The CEO of a local hospital group is exploring the idea of centralizing all of their IT services. They consist of four licensed, acute-care hospitals, three free-standing outpatien

LEARNING OUTCOMES

After reading this chapter, you will be able to:

■ define approaches for integrating IS strategy with business strategy;

■ apply simple strategic analysis tools to determine IS strategy.

MANAGEMENT ISSUES

Annual investment in BIS is signifi cant for many companies. But what return do organisations receive for this investment? To achieve more eff ective investment, a well-planned BIS strategy is required that supports the corporate goals. In this chapter we aim to answer the questions a newly installed manager seeking to develop an IS strategy would ask:

■ Which process can we follow to develop an IS strategy?

■ How can we ensure the IS strategy supports the business strategy?

■ What analysis tools are available to assess current use of IS within the organisation and its environment and formulate IS strategy?

■ Where should we locate the IS function and to what extent should some services be outsourced?

CHAPTER AT A GLANCE

MAIN TOPICS

■ The strategic context 478

■ Introduction to BIS strategy 479

■ Tools for strategic analysis and definition 485

■ IS and business strategy integration 495

FOCUS ON . . .

■ IS/IT and SMEs 499

CASE STUDY

13.1 Which cloud model will prevail? 484

13.2 Next generation of clients forces pace of IT change 501

CHAPTER

13 Information systems strategy

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Organisations that make the most effective use of business information systems (BIS) are those that make BIS strategy an integral part of their overall business strategy. The development of the e-business concept is intended to further support the integration of BIS with business strategy. This chapter looks at the approaches an organisation can use to develop a strategy for putting information systems in place which will support and enhance its overall business strategy.

INTRODUCTION

THE STRATEGIC CONTEXT

In its original sense, ‘strategy’ referred to the development of plans for deceiving or outwitting an enemy. Today, corporate strategy is developed not to conquer a single competitor, but rather to compete within a chosen market. Johnson et al. (2011) use a definition that places strategy in the context of the marketplace environment and stresses its role in utilising internal resources to be best able to compete in this environment. The elements of this environment are summarised in Figure 1.2. These authors define strategy as:

the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations.

Strategy Definition of the future direction and actions of a company defined as approaches to achieving specific objectives.

BIS is one of the resources deployed to help meet the needs of the market by developing and promoting new, innovative products and services that increase customer value. Most companies use a hierarchy of strategies to support the business strategy. For example, a marketing strategy is developed to assist in implementing the business strategy and this in turn will inform a marketing communications strategy. Similarly an information strategy will support the business strategy and this will be achieved by implementing separate IS and IT strategies as explained in the next section.

Effective use of BIS can also result in increased efficiency of internal processes and outward-facing processes which are part of supply chain management. This can help reduce costs and lead to increased profitability.

Any organisation’s strategy can be rooted in four areas:

■ vision – an image of a future direction that everyone can remember and follow; ■ mission – a statement of what a business intends to achieve and what differentiates it

from other businesses; ■ strategies – a conditional sequence of consistent resource allocations that defines an

organisation’s relationships with its environment over time; ■ policies – guidelines and procedures used in carrying out a strategy.

These areas in turn can be applied at a number of levels within an organisation:

■ corporate strategy – view of the lines of business in which the company will participate and the allocation of resources to each line;

■ strategic business units (SBU) – subsidiaries, divisions, product lines;

Hierarchy of strategies

A collection of sub- strategies developed to help achieve corporate objectives.

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■ functional strategy – each functional area within a business unit must develop a course of action to support the SBU strategy. Examples include marketing strategy and logistics strategy.

This straightforward definition masks an underlying complexity of strategy. Indeed, the way in which an organisation can formulate its strategy is the subject of some debate. Claudio Ciborra (Ciborra and Jelassi, 1994) contrasts the mechanistic or prescriptive approach to business strategy with more flexible and eclectic approaches. The former is characterised by such elements as:

■ Conscious and analytical thought, where strategies emerge from a structured process of human thought and rigorous analysis; it is suggested that implementation can only follow when the strategy has been analytically formulated.

■ Top-down and control orientation, where strategy is formulated at the peak of the managerial pyramid and responsibility for strategy lies with the organisation’s chief executive officer.

■ Simple and structured models of strategy formulation, where data analysis and internal and external scanning are undertaken so that the resulting model is clear and simple.

■ Separation between the formulation of strategy and its implementation; diagnosis is followed by prescription and then by action; an organisation structure must therefore follow the formulation of the strategy rather than the other way around.

Flexible, eclectic or emergent approaches, on the other hand, are characterised by responsiveness to gradual changes through evolutionary decision-making processes that often prevail in organisations that profess to adhere to formal and mechanistic approaches to strategy formulation. Mintzberg (1990), as cited by Ciborra and Jelassi (1994), questions the mechanistic, prescriptive school of thought on three counts:

1. During strategy implementation, surprises occur that question previously developed plans. To be successful, the strategic plan needs to be modified to reflect the new situation and this contradicts the previously stated rationality and rigidity that characterise the mechanistic approach. Organisational learning is also hampered by an unduly inflexible approach.

2. While the mechanistic approach to strategy features the strategist as an impartial and independent observer and participant in the strategy development process, the reality in organisations is that organisational structure, culture, inertia and politics themselves influence the strategy development process. Strategy formulation is therefore profoundly influenced by the environment it is seeking to affect.

3. The mechanistic approach to strategy formulation is an intentional process of design. However, the reality is that organisations acquire knowledge on a continual basis and this knowledge can have a profound influence on the contents of strategy and, therefore, its formulation process.

Since both corporate and IS strategy formulation will always involve the need to react to unforeseen circumstances, resulting in sudden changes to overall corporate objectives, an effective strategy formulation process must embrace adaptation, organisational learning and incremental development that reflect a constantly changing business environment.

INTRODUCTION TO BIS STRATEGY

We have seen that all business strategies must be responsive to the external environment, but what are the elements of a strategy for managing BIS and how do they relate? Ward and Peppard (2002) identify three different elements of IS strategy:

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1. Business information strategy. This defines how information, knowledge and the applications portfolio will be used to support business objectives. Increasingly, a chief information officer (CIO) or chief knowledge officer (CKO) who is part of, or reports to the senior management team is appointed to be responsible for defining and implementing this strategy.

2. IS functionality strategy. This defines, in more detail, the requirements for e-business services delivered by the range of business applications (the applications portfolio).

3. IT strategy (IS/IT strategy). This defines the software and hardware standards and suppliers which make up the e-business infrastructure.

These strategies are part of the organisation’s hierarchy of strategies discussed in the previous section.

IT strategy determines the technological infrastructure of the organisation. It ensures the most appropriate technologies and best standards are used in terms of cost, efficiency and supporting the needs of the business users and integration with customers and other partners. A recent strategic decision taken by many companies is to use the Internet protocol (IP) to support deployment of business applications via an intranet. The hardware and software elements of the IT infrastructure were described earlier (in Chapters 3 to 6). Approaches for controlling the total cost of ownership (TCO) of the IT infrastructure are described earlier (in Chapter 16).

IS strategy determines how IT is applied within an organisation. It should ensure that the IT deployed supports business strategies and that the appropriate resources and processes are in place for the deployment to be effective.

Note that, in reality, there is some overlap between elements of IS and IT strategy. For example, it can be argued that the selection of the optimal portfolio of software applications is an aspect of both IS and IT strategy. For this reason a convention preferred by many authors such as Ward and Peppard (2002) refers to both elements together (IS/IT strategy). This convention is used in this chapter.

The relationship between these elements is indicated in Figure 13.1. It is evident that these three elements can be considered to be hierarchical. Here, business information strategy should be driven by the objectives of the business strategy – by its information needs. IS functionality, delivered by BIS applications, should in turn be driven by the

Applications portfolio

The range of different types of business information systems deployed within an organisation.

IT strategy

Determination of the most appropriate technological infrastructure comprising hardware, networks and software applications.

IS strategy

Determination of the most appropriate processes and resources to ensure that information provision supports business strategy.

Figure 13.1 Relationship between business strategy and IS/IT strategies

Information Strategy

Corporate objectives

Business Strategy

Internal resource analysis

IS strategy objectives

IS Strategy

IT Strategy

Information requirements

Information requirements

Micro environment

Macro environment

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Micro-environment

Immediate environment includes customers, competitors, suppliers and distributors.

Macro-environment

Wider environment of social, legal, economic, political and technological influences.

Purpose To emphasise the importance of monitoring and responding to a range of environment influences.

Activity For each of the environment influences shown in Figure 1.3, give examples of why it is import-ant as part of IS/IT strategy to monitor and respond in an information systems strategy context. Environmental influences are clearest for a company operating an e-commerce service.

Why are environment influences important?Activity 13.1

information requirements of the organisation, and finally IT strategy is the implementation of IS strategy through the delivery of IT infrastructure. Such a model is useful for debate. For example, does this model represent reality in most organisations? Do organisations have separate information, IS and IT strategies? What are the benefits and disadvantages of this approach? Although the top-down approach implies strong control of IS and alignment with business strategy, it may have limited responsiveness in taking advantage of opportunities provided by IS. If IS strategy development identifies a business opportunity it is difficult to feed this back up the hierarchy to be incorporated into the business strategy. We return to this issue in a later section where we review the merits of business-impacting and business-aligning techniques.

The importance of a coherent strategy 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 how information is collected stored, analysed and applied’.

All organisations operate within an environment that influences the way in which they conduct business. Strategy development is strongly influenced by considering the environment the business operates in. Environmental influences can be broken down into:

■ the immediate competitive environment (micro-environment) which includes customer demand and behaviour, competitor activity, marketplace structure and relationships with suppliers and partners;

■ the wider environment (macro-environment) in which a company operates includes economic development and regulation by governments in the forms of law and taxes together with social and ethical constraints such as the demand for privacy.

For IS/IT strategy, the most significant environmental influences are those of the immediate marketplace which is shaped by the needs of customers and how services are provided to them through competitors and intermediaries and via upstream suppliers. We concentrate on managing these influences here (and in Chapter 14). Wider influences are provided by local and international economic conditions and legislation together with what business practices are acceptable to society. Finally, technological innovations are vital in providing opportunities to provide superior services to competitors or through changing the shape of the marketplace. Later (in Chapters 15 to 17) we look at issues involved in managing some of the external factors related to information systems.

IS/IT strategy and an organisation’s environment

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Paul Licker refers to seven ‘modern management imperatives’ (Licker, 1997) summarised as the ‘seven Rs of strategy’. These highlight how an organisation must compete by using information systems strategy to respond to its external environment. Each of the seven Rs is described below together with how IS can be used to respond to the influence.

■ Reach – this recognises that businesses increasingly compete globally rather than locally or within national boundaries. As a result organisations need the ability to compete with everyone else, regardless of geographic constraints.

IS/IT both allows global competition and is required to compete; organisations need information and the tools to process it to allow quick, accurate response, any time and anywhere; global competition implies information networks and inter-organisational systems.

■ Reaction – customers are becoming ever more demanding and customers will make their views known and wish to have them respected. This means that organisations need quick customer feedback on products and services in order to offer what customers are demanding.

IS/IT is needed to access and interpret customer feedback. It can be used to keep track of customers, products and projects – it is particularly important to bring order to the data to facilitate fast and accurate response so that managers will be able to anticipate customer needs because they understand the customer. A consequence of this is that software needs to be flexible and quickly developed.

■ Responsiveness – the process of turning an idea into a product or service that can be marketed is shortening – global reach means that there will be a greater probability that a competitor will be able to offer a good or service that more closely meets customers’ requirements. The response to this situation is to shorten the concept-to-customer cycle time so that the organisation can tailor goods and services to meet customers’ specific needs.

There needs to be a rapid movement of product ideas to the market. Organisations need IS/IT to help manage this process: efficiency and speed as well as accuracy and reliability are required and information needs to be relevant and well formatted.

■ Refinement – greater customer sophistication and specificity means that customers are more able than ever to distinguish fine differences between products and compare them with their needs and desires.

More customer sophistication means increased turbulence in the market, so more information and the tools to manage and manipulate it are needed. Customers are better at communicating precise requirements which means that niche markets appear, grow and disappear rapidly. As a result increased breadth of information is required to create and market products. Also, customers respond well to systems that respond well to them.

■ Reconfiguration – as a consequence of changing customer needs and preferences, it may be necessary to re-engineer work patterns and organisational structures to change the structure of work and workflow from idea to product or service.

As business processes need to evolve and adapt to market needs, there is a big impact on information resource requirements needed for organisational learning (crossing functional boundaries). Complex work structures generate complex data, and management support systems are needed to help manage continually evolving work patterns and structures. Also, new architectures (e.g. client/server) allow decentralisation of IS/IT and greater customer responsiveness.

The environment and the modern management imperatives

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■ Redeployment – changing an organisation’s configuration may require the reorganisation and redesign of the financial, physical, human and information resources that are required to create and market a product or service.

Rapid redeployment of resources is required to meet customer needs. An organisation needs to be able to visualise complex arrangements for resources and models to manage them. Therefore, it is necessary to maintain detailed, relevant information on resources at all times and be able to redeploy them. Information itself has become a competitive resource, as well as allowing more control over other resources.

■ Reputation – an organisation’s reputation will be determined, at least in part, by the satisfaction that a customer experiences. This will be enhanced when the product or service meets or exceeds expectations and requirements. Therefore, an organisation needs to pay attention to the quality and reliability of its products or services and processes by which they are produced.

IS/IT can be used to support product development, testing, marketing and customer post-sales service. It can also help to reduce the gap between expectation and performance. Organisations need to enhance the quality and reliability of the product, and information systems can help in such areas as quality benchmarks, measurement and group-based control techniques.

Figure 13.2 illustrates how an organisation’s IS/IT strategy increasingly forms the bridge between the external business environment and internal business processes and activities. Consider an airline: the quality of all customer interactions, often referred to as ‘moments of truth’ by marketers, whether by phone, Internet or in person, require the support of IS. Similarly most supplier services will also be arranged and delivered through IS support.

An organisation’s IS/IT capability will determine, at least in part, how well it can respond to demands placed on it by the external business environment and how it can manage and revise its internal business processes to meet those external demands.

Figure 13.2 IS/IT capability positioning model showing IS/IT capability as the bridge between internally and externally focused business strategies

Internal Process

Internal Process

Internal Process

Internal Process

Competitiors

Suppliers

Customers

IS/IT capability

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Enthusiasm for the cloud continues to grow. Companies from banking groups with thousands of branches to five-person start-ups are embracing it to obtain the benefits of its pay-as-you-go pricing and on-demand flexibility.

‘Cloud computing is one of the biggest game-changers in computing since e-business emerged 15 years ago,’ says Steve Caniano, who is in charge of AT&T’s hosting, cloud and application services businesses.

‘It helps companies directly align business needs to IT consumption, tie revenues to expenses, and control costs,’ he adds. ‘Using the cloud, businesses can scale their infrastructure at will and create opportunities to [take advantage] of services previously unavailable or unthinkable.

‘Based on our work with thousands of businesses, we estimate that approximately 70 per cent of corporate information technology infrastructure runs on customer premises with less than 20 per cent utilisation. The cloud helps companies avoid wasted investment on idle resources.’

Two AT&T customers illustrate the point. One an engineering group, the other a regional energy company. The engineering group uses AT&T’s network- based cloud to increase or decrease its computing capability in line with its business cycles and project execution, both of which tend to be ‘spiky’. This allows it to avoid investing in infrastructure that would sit idle between projects.

The regional energy company had to cope with millions of web requests for information about energy outages and repairs during a big storm. This threatened the site’s ability to work.

‘It moved the site’s infrastructure to our cloud in four hours, enabling it continuously to communicate real-time outage information to residents and media throughout the service area, greatly improving customer service,’ Mr Caniano says.

Mark Brown, IT risk and assurance director at Ernst& Young, a consultancy, agrees that cloud computing will change the operating landscape, but believes it is likely to complement, rather than replace, client server computing.

He believes that traditional large-scale IT programmes will retain their place in the chief information officer’s arsenal, but will be supplemented with cloud computing.

While some companies are comfortable with a public cloud computing model using on-demand resources such as Amazon’s Web Services, others are building

private clouds using their own virtualised servers, or adopting hybrid public-private models.

But the basic drivers are often the same and, perhaps surprisingly, cost savings are not at the top of the list.

As a recent report by Gartner, the IT research company, noted: ‘The cloud promises to deliver a range of benefits, including a shift from capital-intensive to operational cost models, lower overall cost, greater agility and reduced complexity. It can also be used to shift the focus of IT resources to higher-value-added activities for the business, or to support innovation and, potentially, lower risks.’

When asked about the main customer benefits of cloud computing, 67 per cent of Europe-based respondents to a survey published this month by CA Technologies, a software company, pinpointed scalability. Businesses using the cloud have more flexibility to expand or contract IT services as required.

A further 54 per cent highlighted the significance of ‘agility’, again emphasising the importance of being able to deliver services in a shorter time.

The survey investigated the cost benefits from cloud services and found users making savings of about 11.5 per cent on their annual IT budgets, up from 9.7 per cent reported in last year’s study.

The research also highlighted the maturation of the market. Although private clouds dominate the industry, with 55 per cent of CA’s partners saying their customers use them, compared with 33 per cent for public and 22 per cent for hybrid clouds, it is the hybrid model that is expected to take off.

When asked what type of cloud will be predominantly used in five years’ time, almost half (47 per cent) answered hybrid, compared with 37 per cent for private and just 16 per cent for public.

‘The hybrid cloud model combines the best of both worlds by allowing customers to maximise their existing infrastructure and keep it under internal control, but with the ability to use public cloud resources as needed,’ the report’s authors noted.

The reality is that, while most companies are looking at moving to the cloud, many are cautious about the public model, perhaps because of concerns about security and reliability.

For example, at Wells Fargo, the banking group, Scott Dillon, executive vice-president and head of technology infrastructure services, has used what he calls ‘cloud like’ technologies to help steer the company through a three-year integration project following the $15bn acquisition of Wachovia.

Which cloud model will prevail? By Paul Taylor

CASE STUDY 13.1

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In this section we present six tools commonly used in BIS strategic analysis and definition. We start by considering tools that are mainly used to assess the external environmental constraints and options for strategy and then move on to tools that assess the existing internal situation and are used to generate options about future strategy. The tools selected form only a small proportion of those available, but those covered provide a firm foundation for further analysis. In addition, each tool will be examined in the context of the way in which it can be used to help derive an IS strategy that is an integral part of an organisation’s business strategy. We will review the application of these six tools:

1. Porter and Millar’s five forces model – analyses the different external competitive forces that affect an organisation and how information can be used to counter them.

2. Porter’s competitive strategies – assesses how external competitive forces can be harnessed. 3. Nolan’s stage model – an evolutionary maturity model for assessing the current

development of information systems within an organisation. 4. McFarlan’s strategic grid – a model for assessing the current and future applicat