is not a strategic differentiator – Enables the business to do things – Does not have a direct effect on productivity • Must be coupled with other innovative processes Lessons from IT practice… • Value from IT comes only when it is paired with concurrent innovations in business practice • IT's economic impact comes from incremental improvements • Strategic differentiation emerges over time – Short-term EMBA 226 • College of Business Administration • California State University, Sacramento 79