Term/Case study
Chapter 2
An Overview of Strategic Management and the IS/IT Strategy Implications
Outline
The Evolving Nature of Strategic Management in Organizations
Scope of Strategy Development
A Framework for Strategy Formulation
Where to Compete
How to Gain an Advantage
What Assets do We Have? What Assets do We Require?
How to Change – the Need for Dynamic Capabilities
Strategy Implementation
The Evolving Nature of Strategic Management in Organizations
Phase 1: Financial Planning
Phase 2: Forecast-based Planning
Phase 3: Externally Oriented Planning
Phase 4: Strategic Management
Additional Considerations about the Maturity Model
The approach to IS/IT strategic management is often less mature than the approach adopted for the business strategy
Recessions in the 1990’s and 2000’s forced some regression of maturity
Since Y2K, change occurring MUCH more rapidly
Focus on distinction and branding increasing
The Internet – need I say more?
Strategy, Strategic Thinking, & Planning
Henry Mintzberg has asserted that ‘strategic planning’ is not ‘strategic thinking’
Michael Porter argues that many organizations confuse operational effectiveness with strategy
‘Strategy’ is not the result of formal planning or the output of any methodology but the product of a number of processes
Strategic thinking – creative, entrepreneurial insight into the ways the enterprise could develop
Strategic planning – systematic, comprehensive analysis to develop a plan of action
Opportunistic decision making – effective responses to unexpected threats and opportunities
Scope
Small or Medium-sized Enterprise (SME)
Organization as a whole
Larger Organizations
Multiple Industry Organizations
Strategic Business Unit (SBU)
An organizational until that sells a distinct set of products or services, serves a specific set of customers, and competes with a defined set of competitors.
Functional Areas
A Framework for Strategy Formulation
Where to compete
How to gain an advantage
What assets do we have
What assets are required
How to change?
Where to Compete
Industry
Location (think globally)
Raw Materials
Suppliers
Customers
Cost
Physical vs. Virtual
Laws/Regulations
Breakthrough or New Products
Porter’s 5 Forces
Threat of New Entrants
Threat of Substitutions
Rivalry Amongst Competitors
Bargaining Power of Buyers
Bargaining Power of Suppliers
New entrants will be inhibited by:
Capital requirements
Patents and specialist skills required
Distribution channels available
Achieved/required economies of scale and resultant cost advantages
Learning curve effects
Number and size of existing rivals and intensity of competition
Differentiation and brand establishment/loyalty
Legislation and regulation
Access to raw materials/critical resources etc
Substitute Products/Services Concerns
Customer awareness of needs and means of satisfaction
Number of alternatives and customer ability to compare them
Customer sensitivity to value for money
Existing loyalty of customers – impact of ‘industry’ promotion
Ability to differentiate products etc.
Competitive Rivalry will be Intensified by
Market growth slow (or in decline)
Small number of similar sized competitors dominate
High fixed costs and/or high exit barriers for all rivals
Overcapacity and/or capacity increments are large units
Commodity or undifferentiated products etc.
Buyers' power will be increased by
Concentrated/few buyers making high volume and/or high value of purchases
Low switching costs across suppliers
Price sensitive and many alternative sources of supply
Weak brand identities, products not differentiated
Buyers capable of backward integration due to low ‘entry’ costs etc.
Suppliers' Power will be Increased by:
Few suppliers – high switching costs for rivals and suppliers deal with many small customers
Potential substitute supplier/resources not easily available
Supplied goods make up large part of firms' costs
High buyer switching costs
Suppliers capable of forward integration or bypass direct to customers etc.
Industry Analysis: ‘PESTEL’
Better understanding of the “big picture”
Political
Economic
Sociological
Technological
Environmental
Legal
Political
Government stability
Taxation policy
Foreign trade regulations
Social welfare policies
Economic
Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income
Sociocultural
Population demographics
Income distribution
Social mobility
Lifestyle changes
Attitudes to work and leisure
Consumerism
Levels of education
Technological/Environmental
Technological
Government spending on primary research
Government and industry focus on technological effort
New discoveries/development
Speed of technology transfer
Rates of obsolescence
Environmental
Environmental protection laws, incl. product disposal
Waste disposal
Climate change and low carbon policies
Legal
Monopolies legislation
Employment law
Health and safety
Product safety
Minimum wages
Intellectual property (IP) protection
Maintain Competitive Advantage
Defend
Build product differentiation to reduce direct rivalry and recognize and watch for potential substitutes
Both for products and for customer spend
Influence
Pursue strategies that will, in time, change the balance of forces driving profitability in your favor
Raise barriers to entry by building brands, influencing legislation and regulatory bodies and protecting proprietary knowledge
Exploit
Select or focus on buyer groups that have less power or price
Increase switching costs with buyers
Build switching costs and mutual dependencies with suppliers
Gaining Competitive Advantage
Michael Porter’s Three Strategies
Cost Leadership
Differentiation
Focus (Niche)
Cost Leadership
Lower costs for conducting business
Minimizing the indirect/overhead expenses
Detailed reporting on all aspects of fixed and variable costs incurred
Structure and standardization
‘Value engineering’
Adopting ‘lean’ and ‘6-sigma’ approaches
Accurate performance measurement
IS/IT Role in Cost Leadership
Automate basic business information processes to achieve efficiencies
Link processes together effectively
Transfer higher cost activities to either the customers or suppliers or both
Requiring customers to do most of the work when arranging their travel
Provide floor space for vendors, but vendors responsible for stocking (consignment)
Comparison websites provides low cost companies with opportunities to reduce marketing and business acquisition costs
Differentiation
Emphasizes innovation and creativity plus a strong customer and market orientation
Creation of a strong brand and corporate image
Close, mutually beneficial links with the firm's distribution channels
Higher service levels (i.e. better customer service)
More “Bells and whistles”
IS/IT Role in Differentiation
Enabling new things to be achieved or existing things to be done better
Gathering knowledge about customers and consumers.
Opportunities to reduce cost should not be ignored
Building an integrated information resource, together with analytical tools to understand customers, provides the basis for seeking out innovations and developments that customers will value
Major software suites such as ERP or CRM are implemented for core processes
Additional functionality will be needed to address the organizational subtleties that lead to differentiation
Niche/Focus
Provide something no one else has
???
IS/IT Role in Differentiation
Data mining
Social Media
Understanding the Value of the Firm's Existing Products and Services
Tools & Techniques
Industry and Product Life Cycle
Boston Consulting Group’s Matrix
Portfolio Matrixes
Ansolf Matrix
Customer Matrix
The Business Model
Three areas of focus
Economic Focused – The firm's economic profit model and logic of profit generation
Operations Focused – The internal processes and design of the infrastructure than enables the firm to create value
Strategy Focused – Overall direction of the firm's market position, interactions across organizational boundaries, and growth opportunities
Some perspectives of various business model approaches
A coordinated plan to design strategy along three vectors: customer interaction, asset configuration and knowledge leverage
The structure, content, and governance of transactions between the firm and its exchange partners
A system that describes how the pieces of a business fit together
A company's core logic and strategic choices for creating and capturing value within a value network
plan for the organizational and financial architecture of a business
How a firm creates and delivers value
A conceptual framework for identifying how a company creates, delivers and extracts value
The basic architecture underlying all successful businesses
Building a Good Value Proposition
Some questions to ask yourself:
Why should the customer purchase our offering?
Why should the customer purchase our offering instead of a competitor's?
What is most worthwhile for the customer to keep in mind about our offering?
What Assets do We Have?
What Assets are Required?
Resource-Based View
Resource Based View
Resources that are valuable, rare, inimitable and non-substitutable (the so-called ‘VRIN’ criteria) are sources of competitive advantage
Valuable: Does it contribute to revenue generation and/or lower costs?
Rare: Is it scarce within the industry?
Inimitable and immobile: Can it be copied or obtained by competitors?
Non-substitutable: Can a different resource or capability deliver the same effect?
What assets we have and what assets do we require, including IS/IT assets
Determine whether the current basis of competitive advantage is operational excellence, customer intimacy or product/service leadership
Identify both industry entry and organizational strategic assets
Assess the extent to which the strategic assets are creating advantage (valuable and/or rare) or helping sustain it (inimitable and/or non-substitutable)
Identify gaps between the existing assets, resources or capabilities and those required to succeed in all three dimensions of competence
Based on where and how the business intends to compete, the business model and value proposition, identify the priorities for additional or improved assets/resources/capabilities required and how they might be obtained or developed
Capabilities and Competitive Advantage
Operational Excellence
Enabling products and services to be obtained reliably, easily and cost-effectively by customers
Customer Intimacy
Targeting markets very precisely and tailoring products and services to the needs of particular customer groups
Product (or Service) Leadership
Continuing product innovation meeting customers' needs
Dynamic Capabilities and Strategy Implementation
Change Happens
Developing new products and services
Organizational restructuring
Revising the business model and value proposition through new processes
Business relationships
IT applications and improving competences
Employee skills and working practices
Dynamic Capabilities
New product development
Knowledge creation
Demand management
Resource integration
Learning capability
Iterative development of customer value proposition and digitized process