Softw3are selection

A Potential IT Solution

Today, more than a decade after the terrorist attacks, the government has an important new tool at its disposal, known as Palantir. The origins of Palantir go back to PayPal. Because PayPal was so successful, it attracted criminals who used it to carry out money laundering and fraud. By 2000, PayPal was in financial trouble because the existing antifraud software tools could not keep up with the criminal activity. Each time PayPal analysts caught onto one ploy, the perpetrators simply changed tactics.

To deal with these issues, PayPal’s analysts created software that could view each transaction as a part of a pattern, rather than as just a single database entry. This process enabled analysts to spot networks of suspicious accounts and to discover patterns that PayPal’s computers had missed. PayPal utilized this software to freeze suspicious payments before they were processed. The software saved the company hundreds of millions of dollars.

Several PayPal engineers who had worked on the software and Stanford computer scientists formed a startup company to develop PayPal’s fraud-detection tool into a data-analysis system that integrated pattern recognition, artificial intelligence software, and human cognitive skills. They named the tool Palantir (www.palantir.com) for the “Seeing Stones” in the Lord of the Rings.

In an early deployment of Palantir, the U.S. intelligence community used the software tool in the war on terrorism. Palantir technology essentially solves the types of intelligence problems that allowed September 11 to occur. That is, it helps law enforcement agencies spot patterns in the vast amounts of data they analyze every day. Palantir software combs through all of the available databases, identifies related pieces of information, and integrates everything into a unified picture.

The Results

Palantir’s customer list currently includes the U.S. Department of Defense, the CIA, the FBI, the Army, the Marines, the Air Force, the police departments of New York and Los Angeles, and an increasing number of financial institutions that have an interest in detecting bank fraud. Most of Palantir’s government work remains classified, but information on some cases has leaked out.

In April 2010, for example, security researchers in Canada used Palantir software to crack a spy operation called the Shadow Network that had, among other things, broken into the Indian Defense Ministry and infiltrated the Dalai Lama’s e-mail account. Palantir has also been used to unravel child abuse and abduction cases, to locate suspects in the murder of a U.S. Immigration and Customs Enforcement special agent, and to uncover bombing networks in Syria, Afghanistan, and Pakistan.

In Afghanistan, the U.S. Special Operations Forces use Palantir to plan assaults. They type a village’s name into the system, and it generates a map of the village that details the locations of all reported shooting skirmishes and improvised explosive device (IED) incidents. The soldiers then utilize the timeline function to discover where the most recent attacks occurred, and they plot their mission in the village accordingly.

Another scenario that illustrates Palantir’s usefulness involves the U.S. Marines. The Marines used to spend years gathering fingerprint and DNA evidence from IEDs and trying to match those data against a database of similar information collected from villagers. Usually, by the time they obtained any results, the bombers had disappeared. In contrast, field operatives can now upload fingerprint/DNA evidence from villagers into Palantir and instantly find matches from past attacks.

Wall Street banks are also utilizing Palantir to search their transaction databases for criminal fraud, trading insights, and even new ways to price mortgages. One of the world’s largest banks employs Palantir software to break up a popular scam called BustOut. In this scam, criminals steal or purchase access to thousands of people’s online identities and then break into their bank and credit card accounts. Rather than act immediately, however, they spend weeks biding their time until someone on their radar purchases a plane ticket or leaves on a holiday. They then siphon money out of the accounts as quickly as they can while the victim is in transit. The criminals hide their trails by anonymizing their computing activity and disabling alert systems in the bank and credit card accounts. When the bank identifies a small number of compromised accounts, it uses Palantir to discern the characteristics of those accounts. Palantir then helps the bank discover thousands of other accounts with those characteristics that have not yet been tapped.

Another organization, the FBI, utilizes Palantir technology to instantly compile thorough dossiers on U.S. citizens. For example, agents can integrate surveillance videos with credit card transactions, cell phone records, e-mails, air itineraries, and Web search information. Privacy advocates worry that Palantir will make the FBI and other government agencies even more intrusive consumers of personal data. One specific event that raised concerns among privacy advocates concerned a Palantir engineer who was placed on leave after being exposed by the hacker collective Anonymous for participating in a plot to break into the personal computers of WikiLeaks supporters, but later was quietly rehired.

Palantir responds to these concerns by asserting that it has developed very sophisticated privacy-protection technology. Its software creates audit trails that detail who is privy to certain pieces of information and what they have done with the information. Palantir also has a permission system that ensures that agency workers using their software can access only the data allowed by their clearance level.

Palantir is also generating controversy within the U.S. Army. In late 2012, the Pentagon’s top weapons tester assigned a failing grade to the Army’s premier battlefield intelligence system, which troops in Afghanistan have criticized as being too slow and unreliable in analyzing data to locate enemy combatants. A memo from the testing agency called the updated version of the $2.5 billion Defense Common Ground System “not operationally effective, not operationally suitable, and not operationally survivable against cyber threats.” The negative report was a blow to the Army’s analysis system. Further, the system faces competition from Palantir.

At first, the Army resisted Palantir, but overseas troops were clamoring for access to the system. One U.S. congressman accused the Army of protecting its own system, to the detriment of U.S. troops. Finally, in early 2013 the Army announced that it will attempt to integrate Palantir into its existing intelligence system. The results remain to be seen.

Sources: Compiled from J. Gould, “Army May Work With Palantir on Intel Software,” The Army Times, January 3, 2013; M. Hoffman, “Army Considers Palantir to Boost Intelligence Architecture,” Defense.org, December 20, 2012; J. Lonsdale, “How Did Palantir Build Such a Strong Brand?” Forbes, December 12, 2012; R. Scarborough, “Army’s Own Data Mining System Fails Test,” The Washington Times, December 2, 2012; R. Scarborough, “Military Leaders Urgently Push for New Counterterrorism Software,” The Washington Times, August 27, 2012; A. Good, “Who Actually Uses Palantir Finance?” Forbes, August 15, 2012; W. Hickey, “This Peter Thiel Company Is Ripping the Army Intelligence Community Apart,” Business Insider, August 3, 2012; A. Vance and B. Stone, “Palantir, the War on Terror’s Secret Weapon,” Bloomberg BusinessWeek, November 22, 2011; “Husky Names Palantir as Software and Consulting Partner,” Oil & Gas Financial Journal, November 4, 2011; P. Gobry, “Secretive Spy Tech Company Palantir Technologies Raises Another $50 Million,” Business Insider, May 11, 2011; D. Primack, “Analyze This: Palantir Worth More than $2 Billion,” CNN Money, May 6, 2011; A. Greenberg, “Palantir Apologizes for WikiLeaks Attack Proposal, Cuts Ties with HBGary,” Forbes, February 11, 2011; D. Storm, “Bank of America Using Three Intelligence Firms to Attack WikiLeaks,” Computerworld, February 9, 2011; S. Gorman, “How Team of Geeks Cracked the Spy Trade,” Wall Street Journal, September 4, 2009; www.palantir.com, accessed February 16, 2013.

What We Learned from This Case

The chapter-opening case illustrates the importance of the Palantir system in helping organizations respond to business pressures (in this instance, national security and bank fraud) and providing support for their strategy. In particular, the system helps organizations collate and analyze vast amounts of data stored in different places and different organizations. The case also highlights the incredible complexity of the modern high-tech world, and it shows how organizations are using Palantir to make sense of a rapidly changing environment. Finally, it demonstrates that any information system can be strategic, meaning that it can provide a competitive advantage if it is used properly.

Competitive advantage refers to any assets that provide an organization with an edge against its competitors in some measure such as cost, quality, or speed. A competitive advantage helps an organization to control a market and to accrue larger-than-average profits. Significantly, both strategy and competitive advantage take many forms.

Although there are many companies that use technology in more expensive ways, Alta Bicycle Share, which is discussed in IT’s About [Small] Business 2.1, demonstrates that an entrepreneurial spirit coupled with a solid understanding of what IT can do for you will provide competitive advantages to entrepreneurs just as it does for Wall Street CIOs. As you study this chapter, think of the small businesses in your area that are utilizing popular technologies in interesting and novel ways. Have any of them found an innovative use for Twitter? Facebook? Amazon? PayPal? If not, then can you think of any businesses that would benefit from employing these technologies?

This chapter is important for you for several reasons. First, the business pressures we address in the chapter will affect your organization. Just as important, however, they also will affect you. Therefore, you must understand how information systems can help you—and eventually your organization—respond to these pressures.

In addition, acquiring competitive advantage is essential for your organization’s survival. Many organizations achieve competitive advantage through the efforts of their employees. Therefore, becoming knowledgeable about strategy and how information systems affect strategy and competitive position will help you throughout your career.

This chapter encourages you to become familiar with your organization’s strategy, mission, and goals and to understand its business problems and how it makes (or loses) money. It will help you understand how information technology contributes to organizational strategy. Further, you likely will become a member of business/IT committees that decide (among many other things) how to use existing technologies more effectively and whether to adopt new ones. After studying this chapter, you will be able to make immediate contributions in these committees when you join your organizations.

Information systems can be just as strategic to a small- or medium-sized company as they are to a large firm. IT’s About [Small] Business 2.1 illustrates how information systems are strategically important to bicycle-sharing companies.

2.1: Business Processes

A business process is an ongoing collection of related activities that create a product or a service of value to the organization, its business partners, and/or its customers. A process is comprised of three fundamental elements:

• Inputs: Materials, services, and information that flow through and are transformed as a result of process activities
• Resources: People and equipment that perform process activities
• Outputs: The product or a service created by the process

If the process involves a customer, then that customer can be either internal or external to the organization. A manager who is the recipient of an internal reporting process is an example of an internal customer. In contrast, an individual or a business that purchases the organization’s products is the external customer of the fulfillment process.

Successful organizations measure their process activities to evaluate how well they are executing these processes. Two fundamental metrics that organizations employ in assessing their processes are efficiency and effectiveness. Efficiency focuses on doing things well in the process; for example, progressing from one process activity to another without delay or without wasting money or resources. Effectiveness focuses on doing the things that matter; that is, creating outputs of value to the process customer—for example, high-quality products.

Many processes cross functional areas in an organization. For example, product development involves research, design, engineering, manufacturing, marketing, and distribution. Other processes involve only a single functional area. Table 2.1 identifies the fundamental business processes performed in an organization’s functional areas.

Cross-Functional Processes

All of the business processes in Table 2.1 fall within a single functional area of the company. However, many other business processes, such as procurement and fulfillment, cut across multiple functional areas; that is, they are cross-functional business processes, meaning that no single functional area is responsible for their execution. Rather, multiple functional areas collaborate to perform the process. For a cross-functional process to be successfully completed, each functional area must execute its specific process steps in a coordinated, collaborative way. To clarify this point, let’s take a look at the procurement and fulfillment cross-functional processes. We discuss these processes in greater detail in Chapter 10.

The procurement process includes all of the tasks involved in acquiring needed materials externally from a vendor. Procurement comprises five steps that are completed in three different functional areas of the firm: warehouse, purchasing, and accounting.

The process begins when the warehouse recognizes the need to procure materials, perhaps due to low inventory levels. The warehouse documents this need with a purchase requisition, which it sends to the purchasing department (Step 1). In turn, the purchasing department identifies a suitable vendor, creates a purchase order based on the purchase requisition, and sends the order to the vendor (Step 2). When the vendor receives the purchase order, it ships the materials, which are received in the warehouse (Step 3). The vendor then sends an invoice, which is received by the accounting department (Step 4). Accounting sends payment to the vendor, thereby completing the procurement process (Step 5).

The fulfillment process is concerned with processing customer orders. Fulfillment is triggered by a customer purchase order that is received by the sales department. Sales then validates the purchase order and creates a sales order. The sales order communicates data related to the order to other functional areas within the organization, and it tracks the progress of the order. The warehouse prepares and sends the shipment to the customer. Once accounting is notified of the shipment, it creates an invoice and sends it to the customer. The customer then makes a payment, which accounting records.

Table 2.1: Examples of Business Processes

Accounting Business Processes Managing accounts payable Managing accounts receivable Reconciling bank accounts Managing cash receipts Managing invoice billings Managing petty cash Producing month-end close Producing virtual close

Finance Business Processes Managing account collection Managing bank loan applications Producing business forecasts Applying customer credit approval and credit terms Producing property tax assessments Managing stock transactions Generating financial cash flow reports

Marketing Business Processes Managing post-sale customer follow-up Collecting sales taxes Applying copyrights and trademarks Using customer satisfaction surveys Managing customer service Handling customer complaints Handling returned goods from customers Producing sales leads Entering sales orders Training sales personnel

Production/Operations Management Business Processes Processing bills of materials Processing manufacturing change orders Managing master parts list and files Managing packing, storage, and distribution Processing physical inventory Managing purchasing Managing quality control for finished goods Auditing for quality assurance Receiving, inspecting, and stocking parts and materials Handling shipping and freight claims Handling vendor selection, files, and inspections

Human Resources Business Processes Applying disability policies Managing employee hiring Handling employee orientation Managing files and records Applying healthcare benefits Managing pay and payroll Producing performance appraisals and salary adjustments Managing resignations and terminations Applying training/tuition reimbursement Managing travel and entertainment Managing workplace rules and guidelines Overseeing workplace safety

Management Information Systems Business Processes Antivirus control Computer security issues incident reporting Training computer users Computer user/staff training Applying disaster recovery procedures Applying electronic mail policy Generating Internet use policy Managing service agreements and emergency services Applying user workstation standards Managing the use of personal software

An organization’s business processes can create a competitive advantage if they enable the company to innovate or to execute more effectively and efficiently than its competitors. They can also be liabilities, however, if they make the company less responsive and productive. Consider the airline industry. It has become a competitive necessity for all of the airlines to offer electronic ticket purchases via their Web sites. To provide competitive advantage, however, these sites must be highly responsive and they must provide both current and accurate information on flights and prices. An up-to-date, user-friendly site that provides fast answers to user queries will attract customers and increase revenues. In contrast, a site that provides outdated or inaccurate information, or has a slow response time, will hurt rather than improve business.

FIGURE 2.1: Business process for ordering e-ticket from airline Web site.

Clearly, good business processes are vital to organizational success. But, how can organizations determine if their business processes are well designed? The first step is to document the process by describing its steps, its inputs and outputs, and its resources. The organization can then analyze the process and, if necessary, modify it to improve its performance. We examine this procedure in Section 2.2.

To understand this point, let’s consider the e-ticketing process. E-ticketing consists of four main process activities: searching for flights, reserving a seat, processing payment, and issuing an e-ticket. These activities can be broken down into more detailed process steps. The result may look like the process map in Figure 2.1. Note that different symbols correspond to different types of process steps. For instance, rectangles (steps) are activities that are performed by process resources (reserve seats, issue e-ticket). Diamond-shaped boxes indicate decisions that need to be made (seats available?). Arrows are used as connectors between steps; they indicate the sequence of activities.

These symbols are important in the process flowchart (which is similar with a programming flowchart). Other symbols may be used to provide additional process details. For example, D-shaped boxes are used instead of rectangles when a waiting period is part of a process; ovals can show start and stop points; and process resources can be attached to activities with resource connector lines, or included as an annotation or property for each activity box.

The customers of the process are travelers planning a trip, and the process output is an e-ticket. Travelers provide inputs to the process: the desired travel parameters to begin the search, the frequent flyer miles number, and their credit card information. In addition, a computerized reservation system that stores information for many airlines also provides some of the process inputs—such as the seat availability and prices. The resources used in the process are the airline Web site, the computerized reservation system, and, if the customer calls the airline call center at any time during the process, the call center system and the human travel agents. The process creates customer value by efficiently generating an output that meets the customer search criteria—dates and prices. The performance of the process depends on efficiency metrics such as the time required to purchase an e-ticket, from the moment the customer initiates the ticket search until he or she receives the e-ticket. Effectiveness metrics include customer satisfaction with the airline Web site. Finally, the performance of the process may be affected if the quality or the timeliness of the inputs is low—for example, if the customer enters the wrong dates—or if the process resources are not available—for example, if the Web site crashes before the purchase is finalized.

2.2: Business Process Improvement, Business Process Reengineering, and Business Process Management

Excellence in executing business processes is widely recognized as the underlying basis for all significant measures of competitive performance in an organization. Consider these measures, for example:

• Customer satisfaction: The result of optimizing and aligning business processes to fulfill customers’ needs, wants, and desires.
• Cost reduction: The result of optimizing operations and supplier processes.
• Cycle and fulfillment time reduction: The result of optimizing the manufacturing and logistics processes.
• Quality: The result of optimizing the design, development, and production processes.
• Differentiation: The result of optimizing the marketing and innovation processes.
• Productivity: The result of optimizing each individual’s work processes.

The question is: How does an organization ensure business process excellence?

In their book Reengineering the Corporation, first published in 1993, Michael Hammer and James Champy argued that to become more competitive, American businesses needed to radically redesign their business processes to reduce costs and increase quality. The authors further asserted that information technology is the key enabler of such change. This radical redesign, called business process reengineering (BPR), is a strategy for making an organization’s business processes more productive and profitable. The key to BPR is for enterprises to examine their business processes from a “clean sheet” perspective and then determine how they can best reconstruct those processes to improve their business functions. BPR’s popularity was propelled by the unique capabilities of information technology, such as automation and standardization of many process steps and error reduction due to improved communication among organizational information silos.

Although some enterprises have successfully implemented BPR, many organizations found this strategy too difficult, too radical, too lengthy, and too comprehensive. The impact on employees, on facilities, on existing investments in information systems, and even on organizational culture was overwhelming. Despite the many failures in BPR implementation, however, businesses increasingly began to organize work around business processes rather than individual tasks. The result was a less radical, less disruptive, and more incremental approach, called business process improvement (BPI).

BPI focuses on reducing variation in the process outputs by searching for root causes of the variation in the process itself (such as a broken machine on an assembly line) or among the process inputs (such as a decline in the quality of raw materials purchased from a certain supplier). BPI is usually performed by teams of employees that include a process expert—usually the process owner (the individual manager who oversees the process)—as well as other individuals who are involved in the process. These individuals can be involved directly; for example, the workers who actually perform process steps. Alternative, these individuals can be involved indirectly; for example, customers who purchase the outputs from the process.

Six Sigma is a popular methodology for BPI initiatives. Its goal is to ensure that the process has no more than 3.4 defects per million outputs by using statistical methods to analyze the process. (A defect is defined as a faulty product or an unsatisfactory service.) Six Sigma was developed by Motorola in the 1980s, and it is now used by companies worldwide, thanks in part to promotional efforts by early adopters such as GE. Six Sigma is especially appropriate for manufacturing environments, where product defects can be easily defined and measured. Over the years, the methodology has been modified so that it focuses less on defects and more on customer value. As a result, it can now be applied to services as well as products. Today, Six Sigma tools are widely used in financial services and healthcare institutions as components of process-improvement initiatives.

Regardless of the specific methodology you use, a successful BPI project generally follows five basic phases: define, measure, analyze, improve, and control, or DMAIC.

• In the define phase, the BPI team documents the existing “as is” process activities, process resources, and process inputs and outputs, usually as a graphical process map, or diagram. The team also documents the customer and the customer’s requirements for the process output, together with a description of the problem that needs to be addressed.
• In the measure phase, the BPI team identifies relevant process metrics, such as time and cost to generate one output (product or service), and collects data to understand how the metrics evolve over time. Sometimes the data already exist, in which case they can be extracted from the IS that supports the process, as described in the previous section. Many times, however, the BPI team needs to combine operational process data already stored in the company’s IS systems with other data sources, such as customer and employee observations, interviews, and surveys.
• In the analysis phase, the BPI team examines the “as is” process map and the collected data to identify problems with the process (such as decreasing efficiency or effectiveness) and their root causes. If possible, the team should also benchmark the process; that is, compare its performance with that of similar processes in other companies, or other areas of the organization. The team can employ IT applications such as statistical analysis software or simulation packages in this phase. It is often valuable to use process simulation software during the analysis phase. Utilizing this software provides two benefits. First, it enables a process manager to quickly simulate a real situation (e.g., with a certain number of people undertaking activities) for a specific amount of time (e.g., a working day, a week, or a month). The manager can then estimate the process performance over time without having to observe the process in practice. Second, it allows the manager to create multiple scenarios; for instance, using a different number of resources in the process and/or using a different configuration for the process steps. In addition, process simulation software can provide a number of outputs regarding a process including the time used by all resources to execute specific activities, the overall cycle time of a process, the identification of resources that are infrequently used, and the bottlenecks in the process. Simulating a process is extremely valuable for process managers because it is a risk-free and inexpensive test of an improvement solution that does not need to be conducted with real resources.
• In the improve phase, the BPI team identifies possible solutions for addressing the root causes, maps the resulting “to be” process alternatives, and selects and implements the most appropriate solution. Common ways to improve processes are eliminating process activities that do not add value to the output and rearranging activities in a way that reduces delays or improves resource utilization. The organization must be careful, however, not to eliminate internal process controls—those activities that safeguard company resources, guarantee the accuracy of its financial reporting, and ensure adherence to rules and regulations.
• In the control phase, the team establishes process metrics and monitors the improved process after the solution has been implemented to ensure the process performance remains stable. An IS system can be very useful for this purpose.

Although BPI initiatives do not deliver the huge performance gains promised by BPR, many organizations prefer them because they are less risky and less costly. BPI focuses on delivering quantifiable results—and if a business case cannot be made, the project is not continued. All employees can be trained to apply BPI techniques in their own work to identify opportunities for improvement. Thus, BPI projects tend to be performed more from the bottom-up, in contrast to BPR projects, which involve top-down change mandates. BPI projects take less time overall, and even if they are unsuccessful, they consume fewer organizational resources than BPR projects. However, if incremental improvements through BPI are no longer possible, or if significant changes occur in the firm’s business environment, then the firm should consider BPR projects. One final consideration is that over time, employees can become overstretched or lose interest if the company undertakes too many BPI projects and does not have an effective system to manage and focus the improvement efforts.

To sustain BPI efforts over time, organizations can adopt business process management (BPM), a management system that includes methods and tools to support the design, analysis, implementation, management, and continuous optimization of core business processes throughout the organization. BPM integrates disparate BPI initiatives to ensure consistent strategy execution.

Important components of BPM are process modeling, Web-enabled technologies, and business activity monitoring. BPM begins with process modeling, which is a graphical depiction of all of the steps in a process. Process modeling helps employees understand the interactions and dependencies among the people involved in the process, the information systems they rely on, and the information they require to optimally perform their tasks. Process modeling software can support this activity. IT’s About Business 2.2 shows how Chevron has employed BPR, BPI, and BPM.

Web-enabled technologies display and retrieve data via a Web browser. They enable an organization to integrate the necessary people and applications into each process, across functional areas and geographical locations.

Finally, business activity monitoring (BAM) is a real-time approach for measuring and managing business processes. Companies use BAM to monitor their business processes, identify failures or exceptions, and address these failures in real time. Further, because BAM tracks process operations and indicates whether they succeed or fail, it creates valuable records of process behaviors that organizations can use to improve their processes.

BPM activities are often supported by business process management suites (BPMS). A BPMS is an integrated set of applications that includes a repository of process information, such as process maps and business rules; tools for process modeling, simulation, execution, coordination across functions, and re-configuration in response to changing business needs; as well as process-monitoring capabilities.

BPM is growing in business value. In 2012, Capgemini (www.capgemini.com), an international consulting firm, surveyed more than 1,000 senior business executives. The majority of the respondents indicated that BPM would play a more prominent role in their organizations in 2013 and 2014.

Further, Gartner (www.gartner.com), a leading IT research and advisory firm, stated that companies need to focus on developing and mastering BPM skills throughout the organization. Gartner predicts that by 2016, high-performing companies will use BPM technologies such as real-time process monitoring, visualization, analytics, and intelligent automated decision making—all of them integrated in second-generation BPMS—to support intelligent business operations.

Another promising emerging trend is social BPM. This technology enables employees to collaborate, using social media tools on wired and mobile platforms, both internally across functions and externally with stakeholders (such as customers or experts), to exchange process knowledge and improve process execution.

BPM initially helps companies improve profitability by decreasing costs and increasing revenues. Over time, BPM can create a competitive advantage by improving organizational flexibility—making it easy to adapt to changing business conditions and to take advantage of new opportunities. For many companies, BPM can reduce costs, increase customer satisfaction, and ensure compliance with rules and regulations. In all cases, the company’s strategy should drive the BPM effort. The following example illustrates these benefits.

2.3: Business Pressures, Organizational Responses, and Information Technology Support

Modern organizations compete in a challenging environment. To remain competitive they must react rapidly to problems and opportunities that arise from extremely dynamic conditions. In this section you examine some of the major pressures confronting modern organizations and the strategies that organizations employ to respond to these pressures.

Business Pressures

The business environment is the combination of social, legal, economic, physical, and political factors in which businesses conduct their operations. Significant changes in any of these factors are likely to create business pressures on organizations. Organizations typically respond to these pressures with activities supported by IT. Figure 2.2 illustrates the relationships among business pressures, organizational performance and responses, and IT support. You will learn about three major types of business pressures: market, technology, and societal pressures.

FIGURE 2.2: Business pressures, organizational performance and responses, and IT support.

Market Pressures.

Market pressures are generated by the global economy, intense competition, the changing nature of the workforce, and powerful customers. Let’s look more closely at each of these factors.

Globalization.

Globalization is the integration and interdependence of economic, social, cultural, and ecological facets of life, made possible by rapid advances in information technology. In his book The World Is Flat, Pulitzer Prize-winning author Thomas Friedman argues that technology is leveling the global competitive playing field, thereby making it “flat.”

Friedman identifies three eras of globalization. The first era, Globalization 1.0, lasted from 1492 to 1800. During this era, the force behind globalization was how much muscle, horsepower, wind power, or steam power a country could deploy.

The second era, Globalization 2.0, lasted from 1800 to 2000. In this era, the force behind globalization was the emergence of multinational companies; that is, companies that had their headquarters in one country but operated in several countries. In the first half of this era, globalization was driven by falling transportation costs, generated by the development of the steam engine and the railroads. In the second half, the driving force was falling telecommunications costs resulting from the telegraph, telephones, computers, satellites, fiber-optic cable, and the Internet and World Wide Web. The modern global economy began to evolve during this era.

Around the year 2000, the world entered Globalization 3.0. In this era, globalization has been driven by the convergence of ten forces that Friedman calls “flatteners.” Table 2.2 identifies these forces.

According to Friedman, each era has been characterized by a distinctive focus. The focus of Globalization 1.0 was on countries, the focus of Globalization 2.0 was on companies, and the focus of Globalization 3.0 is on groups and individuals.

As you look at Table 2.2, note that nine of Friedman’s ten flatteners directly relate to information technology (all except the fall of the Berlin Wall). These flatteners enable individuals to connect, compute, communicate, collaborate, and compete everywhere and anywhere, anytime and all the time; to access limitless amounts of information, services, and entertainment; to exchange knowledge; and to produce and sell goods and services. People and organizations can now operate without regard to geography, time, distance, or even language barriers. The bottom line? Globalization is markedly increasing competition.

Table 2.2: Friedman’s Ten Flatteners

Fall of the Berlin Wall on November 9, 1989 ○ Shifted the world toward free-market economies and away from centrally planned economies. ○ Led to the emergence of the European Union and early thinking about the world as a single, global market.

Netscape goes public on August 9, 1995 ○ Popularized the Internet and the World Wide Web.

Development of work-flow software ○ Enabled computer applications to work with one another without human intervention. ○ Enabled faster, closer collaboration and coordination among employees, regardless of their location.

Uploading ○ Empowered all Internet users to create content and put it on the Web. ○ Led the transition from a passive approach to content to an active, participatory, collaborative approach.

Outsourcing ○ Contracting with an outside company to perform a specific function that your company was doing itself and then integrating their work back into your operation; for example, moving customer call centers to India.

Offshoring ○ Relocating an entire operation, or certain tasks, to another country; for example, moving an entire manufacturing operation to China.

Supply chaining ○ Technological revolution led to the creation of networks composed of companies, their suppliers, and their customers, all of which could collaborate and share information for increased efficiency.

Insourcing ○ Delegating operations or jobs within a business to another company that specializes in those operations; for example, Dell hires FedEx to “take over” Dell’s logistics process.

Informing ○ The ability to search for information, best illustrated by search engines.

The Steroids (computing, instant messaging and file sharing, wireless technologies, Voice over Internet Protocol, videoconferencing, and computer graphics) ○ Technologies that amplify the other flatteners. ○ Enable all forms of computing and collaboration to be digital, mobile, and personal.

These observations highlight the importance of market pressures for you. Simply put, you and the organizations you join will be competing with people and organizations from all over a flat world.

Let’s consider some examples of globalization. Regional agreements such as the North American Free Trade Agreement (NAFTA), which includes the United States, Canada, and Mexico, have contributed to increased world trade and increased competition. Further, the rise of India and China as economic powerhouses has increased global competition.

One important pressure that businesses in a global market must contend with is the cost of labor, which varies widely among countries. In general, labor costs are higher in developed countries like the United States and Japan than in developing countries such as China and El Salvador. Also, developed countries usually offer greater benefits, such as healthcare, to employees, driving the cost of doing business even higher. Therefore, many labor-intensive industries have moved their operations to countries with low labor costs. IT has made such moves much easier to implement.

However, manufacturing overseas is no longer the bargain it once was, and manufacturing in the United States is no longer as expensive. For example, manufacturing wages in China have more than doubled between 2002 and 2013, and they continue to rise. Meanwhile, the value of China’s currency has steadily risen.

The Changing Nature of the Workforce.

The workforce, particularly in developed countries, is becoming more diversified. Increasing numbers of women, single parents, minorities, and persons with disabilities are now employed in all types of positions. IT is easing the integration of these employees into the traditional workforce. IT is also enabling people to work from home, which can be a major benefit for parents with young children and for people confronted with mobility and/or transportation issues.

Powerful Customers.

Consumer sophistication and expectations increase as customers become more knowledgeable about the products and services they acquire. Customers can use the Internet to find detailed information about products and services, to compare prices, and to purchase items at electronic auctions.

Organizations recognize the importance of customers and they have increased their efforts to acquire and retain them. Modern firms strive to learn as much as possible about their customers to better anticipate and address their needs. This process, called customer intimacy, is an important component of customer relationship management (CRM), an organization-wide effort toward maximizing the customer experience. You will learn about CRM in Chapter 11.

Technology Pressures.

The second category of business pressures consists of those pressures related to technology. Two major technology-related pressures are technological innovation and information overload.

Technological Innovation and Obsolescence.

Few and improved technologies rapidly create or support substitutes for products, alternative service options, and superb quality. As a result, today’s state-of-the-art products may be obsolete tomorrow. For example, how fast are new versions of your smartphone being released? How quickly are electronic versions of books, magazines, and newspapers replacing traditional hard copy versions? These changes force businesses to keep up with consumer demands.

Consider the Apple iPad (www.apple.com/ipad). Apple released the first iPad in April 2010 and sold 3 million of the devices in 80 days. Rather than taking time to enjoy its success, Apple made its iPad2 available for sale on March 11, 2011, only 11 months later. Apple released the iPad 3 on March 7, 2012, and the company released the iPad 4 on November 2, 2012.

An interesting aspect of technological innovation is “bring your own device (BYOD).” BYOD refers to the policy of permitting employees to bring personally owned mobile devices (laptops, tablet computers, and smartphones) to the workplace, and use those devices to connect to the corporate network. BYOD also describes this same practice applied to students using personally owned devices in educational settings to connect to their school’s network. BYOD is causing concern to organizational IT departments, as you see in IT’s About Business 2.3.

IT’s [about business]: 2.3 “Bring Your Own Device” Can Cause Problems

Hamilton Fraser (www.hamiltonfraser.co.uk), located in North London, is an insurance company that specializes in home insurance. The firm is one of Great Britain’s major contractors for its deposit protection system, which assigns an independent arbitrator to both tenants and landlords to resolve any disputes when a tenant moves from a rented property.

The company’s IT manager, Pete Agathangelou, claims that information security is his highest priority because credibility is critical to his company’s success. He began to focus specifically on security threats from “bring your own device (BYOD)” in 2012 when he observed basic changes in his office environment. For example, he noticed that at lunchtime younger employees utilized their mobile devices to play games and contact their friends on social networks. He also observed that many senior executives were accessing their e-mail on mobile devices when they were out of the office.

Hamilton Fraser had already embraced mobile computing by allowing its employees to have iPhones and iPads. However, employees were using other devices—particularly Android devices—on the company network. Agathangelou concluded that he needed a system to manage all of the mobile devices that the employees were utilizing.

The first step in creating this system was to find a vendor who could manage the issue of employees accessing the corporate network with their own mobile devices. The company ultimately selected MobileIron (www.mobileiron.com), a firm that provides mobile device management and security to large enterprises.

MobileIron allowed Hamilton Fraser to identify which mobile devices the company would support. The MobileIron software enabled Hamilton Fraser to keep track of how many employees were accessing the firm’s network for business purposes (as opposed to, e.g., playing games or shopping) and whether they were using an approved device. The company’s human resources department developed an acceptable use policy, and it began to conduct short training sessions to raise awareness of this policy among employees. The policy dictates that employees who use mobile devices must download an application to their smartphone or tablet that will enable the IT department to erase any corporate data from the device if it is lost or stolen, or to erase all data from the device if the employee so wishes.

Sources: Compiled from J. Gold, “Has BYOD Peaked?” Computerworld, March 21, 2013; J. Scott, “Case Study: Hamilton Fraser Embraces BYOD with MobileIron,” Computer Weekly, March 20, 2013; G. Marks, “Do You Really Need a BYOD Policy?” Forbes, February 25, 2013; M. Endler, “4 Big BYOD Trends for 2013,” InformationWeek, February 21, 2013; T. Kaneshige, “BYOD to Change the Face of IT in 2013,” CIO, February 7, 2013; T. Kemp, “Beyond BYOD: The Shift to People-Centric IT,” Forbes, January 14, 2013; L. Mearian, “Nearly Half of IT Shops Ignore BYOD,” Computerworld, November 29, 2012; E. Lai, “Infographic: The Ten Things We Fear (and Love) About BYOD,” Forbes, July 16, 2012; www.hamiltonfraser.co.uk, www.mobileiron.com, accessed April 14, 2013.

Questions

1.

What are the advantages of allowing employees to use any mobile device to connect to the corporate network? The disadvantages?

2.

Why is it necessary to be able to erase corporate data if a mobile device is lost or stolen?

Information Overload.

The amount of information available on the Internet doubles approximately every year, and much of it is free. The Internet and other telecommunications networks are bringing a flood of information to managers. To make decisions effectively and efficiently, managers must be able to access, navigate, and utilize these vast stores of data, information, and knowledge. Information technologies, such as search engines (discussed in Chapter 6) and data mining (Chapter 12) provide valuable support in these efforts.

Societal/Political/Legal Pressures.

The third category of business pressures includes social responsibility, government regulation/deregulation, spending for social programs, spending to protect against terrorism, and ethics. This section will explain how all of these elements affect modern businesses. We start with social responsibility.

Social Responsibility.

Social issues that affect businesses and individuals range from the state of the physical environment, to company and individual philanthropy, to education. Some corporations and individuals are willing to spend time and/or money to address various social problems. These efforts are known as organizational social responsibility or individual social responsibility.

One critical social problem is the state of the physical environment. A growing IT initiative, called green IT, is addressing some of the most pressing environmental concerns. IT is instrumental in organizational efforts to “go green” in at least four areas.

• Facilities design and management: Organizations are creating more sustainable work environments. Many organizations are pursuing Leadership in Energy and Environmental Design (LEED) certification from the U.S. Green Building Council, a nonprofit group that promotes the construction of environmentally friendly buildings. One impact of this development is that IT professionals are expected to help create green facilities. Consequently, IT personnel have to consider how their computing decisions influences sustainable design and, in turn, how the building’s design influences the IT infrastructure. Green design influences the type of IT devices a company uses and the locations where IT clusters personal computers, people, and servers. IT must become familiar with the metering and monitoring systems employed in green buildings and the requirements of buildings’ computerized infrastructure.
• Carbon management: As companies try to reduce their carbon footprints, they are turning to IT executives to develop the systems needed to monitor carbon throughout the organization and its supply chain, which can be global in scope. Therefore, IT employees need to become knowledgeable about embedded carbon and how to measure it in the company’s products and processes. Consider, for example, application development. IT managers will have to ask whether an application will require new hardware to test and run, or how much additional server space (and thus energy) it will require—and how these issues translate into carbon output.
• International and U.S. state environmental laws: IT executives must deal with federal and state laws and international regulations that impact everything from the IT products they buy, to how they dispose of them, to their company’s carbon footprint. IT managers must understand environmental compliance issues so they can ask their vendors the right questions regarding specific state, national, and international environmental standards before they purchase, deploy, and dispose of equipment.
• Energy management: IT executives must understand their entire organization’s energy needs for several reasons. First, energy management systems are becoming increasingly sophisticated. To employ these systems effectively and to make intelligent consumption decisions, IT personnel must understand the system’s complex monitors and sensors. Second, utilities are offering incentives to commercial customers who take certain energy conservation steps, such as enabling computer power management across their networks and designing energy-efficient data centers. Finally, utilities are offering variable rate incentives depending on when companies use electricity and how much they use. Addressing these issues requires IT systems that can regulate electricity use.

Continuing our discussion of social responsibility, social problems all over the world may be addressed through corporate and individual philanthropy. In some cases, questions arise as to what percentage of contributions actually goes to the intended causes and recipients and what percentage goes to the charity’s overhead. Another problem that concerns contributors is that they often exert little influence over the selection of projects their contributions will support. The Internet can help address these concerns and facilitate generosity and connection. Consider the following examples:

• PatientsLikeMe (www.patientslikeme.com), or any of the thousands of message boards dedicated to infertility, cancer, and various other ailments. People use these sites and message boards to obtain information about life-and-death decisions based on volunteered information, while also receiving much-needed emotional support from strangers.
• GiftFlow (www.giftflow.org): GiftFlow is a virtual community where you can obtain things you need for free and find people who need the “stuff” you have to give away. GiftFlow connects community organizations, businesses, governments, and neighbors in a network of reciprocity.
• OurGoods (www.ourgoods.org): OurGoods enables creative people to help one another produce independent projects. More work is accomplished in networks of shared respect and shared resources than in competitive isolation.
• Sparked (www.sparked.com): Sparked is an online “microvolunteering” Web site where large and small organizations list opportunities for people looking to volunteer.
• Thredup (www.thredup.com): Thredup is a Web site where parents trade children’s clothing and toys.
• Collaborative Consumption (www.collaborativeconsumption.com): This Web site is an online hub for discussions about the growing business of sharing, resale, reuse, and barter (with many links to Web sites engaged in these practices).
• Kiva (www.kiva.org): Kiva is a nonprofit enterprise that provides a link between lenders in developed countries and entrepreneurs in developing countries. Users pledge interest-free loans rather than tax-deductible donations. Kiva directs 100 percent of the loans to borrowers.
• DonorsChoose (www.donorschoose.org): DonorsChoose is an education-oriented Web site that functions entirely within the United States. Users make donations rather than loans. The Web site addresses the huge problem of underfunded public schools.

Still another social problem that affects modern business is the digital divide. The digital divide refers to the wide gap between those individuals who have access to information and communications technology and those who do not. This gap exists both within and among countries. IT’s About Business 2.4 provides an example of how modern information technologies are enabling the Surui people of the Amazon region in Brazil to bridge the digital divide.

IT’s [about business]: 2.4 The Surui Tribe of the Amazon

Chief Almir of the Surui tribe of the Brazilian Amazon is using Google to help his tribe maintain its traditional way of life. In 1969, the Surui experienced their first contact with outsiders, who brought with them disease, violence, and death. Then, loggers arrived and laid waste to the Surui’s homeland.

Chief Almir assumed a leadership role in his tribe at age 17, and he became the tribe’s first member to attend college. In 2006, he fled briefly to the United States when loggers put a bounty on his head. The following year he stumbled upon Google Earth in an Internet café.

During this time Chief Almir came to believe that his tribe’s survival depended on outreach. To realize this goal, he partnered with Google to create an online “cultural map” of the Surui with stories provided by the tribe’s elders, which are uploaded onto YouTube, as well as a geographical map of their territory created with GPS-equipped smartphones provided by Google. In 2009, Google employees taught the Surui to use cell phones to record illegal logging on their land. Tribal members can now take photos and videos that are geo-tagged and then immediately upload the images to Google Earth. Law enforcement officials can no longer claim ignorance of the problem when evidence of the deforestation is publicly available online. Satellite pictures indicate that the Surui territory is the only remaining intact piece of rainforest in the area. This fact confirms that the Surui use of technology has been highly effective.

Chief Almir views his partnership with Google not only as a way to sustain his traditions and his land, but also as an opportunity to teach other peoples about the Surui. Furthermore, the tribe has mounted an ambitious reforestation plan to combat the aggressive logging that is destroying the Surui’s 600,000 acres of land. The tribe now uses smartphones to document cleared areas in the forest and to create planting strategies. The Surui intend to plant 100 million saplings in the next decade. They hope to raise millions of dollars through a United Nations program that awards carbon credits, which recipients can trade for cash, to countries and tribes that maintain their forests. The money would fund new homes, a hospital, and a school. The Surui have created a word for Google in their language: ragogmakann, meaning “the messenger.”

In the summer of 2012, Google unveiled a cultural map of the Surui. This map serves as a digital tool to help the tribe share their vast knowledge of the rainforest while fighting illegal logging. The map, which is the result of a five-year partnership between Chief Almir and Google, is a collection of picture and videos mapping historical sites and offering three-dimensional visualization of Surui territory. The map is available on the Web site www.paiter.org, as well as on Google Earth.

A Google spokesperson stated that the company hoped that the methodology used to develop the Surui cultural map would be employed to help other indigenous peoples around the world. By late 2012, similar projects were planned for two tribes who are neighbors of the Surui. The Surui themselves are the trainers for the new cultural maps. In addition, Google has been contacted by tribes from all over the world, including the aboriginal First Nations in Canada, the Maoris in New Zealand, and many other Amazon tribes.

Sources: Compiled from J. Forero, “From the Stone Age to the Digital Age in One Big Leap,” NPR.org, March 28, 2013; “How Mapping Technology Is Helping Chief Almir and the Surui Tribe Protect Their Culture and Environment,” Google Nonprofits Blog, January 23, 2013; “It’s Amazon View! Google Shows Off New Map of Brazilian Rainforests (Put Together by an Indigenous Tribe),” The Daily Mail, June 17, 2012; “The Most Creative People in Business 2011,” FastCompany, June, 2011; S. Zwick, “Brazil’s Surui Establish First Indigenous Carbon Fund,” Ecosystem Marketplace, December 3, 2010; R. Butler, “Brazilian Tribe Owns Carbon Rights to Amazon Rainforest Land,” Mongabay.com, December 9, 2009; R. Butler, “Big REDD,” Washington Monthly, September 7, 2009; R. Butler, “Amazon Conservation Team Puts Indians on Google Earth to Save the Amazon,” Mongabay.com, November 14, 2006.

Questions

1.

Describe the benefits that all of us gain from the Surui’s use of IT.

2.

Provide specific examples of how the Surui could make further use of IT to improve their lives.

Many government and international organizations are trying to close the digital divide. As technologies develop and become less expensive, the speed at which the gap can be closed will accelerate. On the other hand, the rapid pace of technological development can make it more difficult for groups with few resources to keep up with more affluent groups.

One well-known project to narrow the divide is the One Laptop per Child (OLPC) project (http://one.laptop.org). OLPC is a nonprofit association dedicated to developing a very inexpensive laptop—a technology that aims to revolutionize how the world can educate its children.

The first generation of inexpensive laptops appeared in 2007 with a price of $188, which was too high for individuals and groups with limited resources. The second generation was scrapped because the price remained too high. The next generation, a touchscreen tablet computer for schoolchildren in the developing world, uses less power than a light bulb and is unbreakable, waterproof, and half as thick as an iPhone. This computer will be a single sheet of plastic, and will have a projected price of $75.

Compliance with Government Regulations.

Another major source of business pressures is government regulations regarding health, safety, environmental protection, and equal opportunity. Businesses tend to view government regulations as expensive constraints on their activities. In general, government deregulation intensifies competition.

In the wake of 9/11 and numerous corporate scandals, the U.S. government passed many new laws, including the Sarbanes-Oxley Act, the USA PATRIOT Act, the Gramm-Leach-Bliley Act, and the Health Insurance Portability and Accountability Act (HIPAA). Organizations must be in compliance with the regulations contained in these statutes. The process of becoming and remaining compliant is expensive and time consuming. In almost all cases, organizations rely on IT support to provide the necessary controls and information for compliance.

Protection against Terrorist Attacks.

Since September 11, 2001, organizations have been under increased pressure to protect themselves against terrorist attacks. In addition, employees who are in the military reserves have been called up for active duty, creating personnel problems. Information technology can help protect businesses by providing security systems and possibly identifying patterns of behavior associated with terrorist activities, including cyberattacks (discussed in Chapter 4).

An example of protection against terrorism is the Department of Homeland Security’s (DHS) US-VISIT program. US-VISIT is a network of biometric-screening systems, such as fingerprint and ocular (eye) scanners, that ties into government databases and watch lists to check the identities of millions of people entering the United States. The system is now operational in more than 300 locations, including major international ports of entry by air, sea, and land. As another example, refer to the chapter opening case on the Palantir system.

Ethical Issues.

Ethics relates to general standards of right and wrong. Information ethics relates specifically to standards of right and wrong in information-processing practices. Ethical issues are very important because, if handled poorly, they can damage an organization’s image and destroy its employees’ morale. The use of IT raises many ethical issues, ranging from monitoring e-mail to invading the privacy of millions of customers whose data are stored in private and public databases. Chapter 3 covers ethical issues in detail.

Clearly, then, the pressures on organizations are increasing, and organizations must be prepared to take responsive actions if they are to succeed. You will learn about these organizational responses in the next section.

2.4: Competitive Advantage and Strategic Information Systems

A competitive strategy is a statement that identifies a business’s approach to compete, its goals, and the plans and policies that will be required to carry out those goals (Porter, 1985). A strategy, in general, can apply to a desired outcome, such as gaining market share. A competitive strategy focuses on achieving a desired outcome when competitors want to prevent you from reaching your goal. Therefore, when you create a competitive strategy, you must plan your own moves, but you must also anticipate and counter your competitors’ moves.

Through its competitive strategy, an organization seeks a competitive advantage in an industry. That is, it seeks to outperform its competitors in a critical measure such as cost, quality, and time-to-market. Competitive advantage helps a company function profitably with a market and generate larger-than-average profits.

Competitive advantage is increasingly important in today’s business environment, as you will note throughout the text. In general, the core business of companies has remained the same. That is, information technologies simply offer tools that can enhance an organization’s success through its traditional sources of competitive advantage, such as low cost, excellent customer service, and superior supply chain management. Strategic information systems (SISs) provide a competitive advantage by helping an organization implement its strategic goals and improve its performance and productivity. Any information system that helps an organization either achieve a competitive advantage or reduce a competitive disadvantage, qualifies as a strategic information system.

FIGURE 2.3: Porter’s Competitive Forces Model.

Porter’s Value Chain Model

Organizations use the Porter competitive forces model to design general strategies. To identify specific activities where they can use competitive strategies for greatest impact, they use his value chain model (1985). A value chain is a sequence of activities through which the organization’s inputs, whatever they are, are transformed into more valuable outputs, whatever they are. The value chain model identifies points where an organization can use information technology to achieve competitive advantage (see Figure 2.4).

According to Porter’s value chain model, the activities conducted in any organization can be divided into two categories: primary activities and support activities. Primary activities relate to the production and distribution of the firm’s products and services. These activities create value for which customers are willing to pay. The primary activities are buttressed by support activities. Unlike primary activities, support activities do not add value directly to the firm’s products or services. Rather, as their name suggests, they contribute to the firm’s competitive advantage by supporting the primary activities.

Next, you will see examples of primary and support activities in the value chain of a manufacturing company. Keep in mind that other types of firms, such as transportation, healthcare, education, retail, and others, have different value chains. The key point is that every organization has a value chain.

In a manufacturing company, primary activities involve purchasing materials, processing the materials into products, and delivering the products to customers. Manufacturing companies typically perform five primary activities in the following sequence:

• 1. Inbound logistics (inputs)
• 2. Operations (manufacturing and testing)
• 3. Outbound logistics (storage and distribution)
• 4. Marketing and sales
• 5. Services

FIGURE 2.4: Porter’s Value Chain Model.

As work progresses in this sequence, value is added to the product in each activity. Specifically, the following steps occur:

• 1. The incoming materials are processed (in receiving, storage, and so on) in activities called inbound logistics.
• 2. The materials are used in operations, where value is added by turning raw materials into products.
• 3. These products are prepared for delivery (packaging, storing, and shipping) in the outbound logistics activities.
• 4. Marketing and sales sell the products to customers, increasing product value by creating demand for the company’s products.
• 5. Finally, the company performs after-sales service for the customer, such as warranty service or upgrade notification, adding further value.

As noted above, the primary activities are buttressed by support activities. Support activities consist of:

• 1. The firm’s infrastructure (accounting, finance, management)
• 2. Human resources management
• 3. Product and technology development (R&D)
• 4. Procurement

Each support activity can be applied to any or all of the primary activities. In addition, the support activities can also support one another.

A firm’s value chain is part of a larger stream of activities, which Porter calls a value system. A value system, or an industry value chain, includes the suppliers that provide the inputs necessary to the firm along with their value chains. After the firm creates products, these products pass through the value chains of distributors (which also have their own value chains), all the way to the customers. All parts of these chains are included in the value system. To achieve and sustain a competitive advantage, and to support that advantage with information technologies, a firm must understand every component of this value system.

2.5: Business—Information Technology Alignment

The “holy grail” of organizations is business–information technology alignment, or strategic alignment (which we will call simply alignment). Business–information technology alignment is the tight integration of the IT function with the organization’s strategy, mission, and goals. That is, the IT function directly supports the business objectives of the organization. There are six characteristics of excellent alignment:

• Organizations view IT as an engine of innovation that continually transforms the business, often creating new revenue streams.
• Organizations view their internal and external customers and their customer service function as supremely important.
• Organizations rotate business and IT professionals across departments and job functions.
• Organizations provide overarching goals that are completely clear to each IT and business employee.
• Organizations ensure that IT employees understand how the company makes (or loses) money.
• Organizations create a vibrant and inclusive company culture.

Unfortunately, many organizations fail to achieve this type of close alignment. In fact, according to a McKinsey & Company survey on IT strategy and spending, only 16 percent of the IT and business executives who participated agreed that their organization had adequate alignment between IT and the business. Given the importance of business–IT alignment, why do so many organizations fail to implement this policy? The major reasons are:

• Business managers and IT managers have different objectives.
• The business and IT departments are ignorant of the other group’s expertise.
• A lack of communication.

Put simply, business executives often know little about information technology, and IT executives understand the technology but may not understand the real needs of the business. One solution to this problem is to adopt a process view, as explained in Sections 2.1 and 2.2, to map and improve business and IT processes to achieve greater alignment.

Businesses can also utilize enterprise architecture to foster alignment. Originally developed as a tool to organize a company’s IT initiatives, the enterprise architecture concept has evolved to encompass both a technical specification (the information and communication technologies and the information systems used in an organization) and a business specification (a collection of core business processes and management activities).

[ Summary ]

• 1. Discuss ways in which information systems enable cross-functional business processes and business processes for a single functional area. A business process is an ongoing collection of related activities that produce a product or a service of value to the organization, its business partners, and/or its customers. Examples of business processes in the functional areas are managing accounts payable, managing accounts receivable, managing post-sale customer follow-up, managing bills of materials, managing manufacturing change orders, applying disability policies, hiring employees, training staff and computer users, and applying Internet use policy.
• 2. Compare and contrast business process improvement, business process reengineering, and business process management to determine the different advantages and disadvantages of each.
  • Business process reengineering is a radical redesign of an organization’s business processes that is intended to improve the efficiency and effectiveness of these processes. The key to BPR is for enterprises to examine their business processes from a “clean sheet” perspective and then determine how they could best reconstruct those processes to improve their business functions. Because BPR proved difficult to implement, organizations have turned to business process improvement.
  • Business process improvement is an incremental approach to enhancing the efficiency and effectiveness of a process that is less risky and less costly than BPR. BPI relies on a structured approach (define, measure, analyze, improve, and control, or DMAIC), and many methodologies, such as Six Sigma, can be used to support these required steps.
  • Business process management is a management technique that includes methods and tools to support the documentation, design, analysis, implementation, management, and optimization of business processes. BPM coordinates individual BPI activities and creates a central repository of a company’s processes, generally by utilizing software such as BPMS.
• 3. Identify effective IT responses to different kinds of business pressures.
  • Market pressures: An example of a market pressure is powerful customers. Customer relationship management is an effective IT response that helps companies achieve customer intimacy.
  • Technology pressures: An example of a technology pressure is information overload. Search engines and business intelligence applications enable managers to access, navigate, and utilize vast amounts of information.
  • Societal/political/legal pressures: An example of a societal/political/legal pressure is social responsibility, such as the state of the physical environment. Green IT is one response that is intended to improve the environment.
• 4. Describe the strategies that organizations typically adopt to counter Porter’s five competitive forces. Porter’s five competitive forces:
  • The threat of entry of new competitors: For most firms, the Web increases the threat that new competitors will enter the market by reducing traditional barriers to entry. Frequently, competitors need only to set up a Web site to enter a market. The Web can also increase barriers to entry, as when customers come to expect a nontrivial capability from their suppliers
  • The bargaining power of suppliers: The Web enables buyers to find alternative suppliers and to compare prices more easily, thereby reducing suppliers’ bargaining power. From a different perspective, as companies use the Web to integrate their supply chains, participating suppliers can lock in customers, thereby increasing suppliers’ bargaining power.
  • The bargaining power of customers (buyers): The Web provides customers with incredible amounts of choices for products, as well as information about those choices. As a result, the Web increases buyer power. However, companies can implement loyalty programs in which they use the Web to monitor the activities of millions of customers. Such programs reduce buyer power.
  • The threat of substitute products or services: New technologies create substitute products very rapidly, and the Web makes information about these products available almost instantly. As a result, industries (particularly information-based industries) are in great danger from substitutes (e.g., music, books, newspapers, magazines, software). However, the Web also can enable a company to build in switching costs, so that it will cost customers time and/or money to switch from your company to a competitor.
  • The rivalry among existing firms in the industry: In the past, proprietary information systems provided strategic advantage for firms in highly competitive industries. The visibility of Internet applications on the Web makes proprietary systems more difficult to keep secret. Therefore, the Web makes strategic advantage more short-lived.
  The five strategies are as follows:
  • Cost leadership strategy—produce products and/or services at the lowest cost in the industry;
  • Differentiation strategy—offer different products, services, or product features;
  • Innovation strategy—introduce new products and services, put new features in existing products and services, or develop new ways to produce them;
  • Operational effectiveness strategy—improve the manner in which internal business processes are executed so that a firm performs similar activities better than its rivals;
  • Customer-orientation strategy—concentrate on making customers happy.
• 5. Describe the characteristics of effective business–information technology alignment. Business–IT alignment is the tight integration of the IT function with the strategy, mission, and goals of the organization. There are six characteristics of effective alignment:
  • Organizations view IT as an engine of innovation that continually transforms the business.
  • Organizations view customers and customer service as supremely important.
  • Organizations rotate business and IT professionals across departments and job functions.
  • Organizations provide clear, overarching goals for all employees.
  • Organizations ensure that IT employees understand how the company makes (or loses) money.
  • Organizations create a vibrant and inclusive company culture.