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Investment in IT is Strategic to a firm's Survival |
Executive SummaryA major area that has sprouted in recent times as a potential source of competitive advantage is Information Technology. Although, the initial investment required in IT is quite substantial, there is enough reason to believe that the returns are quite phenomenal in the long term.There are several challenges that companies face while making a transition from the conventional ‘Brick and Mortal’ model to the IT based model. These may include the high initial cost, redundancy (and hence waste) of legacy systems, gelling with the organizational culture, opposition from conservative lobbies and concerns regarding future benefits. But the most prominent objection of most managers is about the high investment. Unquestionably, these investment decisions are difficult. They are often complicated by a slew of obstacles: costs that are difficult to estimate, benefits that might or might not materialize, requirements that evolve and change midstream, all contributing to significant delivery risk. But smart investments in IT also offer the promise of huge rewards. Not surprisingly, this has intensified the urgency to build I.T.-enabled capabilities.IT is being seen by many as a necessary and strategic investment. Before taking the plunge into the incorporation of I.T. in a company, several factors need to be studied i.e. Market-driving capabilities, Role and impact of IT, Current investment portfolio, I.T. cost and investment profile etc. This gives an insight into the feasibly and potential effectiveness of the investment. IT provides several tools to derive competitive advantage in the ‘Dog eat Dog’ business environment of the 21st century. These include e-commerce, ERP systems, knowledge management systems, e-procurement systems etc. Most of these systems tend to reduce operating costs, enhance productivity and efficiency, improve transparency and aid the management in taking decisions. Data warehousing and data mining may be employed to understand sales patterns, consumer behavior and map transactional efficiency. The security of the sensitive data can be ensured and threats of pilferage and corrupt practices are mitigated. In an organization IT could be incorporated in the form of three models: Data model, Cost model or the hybrid model. The hybrid model is the clear choice of the managers of today. It combines the best practices of both new age theories and the conventional or traditional organizations. IT can be successfully implemented in an organization only by following crucial dogmas such as internalization of IT in the organization, management of IT spending and proper prioritization, deployment of the best IT model and value management. Most companies recognize that too much is at stake for any corporation to disregard the potential that I.T. represents in the emerging Information Age. While a corporation’s potential for leveraging I.T. to build competitive advantage will vary according to industry, competitive position and existing capabilities, there is absolutely no denying the fact that IT is here to stay as a major weapon for strategic and competitive advantage.IntroductionEvery day chief executives around the world and their boards of directors make tough investment decisions. As diligent investors, they base their decisions on tangible results supported by detailed financial analyses aimed at building shareholder value. These same C.E.O.’s and directors must also, however, deal with a new category of investments that refuse to behave typically. These investments involve information technology — and they are growing in number, breadth and scope. I.T. projects run the gamut from fixing the Year 2000, or “Y2K,” bug to upgrading worldwide networks, replacing legacy systems and developing Internet capabilities to order products and services. Unquestionably, these investment decisions are difficult. They are often complicated by a slew of obstacles: costs that are difficult to estimate, benefits that might or might not materialize, requirements that evolve and change midstream, all contributing to significant delivery risk. But smart investments in I.T. also offer the promise of huge rewards. Not surprisingly, this has intensified the urgency to build I.T.-enabled capabilities. IT: A Weapon for Competitive Advantage Together, the changing business environment and recent advances in Internet, database and network technologies are transforming the array of I.T. opportunities and challenges. In today’s world, opportunities to globalize, engaging customers and suppliers in real time and facilitating knowledge-sharing and best practices can be achieved in much less time than anyone ever could have imagined. This new ball game is literally transforming the corporate landscape. It is forcing corporations to rethink their strategies across entirely different sources of competitive advantage and time-to-market considerations. Before taking the plunge into the incorporation of I.T. in a company, several factors need to be studied. This gives an insight into the feasibly and potential effectiveness of the step. • Market-driving capabilities Those capabilities in which excellence yields a sustainable competitive advantage and allows the leaders to drive the market — Dell’s “build to order” business model, for example. • Role and impact of I.T. The way in which I.T. can deliver or support each market-driving capability.• Current investment portfolioThe prioritized investment opportunities, both I.T.-centric and non-I.T. - related, about which the corporation must make decisions.• I.T. cost and investment profileThe detailed breakdown of the corporation’s budget for I.T., including ongoing costs and one-time investments. Effect of IT on OrganizationsØ Emphasis is shifting toward the potential value delivered by I.T. outside the corporation. Most corporations have completed significant E.R.P. software installations and network infrastructure projects as major improvements to their internal I.T. operations. We are now seeing a shift in I.T. projects to external opportunities that engage customers, suppliers and alliance partners as part of the corporation’s “extended enterprise.” Ø Internet capabilities are affecting strategy, competitive positioning and business models of many corporations. The Internet has presented new opportunities and challenges for corporations to build competitive advantage. Competition and customer needs will continue to drive demand as corporations begin to reposition their capabilities to take advantage of new channels, new cost structures and new business models, most of which did not exist two years ago. The promise of electronic commerce also presents additional challenges in restructuring pieces of the existing order management, customer and supplier capabilities and their supporting infrastructure. Ø Traditional value chains are being restructured by “disintermediating” the middleman. The Internet provides a low-cost, universal medium for suppliers to connect with customers. Whether existing businesses or distributors are vulnerable will depend to a large extent upon how well they provide alternative capabilities.IT Tools for Competitive AdvantageMany companies view e-commerce as a tool of defense rather than offense. They feel obligated to do business on-line to protect market share, but they doubt the venture will ever turn a profit. They envy the explosive growth and extraordinary stock multiples of the pure Internet players, but they are afraid of cannibalizing their existing businesses and rendering legacy assets obsolete. This contradictory mix of skepticism and envy, fear and complacency, slows them down in an arena where the early-mover advantage is substantial and where halfhearted efforts commonly fail.In fact, established companies well positioned to succeed at e-commerce. They possess critical assets that can give them an edge over start-up competitors. But to take advantage of those assets, incumbents need to take the offensive—and quickly. They must carefully assess their strengths and weaknesses, build on the former, and rapidly make up for the latter. And they need to understand e-commerce not as an end in itself but as the cornerstone of an integrated business system 2. Enterprise Resource Planning SystemsThroughout the 1990s, most large industrial companies installed enterprise resource planning (ERP) systems—that is, massive computer applications allowing a business to manage all of its operations. ERP promises huge improvements in efficiency—for example, shorter intervals between orders and payments, lower back-office staff requirements, reduced inventory, and improved customer service. By entering customer and sales data in an ERP system, a manufacturer can generate the next cycle’s demand forecast, which in turn generates orders for raw materials, production schedules, timetables for shifts, and financial projections while keeping close track of inventory.For many businesses, installing ERP is traumatic. Following long, painful, and expensive implementations, some companies have difficulty identifying any measurable benefits. Yet companies shouldn’t bemoan the cost of their investment: the hard-won skills and capabilities they acquire during the ERP installation process will permit them to improve their ERP applications incrementally, and these improvements collectively add considerable value. 3. Electronic procurementOn the buy side, attaching an e-procurement module to an ERP system can restrict purchases to preferred suppliers and cut out maverick spending by employees who have too little time to go through required procedures. Say an accountant needs a new computer. An e-procurement module allows that person to choose “computer supplies” from the procurement folder appearing on everyone’s desktop and to select the desired model from the company’s preferred supplier. The clincher is that the ERP system also receives and pays the invoice electronically, cutting out liaison with the accounts organization. 4. Continuous-relationship marketing Electronic orders yield far more information about customers than over-the-counter sales do—not only who those customers are, but also what else they looked at and even, if one cares to track this, how much time they spent on each screen. An add-on application can combine customer data obtained from e-commerce with information in the existing ERP system, helping one cater to individual tastes and create lifelong relationships with customers. 5. Supply chain optimization Production schedules can be generated by the manufacturer’s ERP system and we can compare them with information about current raw-materials costs. These applications can then automatically place orders with the supplier offering the best price in the right volume at the right time.6. Data Warehouse and Business Intelligence SystemsThe purpose of Data Warehouse (DW) and Business Intelligence processes and systems is to unearth and exploit the valuable nuggets of information buried in mountains of operational data of scant informational value, retrieving them from company Databases distributed across disparate and heterogeneous platforms. Specifically, Data Mining tools have become essential to understanding, maintaining, incentivizing and expanding a company’s customer base, through market segmentation, popularity rating analyses and targeted marketing campaigns.Business Intelligence System (BIS), OLAP and Data Mining platforms form the backbone of “informed” decision-making support capability that is now vital to company managers who wish to secure a real competitive advantage from the data in their possession. By using specific, verticalized IT tools (BIS and OLAP), management can deliberately steer the company by acting on four basic levers: Economic/Financial, Strategic Processes, Internal People Training and Growth, and Customer Satisfaction. 7. Knowledge Management The “core” of KM involves the acquisition, explication, and communication of mission-specific professional expertise in a manner that is focused and relevant to an organizational participant who receives the communication. The cost of setting up a KM infrastructure is quite large, especially for big organizations. However, the benefits far outweigh the costs in the long term. IT Management ModelsMost corporations adopt one I.T. management model based on their own priorities and strategies, but some use a hybrid approach, separating the scale-intensive functions from the value-oriented ones. The differences between approaches are clear: ► Cost Model The cost model requires a commitment to maintaining an operating environment that relies on mature hardware, software and network architecture, with proven products that are stable and well understood by the staff. ► Value ModelThe value model is predicated on meeting the specific needs of the business community, often trading cost efficiency for new capability-building activities. In this model, business executives either wield a great deal of influence or control their own I.T. funding and resources. ► Hybrid Model The hybrid model evolves when corporations try to optimize on both the cost and value dimensions. The operating components and the capability-building resources are often separated, sometimes with different managers leading each. Over the past few years, we have seen more companies trying to use the hybrid model. This reflects the evolving partnership between the I.T. function and the business community, as well as the increasingly urgent need to look at a corporation’s I.T. spending and investment performance across major I.T. projects. Look into the Hybrid ModelTaking a hybrid approach creates more options for building competitive barriers that protect the profit stream. One such mechanism involves owning the hard to replicate assets associated with delivering after-sales support services to the customer.Creating a hybrid approach requires a different mindset from the one familiar to most bricks and mortar companies. Whereas careful planning and deployment of resources in an often stable market are characteristic of a mature business, a company moving online must emphasize speed and experimentation. Implementation of IT in Organizations► Make I.T. a key part of the company agenda The biggest decision the company can make is to elevate I.T. to the ranks of the top-priority, highest- visibility opportunities for the corporation. The visibility alone will help keep the management team focused on every opportunity to build competitive advantage. ► Manage for value creationThe C.E.O. and the management team must decide whether (and if so, to what extent) they want to control I.T. costs and/or build capabilities with I.T. The key here lies in recognizing that this decision drives the entire opportunity to build competitive advantage with I.T., so it must line up with the corporation’s overall market strategy.. ► Manage I.T. spending and investment priorities After determining the overall investment strategy and the proper role of I.T., the company and management team must drive the implementation of the investment projects with a focus on demonstrable results. ► Deploy the best I.T. management model This decision must be explicit and tied to the corporation’s potential to build competitive advantage with I.T. Accordingly, one of the three models mentioned earlier could be implemented. ConclusionMost companies recognize that too much is at stake for any corporation to disregard the potential that I.T. represents in the emerging Information Age. While a corporation’s potential for leveraging I.T. to build competitive advantage will vary according to industry, competitive position and existing capabilities, the issues that ultimately force C.E.O.’s to take action will likely come from customers and competitors. Companies now have before them a vast array of I.T. opportunities that can affect virtually every function and every capability in the corporate portfolio. To capitalize on these opportunities, C.E.O.’s must understand how they can use I.T. to achieve many fundamental goals and thereby build shareholder value. The early winners have already figured out that tomorrow’s opportunities for competitive advantage will be driven by information and the ability to use it, in real time, across an increasingly complex, global landscape.Authored By: Siddharth Mohan Patnaik, Ravulpathi Janaki, IIM Lucknow
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Writers
Profile Siddharth Mohan Patnaik, IIM Lucknow
B tech
(Electronics) & Ravulpathi Janaki, IIM Lucknow
B
tech (Mechanical) pgp19217@iiml.ac.in
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