Strategic Role of ITStrategic Role of IT

Dr. Merle P. MartinDr. Merle P. MartinMIS DepartmentMIS DepartmentCSU SacramentoCSU Sacramento

AgendaAgenda IT strategic rolesIT strategic roles IT as a competitive toolIT as a competitive tool ReengineeringReengineering Where are we going?Where are we going? Strategic IT PlanningStrategic IT Planning Foundation Health Corporation Foundation Health Corporation

Strategic IT Plan Strategic IT Plan

IT Strategic RolesIT Strategic Roles As competitive toolsAs competitive tools To reengineer business To reengineer business

processesprocesses For interorganizational linkingFor interorganizational linking

IT as Competitive ToolIT as Competitive Tool Watchwords for 90’s Watchwords for 90’s

((HammerHammer)) innovation (innovation (ITIT)) speed (speed (deliverydelivery)) service (tservice (tailoringailoring)) quality (quality (TQM)TQM)

IT Competitive Tools IT Competitive Tools Market Share StrategiesMarket Share Strategies

““Beat the other guys”Beat the other guys” ““Stay in the game”Stay in the game” Be acquired by othersBe acquired by others

IT roleIT role

To Stay in BusinessTo Stay in Business Catch up to innovatorsCatch up to innovators Galiler / AmodeusGaliler / Amodeus

European airlinesEuropean airlines global reservations systemglobal reservations system Keep up with American Keep up with American

and United Airlinesand United Airlines

To Gain Market ShareTo Gain Market Share Porter’s Competitive Porter’s Competitive

Threats ModelThreats Model Threats:Threats:

CustomersCustomers SuppliersSuppliers Substitute productsSubstitute products Potential entrantsPotential entrants

Use of IT to mitigate threatsUse of IT to mitigate threats

Porter ModelPorter ModelSu

pplie

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pplie

rsSu

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BargainingBargainingPowerPower

BargainingBargainingPowerPower

SubstitutesSubstitutesSubstitutesSubstitutesThreatThreatThreatThreat

Buyers

Buyers

Buyers

Buyers

BargainingBargainingPowerPower

BargainingBargainingPowerPower

NewNewEntrantsEntrants

ThreatThreatThreatThreat

IndustryIndustry

Mitigating ThreatsMitigating Threats Suppliers - GM / ConrailSuppliers - GM / Conrail Buyers - Amer Hosp SupBuyers - Amer Hosp Sup New Entrants - New Entrants -

Supermarket scanningSupermarket scanning IT as market barrierIT as market barrier

SubstituesSubstitues Determine market strategyDetermine market strategy Use IT to enhance strategyUse IT to enhance strategy

Market StrategiesMarket Strategies Lowest costLowest cost - IT in - IT in

ProductionProduction DistributionDistribution

Market nicheMarket niche - IT in - IT in AdvertisingAdvertising Market ResearchMarket Research

Market barriersMarket barriers - IT pioneer - IT pioneer Product differentiationProduct differentiation - R&D, Mrkt - R&D, Mrkt

RsrchRsrch

Reengineering Reengineering “ “ . . . . . . fundamentalfundamental rethinking rethinking and and radicalradical redesign redesign of business of business processesprocesses to achieve to achieve dramaticdramatic improvements improvements in critical contemporaryin critical contemporary measures of performancemeasures of performance such as such as cost, quality, service, and speed” cost, quality, service, and speed”

Reject Industrial ModelReject Industrial Model Adam Smith’s PrinciplesAdam Smith’s Principles Industrial RevolutionIndustrial Revolution

division of labordivision of labor specialistsspecialists

economies of scaleeconomies of scale big is betterbig is better

hierarchical controlhierarchical control

Reengineering Isn’tReengineering Isn’t DownsizingDownsizing ReorganizationReorganization Software ReengineeringSoftware Reengineering Busting bureaucracyBusting bureaucracy TQMTQM

IssueIssue

Is your firm reengineering?Is your firm reengineering?Why don’t more firms reengineer?Why don’t more firms reengineer?What’s the “downside” to What’s the “downside” to

reengineeringreengineering

WHAT DO YOU THINK?WHAT DO YOU THINK?

Where Are We Going?Where Are We Going? Peter Keen’s 8 scenariosPeter Keen’s 8 scenarios

25-80% cashflow systems 25-80% cashflow systems on-line rather than batchon-line rather than batch

Point of Sale (Point of Sale (POSPOS)) electronic paymentselectronic payments

Image technologyImage technology Electronic Data Interface (Electronic Data Interface (EDIEDI))

Electronic Data Exchange (EDI)Electronic Data Exchange (EDI)Electronic Data Exchange (EDI)Electronic Data Exchange (EDI)

VendorsVendorsVendorsVendorsStoresStoresStoresStores

BentonvilleBentonvilleBentonvilleBentonville

Keen’s ScenariosKeen’s Scenarios Distributed workDistributed work Work location dependentWork location dependent Reorganization frequent, Reorganization frequent,

not exceptionalnot exceptional Electronic business partnershipsElectronic business partnerships

Electronic Business Electronic Business Partnerships Partnerships

Typical markets:Typical markets: firm’s products / services firm’s products / services

stand alonestand alone judged by comparison with rivaljudged by comparison with rival judgment determines market sharejudgment determines market share zero-sum gamezero-sum game first with innovation (IT) gains first with innovation (IT) gains

competitive edgecompetitive edge

InterrelatednessInterrelatedness Markets involving IT Markets involving IT

atypicalatypical Effect of IT is subtleEffect of IT is subtle

can accelerate competitioncan accelerate competition can soften competitioncan soften competition

Interrelatedness sources:Interrelatedness sources: networksnetworks concern for compatibilityconcern for compatibility

NetworksNetworks Value increases with sizeValue increases with size # transactions = N ( N - 1 )# transactions = N ( N - 1 ) Western Union exampleWestern Union example

2 cities (A and B)2 cities (A and B) Can send a dollar each wayCan send a dollar each way Value = 2 ( 2 - 1 ) * $1 = $2Value = 2 ( 2 - 1 ) * $1 = $2 Add 3rd cityAdd 3rd city Value = 3 ( 3 - 1 ) * $1 = $6Value = 3 ( 3 - 1 ) * $1 = $6

Sharing NetworksSharing Networks CIRRUS / ATM led to CIRRUS / ATM led to

larger networklarger network Increase network qualityIncrease network quality

different users with different users with different servicesdifferent services

Airline reservationsAirline reservations

Compatibility Compatibility InterconnectivityInterconnectivity

DEC connecting DEC connecting different vendorsdifferent vendors

Human skillsHuman skills QWERTY standardsQWERTY standards

Complementary productsComplementary products plug-in peripheralsplug-in peripherals IBM Repository CASE productIBM Repository CASE product

Strategic Planning

Strategic PlanStrategic PlanStrategic PlanStrategic Plan

Management Control

TacticalTacticalPlanPlan

TacticalTacticalPlanPlan

Operational Control

Operational PlanOperational PlanOperational PlanOperational Plan

IT Planning SequenceIT Planning Sequence

Level of ManagementLevel of Management

OperationalOperationalOperationalOperational TacticalTacticalTacticalTactical

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Syst

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ShortShortRangeRangeShortShortRangeRange Planning HorizonPlanning HorizonPlanning HorizonPlanning Horizon

StrategicStrategic

LongLongRangeRangeLongLong

RangeRange

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IT Planning CycleIT Planning Cycle Develop Mission Develop Mission

StatementStatement e.g, 15% market sharee.g, 15% market share increase sales volume by 10%increase sales volume by 10%

Identify strategic unitsIdentify strategic units Define Critical Success Factors (Define Critical Success Factors (CSFCSF))

Critical Success FactorsCritical Success Factors John Rockart, MITJohn Rockart, MIT Translation of firm’s Translation of firm’s

critical factors for strategic critical factors for strategic success down level by level success down level by level to measurable goals all to measurable goals all levelslevels

Example:Example: Key strategic factorKey strategic factor: :

Retain profit levelRetain profit level CSFCSF: Profit-to-sales ratio: Profit-to-sales ratio

IT Planning CycleIT Planning Cycle Identify IT enhancing CSFsIdentify IT enhancing CSFs Consider industry and Consider industry and

technological trendstechnological trends Categorize potential ITCategorize potential IT

new versus redesignnew versus redesign matches strategic goalsmatches strategic goals potential ROIpotential ROI potential risk potential risk

IT Planning CycleIT Planning Cycle Set IT portfolio strategySet IT portfolio strategy

eliminate non-strategic eliminate non-strategic contenders contenders

allocate resources to IT allocate resources to IT with high ROI or low level of riskwith high ROI or low level of risk

Leave 5 to 15% of technology Leave 5 to 15% of technology budget for Research and budget for Research and Development (Development (R&DR&D))

IssueIssueDoes your company do IT Does your company do IT

strategic planning?strategic planning? If not, why not?If not, why not? If so, do what steps do they follow?If so, do what steps do they follow?

Tell us your experiences!Tell us your experiences!

FHC ExampleFHC Example Foundation Health Foundation Health

CorporationCorporation Organizational goalsOrganizational goals IT visionIT vision IT goalsIT goals IT guiding principlesIT guiding principles IT tacticsIT tactics

Who is FHC?Who is FHC? Fortune 500 companyFortune 500 company Rancho Cordova, CARancho Cordova, CA Managed care servicesManaged care services

12 states12 states 3.1 million people3.1 million people

Specialty health servicesSpecialty health services 17.2 million people17.2 million people every state in unionevery state in union

Organization GoalsOrganization Goals Leader in U.S. managed Leader in U.S. managed

care marketcare market Cover over 6 million Cover over 6 million

medical risk livesmedical risk lives Over $2.5 billion annualized revenueOver $2.5 billion annualized revenue Upper quartile in market shareUpper quartile in market share

Organization GoalsOrganization Goals Satisfied, long-term Satisfied, long-term

customer relationshipscustomer relationships Top quartile ROE (public Top quartile ROE (public

companies)companies)

NOTE:NOTE: Goals are measurableGoals are measurable

1 1 3

System Development VisionSystem Development VisionID and Exploit Business Opportunities via Technology

All systems -networks 98% available

Problems resolved within 4 hours

Address business needswithin estimated time/cost

Address business needs within business dictated time and cost

Business Partner

Solution Provider

Application Provider

Service Provider

System Provider

Where Are We?Where Are We?

Business Partner

Solution Provider

Application Provider

Service Provider

System Provider

We are in the beginning stages, here

IT GoalsIT Goals IT contribute to IT contribute to

organization goalsorganization goals State-of-the-art State-of-the-art

administrative processadministrative process IT flexible to customer needs IT flexible to customer needs

(both anticipated and unanticipated)(both anticipated and unanticipated) Define “Define “TO BETO BE” IT environment” IT environment

manageable transition planmanageable transition plan

IT Guiding PrinciplesIT Guiding Principles Technology leader Technology leader

(health care)(health care) Use proven, reliable Use proven, reliable

technologytechnology Move to real-time settingsMove to real-time settings Leverage investment in current Leverage investment in current

systemssystems marketing toolsmarketing tools

IT PrinciplesIT Principles Common systems Common systems

for common functionsfor common functions Incrementally improve Incrementally improve

systemssystems Move towards “Enterprise Systems”Move towards “Enterprise Systems”

Development TacticsDevelopment Tactics Development costs Development costs

capitilizedcapitilized Cost / benefit for major projectsCost / benefit for major projects Major projects analyzedMajor projects analyzed

develop in-house?develop in-house? off-the-shelf package?off-the-shelf package? outsource?outsource?

IT pay benchmarkedIT pay benchmarked

Organization Structure Organization Structure TacticsTactics IT governed by steering IT governed by steering

committee (chief executives)committee (chief executives) ““Major Development” Major Development”

separate departmentseparate department CHAMPUS separate departmentCHAMPUS separate department Data responsibilities centralizedData responsibilities centralized Functional area support temsFunctional area support tems

Ops Mgmt TacticsOps Mgmt Tactics Mainframe relianceMainframe reliance 7-day, 24 hour availability7-day, 24 hour availability Centrally managed storageCentrally managed storage Data center automationData center automation Enterprise network architectureEnterprise network architecture Enhance data center Enhance data center

recovery processrecovery process End-user computing strategyEnd-user computing strategy

DiscussionDiscussion What does FHC’s strategic What does FHC’s strategic

IT planning tell us about IT planning tell us about the firm’s change culture?the firm’s change culture? (e.g., conservative, pioneer, etc)(e.g., conservative, pioneer, etc)

How could FHC’s IT strategic How could FHC’s IT strategic planning process be improved?planning process be improved?

WHAT DO YOU THINK?WHAT DO YOU THINK?

Points to RememberPoints to Remember IT strategic rolesIT strategic roles IT as competitive toolIT as competitive tool IT for reengineeringIT for reengineering Keen’s 8 scenariosKeen’s 8 scenarios IT Strategic PlanningIT Strategic Planning