strategic analysis (see, e.g. Figure 2.8 and the discussion on pages 95–100). Determination of priority IS/IT investments also depends on the chosen ‘value discipline’, as per Treacy and Wiersma, 4 for achieving advantage and the relative strength of the organiz ation in the other disciplines (i.e. Operational Excellence, Customer Intimacy and Product Leadership). Figure 5.2 portrays levels of relative competence of the organization along each of the axes—survival, success and prosperity. The last of these implies that, if the organization is beyond the ‘success’ line in at least one competency and equal to competitors in the other(s), it should deliver above-average profits in the industry. However, if any of the compet encies are within the ‘success’ circle, any potential advantage is likely to be offset by poor performance elsewhere. For example, a bank that had developed a new and excellent mortgage product for younger people (as defined by independent benchmarks) and had as good customer relationships as any other bank (again via inde- pendent surveys), could not understand why sales were so poor. The reason was the slowness and unreli ability of the mortgage application process, which used a much older system designed for an earlier genera- tion of products. The process could not deliver the ‘service promise’ Aligning the IS/IT Investment Strategy to the Business 241 Customer intimacy SURVIVAL SUCCESS PROSPERITY Operational excellence Product leadership Figure 5.2 Advantage and disadvantage—dimensions of competency (source: after M. Treacy and F. Wiersma, The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market, HarperCollins, London, 1995) inherent in the product and, given the target customer group, many cus- tomers went elsewhere to obtain an infer ior product, faster. This is just one example of how the competency analysis can help identify how priority IS investments are essential to avoid competitive disadvantages. Where the organization is outside the success line (i.e. is outperforming most others in one dimension), more creative thinking is needed to identify how IS/IT can be used to develop the competency further and sustain the advantage. For example, having established ‘personal’ relationships with its book-buying customers, Amazon.com is able to analyse purchase patterns and identify other books of potential interest to an individual customer—a far more valued service than sending a general catalogue, either by post or electronically. Some suggested questions, of particular relevance to the electronic commerce dimensions of the strategy, have been overlaid on the basic model in Figure 5.3. They attempt to show how generic e-com merce options—improving the value proposition, mass customization, perform- ance improvements and cost reductions—require combinations to be addressed. As stated in Chapter 2, this technique proves very valuable in gaining agreement among managers about what has to impr ove and why, and, especially, whether the purpose is to gain advantage or avoid disadvan- tage. It helps integrate the ‘themes’ inherent in the business and IS strategies and focus resources on medium-term IS priorities. Although the relationship will not always be perfect, the changing content of the application portfolio should reflect the evolving strategic themes. Applying these ideas in a number of organizational situations, they have proved very useful in clarifying the business rationale for IS/IT investment plans. Generally speaking: . Strategic applications should relate readily to the dimension in which the organization seeks to excel in the next one to three years (i.e. product leadership, customer intimacy or operational excellence), with the objectives of gaining advantage in the marketplace. . Key operational application improvements are essential in any dimension if the systems are causing performance levels to fall below those essential to success (i.e. are causing disadvantage). . High-potential projects would normally be ‘prototypes’ related to specific strategic developments or evaluations of ideas relevant to the other dimensions (i.e. early, tentative steps in finding out how IS/IT might provide future opportunities once the current focus of the strategy changes). Over a period of time, an organization might pursue all three of these 242 IS/IT Strategic Analysi s: Determining the Future Potential Figure 5.3 E-commerce and the dimensions of competence directions. It will probably have to change if it is to maintain a leadership position in response to the actions of competitors. But, it is extremely difficult to ‘major’ in more than one at once, and any indecision will cause ever-changing priorities, inconsistency and even confusion within the business—a recipe for failure with IS/IT investments. Analysis of the business situation, from both external and internal perspectives, is essential to establ ish the context within which opportu- nities can be identified and assessed. The techniques described below need to be used following an assessment of the business environm ent and with an agreed purpose, based on the priority ‘themes’ for improving perform- ance through IS/IT. Othe rwise, the assessment can become an unfocused exercise in which interesting options are identified, but without a natural and coherent link to the overall future intentions and direction of the business. As such, they will not be seen and treated as priority or strategic business investments. VALUE CHAIN ANALYSIS The concept of Value Chain Analysis is described at length by Michael Porter 5 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.’ Equally, the value chain of the business unit is only one part of a larger set of value-adding activities in an industry—the industry value chain or value system. The value chain of any firm therefore needs to be under- stood as part of the larger ‘system’ of related value chains—those of its suppliers, custom ers and competitors, before it can be optimized. The actions of those other parties will have a significant impact on what the firm does and how it does it. This is especially true in the area of in- formation systems. For example, the considerable investment made by food retailers in Point-of-Sale (POS) systems has changed the way in- formation is passed to food manufacturers and has dramatically changed the delivery service required from those manufacturers. This has implica- tions for the information systems within the food-processing companies and, in turn, the systems that relate to their suppliers. For an organiza- tion to identify the overall implications of e-commerce for its business in terms of opportunities and threats, the information flowing through the industry—the external value chain—needs to be analysed before the information processes can be optimized inside the business—by consider- ing the inte rnal value chain. 244 IS/IT Strategic Analysi s: Determining the Future Potential TEAMFLY Team-Fly ® THE EXTERNAL VALUE CHAIN (INDUSTRY VALUE CHAIN OR VALUE SYSTEM) Figure 5.4 gives a schematic view of an industry value system. In par- ticular, it emphasizes the key roles information plays throughout the chain. The overall performan ce of the industry, in terms of its ability to maximize its value-added and minimize its costs, is primarily depen- dent on how well demand and supply information are matched at all stages of the industry. To achieve the highest possible income and profit from the consumption of goods or services produced by the industry, the resources of the industry need to be focused on the value- adding activities involved, by producing those goods and services as efficiently as possible to the satisfaction of the consumers. If poor in- formation means that those resources are wasted or used inefficiently, costs rise without increases in revenue, and overall profitability falls. In such situations, all that firms can do to improve profit is compete with their suppliers and customers to share out the limited available net profit. This almost inevitably leads to some firms going ‘bust’, the equilibrium is destroyed and the industry has to be reorganized in some way. It is not always the least efficient that suffer, it is often those with the poorest information about what is happen ing in the industry who go to the wall. While the above discussion is primarily about ‘profit’, the value chain approach can be used in any industry, since every industry use s funds, incurs cost and uses resources to de liver services of some sort to con- sumers. In ‘non-profit’ industries such as government, health care and charities, there is always a matching of supply and demand to achieve a break-even, if not a profit. The type of industry value chain model depicted above is appropriate for ‘traditional’ manufactured goods. Alternative models are considered on pages 265 –268 that represent service-based industries. However, the following general issues apply to all the models. Obviously, if an organization can match the demand for its products and services very closely to the supply of resources at all times, perform- ance can be optimized and efficiencies maximized. Equal ly obviously, if the firm, ‘the business unit’ in Figure 5.4, is operating at some distance from the ultimate consumer and primary suppliers, it is difficult to obtain precise demand and supply information. Interestingly, we would expect organizations that have component businesses in different parts of the same industry value chain to be able to exploit their combined informa- tion to outperform others who cover less of the chain. In fact, that is often not the case, especially when the businesses operate as profit centres—the ‘internal competition’ that produces often means they actually cooperate less well than independent firms in sharing information! The External Value Chain (Industry Value Chain or Value System) 245 Suppliers Raw materials Capital goods Services Components Labour Direct suppliers Competitors The business unit Local distribution channels Agencies and distributors Export distribution channels Market A Market B Market C End consumers Cost and supply information Value and demand information Direct channel Direct channel Figure 5.4 The external value chain When starting to understand how indust ry information flows affect the firm itself, the firm should be treated as a ‘black box’ (i.e. how things are done inside the firm should be ignored—that will be considered later when looking at the internal value chain). The consider ation should start at the end-consumers in terms of what information is available about the consumers’ needs, who they are, etc. and how they can be influenced. 6 Then, the needs for information exchange with more im- mediate customers can be examined in terms of how effective it is for both parties. Eventually, all the flows of information to and from the firm downstream in relation to the con sumers and intermediaries can be understood, in terms of critical information the firm needs and the current and potential sources of that information. The same process can be repeated in terms of immediate suppliers and their suppliers of key resources, raw materials and services. Then, each of the key information flows can be examined to see how the process could possibly be improved in terms of accuracy, speed, co st or timeliness and how that might benefit the business. It might be, for instance, beneficial if a distributor could provide raw sales data directly, rather than consolidate their sales in order to place larger orders. This may enable the firm to give that distributor a more reactive service, allowing the distributor to hold lower stocks, yet satisfy more of its customers. At the other end of the chain, it may be possible to do similar things with suppliers and, while these are simple examples, they form the basis of ‘re-engineering’ the way the industry operates to every- one’s benefit. It may be, of course, that many of the information exchanges cannot easily be improved, or cannot be improved without the willing coopera- tion of trading partners. Cooperation may only be forthcoming if there is some mutual benefit in changing that particular information flow or by changing another flow to provide the partner with a balancing benefit. It could be that, to produce the improvement, existing trading partners have to be bypassed and information exchanged with other parties further upstream or downstream in the chain. This may eventually lead to significant realignment of business relationships. It is important to understand the type of ‘value’ and ‘cost’ added by each firm or process in the chain (i.e. what is different between the outputs and inputs); for example, a financial broker provides more choice to a customer than one insurer, but takes a % commission from the insurers on sales. Eac h key process in the chain should be assessed from two viewpoints: (a) How does it add value to the (next) customer in the chain? (b) How does it add value to those providing the input? The External Value Chain (Industry Value Chain or Value System) 247 A retailer adds value to the customer mainly through the range of goods offered and local access to them, and adds value to the supplier by providing consumer availability, sharing stock costs and administration of low-value transactions, etc. When assessing changes to the chain, it implies that new value can be added, or existing value-adding and costs will be redistributed, or costs of adding the same value can be reduced, enabling price reduction or increased profit. In Internet shopping, the consumer’s (invisible) costs are reduced, but costs are switched to home delivery. Unless this is offset by another cost reduction (e.g. lower stock holdings), the increased cost of supply will require an equivalent increase in price (payment for delivery)—or the profit in the chain will be reduced. These are relatively simple and obvious examples, but it is necessary to understand the overal l chain economics and utility if changes are to be successful. Many options will usually present themselves from the analysis, only some of which will pr ove feasible and beneficial to implement, at least in the short term. However, an understanding of the complete picture may lead to further options emerging in the longer term. It will certainly enable the organization to understand the implications of potential actions by others and then determine a more strategic response. INFORMATION SYSTEMS AND THE VALUE CHAIN Obviously, business performance is dependent on the processes that gather and disseminate information. Links can be developed to various levels of sophistication and mutual dependence. Figure 5.5 shows three types of relationship. Normal business transactions (invoices, orders, payments, etc.) could be addressed by a company with most of its customers and suppliers who have computers, simply by connection via the Internet. This has indeed already happened in some industries, especially those dominated by large retailers, where the majority of basic business transactions with suppliers are now electronic. This basic use of e-commerce is spreading through different industries at varying rates. It not only impr oves the economics of transaction processing but also enables the whole chain to respond more effectively to real- time demand and supply changes—provided transaction information is shared. Figure 5.5, based on work by Rayport and Sviokla, 7 considers two further types of value chain information flow that are being challenged by e-commerce. First, the implications of the promotional flow of informa- tion, which informs customers furt her down the chain of the produ cts and services available, have to be understood. E-commerce offers an 248 IS/IT Strategic Analysi s: Determining the Future Potential additional channel for this flow, but also provides customers with the ability to search the whol e chain for information directly or via inter- mediaries, on whom firms become increasingly dependent to provide an electronic shop window/shelf space for their products and services. Demand from the end-consumer may well change more rapidly than in the past, given the combined e-commerce attributes of effective ‘promo- tion’ linked to the immediate ability to transact business. Second, e-commerce offers huge potential to gather information and intelligence about consumer and customer preferences and attitudes online, rather than through traditional market research. More impor- tantly, customer behaviour can be tracked with greater accuracy than before via e-transactions and hence correlated with both the promotional stream and the intelligence gathering stream. Unless each organization and the chain as a whole can assess this information coherently, it is likely that major misinterpretations of changing demand patterns will create potential chaos in the supply chain. The issue is therefore that, in the e- commerce environment, three information streams that could previously have been reconciled off-line now have to be integrated if the value chain is to function economically. A firm will not be able to determine its own destiny with regard to its information systems. It is not just a matter of company size, but clearly the larger players have more to gain and henc e tend to force the smaller Information Systems and the Value Chain 249 Figure 5.5 Understanding the information issues in the value chain (source: after Rayport and Sviokla) companies to comply with their demands. As most indust ries develop standards for electronic trading and information exchange, the potential risks for the small company diminish since it will not have the cost of satisfying a variety of requirements for different suppliers or customers. The arrival of XML (Extended Mark-up Language) will produce a general standard for the majority of organizations to utilize and reduce the need for industry-specific standar ds for many types of information transfer. According to Porter, 8 we are entering a new stage of evolut ion in terms of how IT is affecting industry value chains. Previously, each firm has achieved improved performance by integrating its activities and processes as well as its supplier and customer interactions through IS, most recently via Enterprise Resource Planning (ERP) and Custo mer Relationship Management (CRM) software packages. He believes this new stage, ‘which is just beginning, enables the integration of the ( ) set of value chains in an entire industry, as end-to-end applications involving customers, channels and suppliers ’. It is difficult to predict whether the emergence of ‘e-marketplaces’ (or trading hubs) or the ability to integrate throughout the value chain will have the more significant effects on industry economics and customer/supplier relationships. Could trading hubs become the centres though which IRP (‘Industry Requirements Planning’ ) systems operate, linking everyone’s ERP systems together to provide seamless, integrated infor mation flows? 9 However, even in sophisticated and mature industries, there is often a huge gap between what is possible and the current reality. Box 5.1 gives examples of the problems in the motor industry value chain that needs major information systems and process changes if the benefits, potentially available from information integration, are to be realized. By whatever means 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 outperform- ing its real competitors rather than competing with its trading partners for the available profit. The essence of the argument is: (a) At any one time, an industry generates a certain amount of net profit (totalsales — totalcosts).Thatprofitissharedamongtheorganiza- tions contributing to the value chain for the industry. Clearly, inter- mediation increases the number of firms among whom the profit is shared, and the attraction of disintermediation is that the opposite occurs. (b) If, in the version of the value chain that includes our firm, the overall net profit can be increased, we can take a share of that increased 250 IS/IT Strategic Analysi s: Determining the Future Potential [...].. .Information Systems and the Value Chain 251 Box 5. 1 Information problems affecting the performance of the automotive industry value chain (source: M Howard, R Vidgen, P Powell and A Graves, Planning for IS related industry transformation: The case of the 3DayCar’, in Proceedings of the 9th European Conference on Information Systems, Bled, Slovenia, June 2001, pp... Learmonth, ‘The information systems as a competitive weapon’, Communications of the ACM, Vol 27, No 12, 1984, 1193–1201 D Feeny, ‘Making business sense of the e-opportunity,’ MIT Sloan Management Review, Winter, 2001, 41 51 N Rackoff, C Wiseman and W.A Ullrich, Information systems for competitive advantage: Implementation of a planning process’, MIS Quarterly, Vol 9, No 4, 19 85, 2 85 294 C Wiseman,... Providing plans for forward requirements, even buying on its behalf to spread both companies’ risks, might help The information links between companies are far more complex than often appreciated and the value chain approach allows them to be analysed Obviously, the use of electronic commerce is becoming the main basis for such information sharing across various companies’ information systems In the... drug during development can take many years, and reducing the development time from, say, 8–12 years to maybe 5 6 means more of the patent life is unexpired for production, and this affects drug profitability dramatically over its patented Information Systems and the Value Chain 257 258 5 6 IS/IT Strategic Analysis: Determining the Future Potential life (hundreds of millions of pounds) Much testing is in-house... following: 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 For instance, in some industries like fashion goods, ‘demand’ information is the critical... industry value chain, and the key information flows in the industry, can enable an organization to intercept and influence those information flows to its advantage, to the benefit of its trading partners and at the expense of its competitors Box 5. 2 is another example of a real value chain for the ethical pharmaceutical industry (i.e prescription drugs)—showing where information systems applications have had... significantly or frequently 272 IS/IT Strategic Analysis: Determining the Future Potential chain in information terms is to reduce the existing complexity either inherent in the current information relationships or caused by them The second purpose is to identify new, often faster, options for information to flow to where it enables the value-adding processes to be performed more effectively and at the ideal... development ENDNOTES 1 2 3 S Neumann, Strategic Information Systems, Macmillan, London, 1994 D Feeny, ‘Making business sense of the e-opportunity,’ MIT Sloan Management Review, Winter, 2001, 41 51 P Timmers, Electronic Commerce: Strategies and Models for Business to Business Trading, John Wiley & Sons, Chichester, UK, 1999 Team-Fly® Endnotes 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 2 75 M Treacy and F Wiersma, ‘Customer... in Table 5. 2  256 IS/IT Strategic Analysis: Determining the Future Potential Box 5. 2 Value chain for pharmaceutical company N.B This is for an ‘ethical’ drug company where the whole strategy is based on differentiation of the product and its treatment efficacy Key areas where information flows/relationships are critical to success and provide opportunity to gain advantage or achieve significant performance... advantage?’, Long Range Planning, Vol 23, No 1, 1990, 29–40 L O’Sullivan, and J.M Geringer, ‘Harnessing the power of your value chain’, Long Range Planning, Vol 26, No 2, 1993, 59 –68 6 Determining the Business Information Systems Strategy Through in-depth analyses of the business environment and the strategy of the business as well as an examination of the role that information and systems can and could . in Table 5. 2. Information Systems and the Value Chain 255 256 IS/IT Strategic Analysi s: Determining the Future Potential Box 5. 2 Value chain for pharmaceutical company N.B. This is for an ‘ethical’. of that increased 250 IS/IT Strategic Analysi s: Determining the Future Potential Information Systems and the Value Chain 251 Box 5. 1 Information problems affecting the performance of the automotive. with regard to its information systems. It is not just a matter of company size, but clearly the larger players have more to gain and henc e tend to force the smaller Information Systems and the