Module 2 VA 63775

“The biggest risk is not taking any risk…. In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

—Mark Zuckerberg, founder and CEO of Facebook

APPLE’S INNOVATIVE BUSINESS STRATEGY

When Steve Jobs resigned from his position as CEO of Apple in August 2011, Apple shares dropped as much as 7 percent across markets around the world. When Jobs died of cancer a few months later, Apple stock prices took another hit. Why was there such an extreme reaction to the loss of one individual from a company with tens of thousands of employees worldwide? Steve Jobs had created a vision for Apple, a strategic plan that had propelled the company into its posi- tion as a market leader and allowed it to remain there for decades.

Steve Jobs and Steve Wozniak founded Apple in 1976, introducing the first personal desktop computer into the market. When faced with competition from personal computers (PCs) manufac- tured and sold by IBM, Apple pioneered other innovations—the mouse, the desktop, and icons that users could click, rather than having to enter commands using the keyboard. In the fight to maintain its market position, Apple eventually began to manufacture laser printers, hard drives, and other hardware to supplement its desktop computers. By the 1990s, however, both founders

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had left the company after a series of power struggles, and Apple was suffering from mismanage-

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ment. Apple overestimated demand for its PowerBook laptops and then significantly underesti- mated demand for its Power Macintosh laptops, leaving $1 billion in unfulfilled orders.

With Jobs’ return to the company in 1997, Apple reset its business strategy to focus on inno- vation within the desktop and portable computer market. Apple released the iMac in 1998 and then in 2001, the wildly successful iPod. Restoring its reputation for innovation, Apple began to branch out, opening its online iTunes store in 2004 and launching the iPhone in 2007. In 2008, Apple opened its online App Store and released the MacBook. In 2010, Apple introduced the iPad, quickly acquiring more than 80 percent of the tablet market.

By 2012, however, some analysts were noting that innovation from Apple’s competitors had begun to draw customers away from the ecosystem of Apple products. In response to that encroachment, Apple released the iPad Mini, in an effort to prevent Amazon’s Kindle Fire and Google’s Nexus 7 from chipping away at its consumer base. Yet, some people believed that Apple could coast for a while on its earlier years of innovation. Over one-fifth of iPhone users said that they were committed to the Apple product line—not only because of Apple’s perceived superior quality, but also because of the integration of Apple devices—as music, videos, and other data could be shared seamlessly from one Apple device to another through iCloud. Still, the iPhone’s market share began to drop.

In 2014, Apple released the iPhone 6 with larger screen sizes to compete with Samsung and other smartphone products. On the same day when Apple unveiled the iPhone 6, CEO Tim Cook quietly added that there was “one more thing” he had to show the audience, and as they cheered, he gave them a sneak peak at the long-rumored top-secret Apple watch, which went on sale in

2015. “It will change what people expect from a watch,” Cook hinted. And with this, Cook

seemed to persuade the audience that the death of the man who cofounded Apple would not mean the collapse of Apple’s innovative business strategy.

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L E A R N I N G O B J E C T I V E S

As you read this chapter, ask yourself:

What is an effective strategic planning process, who needs to participate in it, and what are the deliverables of such a process?

How is IT planning tied to overall strategic planning, so that business objectives and IT activities are well aligned?

This chapter defines strategic planning and outlines an effective process for good planning. It also provides an example of effective IT planning at Chevron.

WHY MANAGERS MUST UNDERSTAND THE RELATIONSHIP BETWEEN STRATEGIC PLANNING AND IT

Ever since the dawn of the computer age, various surveys of business and IT executives have stressed the need to improve alignment between business and IT as a top business priority. In this context, alignment means that the IT organization and its resources are focused on efforts that support the key objectives defined in the strategic plan of the busi- ness. This implies that IT and business managers have a shared vision of where the organi- zation is headed and agree on its key strategies. This shared vision will guide the IT organization in hiring the right people with the correct skills and competencies, choosing the right technologies and vendors to explore and develop, installing the right systems, and focusing on those projects that are needed to move the organization closer to its vision and meeting its mission. The impact of the IT staff on the rest of the organization will be extremely positive, and the IT group will be viewed as a well-respected business partner.

An IT organization not aligned with the key objectives of the business will find it dif- ficult to gain management support for its proposed efforts. Much of its work will fail to hit the mark and it will not be well received by the rest of the organization.

STRATEGIC PLANNING

Strategic planning is a process that helps managers identify desired outcomes and formu- late feasible plans to achieve their objectives by using available resources and capabilities.

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The strategic plan must take into account that the organization and everything around it is changing: consumers’ likes and dislikes change; old competitors leave and new ones enter the marketplace; the costs and availability of raw materials and labor fluctuate, along with the fundamental economic situation (interest rates, growth in gross domestic product, inflation rates); and the degree of industry and government regulation changes.

The following is a set of frequently cited benefits of strategic planning:

Provides a framework and a clearly defined direction to guide decision mak- ing at all levels throughout the organization

Ensures the most effective use is made of the organization’s resources by focusing those resources on agreed-on key priorities

Enables the organization to be proactive and take advantage of opportunities and trends, rather than passively reacting to them

Enables all organizational units to participate and work together toward accomplishing a common set of goals

Provides a set of excellent measures for judging organizational and personnel performance.

Improves communication among management and the board of directors, shareholders, and other interested parties

In some organizations with immature planning processes, strategic planning is an annual process timed to yield results used to prepare the annual expense budget and capital forecast. The process is focused inward, concentrating on the individual needs of various departments. Organizations that are more advanced in their planning processes develop multiple-year plans based on a situational analysis, competitive assessments, consideration of factors external to the organization, and an evaluation of strategic options.

The CEO of an organization must make long-term decisions about where the orga- nization is headed and how it will operate, and has ultimate responsibility for strategic planning. Subordinates, lower-level managers, and consultants typically gather useful information, perform much of the underlying analysis, and provide valuable input. But the CEO must thoroughly understand the analysis and be heavily involved in setting high-level business objectives and defining strategies. The CEO also must be seen as a champion and supporter of the chosen strategies or the rest of the organization is unlikely to “buy into” those strategies and take the necessary actions to make it all happen.

There are a variety of strategic planning approaches, including issues based, organic, and goals based. Issues-based strategic planning begins by identifying and analyzing key issues that face the organization, setting strategies to address those issues, and identifying projects and initiatives that are consistent with those strategies. Organic strategic plan- ning defines the organization’s vision and values and then identifies projects and initia- tives to achieve the vision while adhering to the values.

Goals-based strategic planning is a multiphase strategic planning process that begins by performing a situation analysis to identify an organization’s strengths, weak- nesses, opportunities, and threats. Next, management sets direction for the organiza- tion by defining its mission, vision, values, objectives, and goals. The results of the

Strategic Planning

situation analysis and direction setting phases are used to define strategies to enable the organization to fulfill its mission. Initiatives, programs, and projects are then

identified and executed to enable the organization to meet the objectives and goals. 35

These ongoing efforts are evaluated to ensure that they remain on track toward achieving the goals of the organization. The major phases in goals-based strategic planning are (1) analyze situation, (2) set direction, (3) define strategies, and

(4) deploy plan (see Figure 2-1).

Analyze Situation

All levels and business units of an organization must be involved in assessing its strengths and weaknesses. Preparing a historical perspective that summarizes the company’s devel- opment is an excellent way to begin this step of strategic planning. Next, a multitude of data is gathered about internal processes and operations, including survey data from cus- tomers and suppliers and other objective assessments of the organization. The collected data is analyzed to identify and assess how well the firm is meeting current objectives and goals, and how well its current strategies are working. This process identifies many of the strengths and weaknesses of the firm.

Strategic planning requires careful study of the external environment surrounding the organization and assessing where the organization fits within it. This analysis begins with an examination of the industry in which the organization competes: What is the size of the market? How fast is it growing or shrinking? What are the significant indus- try trends?

Next, the organization must collect and analyze facts about its key customers, competitors, and suppliers. The goal is two-fold: capture a clear picture of the strategi- cally important issues that the organization must address in the future and reveal the firm’s competitive position against its rivals. During this step, the organization must get input from customers, suppliers, and industry experts, who can provide more objective viewpoints than employees. Members of the organization should be prepared to hear things they do not like, but that may offer tremendous opportunities for improvement. It is critical that unmet customer needs are identified to form the basis for future growth.

FIGURE 2-1 The goals-based strategic planning process

© Cengage Learning

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The most frequently used model for assessing the nature of industry competition is

Michael Porter’s Five Forces Model (see Figure 2-2).

The following fundamental factors determine the level of competition and long-term profitability of an industry:

1. The threat of new competitors will raise the level of competition. Entry bar- riers determine the relative threat of new competitors. These barriers include the capital required to enter the industry and the cost to customers to switch to a competitor.

2. The threat of substitute products can lower the profitability of industry com- petitors. The willingness of buyers to switch and the relative cost and perfor- mance of substitutes are key factors in this threat.

3. The bargaining power of buyers determines prices and long-term profitability. This bargaining power is stronger when there are relatively few buyers but many sellers in the industry, or when the products offered are all essentially the same.

4. The bargaining power of suppliers can significantly affect the industry’s profitability. Suppliers have strong bargaining power in an industry that has many buyers and only a few dominant suppliers, or in an industry that does not represent a key customer group for suppliers.

5. The degree of rivalry between competitors is high in industries with many equally sized competitors or little differentiation between products.

Many organizations also perform a competitive financial analysis to determine how their revenue, costs, profits, cash flow, and other key financial parameters match up against those of their competitors. Most of the information needed to prepare such comparisons is readily available from competitors’ annual reports.

FIGURE 2-2 Porter’s Five Forces Model

© Cengage Learning

Strategic Planning

TABLE 2-1 SWOT analysis for Coca-Cola

Strengths

The best global brand in the world in terms of value ($77,839 billion)

World’s largest market share in beverage Strong marketing and advertising

Most extensive beverage distribution channel Strong customer loyalty

Bargaining power over suppliers Corporate social responsibility

Weaknesses

Significant focus on carbonated drinks Undiversified product portfolio

High debt level due to acquisitions Negative publicity

Brand failures or many brands with insignificant amount of revenues

Opportunities

Bottled water consumption growth

Increasing demand for healthy food and beverage

Growing beverages consumption in emerging markets (especially BRIC)

Growth through acquisitions

Threats

Changes in consumer preferences Water scarcity

Strong dollar

Legal requirements to disclose negative infor- mation on product labels

Decreasing gross profit and net profit margins Competition from PepsiCo

Saturated carbonated drinks market

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The analysis of the internal assessment and external environment is summarized into a Strengths, Weaknesses, Opportunities, Threats (SWOT) matrix, as shown in Table 2-1, which provides a SWOT matrix for Coca-Cola.1 The SWOT matrix is a simple way to illustrate what the firm is doing well, where it can improve, what opportunities are avail- able, and what environmental factors threaten the future of the organization. Typically, the internal assessment identifies most of the strengths and weaknesses, while the analysis of the external environment uncovers most of the opportunities and threats. The tech- nique is based on the assumption that an effective strategy derives from maximizing a firm’s strengths and opportunities and minimizing its weaknesses and threats.

Set Direction

The direction setting phase of strategic planning involves defining the mission, vision, values, objectives, and goals of the organization. Determining these will enable identification of the proper strategies and projects as shown in Figure 2-3.

Vision and Mission

Senior management must create a vision/mission statement that communicates an organi- zation’s overarching aspirations to guide it through changing objectives, goals, and strate- gies. The organization’s vision/mission statement forms a foundation for making decisions and taking action. The most effective vision/mission statements inspire and require employees to stretch to reach its goals. These statements seldom change once they are formulated. An effective statement consists of three components: a mission statement,

a vision of a desirable future, and a set of core values.

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FIGURE 2-3 The strategic planning pyramid

© Cengage Learning

The mission statement concisely defines the organization’s fundamental purpose for existing. It usually is stated in a challenging manner to inspire employees, customers, and shareholders. For example, Google’s mission is “to organize the world’s information and make it universally accessible and useful.”2

The organization’s vision is a concise statement of what the organization intends to achieve in the future. The following are the earmarks of a good vision:

It motivates and inspires.

It is easy to communicate, simple to understand, and memorable.

It is challenging, yet achievable and moves the organization toward greatness.

Core values identify a few widely accepted principles that guide how people behave and make decisions in the organization.

Objectives

The terms objective and goal are frequently used interchangeably. For this discussion, we distinguish between the two—defining objective as a statement of a compelling business need that an organization must meet to achieve its vision and mission.

Johns Hopkins Medicine, with headquarters in Baltimore, Maryland, is a $6.5 billion global healthcare organization that operates six academic and community

Strategic Planning

hospitals along with four healthcare and surgery centers. The organization employs more than 41,000 full-time faculty and staff and has more than 2.8 million outpatient

encounters per year.3 The organization has defined its mission, vision, values, and

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objectives as shown in Table 2-2.4

Goals

A goal is a specific result that must be achieved to reach an objective. In fact, several goals may be associated with a single objective. The objective states what must be accomplished, and the associated goals specify how to determine whether the objective is being met.

Goals track progress in meeting an organization’s objectives. They help managers determine if a specific objective is being achieved. Results, determined by how well the goals are met, provide a feedback loop. Depending on the difference between the actual and desired results, adjustments may be needed in the objectives, goals, and strategies as well as with the actual projects being worked on.

Some organizations encourage their managers to set Big Hairy Audacious Goals (BHAGs) that require a breakthrough in the organization’s products or services to achieve. Such a goal “may be daunting and perhaps risky, but the challenge of it grabs people in the gut and gets their juices flowing and creates tremendous forward momentum.”5

TABLE 2-2 Johns Hopkins Medicine mission, vision, values, and objectives

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In April 2012, Facebook purchased the two-year-old photo-sharing service Instagram for $1 billion, a move that many industry analysts viewed as an imprudent investment at the time.6 However, since then, Instagram usage has grown rapidly, and the app has captured a large share of the micro-video market. Achieving the goal of successfully inte- grating Instagram with Facebook expanded the company’s mobile offerings while removing a rival for users’ attention.7

The use of so called SMART goals has long been advocated by management consul- tants.8 The principal advantage of SMART goals is that they are easy to understand, are easily tracked, and contribute real value to the organization. The SMART acronym stands for:

Specific—Specific goals have a much greater chance of being understood and accomplished than vague goals. Specific goals use action verbs and specify who, what, when, where, and why.

Measurable—Measurable goals include numeric or descriptive measures that define criteria such as quantity, quality, and cost so that progress toward meeting the goal can be determined.

Achievable—Goals should be ambitious yet realistic and attainable. Goals that are either completely out of reach or below standard performance are worthless and demotivating.

Relevant—Goals should strongly contribute to the mission of the department, else why expend the effort?

Time constrained—A time limit should be set to reach the goal to help define the priority to assign to meeting the goal.

For each of its objectives, Johns Hopkins Medicine has defined SMART goals. Table 2-3 shows the organization’s financial objectives as well as the goal tied to those objectives.

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TABLE 2-3 Johns Hopkins Medicine financial objectives and goal

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Goal: Add $150 million in annual net operating income by June 2016.

Objective:

Create sustainable financial success and implement continuous performance improvement. Ensure that financial operations, performance indicators, and results support the strategic priorities, as well as the individual entity requirements.

Identify new and expand existing sources of revenue and implement operating

efficiencie consistent with the tripartite mission and with a commitment to reducing healthcare costs.

Establish a transparent financial reporting system available to and understood by all organizational constituents.

Define Strategies

A strategy describes how an organization will achieve its vision, mission, objectives, and goals. Selecting a specific strategy focuses and coordinates an organization’s resources and activities from the top down to accomplish its mission. Indeed, creating a set of strategies that will garner committed supporters across the organization, all aligned with the mission and vision, is key to organizational success.

Frequently used themes in setting strategies include “increase revenue,” “attract and retain new customers,” “increase customer loyalty,” and “reduce the time required to deliver new products to market.” In choosing from alternative strategies, managers should consider the long-term impact of each strategy on revenue and profit, the degree of risk involved, the amount and types of resources that will be required, and the potential com- petitive reaction. In setting strategies, managers draw on the results of the SWOT analysis and consider the following questions:

How can we best capitalize on our strengths and use them to their full potential?

How do we reduce or eliminate the negative impact of our weaknesses? Which opportunities represent the best opportunities for our organization? How can we exploit these opportunities?

Will our strengths enable us to make the most of this opportunity? Will our weaknesses undermine our ability to capitalize on this opportunity?

How can we defend against threats to achieve our vision/mission, objectives, and goals?

Can we turn this threat into an opportunity?

Amazon has made a strategic decision to explore the possible use of delivery drones to gain a real technological advantage over competitors who rely on less efficient ground transportation. Because nearly 86 percent of Amazon packages weigh less than 5 pounds, drones could make the ideal rapid-delivery vehicles.9 Such a strategy has the potential to attract new customers and increase revenue.

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Deploy Plan

The strategic plan defines objectives for an organization, establishes SMART goals, and sets strategies on how to reach those goals. These objectives, goals, and strategies are then communicated to the organization’s business units and functional units so that everyone is “on the same page.” The managers of the various organizational units can then develop more detailed plans for initiatives, programs, and projects that align with the firm’s objec- tives, goals, and strategies. Alignment ensures that the efforts will draw on the strengths of the organization, capitalize on new opportunities, fix organizational weaknesses, and min- imize the impact of potential threats.

The extent of strategic planning done at lower levels within the organization depends on the amount of autonomy granted those units as well as the leadership style and capa- bilities of the managers in charge of each unit. For these reasons, the amount of effort, the process used, and the level of creativity that goes into the creation of a business unit stra- tegic plan can vary greatly across the organization.

Alstom Transport, which develops and markets railway systems, equipment, and services, won a contract to supply Virgin Trains in operating its West Coast Mainline in the United Kingdom.10 Alstom supplied Virgin Trains 52 of its high-speed (125 mph) Pendolino trains. However, the train was initially too unreliable—too many trains were shut down on any given day due to maintenance issues.11 Only 38 of the 52 trains were available on a given day; however 46 trains were needed to meet service-level goals.

The situation was affecting Alstom’s relationship with Virgin Trains, and, if not improved, would likely affect contract renewal. Alstom Transport executives met and set key objectives to improve the relationship with Virgin Trains:

Meet availability goals and improve reliability Do not increase costs

Provide greater value to the customer

Alstom leaders then employed a “catch-ball” process to deploy these objectives to other workers at the firm. The management team “threw” the goals back and forth with

the entire management chain, including senior management, operations leaders, and depot and production management. By means of this process, Alstom identified over 15 potential

improvement projects to support the goals, leading to an increased train availability rate— 43

72 percent to 90 percent—while headcount and costs were kept flat. Alstom won renewal of a service maintenance contract with Virgin Trains three years earlier than expected because of its improved service.12

SETTING THE IT ORGANIZATIONAL STRATEGY

The strategic plan of the IT organization must identify those technologies, vendors, com- petencies, people, systems, and projects in which the organization will invest to support the corporate and business unit objectives, goals, and strategies. The IT strategic plan is strongly influenced by new technology innovations (e.g., increasingly more powerful mobile devices, advanced printers that can generate three-dimensional objects from a digital file, access to shared computer resources over the Internet, advanced software that can analyze large amounts of structured and unstructured data) and innovative thinking by others both inside and outside the organization (see Figure 2-4).

FIGURE 2-4 Drivers that set IT organizational strategy and determine IT investments

© Cengage Learning

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The strategic planning process for the IT organization and the factors that influence it depend on how the organization is perceived by the rest of the organization. An IT organization can be viewed as either a cost center/service provider, a business partner/ business peer, or as a game changer (see Table 2-4).

In a recent survey of 722 CIOs, 38 percent said they felt that their IT organization is viewed as a cost center/service provider that is expected to reduce IT costs and improve IT services.13 The strategic planning process for such an organization is typically directed inward and focused on determining how to do what it is currently doing but cheaper, faster, and better.

The IT organization of the state of Delaware is viewed as a cost center/service provider. One of the organization’s primary strategic initiatives is to consolidate IT resources and to eliminate redundant functions and resources within the various state agencies. The goal is to deliver significant improvements in customer service and to reduce costs.14

The majority of CIOs surveyed, about 52 percent, felt that their IT

organization is viewed as a business partner/business peer that is expected to

control IT costs and expand IT services in support of business initiatives.15 The strategic planning process of these organizations is based on understanding the col-

lective business plans for the next year and determining what those mean for the IT organization in terms of new technologies, vendors, competencies, people, systems, and projects.

The IT organization for the city of Seattle operates under the constraint of a decreas- ing budget but is continually striving to expand its services and capitalize on the latest technology developments. It employs newer technologies such as mobile computing to improve the interaction of city government with its constituents and to support city ser- vices on the move. The organization also seeks opportunities to access shared computer resources as a utility over the Internet (cloud computing) to gain advantages and efficien- cies where it makes sense.16

TABLE 2-4 The IT strategic planning spectrum

Strategic Planning

Only 10 percent of surveyed CIOs stated that their IT organization is viewed by fellow employees as a game-changing organization that is asked to lead product innovation

efforts and open new markets.17 Their strategic planning process is outwardly focused and

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involves meeting with customers, suppliers, and leading IT consultants and vendors to answer questions like “What do we want to be?” and “How can we create competitive advantage?”18 In such organizations, IT is not only a means for implementing business- defined objectives, but also a catalyst for achieving new business objectives unreachable without IT.

GAF is a $3 billion privately held manufacturer of commercial and residential roofing. GAF’s IT employees regularly collaborate with external customers to learn from them and to help educate potential customers about why they should do business with GAF.19 Using these collaboration sessions to gain a better understanding of its customers’ needs, GAF developed a mobile app that allows a contractor to take a photo of a prospect’s house and then use that photo to allow the prospect to preview different GAF shingle styles and col- ors on an actual image of their home. The app was a game changer for the organization as it helps GAF contractors demonstrate the beauty of GAF shingles and eliminates one of the biggest barriers to closing the sale—answering the question, “How will it look on my house?”20

No matter how the IT organization is perceived, the odds of achieving good alignment between the IT strategic plan and the rest of the business are vastly increased if IT work- ers have experience in the business and can talk to business managers in business terms rather than technology terms. IT staff must be able to recognize and understand business needs and develop effective solutions. The CIO especially must be able to communicate well and should be accessible to other corporate executives. However, the entire burden of achieving alignment between the business and IT cannot be placed solely on the IT organization.

Identifying IT Projects and Initiatives

In mature planning organizations, IT workers are constantly picking up ideas for potential projects through their interactions with various business managers and from observing other IT organizations and competitors. They also keep abreast of new IT developments and consider how innovations and new technologies might be applied in their firm. As members of the IT organization review and consider the corporate objectives, goals, and strategies, they can generate many ideas for IT projects that support corporate objectives and goals. They also recognize the need

for IT projects that help other corporate units fulfill their business objectives. Often, experienced IT managers are assigned to serve as liaisons with the business units

in order to gain a deeper understanding of each business unit and its needs. The IT managers are then able to help identify and define IT projects needed to meet those needs.

Most organizations find it useful to classify various potential projects by type. One such classification system is shown in Table 2-5.

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TABLE 2-5 Project classification example

Prioritizing IT Projects and Initiatives

Typically, an organization identifies more IT-related projects and initiatives than it has the people and resources to staff. An iterative process of setting priorities and determining the resulting budget, staffing, and timing is needed to define which projects will be initiated and when they will be executed. Many organizations create an IT investment board of business unit executives to review potential projects and evaluate them from several dif- ferent perspectives:

1. First and foremost, each viable project must relate to a specific organiza- tional goal. These relationships make it clear that executing each project will help meet important organizational objectives (see Figure 2-5).

2. Can the organization measure the business value of the initiative? Will there be tangible benefits, or are the benefits intangible? Tangible benefits can be measured directly and assigned a monetary value. For example, the number of staff before and after the completion of an initiative can be measured, and the monetary value is the decrease in staff costs, such as salary, benefits, and overhead. Intangible benefits cannot directly be measured and cannot easily be quantified in monetary terms. For example, an increase in customer satis- faction due to an initiative is important but is difficult to measure and cannot easily be converted into a monetary value.

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3. What kinds of costs (hardware, software, personnel, consultants, etc.) are associated with the project, and what is the likely total cost of the effort over multiple years? Consider not just the initial development cost but the total cost of ownership, including operating costs, support costs, and main- tenance fees.

4. Preliminary costs and benefits are weighed to see if the project has an attractive rate of return. Unfortunately, costs and benefits may not be well understood at an early phase of the project, and many worthwhile projects do not have benefits that are easy to quantify.

5. Risk is another factor to consider. Managers must consider the likelihood that the project will fail to deliver the expected benefits; the actual cost will be significantly more than expected; the technology will become obsolete before the project is completed; the technology is too “cutting edge” and will not deliver what is promised; or the business situation will change so that the proposed project is no longer necessary.

6. Some projects enable other projects. For example, a new customer database may be required before the order-processing application can be upgraded. Therefore, some sequencing of projects must be considered.

7. Is the organization capable of taking on this project? Does the IT organiza- tion have the skills and expertise to execute the project successfully? Is the organization willing and able to make the required changes to receive their full value?

EFFECTIVE STRATEGIC PLANNING: CHEVRON

The preceding sections described the goals-based strategic planning process. The following section provides a thorough example of the goals-based strategic planning process. The subject company is Chevron.

Background

Chevron is one of the world’s largest energy companies, with operations in over 100 countries. The company participates in every aspect of the oil and gas industry, including

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exploration and production, refining, marketing, and transportation of its product. Chev- ron is also involved in chemicals manufacturing and sales, geothermal energy sources, mining operations, and power generation.

Chevron can trace its origins to an 1879 oil discovery in Pico Canyon, north of Los Angeles. That discovery led to the formation of the Pacific Coast Oil Company, which later became Standard Oil Company of California. After several acquisitions throughout the twentieth century, the company eventually became Chevron when it acquired Gulf Oil Corporation in 1984. The merger with Gulf was then the largest in U.S. history and nearly doubled the company’s worldwide crude oil and natural gas reserves. Chevron merged with Texaco in 2001 and acquired Unocal Corporation in 2005. Today, Chevron is head- quartered in San Ramon, California, and employs about 64,500 people, including more than 3200 service station employees.

Chevron is divided into five major businesses including Upstream, Downstream and Chemicals, Gas and Midstream, Technology, and Renewable Energy and Energy Efficiency. Upstream explores for and produces crude oil and natural gas. Downstream and Chemicals businesses include those involved with refining as well as those that manufacture and market fuels, lubricants, petrochemicals, and additives. Gas and Midstream connects the Upstream and Downstream and Chemicals businesses to the markets by providing infrastructure and services. The Technology business includes three companies—Energy Technology, Technology Ventures, and Information Technology—that are responsible for developing and deploying technological solutions to all of Chevron’s operations. Renewable Energy and Energy Efficiency develops potential renewable sources of energy, including solar and advanced biofuels. This business works to improve the energy efficiency of Chevron operations as well as provide more energy-efficient solutions to Chevron customers in the United States.

Chevron continues to expand through both exploration and acquisitions. In 2013, the success rate of the company’s exploration wells was 59 percent, and it made crude oil and natural gas discoveries in 10 countries.

Situation Analysis

The situation analysis for Chevron is based on an identification of its strengths, weak- nesses, opportunities, and threats.

Strengths

The situation analysis of Chevron revealed the following strengths.

Financial strength—Chevron has a history of strong financial performance, leading its competitors with total stockholder returns of almost 15 percent over the previous

5- and 10-year periods. Sales and operating revenues for 2013 were $220 billion with a net income of $21 billion, or $11.09 per share. In that same year, Chevron earned a 13.5 per- cent return on capital and a 15 percent return on stockholder’s equity. See Table 2-6.

Presence in all phases of the energy industry—Chevron has expanded its scope of operations from a tunnel-vision oil company to a highly diversified conglomerate looking to capitalize on the changing world energy marketplace. The company has branched out beyond petroleum and petrochemicals to ventures in the coal, plastics, insurance, and real estate markets.

Strategic Planning

TABLE 2-6 Select Chevron financial data (in billions of dollars)

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Financial Result

2013

2012

2011

2010

Sales and other operating revenue

$220,156

$230,590

$244,371

$198,198

Net income

$21,423

$26,179

$26,895

$19,024

Total assets at year end

$253,753

$232,982

$209,074

$184,769

Stockholders’ equity

$149,113

$136,524

$121,383

$105,081

Cash provided by operating activities

$35,002

$38,812

$41,098

$31,359

Common stock price at year end

$124.91

$108.14

$106.40

$91.25

Return on equity

15.0%

20.3%

23.8%

19.3%

Return on capital

13.5%

18.7%

21.6%

17.4%

Broad geographic presence—Chevron is a global energy company, with substantial business activities in almost 30 countries.

High reserves ratio—The oil reserve replacement ratio represents the amount of proven reserves added to a company’s proven reserve base in a given year, relative to the amount of oil and gas produced during that year. Proven reserves lie below the surface and have not yet been produced but are believed to be eco- nomically, technically, and legally viable to extract and deliver to market. Long term, a company’s reserve replacement ratio must be at least 100 percent for the company to stay in business; otherwise, it will eventually run out of oil. Chevron’s

three-year average oil reserve replacement ratio is 123 percent of net oil-equivalent production.

Leading position in the United States—Chevron is the second-largest integrated energy company in the United States. Its products are sold in more than 8000 Chevron and Texaco retail stations in the United States. The firm is also the major supplier of aviation fuel in the United States.

Weaknesses

The situation analysis of Chevron revealed the following weaknesses.

Entanglement in environmental disaster in Ecuador—While operating in Ecuador, Texaco allegedly dumped 18 billion gallons of toxic wastewater directly into surface streams and rivers. In February 2011, an Ecuadorian court ordered Chevron, which had acquired Texaco in 2001, to pay $8 billion in compensation for the dumping, a ruling the company appealed. In March 2014, a U.S. district court judge ruled that the Ecuadorian plaintiff’s lead U.S. attorney had used “corrupt means,” to obtain the verdict in Ecuador. The judge did not rule on the underlying issue of environmental damages. While the U.S. ruling does not affect the decision of the court in Ecuador, it has blocked efforts to collect damages from Chevron in U.S. courts. The matter is still unresolved and has earned much negative publicity for Chevron.

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Strain on sales of refined products—In 2014, refiners and blenders in the United States were delaying purchases of biodiesel until the Environmental Protection Agency released its 2014 Renewable Fuel Standard. This placed a severe strain on biodiesel manufacturers, causing a downward pressure on prices.

Opportunities

The situation analysis of Chevron uncovered the following opportunities.

Planned investments for future development—Chevron has forecasted that between 2013 and 2017 the company will have launched 15 project start-ups, with an investment of more than $1 billion each.

Strategic acquisitions and agreements—Chevron continues to add resources to its reserves through both exploration and acquisitions.

Threats

The situation analysis of Chevron recognized the following threats.

Rising production costs and capital expenditures—The demand for oil, natural gas, and other energy sources is growing dramatically, with worldwide energy con- sumption projected to increase by more than 40 percent by 2035. However, oil and gas companies are experiencing lower production from existing fields, with higher than expected costs and capital investment required to develop new fields. For example, the cost of Chevron’s Australian Gorgon project was initially estimated to be $37 billion in 2009. The estimated cost rose to $52 billion in 2013 and $54 billion in 2014. And Chevron ultimately put its $10 billion Rosebank North Sea project (estimated to contain the equivalent of 240 million barrels of oil) on hold due to rising costs.

Regulation of greenhouse gas emissions—The use of fossil fuels is a contributor to an increase in greenhouse gases (GHGs), mainly carbon dioxide (CO2), in the Earth’s atmosphere. In part due to increased regulation, Chevron must continue to make global investments in renewable and alternative energy and in energy efficiency, with the goal of modifying the com- pany’s energy portfolio over the long term.

Changing economic, regulatory, and political environments—Chevron’s businesses, especially its Upstream operations, can be affected by changing economic, regulatory, and political environments in the various countries in which it operates. From time to time, certain governments have sought to renegotiate contracts or impose additional costs on the company. Civil unrest, acts of violence, or strained relations between a government and Chevron or other governments may also impact the company’s operations or invest- ments. Those developments have at times significantly affected the company’s operations and results.

Commodity prices risks—The primary determinants of the value of an oil and gas company are its reserves, level of production, and commodity price at the time of assess- ment. Thus the valuation of Chevron tends to be very sensitive to variations in commodity prices. Indeed, in 2014, there was a dramatic drop in crude oil prices, which caused a drop in Chevron’s profits as well as its share price.

Table 2-7 provides a summary of the SWOT analysis for Chevron.

Strategic Planning

TABLE 2-7 Chevron SWOT summary

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Strengths

Financial strength

Presence across the energy value chain Broad geographic presence

High reserves ratio

Leading position in the United States

Weaknesses

Entanglement in environmental disaster in Ecuador Strain on sales of refined products

Opportunities

Planned investments for future development Strategic acquisitions and agreements

Threats

Rising production costs and capital expenditures Regulation of greenhouse gas emissions Changing economic, regulatory, and political environments

Commodity prices risks

Set Direction

This section discusses the vision, mission, values, objectives, and goals for Chevron. Chevron’s senior managers have created a well-defined vision/mission statement and a set of corporate values that has remained essentially the same for several years. These are outlined in Table 2-8.

Objectives

Chevron has seen its revenues and profit decline from $244 billion and $27 billion in 2011 to $220 billion and $21 billion in 2013. A key management objective is to increase reve- nue and profits in the years ahead. To support its objective of finding more oil and gas fields to increase production to create revenue growth, the company will invest over

$40 billion per year for the next few years.

TABLE 2-8 Chevron mission, vision, values

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Goals

Chevron management has defined several growth-related measures for 2014 and beyond, including the following:

Reduce the time lag between initial exploration and start of production. Over the next four years, execute 15 project start-ups with a Chevron investment of over $1 billion each.

Continue to add to its portfolio through both exploration and targeted acquisitions

Maintain or improve the success rate of exploration wells, which is currently at 59 percent.

Continue to be a leader in personal safety as measured by injuries requiring time away from work—with a goal of zero incidents and achieving world-class performance in all measures of safety.

Define Strategies

Chevron’s five overarching strategies at the enterprise level are the following:

Create shareholder value and achieve sustained financial returns from opera- tions that will enable Chevron to outperform its competitors.

Invest in people to strengthen organization capability and develop a talented global workforce that gets results the right way.

Execute with excellence through rigorous application of operational excel- lence and capital stewardship systems and disciplined cost management. Grow profitably by using competitive advantages to maximize value from existing assets and capture new opportunities.

Attain world-class performance in operational excellence with a goal of zero safety and operating incidents. This includes systematic management of pro- cess safety, personal safety and health, environment, reliability, and efficiency.

In addition, each major business has a key strategy.

Upstream—Grow profitably in core areas and build new legacy positions. Downstream and Chemicals—Deliver competitive returns and grow earnings across the value chain.

Gas and Midstream—Apply commercial and functional excellence to enable the success of the Upstream and Downstream and Chemicals businesses.

Technology—Differentiate performance through technology.

Renewable Energy and Energy Efficiency—Invest in profitable renewable energy and energy-efficient solutions.

Deploy Plan

The Chevron strategic plan is communicated to all business units worldwide, and each unit is encouraged to conduct its own strategic planning process to identify initiatives,

Strategic Planning

programs, and projects that will lead to accomplishment of the corporate goals. Chevron focuses on technologies that improve its ability to find, develop, and produce crude oil and

natural gas from conventional and unconventional resources. 53

Identifying Projects and Initiatives

Louie Ehrlich was appointed CIO and president of the Chevron Information Technology Company in 2008. His organization is considered a “game changer” and is focused on “accelerating insights, automating operations, and connecting people.” Ehrlich believes that by becoming experts at choosing IT investments that will be “the biggest game chan- gers” for the company, Chevron IT can help to differentiate the company’s performance. His organization looks to hire IT professionals with a bachelor’s or master’s degree in computer science, management information systems, or a related technical or business field. It seeks candidates who have a collaborative work style, enjoy a teamwork-oriented environment, are solution oriented and outcome driven, can translate situations into scal- able solutions, and have a high level of integrity.

Chevron Information Technology Company supports all of Chevron’s businesses by developing and supporting information technologies that connect people, ideas, processes, and data. The company’s key applications include “intelligent” oil and gas fields, automa- tion and visualization technologies, and technical networks.

The world’s supply of easy-to-reach oil and gas is running low. To reach new supplies, Chevron must continue to drill deeper and pursue more difficult deposits. In these more challenging environments, the company counts on IT to help boost production. Chevron uses distributed sensors, high-speed communications, and sophisticated data analysis techniques to monitor and fine-tune remote drilling operations. Sensors and computing are used to capture and monitor data related to seismic and borehole activity, environ- mental readings, production utilization, transportation, inventory levels, and demand.

Real-time data is used to make better decisions and predict problems before they happen. The industry term for this increased use of technology is the digital oil field. At Chevron it is called the i-field, and the company estimates it can yield 8 percent higher production rates and 6 percent higher overall recovery from a fully optimized i-field. The trend in the industry is toward cheaper computer and communications technology and a proliferation of data sensors and analytical software.

Prioritizing Projects and Initiatives

Chevron has an IT governance board that decides strategic direction, defines resource constraints, and sets project priorities. The governance board has delegated responsibility for identifying viable projects to local business units. A business sponsor is required for each project, and the sponsor must review a checklist of investment decision criteria with an IT decision maker. The business sponsor and IT decision maker then decide if the project is feasible and worthwhile. The project ideas will be reviewed by the governance board and then passed back to the business sponsor and IT decision maker for the appro- priate Chevron business unit for further clarification and definition, if necessary, before

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project execution begins. Following is a brief description of some of the programs identi- fied through the strategic planning process:

In order to identify new oil deposits, Chevron must be able to process seismic data quickly. To do so, the company uses sound waves to create images of the earth, deep below the ocean floor. Then high-powered computers search those images to find places where oil is likely to be. Chevron is continually upgrading the hardware and software used to collect massive amounts of data and process them as quickly as possible.

Much of the software innovation that is key to the digitization of oil and gas fields is happening at oil service companies, such as Halliburton and Schlum- berger, and large IT companies including Microsoft and IBM. Chevron colla- borates with these companies on pilot projects and the evaluation of new software and techniques to obtain state-of-the-art solutions.

As part of Chevron’s i-field program, it has established eight global “mission control” centers designed to improve the performance of forty of the com- pany’s biggest energy projects. Each center is assigned a specific goal—such as using real-time data to make drilling decisions. Chevron estimates these centers could save the company $1 billion per year.

Chevron continues to focus on improving leak detection by using modeling technology in most of the company’s pipelines. Complex computer models allow Chevron to use real-time operations data to locate pipeline leaks and avoid major incidents.

Chevron IT operates NetReady, a network that connects more than 50,000 desktops around the world, allowing Chevron employees to collaborate and communicate through a common network platform.

Digital imaging helps Chevron better manage an oil field once it is producing oil. Newer imaging techniques can even show how oil is moving in a reservoir and tell Chevron if it needs to drill more wells to extract the remaining fluid. The IT organization is responsible for providing network operations and security, purchasing and deploying hardware, and setting global technology standards and strategy for the company.

Source: “Chevron 2013 Annual Report; Chevron 2011 Annual Report,” Chevron, www.chevron