Strategic Planning

for Information
Systems
Third Edition

John Ward and Joe Peppard

CHAPTER 5
IS/IT Strategic
Analysis: Determining
the Future Potential

Learning Objectives
Criteria for effective planning
Business strategic and IS/IT strategic
analysis methods
Value Chain
Strategic option generator
Resource life cycle analysis

Determining the Future Potential

Historically, IT used to optimize
performance of main operational activity of
the business
Emphasis has been on:
Internal processes and operations.
Key processes in the organization
Internal critical success factors.
Firm rather than the industry.

Current Patterns

IT Improvement Zone

Possible Outcomes

Strategic Perspective for Applications

The changing content of the application portfolio should reflect the evolving
strategic themes.

Aligning IS/IT Investment

Business
Development of business strategies is best carried out if you
consider the organization as a group of (strategic)
business units.
This enables the market/product relationship to
determine strategic thinking and functional/organization
aspects become secondary, ensuring that external
strategy drives internal strategy.
The portfolio of products and/or customers can be
analyzed to identify how each grouping contributes to or
makes demands on resources available.
Provides the sharpest focus
Generic strategy concepts can be best applied to
business units (low cost, differentiation and niche).
To achieve more effective strategic decision-making.

Criteria for Effective Planning

Situation analysis and competitive
assessment
Evaluation of strategic options
Dynamic allocation of resources
The purpose of strategic planning is to add value to the firm by adding
new customers, new products or services, new markets, new locations, or
new breakthrough technology.
If the plan does not add value, it is worthless

Value Chain Analysis

The concept of Value Chain Analysis is
described by Michael Porter who notes
that: Every firm is a collection of activities
that are performed to design, produce,
market, deliver and support its products or
services. All these activities can be
represented using a value chain. Value
chains can only be understood in the
context of the business unit.

Value Chain Analysis

The value chain of the business unit is
only one part of a larger set of valueadding activities in an industry- the
industry value chain or value system
The value chain of any firm needs to be
understood as part of the larger system
of related value chains

The External Value Chain

Supplier
Raw materials
Capital goods

Agencies and
distributors

Local distribution
channels

The business unit

MARKET A
MARKET B
MARKET C

Direct suppliers
Components
Labour
Services

End Customers

Competitors

Value and demand information

Cost and supply information
The External value chain

Expect
distribution
channels

Paper Industry Value Chain

IS and Value Chain

Information systems are used to enable
better information exchanges through the
industry value chain, significant benefits
can be obtained from the improved links.
These benefits should enable a firm to
spend more of its business energy in
outperforming its real competitors rather
than competing with its trading partners for
profit.

Information Systems and The

Value Chain

Resource Life Cycle Analysis

(RLC)
To analyze relationships with customers
Can determine not only when
opportunities (and threats) exist for
improved or new information exchanges
but also which specific applications should
be developed
Should be viewed from one end only
(customer or supplier)=> RLC model could
be a customer or supplier RLC

Resource Life-Cycle Analysis

Requirements
Establish requirements
Specify

To determine how much of a resource is required

To determine a resources attributes

Acquisition
Select source
Order
Authorize and pay for
Acquire
Test and accept

To determine where customers will buy a resource

To order a quantity of a resource from the supplier
To transfer funds or extend credit
To take possession of a resource
To ensure that a resource meets specifications

Stewardship
Integrate
Monitor
Upgrade
Maintain

To add an existing inventory

To control access and use of a resource
To upgrade a resource if conditions change
To repair a resource, if necessary

Retirement
Transfer or dispose
Account for

To move, return or dispose of inventory as necessary

To monitor where and how much is spent on a resource

Strategic Option Generator

Define Strategic Targets
Define Strategic Trust
Select Alternatives

Strategic Option Generator

Strategic Targets:
Suppliers anyone supplying essential resources. It
may be necessary to subset them either by the nature
of what they supply or their strength, or their ability to
exert pressure on you and other customers.
Customers this could include the consumers as well
as direct customers. The customers should be
segmented in terms of what they buy or how much.
Competitors who dell very similar product or
services should be supplemented by actual or
potential new entrants into the market and
threatening substitute products and services should
be included as competition.

Strategic Thrusts
Differentiation ensuring that superior quality is
delivered and perceived, leading to obtaining a premium
price
Cost being cheaper or enabling suppliers or customers
to reduce their costs and thereby preferring to conduct
business with the firm
Innovation introduce a new product, service, process
or way of doing business that transforms the
relationships and competitive forces in the industry.
Growth enable volume or expansion in geography or
increased flexibility of production and distribution to meet
different segments needs.
Alliance forcing agreements, joint ventures or joint
investments in systems to prevent new entrants or
competitors achieving advantage.

Strategic IS Opportunities
SUPPLIER

CUSTOMER

DIFFERENTIATION
COST
INNOVATION
GROWTH
ALLIANCE

STRATEGIC
THRUST

STRATEGIC
TARGET
Framework for assessing strategic IS opportunities.
Sources : Rackoff, Wiseman and Ullrich (1985)

COMPETITORS

IS/IT Opportunities Analysis:

Questions
Suppliers Can we use IS/IT to:
Gain leverage over our suppliers?
Reduce buying costs?
Reduce the suppliers costs?
Be a better customer and obtain a better
service?
Identify alternative sources of supply?
Improve the quality of products/services
purchased?

IS/IT Opportunities Analysis:

Questions
Customers Can we use IS/IT to:
Reduce customers cost and/or increase their
revenue?
Increase our customers switching costs?
Increase our customers knowledge of our
products/services?
Improve support/service to customers and
their needs?
Identify new potential customers?

IS/IT Opportunities Analysis:

Questions
Competitors Can we use IS/IT to:
Raise the entry cost of potential competitors?
Differentiate products/services?
Reduce our costs/Increase competitors
costs?
Alter the channels of distribution?
Identify/Establish a new market niche?
Form joint ventures to enter new markets?

Select Alternatives
Strategic Option Generator (Wiseman)

Offensive
Defensive

TARGET
SUPPLIER

CUSTOMER

COMPETITOR

THRUST
Differential

Cost

Innovation

Growth

MODE
OFFENSIVE

DEFENSIVE
DIRECTION

USE

PROVIDE
EXECUTION

STRATEGIC
ADVANTAGE

Alliance

Federal Express Analysis Using

the Strategic Option Generator
Target
Supplier

Customer

Competitors

Thrust
Differentiation

Cost

Innovation

Growth

Mode
Offensive

Defensive

Use

Provide

Direction

Execution

Strategic Advantage

Alliance

UPS Analysis Using the Strategic

Option Generator
Target
Supplier

Customer

Competitors

Thrust
Differentiation

Cost

Innovation

Growth

Mode
Offensive

Defensive

Use

Provide

Direction
Execution

Strategic Analysis

Alliance

Internal Value Chain

The purpose of Internal Value Chain analysis is
to divorce what the company does from how it
does it.
Two types of business activity:
Primary activities; those that enable it to fulfill its
role in the industry value chain and hence satisfy
its customers. They must be linked together
effectively.
Support activities; those which are necessary to
control and develop the business over time and
thereby add value indirectly.

Primary Activities
Inbound logistics Procuring, receiving and
warehousing raw materials.
Operations Machining, assembly and
manufacturing products.
Outbound logistics Getting the product to
the customer.
Marketing and sales Advertising, marketing
and selling.
Service Providing customer support and
product repairs.

Support Activities
Procurement: The purchasing of materials used
to create value for the firm.
Technology Development: Any technology
used to support the firms value chain activities.
Human Resource: The Activities surrounding
the Recruiting, Hiring, Training and
compensation of an organizations employees.
Firm Infrastructure: The activities and functions
that support a firms ability to create value such
legal, accounting, management, strategy, etc.

Cont..
The term, Margin implies that
organizations realize a profit margin that
depends on their ability to manage the
linkages between all activities in the value
chain. In other words, the organization is
able to deliver a product / service for
which the customer is willing to pay more
than the sum of the costs of all activities in
the value chain.

Value Chain: An Example

SUPPORT ACTIVITIES
INFRASTRUCTURE

- Legal, Accounting, Financial Management

HUMAN RESOURCE
MANAGEMENT

- Personnel, Pay, Recruitment, Training,

Manpower Planning, etc.

PRODUCT AND TECHNOLOGY

DEVELOPMENT

- Product and Process Design, R&D,

Production Engineering, IT, etc.

PROCUREMENT

- Supplier Management, Funding,

Subcontracting, Specification

INBOUND
LOGISTICS
eg.

OPERATION

Quality Control
Receiving
Raw Material
Control
etc.

Manufacturing
Packing
Production
Control
Quality Control
Maintainace
etc.

eg.

OUTBOUND
LOGISTICS
eg.

SALES AND
MARKETING
eg.

SERVICES

Finished Goods
Order Handling
Despatch
Delivery
Invoicing
etc.

Customer Mgmt
Order Taking
Promotion
Sales Analysis
Market Research
etc.

Warranty
Maintenance
Education/
Training
Upgrade
etc.

PRIMARY ACTIVITIES
A manufacturing company's value chain. Many activities cross the boundaries, especially
information based activities such as sales forecasting, capability planning, resource scheduling,
pricing etc.

eg.

VALUE
ADDED
- COST
= MARGIN

Alternative Value configuration

Models
The traditional value chain model was
essentially based on manufacturing/retail
view of industry and works well for
physical goods. But does not really
represent what the business does or its
relationships with customers and suppliers
in many other businesses.
2 alternatives: Value Shops and Value
Networks

Alternative Value configuration

Models
Value Shops
Businesses that essentially are problem solving
delivering value by producing solutions for clients.
Characterized by intense and extensive information
exchanges both in setting up the business transaction
and delivery of the solution.
Each solution is unique and the client is normally involved
in both the design and implementation of the solution.
Figure 5.7 on page 266 shows an example.
Objective: satisfy the customer requirements, by bringing
together the appropriate knowledge and resources from
inside the firm or by using other external resources.
Example, advertising agencies and professional services
organizations

Alternative Value configuration

Models
Value Networks
Businesses that provide exchanges and
mediation between buyers and sellers, enabling
relationships to be established.
They earn revenue from either or both in their
use of the firms network everyones a
customer.
Figure 5.8 on page 268 suggest how this model
differs from the other two.
Example, insurance companies, banks,
telecommunications companies and airlines

Value Chain: Service Business

(Value Shop)

Value Chain: Service Business

(Value Network)

The Use of Value Chain Analysis

The main objective is to represent the main
activities in the business and their
relationships in terms of how they add value
so as to satisfy the customer and obtain
resources from suppliers.
The information that flows throughout the
industry and how critical that information is to
the functioning of the industry and the success of
the firms in it, by determining where and when
that information is available, who has it and how
it could be obtained and turned to advantage or
used against the firm.

The Use of Value Chain Analysis

The information that is or could be
exchanged with customers and suppliers
throughout the chain to improve the
performance of the business or lead to mutuallyimproved performance by sharing the benefits.
How effectively the information flows through
the primary processes and is used by them:
Within each activity to optimize performance
To link the activities together and avoid unnecessary
costs and missed opportunities; and
To enable support activities to contribute to the valueadding processes, not hinder them.

'Natural' and 'Contrived' Value

Chains.
The natural chain describes the (unattainable)
optimum structure for the industrys value-adding
processes and information flows, based on what
needs to be done.
The contrived value chain shows how things
are currently done. Look at table 5.4 on page
271.
Purpose in Analyzing the Value Chain
Analyzing the value chain in information terms to
reduce the existing complexity either inherent in the
current information relationships or caused by them.
Identify new, often faster, options for information flow to
where it enables the value-adding processes to be
performed more effectively and at the ideal time.

Natural VS. Contrived Value

Chains
Contrived value chain represents how things are
done by resources in the industry organization:
Driven by organization structures, historical evolution
and compromise
Is often very complex, confused and messy, and
poorly understood
Contains many reconciliation activities and reacts
slowly
Can take many forms, is continuously being modified
to meet business changes

Natural VS. Contrived Value

Chains
Natural value chain represents what has to be
done to succeed in market requirements:
Based on value-adding activities and the resources
needed to carry them out
Defines essential interrelationships and dependencies
and the ideal way to achieve business purposes
Contains few reconciliation activities and responds
quickly
Usually only one ideal exists, and it does not change
significantly or frequently

Business Re-engineering and the

Value Chain
Most of the successful business re-engineering initiatives have also had
an external drive or focus, ensuring that internal changes deliver perceived
improvements to the customers. Almost by definition, the starting point for
determining what to change, why and how to change, is an understanding
of the value adding processes in the industry and/or the firm.
Actions to improve business performance
(by using business re-engineering):

Eliminate unnecessary processes.

Rationalize the rest to ensure the value adding processes are optimized
Integrate to improve responsiveness and reduce unnecessary effort and error
Automate where technology can deliver further improvements.

It is important to adopt a value-chain driven approach to understanding

how the business works and hence can be improved via a combination
of business re-engineer and new IS.