Learning and

Development Council,
CAC

Strategic Analysis of Information Technology

This document covers the basic concepts of Strategic Analysis of
Information Technology

CONTENTS
1. IT and competitive advantage
2. Competing with Platform-mediated Networks
3. Disruptive Innovations and Transformational Business Models
4. Business Processes and Enterprise Systems
5. Social Networks and Enterprise 2.0
6. Competing with Open Innovation Networks
7. Competing on Business Analytics
8. Making the business case for IT investments
9. Governance of the extended enterprise

IT AND COMPETITIVE ADVANTAGE

InnovatingwithIT:Model

TypesofITinvestments:
Transactional investments are used primarily to
cut costs or increase throughput for the same cost
(for example, think of a brokerage firms trade
processing system)
Informational investments provide information
for purposes such as accounting, reporting,
compliance, communication or analysis.
Strategic investments are used to gain
competitive advantage by supporting entry into
new markets or by helping to develop new
products, services or business processes (ATMs
were a successful strategic IT initiative for the first
banks that introduced them but they became
transactional over time).
Infrastructure investments are the shared IT
services used by multiple applications (such as,
servers, networks, laptops, customer databases

The Five Characteristics of IT Savvy

SevenWaystoExtractMoreBusinessValueFromYourITPortfolio
1. Identify the current and previous years IT portfolios
2. Understand IT asset class performance and benchmarks for your business.
3. Understand and track your organizations IT savvy
4. Balance the portfolio for alignment and risk-return profile and ensure that the process is transparent
5. Re-weight portfolios annually and whenever major changes occur
6. Incorporate the IT portfolio approach into the IT governance framework.
7. Learn from post-implementation reviews and formal training

COMPETING WITH PLATFORM MEDIATED NETWORKS

The two-sided networks differ from other offerings in a fundamental way. In the traditional value chain,
value moves from left to right: To the left of the company is cost; to the right is revenue. In two-sided
networks, cost and revenue are both to the left and the right, because the platform has a distinct group of
users on each side. The platform incurs costs in serving both groups and can collect revenue from each,
although one side is often subsidized, as well see
Effects in a Platform:
A same-side effect, in which increasing the number of users on one side of the network makes it either
more or less valuable to users on the same side;
A cross-side effect, in which increasing the number of users on one side of the network makes it either
more or less valuable to the users on the other side.
Cross-side network effects are typically positive, but they can be negative (TV viewers preferring fewer ads).
Same-side network effects are often negative (sellers preferring fewer rivals in a B2B exchange), but they
may be positive (Microsoft Xbox owners valuing the fact that they can play games with friends).
ManagingPlatforms:TheIdeainBrief
Eisenmann, Parker, and Van Alstyne contend, managing platforms is tricky:
Strategies that make traditional offerings successful wont work in these two-sided markets. To capture the
advantages that platforms promise, you must address three strategic challenges
(1) GET PRICING RIGHT (2) COPE WITH WINNER-TAKE-ALL COMPETITION (3) AVOID ENVELOPMENT

CHALLENGE1:GETPRICINGRIGHT
To make the right decisions about pricing, executives of platform providers need to look closely at the
following factors:
Ability to capture cross-side network effects
Your giveaway will be wasted if your networks subsidy side can transact with a rival platform providers
money side.
User sensitivity to price
Generally, it makes sense to subsidize the networks more price sensitive side and to charge the side that
increases its demand more strongly in response to the other sides growth
User sensitivity to quality
High sensitivity to quality also marks the side you should subsidize. This pricing prescription can be
counterintuitive: Rather than charge the side that strongly demands quality, you charge the side that must
supply quality
Output costs
Pricing decisions are more straightforward when each new subsidy-side user costs the platform provider
essentially nothing. However, when a giveaway product has appreciable unit costs, as with tangible goods,
platform providers must be more careful. If a strong WTP does not materialize on the money side, a
giveaway strategy with high variable costs can quickly rack up large losses
Same-side network effects
Surprisingly, sometimes it makes sense to deliberately exclude some users from the network
Users brand value
All users of two-sided networks are not created equal. The participation of marquee users can be
especially important for attracting participants to the other side of the network. Marquee users may be
exceptionally big buyers, like the U.S. government or a high profile supplier.
CHALLENGE2:COPEWITHWINNER-TAKE-ALLCOMPETITION
Coping with platform competition is a two step process. First, executives must determine whether their
networked market is destined to be served by a single platform. When this is the case, the second step
deciding whether to fight or share the platformis a bet-the company decision
First Step: The market is likely to be served by a single platform when the following three conditions apply:
Multi-homing costs are high for at least one user side.
Network effects are positive and strongat least for the users on the side of the network with high
multi-homing costs
Neither sides users have a strong preference for special features

Second Step: Determine whether to Fight or Share!

a. Sharing: Even those firms that have a fighting chance of gaining proprietary control stand to realize
benefits from sharing
First, the total market size will be greater with a shared platform.
Second, since the stakes are so high in battles for network dominance, firms spend enormous amounts on
upfront marketing
b. Fighting: To fight successfully, you will need, at a minimum, cost or differentiation advantages. Three
other assets are important in establishing proprietary control:
1. Preexisting relationships with prospective users
2. A reputation for past prowess helps a great deal
3. In a war of attrition, deep pockets matter!
CHALLENGE 3: THREAT OF ENVELOPMENT
Platforms frequently have overlapping user bases. Leveraging these shared relationships can make it easy
and attractive for one platform provider to swallow
the network of another. The real damage comes
when your new rival offers your platforms
functionality as part of a multiplatform bundle
What do you do?
Change business models
Find a bigger brother.
Sue!
Change business models: Reals response to Microsofts envelopment attack was to switch its money side.
Ceding the streaming media business, Real leveraged existing relationships with consumers and music
companies to launch Rhapsody in 2003, charging $10 per month for unlimited streaming to any PC from a
library of a half-million songs
Find a bigger brother: When bullied on the playground, a little guy needs a big friend. Real has found
allies through partnerships with cable TV system operators and cellular phone companies. Subscription
music which requires a broadband connectionmakes cable modem service stickier: Once consumers
commit to a music service, they face switching costs

1. Sue!: Firms facing envelopment are wise to consider legal remedies, because antitrust law for twosided networks is still in dispute. Antitrust law was conceived to constrain the behavior of traditional
manufacturing firms and does not fully reflect the economic imperatives of platform-mediated
networks

DISRUPTIVE INNOVATIONS AND TRANSFORMATIONAL BUSINESS MODELS

Two types of INNOVATION
Sustaining
Disruptive
Sustaining innovation: makes a product perform better for mainstream customers
Most new technologies foster improved product performance (sustaining technologies)
All sustaining technological changes improve the performance of established products
Improvements along dimensions of performance historically valued by mainstream
customers in major markets
Good managers in established companies excel at sustaining innovations but fare less well with
disruptive ones
Unique core capabilities define a company and shapes its capacity to change
Resources
Processes
Values
Disruptive innovation: creates entirely new markets
Occasionally, disruptive technologies emerge
innovations that result in worse product performance (in the near term)
can have enormous potential for the future, but that future is largely unknown
Often sacrifice performance along dimensions important to current customers
Offer a very different package of attributes not (yet) valued by those customers
But the new attributes can open up entirely new markets
TWOSTRATEGIESFORCREATINGNEWDISRUPTIVEGROWTHBUSINESSES:
1. Creating a new market as a base for disruption
2. Disrupting the prevailing business model from the low end
CREATING A NEW MARKET AS A BASE FOR DISRUPTION
Test #1: Does the innovation target customers who in the past haven't been able to "do it themselves" for
lack of money or skills? Many of the most successful disruptive growth businesses have given people direct
access to products or services that had been too expensive or too complex for the mainstream
Test #2: Is the innovation aimed at customers who will welcome a simple product? If the innovation
enables a new population of customers to consume for hemselves, it can more easily be shaped to pass the
second litmus test: The disruptive product must be technologically straightforward, targeted at customers
who will be happy with a simple product

Test #3: Will the innovation help customers do more easily and effectively what they are already trying to
do? One essential fact: At a fundamental level, the things that people want to accomplish in their lives don't
change quickly. Because of this stability, if an idea for a new growth business is predicated on customers
wanting to do something that hadnt been a priority in the past, it stands little chance of success.
DISRUPTING THE PREVAILING BUSINESS MODEL FROM THE LOW END
Test #1: Are prevailing products more than good enough?
If available products aren't yet good enough, a disruptive innovation whose performance is even lower will
not gain any traction in the market. Mobile telephone networks probably fall into the category of "not yet
good enough" to be disrupted with this strategy. (Online Commodity Exchange is an example)
Test #2: Can you create a different business model?
If the low end of a market is over served and thus open to disruption, the second test requires managers to
craft a new business model; the business must be able to earn attractive returns at prices that can steal
business at the low end (Retailing)
CORECAPABILITIES:
Three classes of factors that affect what a company like Xerox can do with the printer opportunity - its
resources, processes and values - need to be managed carefully.
The meaning of the first two terms is straightforward. In this context, we use the term "values" to mean the
criteria that people employ when making both big and small decisions -- when giving priority to one set of
activities over another.
Managers need to determine which resources, processes and values to leverage to help the new business
succeed.
Resources:
In addition to the technology, the key resources for Xerox's printer business would be management talent
and cash
To choose the right managers to lead a new venture, it's useful to construct a three-column chart. In the
left column, list the challenges that the managers will confront as they build the new venture. In the middle
column, list the experiences the managers should already have had, to be certain they have the perspective
to succeed. In the right column, list the backgrounds of candidates.
The other important resource, cash, must be managed in a way that avoids two common misconceptions.
The first is that access to deep corporate pockets is an advantage to a new growth business. It is not
The second misconception is that the corporation needs to be patient - that it should be prepared to accept
large losses for sustained periods in order to reap the huge upside that eventually comes from disruptive
innovation.

Processes and Values:

In any company, mainstream processes and criteria for setting priorities (values) have been honed to
sustain the core business.
Typically, key processes that work well in the core (such as strategic planning and product development)
actually impede what needs to be done in an emerging business.
And the criteria for setting priorities and making decisions that are inherent to the business model of the
new enterprise often must be very different from those that are useful in the mainstream.
That is why disruptive enterprises often need to be managed as independent business units.
BUILDINGANINNOVATIONENGINE:

Start Before You Need To

Establish an Aggregate Project Plan

Train People To Distinguish Between Disruptive and Sustaining Ideas

Create Processes for Shaping Disruptive Business Plans

Not Just a Lucky Bet:

The structure of our proposed innovation engine is quite different from a conventionally managed
corporate venture-capital organization
We are proposing that starting successful growth businesses isn't as random and failure-fraught as it has
appeared. It is complicated, to be sure. But it only appears random, we believe, because managers haven't
understood the factors that lead to success or cause failure.
Spending too much on the wrong strategy in an attempt to get big fast; putting people with inappropriate
experience in charge; violating the litmus tests; and launching growth initiatives in an ad hoc manner when
it is already too late -- these reasons for failure can be managed and avoided

COMPETING THROUGH BUSINESS PROCESSES AND ENTERPRISE SYSTEMS

Enterprise Systems:
What?
Provide standardization of processes and
integration of data cross functions
Why?
Reduce redundancy and resource wastage
across the supply chain
Plan, deploy and control key resources like
labor, equipment and money
How?
Centralize enterprise data
Enforce best practice business processes

Advantages of enterprise systems and Key elements of enterprise systems:

1. Data is available for use across the organization, allowing coordinated and synchronized operations
2. The agreed-on data definitions allow managers, professionals and workers across an organization to
communicate via a common language
3. Coordination and collaboration across functional and departmental lines
4. Availability of digitized data archives enables new IS and new business platforms to be designed and
implemented more quickly and less expensively.
Some of the factors that influence the success of implementation of enterprise systems:
1. Put best people on the team
2. Well communicated top management commitment
3. Middle management commitment
4. High Priority within the company
5. Seasoned consulting support
6. Strong vendor alliances
7. Well defined end date

Different types of implementations of enterprise systems:

Centralize data, optimize processes, and link with other applications/ systems
Big bang (All modules simultaneously across the enterprise)
Franchising (Independent implementations across business units, Common processes linked)
Pilot implementation (can be done with either big bang or franchising)

The Risks of Enterprise Systems:

Expensive, complex and notoriously difficult to implement

Conflict between systems and strategy
Significant costs that must often be managed over long periods of time
Fundamental changes to organizational structure and culture

SOCIAL NETWORKS AND ENTERPRISE 2.0

The Growing Salience of Social Networking Technologies

Viral communication
Global, democratic and open communities
Enhance efficiency and creativity by co-opting users: create, edit, modify content

Harnessing the power of collaboration: Crowd sourcing for collective decision making
Prediction Markets
Enterprise 2.0
Harnessing the power of collaboration: Co-opting customers in commerce
Recommendation systems
PredictionMarkets:
What are they?
Small scale electronic markets, frequently open to any employee, that tie payoffs to measurable
future events
Aggregate judgments of a heterogeneous group of people
Prices can be interpreted as market aggregated forecasts
Collective wisdom of the crowd is better than that of the smartest individuals

Why do they work?

Diversity of information
Interdependencies between participants
Individuals have a personal financial stake
What

are the conditions for success?

Outcomes of each market are verifiable, mutually exclusive and collectively exhaustive
Outcome is independent of the market
Underlying events are widely discussed
Insider trading

Potential Problems:
Biased Opinions
Market Manipulation
RecommendationSystems
What are Recommendation Systems?
System that matches patterns in the preferences and purchasing behavior of a buyer to those of other
buyers
Item-to-item filtering
User-to-user filtering
Value of a recommendation system:

Based on real activity

Facilitates discovery and new customer transactions
Personalization
Constantly updated

Key Takeaway: A shift in the use of organizational IT:

COMPETING WITH OPEN INNOVATION NETWORKS

Introduction:
Open business models enable an organization to be more effective in creating as well as capturing value.
They help create value by leveraging many more ideas because of their inclusion of a variety of external
concepts.
They also allow greater value capture by utilizing a firms key asset, resource or position not only in that
organizations own operations but also in other companies businesses.
The Innovation Funnel
Reasons whycompanies goforOpen
BusinessModels:
Innovation Efficiencies
Rising Costs, Shorter Costs
Open experiments
Theeconomicpressures ofinnovation:

Closed Model

Open Model

Summary:ClosedInnovation
Advantages: Control over the direction of innovation; receive solutions from the best experts in a selected
knowledge domain
Challenges: Choosing the right direction; identifying the right knowledge domain and the right parties
Enablers: Capability to understand user needs; Capability to find unspotted talent in relevant networks;
Capability to develop privileged relationships with the best parties
Summary:OpenInnovation
Advantage: Large number of solutions, broader range of interesting ideas
Challenges: Attracting several ideas from a variety of domains and screening them
Enablers: Capability to test and screen solutions at low cost; information platforms that allow parties to
contribute easily; small or modular problems
COMPETING ON BUSINESS ANALYTICS
Business Analytics: Process Model

Examples:

Data mining:
The Concept
New buzzword, old idea.
Inferring new information from already collected data.
Traditionally job of Data Analysts
Computers have changed this.
Far more efficient to comb through data using a machine than eyeballing statistical data.
Data Mining Techniques
Classification
Prediction
Clustering
Affinity Analysis (Think of Amazons Recommendation Engine Association Rul s)
Howtouseyourdatabasetosecure customersloyalty?ConsiderHarrahsEntertainmentsapproach as an
example:
1. Acquire a rich repository of customer information.
Total Gold customers inserted cards into slot machines and earned rewards for playing while Harrahs
gathered information about them.

2. Slice and dice data finely to develop marketing strategies.

Most companies do the opposite: design grand marketing schemes, and then adjust their databases to
those strategies. Example: Harrahs database information indicated the need for a loyalty strategy. How? By
enveloping customers in Reasons to be loyalcultivating intimately friendly relationships with them.
3. Identify core customers by predicting their lifetime value.
Instead of emphasizing how much people spent during one transaction, calculate their potential worth over
time. Example: Harrahs discovered 26% of its gamblers generated 82% of its revenue
4. Gather increasingly specific information about customers preferencesthen appeal to those interests.
Reward customers for spending more, which increases their lifetime value. Example: Harrahs split Total
Rewards cardholding customers into tiers based on their annual theoretical value, and treated the groups
differently
5. Reward employees for prioritizing customer service.
Example: Harrahs measures employees speed and friendliness, paying bonuses for improving customersatisfaction scores. Rewards hinge on everyones performance at a casino and on customer satisfaction,
not a propertys financial performance.
MAKING THE BUSINESS CASE FOR IT INVESTMENTS
Why is it difficult to assess returns to IT investments?
It is difficult to assess returns to IT investments due to uncertainty whether the project will achieve its goal.
There are two levels of moderators which are not under firms control but have potential of impacting the
returns:
(1) Implementation Quality Affect First order impact
(2) Competition, business/regulatory environment, speed of IT innovations Affect Financial impact

IT Investment Risks and Consequences

TheFinancialCaseforITInvestments:
The Net Present Value (NPV) method doesnt cut it for large, complex projects
Now or never - does not consider additional choices to structure the investment favorably
Risk/uncertainty associated with large IT investments
Does not consider options which are rights to take some actions in the future based upon
contingencies
Active NPV = Passive NPV + Value of managerial flexibility
Real Options Analysis
Firm has the right but not the obligation to acquire IT assets
Types of IT Options:
Defer: Waiting may reveal the truth
Stage: Divide and conquer
Explore (Pilot/Prototype): Gather information, demonstrate feasibility
Alter scale (scale up/scale down): Design for scalability
Abandon: Its a dead horse!
Strategic growth: Immediate benefits may be small, but may enable additional options
Key Points:
Waiting is not valuable if there is no learning in the meantime and if NPV is already positive!
In the presence of real options, NPV > 0 is no longer a sufficient decision criterion for value
maximization!
A revised decision rule compares the NPV of exercising now versus the value of holding the project
as an option!

The Business Case for Strategic IT Initiatives:

GOVERNANCE OF THE EXTENDED ENTERPRISE

Developing an Offshoring Strategy: The Client Perspective
What tasksshouldweoutsource?

Task complexity
o Are task activities and their performance expectations clearly specifiable?
o Do task requirements frequently change to respond to changing business requirements?
Task Interdependence
o Does task execution require coordination among various departments in the organization?
Strategic Importance
o Does task execution require transfer of strategic knowledge or IP or control over intangible
assets?

What shouldbethe sourcingmode?

Identify and manage operational and structural risks

Operational Risks and Structural Risks:
The Operational risks of outsourcing essentially deal with the codifiability of the tasks and the
structural risks deal with the ability to monitor work.

Matrix for Choice of Outsourcing:

Howshouldthe outsourcingrelationship bemanaged?

Contractual coordination
o Aligns incentives between the client and vendor
o Fixed price, time and materials, gainsharing, etc.
Relational coordination
o Aligns actions between the client and vendor
o Joint action, coordination, etc.

Higher Risk of Failure in Strategic Outsourcing:

Difficult to codify work, monitor work and develop metrics that precisely measure the quality of
work
Costly, incomplete contracts may not capture outputs and desired behaviors
Lack of industry standards and performance benchmarks
Increased costs of relational governance

Takeaways:

Outsourcing is an imperative for competitive success in modern organizations. Yet, organizations

remain unprepared for the transformation that outsourcing brings
Key decisions include what and how to outsource
A sound and comprehensive governance strategy including contractual, relational and technological
coordination is essential to unlocking the true value of outsourcing