FOCUS on information systems strategy and e-business strategy

An essential part of any e-business strategy is consideration of how information systems strategy supports change. The importance to e-business success of utilizing information sys­tems to manage information is highlighted by Willcocks and Plant (2000) who found in a study of 58 major corporations in the USA, Europe and Australasia that the leading com­panies were astute at distinguishing the contributions of information and technology, and considering them separately. They make the point that competitive advantage comes not from technology, but from how information is collected stored, analysed and applied.

An established aspect of information systems strategy development is the focus of IS strat­egy on business impact or alignment. In the business-alignment approach, a top-down approach is used to review how information systems can be used to directly support a defined business strategy. Referring to e-business strategy, Pant and Ravichandran (2001) say:

Alignment models focus on aligning the information system’s plans and priorities with organizational strategy and business goals.

The importance of alignment is stressed in digital channel strategic initiative business-case prioritization investment matrix Figure 5.7 Linking information systems to objectives and critical success factors (CSF) (Table 5.6), is one approach for using the alignment approach. Another is the use of business systems planning methodology which focuses on deriving data and applications needs by analysis of existing business processes.

In the business-impacting approach, a bottom-up approach is used to determine whether there are new opportunities from deploying information systems that may impact positively on a business strategy. New hardware and software technologies are monitored by the IS manager and other managers to evaluate whether they can achieve competitive advantage. Pant and Ravichandran (2001) say:

impact models focus on the potential impact of information technology on organizational tasks and processes and use this as a basis to identify opportunities for deploying infor­mation systems.

The impacting approach may also involve redesigning business processes to integrate with part­ners such as suppliers and distributors in new ways. This point is made by Sultan and Rohm (2004) who, based on a study of three organizations, identify different forms of aligning Inter­net strategies with business goals with their framework identifying these strategic objectives:

• Cost reduction and value chain efficiencies. For example, B2B supplier AB Dick used the Internet to sell printer supplies via the Internet to reduce service calls.
• Revenue generation. Reebok uses the Internet for direct licensed sales of products such as treadmills which do not have strong distribution deals.
• Channel partnership. Partnering with distributors using extranets.
• Communications and branding. Car company Saturn developed the MySaturn site to foster close relationships with customers.

Value chain analysis (Chapter 6, p. 351) is one method that can be used for the impact approach. For example, this might identify the need for e-procurement which can be used as part of an effort to reduce costs and increase efficiency as part of business strategy. This technique has merit in that it not only considers internal use of information systems, but also how they can be used to integrate with external organizations such as suppliers, perhaps through innovative methods such as marketplace exchanges.

The impact and alignment techniques need not be mutually exclusive. During initial development of an e-business strategy, a business-alignment approach can be applied to ensure that IS strategy supports e-business strategy. A business-impacting approach is also useful to see which new opportunities IS produce. For instance, managers could consider how a relatively new technology such as workflow management software (Chapter 11, P■ 609) can be used to improve efficiency and customer service.

The business-impacting approach can be achieved through the use of value chain analysis or re-engineering where an organization, through an analysis of the potential for the use of IS within and between value chain elements, may seek to identify strategic IS opportunities. Perhaps the ulti­mate expression of using IS to impact business performance is through business process re-engineering, which is considered in Chapter 10.

The application of an impacting or aligning strategy with respect to IS and business strat­egy is dependent on the importance attached to IS within an organization.

1. Elements of IS strategy

Developing an IS strategy for e-business involves many different perspectives, rather than a single perspective such as hardware technologies or applications to deploy. Ward and Grif­fiths (1996) suggest an IS strategy plan contains three elements:

• Business information strategy. How information will support the business. This will include applications to manage particular types of business.
• IS functionality strategy. Which services are provided?
• IS/IT strategy. Earlier in this book we have referred to providing a suitable technological, applications and process infrastructure (Chapter 3).

The advent of e-business clearly increases the strategic importance of information systems resources of an organization. However, developing an IS strategy to achieve e-business goals is complex because it can be viewed from many different perspectives (Table 5.12). This table is essentially a checklist of different aspects of IS strategy that have to be implemented by an IS manager in the e-business. Many of these aspects are solutions to business and technical problems that are described in Parts 2 and 3 of this book as summarized in the table.

We will now consider one of the most important issues facing IS managers in more detail.

2. Investment appraisal

In the e-business context, investment appraisal can refer to:

• Overall levels of spending on information systems to support e-business.
• Decisions about which business applications to invest in (portfolio analysis).
• Assessment of the cost/benefit for individual applications.

2.1. Decisions about which business applications to invest in

A portfolio analysis such as that illustrated for a B2B company in Figure 5.7 can also be used to decide priorities for application by selecting those that fall within the strategic and turn­around categories for further investment. Relative priorities and the amount of investment in different applications can also be assisted if priorities for e-business objectives have been assigned, as is the case with Table 5.4.

Traditionally investments in information systems have been categorized according to their importance and contribution to the organization. For example, Robson (1997) describes four types of BIS investment:

• Operational value investment. These investments are in systems that are key to the day-to­day running of the organization, such as transaction processing systems for processing orders received by phone or a workflow system for managing booking staff training and leave. Such systems are often valuable in increasing efficiency or reducing costs, but they do not contribute directly to the performance of the business.
• Strategic value investment. Strategic investments will enhance the performance of a busi­ness and should help in developing revenue. A customer relationship management system would be a strategic investment. This will be intended to increase customer loyalty, resulting in additional sales from existing customers.
• Threshold investment. These are investments in BIS that a company must make to operate within a business. Investments may have a negative return on investment but are needed for competitive survival.
• Infrastructure investment. These can be substantial investments which result in gain in the medium-to-long term. Typically this includes investment in internal networks, electronic links with suppliers, customers and partners and investment in new hardware such as client PCs and servers.

As part of developing e-business strategies, companies can prioritize potential information systems investments in the above categories according to their impact on the business. A similar approach is to specify the applications portfolio described in the section on situation analysis. It is evident that priority should be given to applications that fall into the strategic and high-potential categories in Figure 5.7.

2.2. The productivity paradox

All discussion of investment appraisals in information systems should acknowledge the exis­tence of the productivity paradox. Studies in the late 1980s and 1990s summarized by Brynjolfsson (1993) and Strassman (1997) suggested that there is little or no correlation between a company’s investment in information systems and its business performance measured in terms of profitability or stock returns. Strassman’s work, based on a study of 468 major North American and European firms, showed a random relationship between IT spending per employee and return on equity.

To the present day, there has been much dispute about the reality of the productivity paradox. Carr (2003) suggested that information technology has become commoditized to such an extent that it no longer delivers a competitive advantage. Carr says:

What makes a resource truly strategic – what gives it the capacity to be the basis for a sustained competitive advantage is not ubiquity, but scarcity. You only gain an edge over rivals by having something that they can’t have or can’t do. By now the core functions of IT – data storage, data processing and data transport have become available and afford­able to all… They are becoming costs of doing business that must be paid by all but provide distinction to none.

While many would agree that the technology such as PCs, servers and communications technologies have become commoditized, it is arguable whether technology cannot provide distinction. Carr’s argument is consistent with the productivity paradox concept, since although IT investments may help in increasing productivity, this does not necessarily yield a competitive advantage if all competitors are active in making similar IT investments. As the Financial Times (2003) puts it:

Productivity gains that are easily replicated across an industry usually end up in the hands of customers. Only when gains remain unique to a company do managers get a say in how to distribute the spoils – between customers (in the form of lower prices or higher quality), shareholders (higher profits) and workers (increased pay).

Today, most authors such as Brynjolfsson and Hitt (1998) and Mcafee and Brynjolfsson (2008) refute the productivity paradox and conclude that it results from mismeasurement, the lag occurring between initial investment and payback and the mismanagement of infor­mation systems projects. Mcafee and Brynjolfsson (2008) suggest that to use digital technology to support competition the mantra should be:

‘Deploy, innovate, and propagate’: First, deploy a consistent technology platform. Then separate yourself from the pack by coming up with better ways of working. Finally, use the platform to propagate these business innovations widely and reliably. In this regard, deploying IT serves two distinct roles – as a catalyst for innovative ideas and as an engine for delivering them.

More recent detailed studies such as that by Sircar et al. (2000) confirm the findings of Brynjolfsson and Hitt (1998). They state that:

Both IT and corporate investments have a strong positive relationship with sales, assets, and equity, but not with net income. Spending on IS staff and staff training is positively correlated with firm performance, even more so than computer capital.

In conclusion they state:

The value of IS staff and staff training was also quite apparent and exceeded that of computer capital. This confirms the positions of several authors, that the effective use of IT is far more important than merely spending on IT.

The disproportionate allocation of spend to implementation was highlighted by the Finan­cial Times (2003) which said:

Prof Brynjolfsson and colleagues found that of the $20m total cost of an enterprise resource planning (ERP) system, only about $3m goes to the software supplier and perhaps $1m towards the acquisition of new computers. The $16m balance is spent on business process redesign, external consultants, training and managerial time. The ratio between IT investment and this ‘supporting’ expenditure varies across projects and companies. But, over a range of IT projects, Prof Brynjolfsson believes that a 10:1 ratio is about right. Returns on these investments commonly take 5 years to materialise.

The 10:1 ratio between total investment in new information management practices and IT, mentioned in the extract, also shows that applying technology is only a relatively small part in achieving returns – developing the right approaches to process innovation, business models and change management are more important, and arguably more difficult and less easy to replicate. Some leading companies have managed to align investment in e-business with their business strategies to achieve these unique gains. For example, Wal-Mart Stores, Dell, Intel and easyJet have combined extensive use of technology with strategic innovation.

For example, Dell has used a range of IT-enabled techniques mentioned earlier in the chap­ter such as online ordering, the Dell Premier extranet for large purchasers, vendor-managed inventory, adaptive supply chains, build-to-order to gain competitive advantage.

So, in summary research into the productivity paradox highlights the importance of considering the information, people and technology resources together when planning for e-business strategy and implementation. It also suggests that e-business contributes to productivity gains only when combined with investments in process redesign, organiza­tional change management and innovation.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).