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IS 8950

Challenges of Managing in a Network Economy

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Different perspectives: Business vs. Technical

• Business executives view:– View IT function with apprehension– Province of technocrats primarily interested with new features– New features with little relevance to real-world business

problems

• Technology executives view:– View business managers as shortsighted– Lack the vision to exploit all that technology has to offer

• Both:– Struggle to implement increasingly complex systems in the face

of rapid change in business and technology

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The Reality

• Businesses have tightened their embrace of IT• Technology has become embedded in the way

we:– define and execute strategy– organize and lead businesses– define a unique value proposition

• IT has become a strategic part, no longer limited just to “back office”– enabling the redefinition of markets and industries– enabling the strategies and designs of firms

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Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan., Corporate I nformation Strategy and Management. Burr Ridge, IL: McGraw-Hill/I rwin, 2002.

1

10

100

1,000

10,000

100.000

1,000,000

1980 1990 1996

PCs and workstations

Mainframe

Adapted from: McKenney, J., Waves of Change: Business Evolution through Information Technology , Boston: Harvard Business School Press, 1995.

Price Performance Trends of Mainframes and PCs $/MIPs

*Ratio of MIPs per Dollars (Mainframes:PCs)

8:1*

286:1*

900:1*

Evolution of Computing Performance

I ntroduction Figure I-1

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A different perspective

• “In our organization we don’t have IT initiatives, we have IT enabled business initiatives.” CIO of a large firm. – Viewing IS/IT as enabler not an end by itself

• “Much of the failure of IS/IT to deliver consistent benefits is often due to the short-term business focus & the delegation of IS/IT strategy to IT specialists.” Ward, J. & Peppard, J. (2002). Strategic Planning for Information Systems (3rd Edition), John Wiley & Sons: New York– Reconsidering the CIO/CTO role– Educating IS/IT specialists the strategic role of IT

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The 1990’s

• Something dramatic happened to technology in the 1990s:– first time we opened a browser and gained access to the WWW– the light turned on for some executives– others become mired in a sea of useless information and broken

links, cool technology but the same old flaws remained

• The boom of the late 1990’s– Stories of “20-something” billionaires– Investors pumped more money– Challenged the ground up new business development view of

blood, sweat, and tears

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The 21st Century• The “bubble” burst• Nasdaq lost more than half its value within months• Spending for IT equipment and services dropped• The world economy headed downward• The world has forever changed, however,

– Technology has become a core enabler– The “global village” is quickly becoming a reality– Physical location matters less than it once did– Borders and boundaries, ownership and control have become less ridged– “virtual” organizations challenged our legal and social definition of organizations

• Objectives– To help business executives to begin to take the first steps on the path of transformational

change– To help IT executives assume leadership positions in defining and executing business and

technology strategies • In the next few slides we will review some themes reflecting the IS/IT change in the

21st century

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Theme 1: Market Structure and Industry Dynamics

• 21st century IT opens new choices for designing and building industries, markets, and organizations by:– expanding processing capacity– enabling convergence of voice, video, and data– encouraging real time transaction and interactivity– increasing connectivity and access

• 21st century organizations continue to operate as networks of suppliers, producers, distributors, and partners

• While the basic roles remain unchanged, executives today have numerous options for how to organize these activities and manage relationships

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Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan., Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/I rwin, 2002. Introduction Figure I-2

The Value Chain Defines Industry Structure and Relationships

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Theme 1 (continued)

• Before: – Primary value activities used to be structured as a sequential “value chain”– Relationship among functional units were “transactional”; e.g. new product

design transition between R&D and production, “thrown over the wall”– Executives chose to locate everything except the most routine activities within

their organizational boundaries– The rise of vertically integrated firms as the key power broker within most

industries• Today:

– Executives faced with myriad of organizational and market choices– Boundaries are becoming fluid and relationships are increasingly based less on

structured transaction and contracts and more on partnerships that require trust and cooperation

– The rise of virtually integrated industries; Example: • AOL and Time Warner merger, testing “virtual integration” inside a vertically

integrated governance structure; • Convisint—collaborative partnership between auto industry manufacturers, suppliers,

distributors, and technology providers

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Theme 2: Evolving Business Models

• The business models that dominated the Industrial Economy are evolving to take advantage of the capabilities of the new technologies and business practices of the Network Economy, giving rise to new sources of power and differentiation.

• The business logic traditionally used to frame how executives made decisions and took actions has been called into question– technology redefines opportunities and the choices executive make to

exploit those opportunities• Why focus on business models?

– It is a framework on how executives make business decisions– The Industrial Economy business model is changing– The Internet and associated technologies of the Network Economy are

enabling us to exploit new opportunities

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So urce: A ppl egate, L ynd a M ., R ober t D . A usti n, and F . W ar r en M cF ar l an., C or por ate I nfor ma tion S tr a tegy a nd M a nagement . B ur r R i dge, I L : M cG r aw -H i l l /I rw i n, 2002.

C omponen ts of a B usi ness M odel

I ntroduc tion F i gure I -3

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Theme 3: IT Impact• The types of opportunities pursued and the technology employed strongly influence the approach

taken to developing, operating, and managing IT• Two key dimensions in organizing and managing IT:

– The impact of IT on core operations– The impact of IT on core strategy

• Impact of IT on core operations– Nasdaq: reliable, zero-defect operation of IT; delay of few seconds can bring the entire securities industry to

its knees– Law firms: impact of a day-long IT failure would be much less immediate and severe

• Impact of IT on core strategies– PSA and American Express: a steady stream of technological innovations drives strategy evolution

• IT development activities are inextricably linked to the strategy of the firm• IT development decisions are made in the boardroom

– Other firms: IT development priorities are targeted toward incremental, operational improvements that may improve a firm’s cost profile but do little to change its position or power in the industry

• Support: consulting company; potential to shift to Turnaround quadrant• Turnaround; manufacturing firm; potential to shift to Factory quadrant• Factory: investment bank • Strategic: Banks, Insurance companies, auto manufacturers, and retail chains

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S o u r c e: A p p l e g a te , L y n d a M ., R o b e r t D . A u s t i n , a n d F . W a r r e n M c F a r l a n . , C o r p o r a te I n fo r m a t i o n S t r a teg y a n d M a n a g e m e n t . B u r r R i d g e , I L : M c G r a w - H i l l / I r w i n , 2 0 0 2 . I n t r o d u c t i o n F i g u r e I - 4

T h e I m p a c t o f I T

F a c t o r y S t r a t e g i c

S u p p o r t T u r n a r o u n d

G o a l : I m p r o v e p e r f o r m a n c e o f c o r e p r o c e s s e s

L e a d e r s h i p : B u s i n e s s u n i t e x e c u t i v e s

P r o j e c t M a n a g e m e n t : P r o c e s s r e e n g i n e e r i n g

G o a l : I m p r o v e l o c a l p e r f o r m a n c e

L e a d e r s h i p : L o c a l l e v e l o v e r s i g h t

P r o j e c t M a n a g e m e n t : G r a s s r o o t s e x p e r i m e n t a t i o n

G o a l : T r a n s f o r m o r g a n i z a t i o n o r i n d u s t r y

L e a d e r s h i p : S e n i o r e x e c u t i v e s & b o a r d

P r o j e c t M a n a g e m e n t : C h a n g e m a n a g e m e n t

G o a l : I d e n t i f y a n d l a u n c h n e w v e n t u r e s

L e a d e r s h i p : V e n t u r e i n c u b a t i o n u n i t

P r o j e c t M a n a g e m e n t : N e w v e n t u r e d e v e l o p m e n t

I T I m p a c t o n C o r e S t r a t e g y

IT Im

pac

t o

n C

ore

Op

erat

ion

s

L o w

H i g h

H i g h

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Theme 4: Prioritizing IT Investments

• As IT infrastructure becomes more standardized, modular, and scalable, we see a shift in IT investment priorities and decisions from a cost-avoidance, project centered approach to an asset-based, strategic option approach

• Think of IT as an investment, not a cost item.• Type I: Benefits from investments in Networked IT infrastructure;

– functionality and flexibility:• Internal: improve infrastructure performance• External: create an efficient, flexible online/offline platform for doing business with

customers, suppliers, and partners

• Type II: Benefits from doing business on a networked IT infrastructure– Commerce: benefits are created when a company uses IT to improve internal and

external operations– Content/knowledge: benefits created when a company harnesses information and

knowledge located inside or outside an organization to improve the performance of individuals and groups as they make decisions and take actions

– Community: benefits are created when a company uses networked technologies to increase the commitment and loyalty of internal and external stakeholders

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Theme 5: Assimilation and Organizational Learning

• The time required for successful organizational learning and assimilation of rapidly changing technologies limits the practical speed of change

• When strategic technologies transform organizations and industries, the need for individuals to assimilate and learn how to use them to achieve the intended benefits extends throughout an organization to encompass users within customer, supplier, and partner firms:– Phase 1: opportunity identification and investment– Phase 2: organizational learning and adaptation– Phase 3: rationalization and continuous evolution

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Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan., Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/I rwin, 2002.

Success

Phase 1Opportunity Identification and Investment

Phase 2Organizational Learningand Adaptation

Phase 3Rationalization and Continuous Evolution

Widespread TechnologyTransfer

Lack of attention andcommitment

StagnationBlock A

StagnationBlock B

Narrowly focused andnot marketed

Too efficiencydominated

StagnationBlock C

Success

Success

Introduction Figure I-5

Identifying and Assimilating IT

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Theme 6: Buy versus Make

• External industry, internal organizational, and technological changes are increasing the pressure on organizations to “buy” rather than “make” IT applications and services

• The mid-1980s and early 1990s:– PC adoption, GUI, word processing, spreadsheets– If I can buy a word processing package, why can’t I buy an order fulfillment

package?– Do I really need to keep all these IT assets on my books? Can I outsource my data

centers, networks, help desks, and PC support?• The late 1990s:

– Can I replace many of my off-the-shelf IT applications with subscriptions to IT services run by network and hosting services and ASPs?

– Executive preferences has shifted from make to buy, rent, or subscribe– This shift significantly influenced how IT systems and assets were implemented,

operated, and managed– It also dramatically changed the role of IT professionals and executives

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Make versus Buy decisionsDecision Criteria Pressure to Make/Own Pressure to Buy/Rent/Subscribe

Business strategy Provides proprietary competitive advantage Support but not considered strategic

Core competencies Expertise required to develop IT considered a core competency of the firm

Expertise is not critical to the firm’s success

Information/process security and confidentiality

Considered highly confidential Failure would not cause serious problems

Availability of suitable partners No reliable, competent, and/or motivated partners

Partners available

Availability of packaged software or solutions

Application required by the firm is unique Package software that meet majority of the business requirements are available

Cost-benefit analysis Cost of purchasing is greater than performing the service in-house

Cost of purchasing is significantly lower

Time frame for implementation Sufficient time available to develop internal resources and skills

Time required for development exceeds org. demand

Evolution and complexity of the technology

Firm is able to attract, retain, and develop IT experts

Firm is unable to keep pace with the rapid change

Ease of implementation Tools for rapid IT application development are available

Tools for supporting rapid application development are not available

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Theme 7: Partnership among Key Constituencies as IT Evolves

• The ability to exploit 21st century technology successfully demands high levels of engagement and cooperation

• Four key constituents: business executives, IT executives, users, and technology providers/partners

• Need to develop shared understanding between key constituents– May have conflicting goals, interests, and incentives– Use different language to define opportunities

• Business executives must become active players in IT– Many executives would not consider themselves finance professionals;

but would not delegate all financial oversight to the CFO. Delegating all IT oversight to the CIO is not different.

– Lou Gerstner, CEO of IBM, and the executive team involvement• Managing IT through three eras of evolution; some IT managers may

have to simultaneously manage in all three eras

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Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan., Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/I rwin, 2002. Introduction Figure I-6

Three Eras of IT Evolution

AdministrativeFramework

Target for IT Use

Justification/Benefits

Era IMainframe

Regulated monopoly

Back office automation

Organizational productivity

Era IIMicrocomputer

Freemarket

Individual decision-

making and productivity

Individual effectiveness

Era IIIInternetworking

Shared partnership

Electronic integration and

learning

Business advantage

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Theme 8: Protecting IT Assets and Managing Risks

• Customers expect “always on” service performance

• Increased risk of doing business online– Accidental and malicious cyberterrorism and attacks

• Cost of IT interruption– Immediate and significant economic loss– e-Bay’s system: IT failure made the front page of The

Wall Street Journal, stock price dropped, company’s market value declined

• 24x7 up time is expected

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Theme 9: Pervasive Computing: Opportunities and Risks

• 21st century IT influence in our lives:– Over 350 million people around the world connected

to the Internet

– People in the U.S. spent more time on PCs than on televisions

– i-mode in Japan has 40 million customers

– Executives can cary laptops and PDAs on airplanes, in hotels, and during morning commute

– The future promises more, …

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Summary

• These themes create a very complex and challenging managerial environment

• Form the backdrop for the discussions of specific frameworks and managerial approaches

• Questions for senior executives:– How important is IT to our success and survival?– Are we prioritizing IT investments and targeting our development

efforts in the right areas?– Are we managing IT assets and infrastructure efficiently and

effectively?– Is our IT infrastructure sufficiently insulated against the risks of a major

operational disaster?– Are IT and business leaders capable of defining and executing IT-

enabled strategies?