IT Strategic Planning Process

IT strategic planning is a systematic process for determining what a business should become and how it can best achieve that goal, as you read in Opening Case 12.1. Typically, an organization will evaluate its full potential using SWOT analysis (Tech Note 12.1) and then will decide how to allocate resources to develop critical capabilities. In practice, competing agendas, tight budgets, poor interdepartmental communication, and politics can turn strategic planning discussions into bar room brawls—if they are not well managed.

Generally speaking, during strategic analysis, an organization scans and reviews the political, social, economic, and technical environments of an organization. For example, any company looking to expand its business operations into a developing country has to investigate that country’s political and economic stability and critical infrastructure. In this case, strategic analysis would include reviewing the U.S. Central Intelligence Agency’s (CIA) World Factbook.

The World Factbook provides information on the history, people, government, economy, geography, communications, transportation, military, and transnational issues for 266 world entities. Then the company would need to investigate competitors and their potential reactions to a new entrant into their market.

Equally important, the company would need to assess its ability to compete profitably in the market and impacts of the expansion on other parts of the company. For example, having excess production capacity would require less capital than if a new factory needed to be built.

CIOs undertake IT strategic planning on a yearly, quarterly, or monthly basis. A good IT planning process helps ensure that IT aligns, and stays aligned, within an organization’s business strategy. Because organizational goals change over time, it is not sufficient to develop a long-term IT strategy and not re-examine the strategy on a regular basis. For this reason, IT planning is an ongoing process. The IT planning process results in a formal IT strategy or a reassessment each year or each quarter of the existing portfolio of IT resources.

Recall that the focus of an IT strategy is on how IT creates business value. Typically, annual planning cycles are established to identify potentially beneficial IT services, to perform cost–benefit analyses, and to subject the list of potential projects to resource allocation. Figure 12.3 illustrates the IT strategic planning process.

The planning process begins with the creation of a strategic business plan. The long-range IT plan, sometimes referred to as the strategic IT plan, is then based on the strategic business plan. The IT strategic plan starts with the IT vision and strategy, which defines the future concept of what IT should do to achieve the goals, objectives, and strategic position of the firm and how this will be achieved. The overall direction, requirements, and sourcing—either outsourcing or insourcing—of resources, such as infrastructure, application services, data services, security services, IT governance, and management architecture; budget; activities; and time frames are set for three to five years into the future. The planning process continues by addressing lower-level activities with a shorter time frame.

The next level down is a medium-term IT plan, which identifies general project plans in terms of the specific requirements and sourcing of resources as well as the project portfolio. The project portfolio lists major resource projects, including infrastructure, application services, data services, and security services, that are consistent with the long-range plan. Some companies may define their portfolio in terms of applications. The applications portfolio is a list of major, approved information system projects that are also consistent with the long-range plan. Expectations for sourcing of resources in the project or applications portfolio should be driven by the business strategy. Since some of these projects will take more than a year to complete and others will not start in the current year, this plan extends over several years.

The third level is a tactical plan, which details budgets and schedules for current-year projects and activities. In reality, because of the rapid pace of change in technology and the environment, short-term plans may include major items not anticipated in the other plans.

The planning process just described is currently practiced by many organizations. Specifics of the IT planning process, of course, vary among organizations. For example, not all organizations have a high-level IT steering committee. Project priorities may be determined by the IT director, by his or her superior, by company politics, or even on a first-come, first-served basis.

The deliverables from the IT planning process should include the following: an evaluation of the strategic goals and directions of the organization and how IT is aligned; a new or revised IT vision and assessment of the state of the IT division; a statement of the strategies, objectives, and policies for the IT division; and the overall direction, requirements, and sourcing of resources. The entire strategic planning process is often conducted by an IT steering committee.

Concept Check 12.1

Achieving and Sustaining a Competitive Advantage

A well-thought-out and executed IT strategy that aligns with the business to develop, source, and put in place technology that best supports business processes and goals can give an organization a competitive advantage in the marketplace.

In business, as in sports, companies want to win—customers, market share, position in the industry. Basically, this requires gaining an edge over competitors by being first to take advantage of market opportunities, providing great customer experiences, doing something well that others cannot easily imitate, or convincing customers why it is a more valuable alternative than the competition.

Competitiveness relies heavily on IT agility and responsiveness. The benefit of IT agility is that it enables organizations to take advantage of opportunities faster or more effectively.

Closely related to IT agility is flexibility. For example, mobile networks are flexible—able to be set up, moved, or removed easily, without dealing with cables and other physical requirements of wired networks. Mass migration to mobile devices from PCs has expanded the scope of IT beyond traditional organizational boundaries—making location practically irrelevant.

IT agility, flexibility, and mobility are tightly interrelated and fully dependent on an organization’s IT infrastructure and architecture, as discussed in Chapter 2.

Once an enterprise has developed a competitive edge, it can only be maintained and sustained by continually pursuing new and better ways to compete. Maintaining a competitive advantage requires forecasting trends and industry changes and figuring out what the company needs to do to stay ahead of the game. It demands continuously tracking competitors and their future plans and promptly taking corrective action. It’s important to remember that while IT plays a key role in competitive advantage, that advantage is short-lived if competitors quickly duplicate it.

Two of the most widely used methodologies associated with gaining, maintaining, and sustaining a competitive edge are the Competitive Forces Model and Value Chain Model. Both of these are discussed next.

Porter’s Competitive Forces Model

Michael Porter’s competitive forces model, also called the five-forces model, is a simple but powerful strategic planning tool for understanding the strength of an organization’s competitive position in its current environment and in the environment into which it’s considering moving. Professor Porter discusses his model in detail in a 13-minute YouTube video from Harvard Business School.

The model assumes that there are five important forces that determine competitive power in a business situation and influence a company’s position within a given industry and the strategy that management chooses to pursue. Other forces, including new regulations, which affect all companies in the industry and have a rather uniform impact on each company in an industry, are not included in the model.

The Five Forces

According to Porter, five major forces in an industry affect the degree of competition, which impact profit margins and ultimate profitability (Figure 12.5). While each of the five forces need to be assessed individually, it’s their overall interaction that determines potential competitive advantage. For example, while profit margins for pizzerias may be small, the ease of entering that industry draws many new entrants. Conversely, profit margins for delivery services may be large, but the cost of technology needed to support the service is a huge barrier to entry into the market.

The five industry (or market) forces are as follows:

1. Threat of entry of new competitors Industries that have large profit margins attract entrants into the market to a greater degree than industries with small margins. The same principle applies to jobs—people are attracted to higher-paying jobs, provided that they can meet the criteria or acquire the skills for that job. In order to gain market share, entrants usually need to sell at lower prices as an incentive. Their tactics can force companies already in the industry to defend their market share by lowering prices—reducing profit margin. Thus, this threat puts downward pressure on profit margins by driving down prices.

   This force also refers to the strength of the barriers to entry into an industry, which is how easy it is to enter an industry. The threat of entry is lower (less powerful) when existing companies have ITs that are difficult to duplicate or very expensive. Those ITs create barriers to entry that reduce the threat of entry.

2. Bargaining power of suppliers Bargaining power is high where the supplier or brand is powerful, such as Apple, Microsoft, and auto manufacturers. Power is determined by how much a company purchases from a supplier. The more powerful company has the leverage to demand better prices or terms, which increase its profit margin. Conversely, suppliers with very little bargaining power tend to have small profit margins.
3. Bargaining power of customers or buyers This force is the reverse of the bargaining power of suppliers. Examples are Walmart and government agencies. This force is high when there are few large customers or buyers in a market.
4. Threat of substituting products or services Where there is product-for-product substitution, such as Kindle for Nook, there is downward pressure on prices. As the threat of substitutes increases, the profit margin decreases because sellers need to keep prices competitively low.
5. Competitive rivalry among existing firms in the industry Fierce competition involves expensive advertising and promotions, intense investments in R&D, or other efforts that cut into profit margins. This force is most likely to be high when entry barriers are low, the threat of substitute products is high, and suppliers and buyers in the market attempt to control it. That is why this force is placed in the center of the model.

The strength of each force is determined by the industry’s structure. Existing companies in an industry need to protect themselves against these forces. Alternatively, they can take advantage of the forces to improve their position or to challenge industry leaders or move into a new industry. The relationships between the forces are shown in Figure 12.5.

Companies can identify the forces that influence competitive advantage in their marketplace and then develop their strategy. Porter (1985) proposed three types of strategies—cost leadership, differentiation, and niche strategies. In Table 12.6, Porter’s three classical strategies are listed first, followed by a list of nine other general strategies for dealing with competitive advantage. Applying the right kinds of technology support can enhance each of these strategies.

Strategy	Description
Cost leadership	Produce product/service at the lowest cost in the industry.
Differentiation	Offer different products, services, or product features.
Niche	Select a narrow-scope segment (market niche) and be the best in quality, speed, or cost in that segment.
Growth	Increase market share, acquire more customers, or sell more types of products.
Alliance	Work with business partners in partnerships, alliances, joint ventures, or virtual companies.
Innovation	Introduce new products/services; put new features in existing products/services; develop new ways to produce products/services.
Operational effectiveness	Improve the manner in which internal business processes are executed so that the firm performs similar activities better than its rivals.
Customer orientation	Concentrate on customer satisfaction.
Time	Treat time as a resource, then manage it, and use it to the firm’s advantage.
Entry barriers	Create barriers to entry. By introducing innovative products or using IT to provide exceptional service, companies can create entry barriers to discourage new entrants.
Customer or supplier lock-in	Encourage customers or suppliers to stay with you rather than going to competitors. Reduce customers’ bargaining power by locking them in.
Increase switching costs	Discourage customers or suppliers from going to competitors for economic reasons.

Porter’s Value Chain Model

Another useful strategic management tool is Porter’s Value Chain. The Value Chain Model identifies where the greatest value exists in an organization and how that value can be increased. Understanding how your company creates value and identifying ways to add even greater value are essential in developing a competitive strategy. Porter proposed a general-purpose value chain that any organization can use to examine all of its activities and their relationships to each other. These activities fall into two major categories: primary and support.

Primary activities are those business activities directly involved in the production of goods. Primary activities relate directly to the creation, sale, maintenance, and support of a product of services. The five primary activities are as follows:

1. Inbound logistics, or acquiring and receiving of raw materials and other inputs
2. Operations, including manufacturing and testing
3. Outbound logistics, which includes packaging, storage, delivery, and distribution
4. Marketing and sales to customers
5. Services, including customer service

Primary activities usually occur sequentially, from 1 to 5. As work progresses, value is added to the product in each activity. To be more specific, incoming materials (1) are processed (in receiving, storage, etc.) in activities called inbound logistics. Next, the materials are used in operations (2), where significant value is added by the process of turning raw materials into products. Products need to be prepared for delivery (packaging, storing, and shipping) in the outbound logistics activities (3). Then marketing and sales (4) attempt to sell the products to customers, increasing product value by creating demand for the company’s products. The value of a sold item is much larger than that of an unsold one. Finally, after-sales service (5), such as warranty service or upgrade notification, is performed for the customer, further adding value.

A variety of support activities feed into one or more of the primary activities. The four support activities are as follows:

1. The firm’s infrastructure, accounting, finance, and management
2. Human resources (HR) management
3. Technology development, and research and development (R&D)
4. Procurement, or purchasing

Each support activity can be applied to any or all of the primary activities. Support activities may also support each other, as shown in Figure 12.6.

Concept Check 12.2

Sourcing and Cloud Services

As you have read, in its simplest form, cloud computing is a way for companies to procure technology as a service (XaaS), including infrastructure (IaaS), applications (AaaS), platforms (PaaS), and business processes, via the Internet. IT resources no longer depend on capital investments and IT developers to own that resource. IT capabilities can be sourced, scaled on, and delivered on demand without physical location, labor, or capital restrictions. As a result, an enterprise’s cloud strategy plays a role in its sourcing strategy and business growth.

Factors Driving Outsourcing

Enterprises choose outsourcing for the reasons shown in Table 12.7.

Outsourcing Risks and Hidden Costs

As companies find that their business strategy is increasingly tied to IT solutions, the concerns about outsourcing risks increase. Risks associated with outsourcing are as follows:

• Shirking The vendor deliberately underperforms while claiming full payment, for example, billing for more hours than were worked and/or providing excellent staff at first and later replacing them with less qualified ones.
• Poaching The vendor develops a strategic application for a client and then uses it for other clients.
• Opportunistic repricing When a client enters into a long-term contract with a vendor, the vendor changes financial terms at some point or overcharges for unanticipated enhancements and contract extensions.
• Breach of contract by vendor The vendor fails to carry out the terms of the outsourcing agreement.
• Inability of vendor to deliver as promised Sometimes outsourcers represent themselves as being more skilled than they actually are and they are unable to deliver the products or services that are promised in the outsourcing agreement.
• Vendor lock-in In the event that the outsourcing relationship does not go well, it can be difficult to get out of the outsourcing agreement.
• Loss of Control over data Once the data is on the outsourcers servers, the organization has little control over how and when that data can be accessed and by whom.
• Lower employee morale IT employees may feel devalued as a result of development and services being performed by an outside source.

Depending on what is outsourced and to whom, an organization might end up spending 10% above the budgeted amount to set up the relationship and manage it over time. The budgeted amount may increase anywhere from 15 to 65% when outsourcing is sent offshore and the costs of travel and cultural differences are added in.

Offshoring

Another IT strategy is to offshore IT development and services. Offshoring of software development has become a common practice due to global markets, lower costs, and increased access to skilled labor. About one-third of Fortune 500 companies outsource software development to software companies in India. It is not only the cost and the technical capabilities that matter. Several other factors to consider are the business and political climates in the selected country, the quality of the infrastructure, and risks such as IT competency, human capital, the economy, the legal environment, and cultural differences.

Duke University’s Center for International Business Education and Research studied actual offshoring results. According to their study, Fortune 500 companies reduced costs by offshoring—63% of the companies achieved over 30% annual savings and 14% of them achieved savings over 50%. The respondents were overwhelmingly satisfied with their offshore operations. Three-quarters (72%) said their offshore implementations met or exceeded their expected cost savings. Almost one-third of the respondents (31%) achieved their service level goals within the first five months of their contracts while 75% did so within 12 months. The study concluded that “offshoring delivers faster results than average domestic improvement efforts.” Even though these are very general results, offshoring success stories ease the fears about the risks of offshoring.

Based on case studies, the types of work that are not readily offshored include the following:

• Work that has not been routinized.
• Work that if offshored would result in the client company losing too much control over critical operations.
• Situations in which offshoring would place the client company at too great a risk to its data security, data privacy, or intellectual property and proprietary information.
• Business activities that rely on an uncommon combination of specific application domain knowledge and IT knowledge in order to do the work properly.

Outsourcing Life Cycle

Regardless of the services an organization wants to outsource, such as manufacturing, data center, applications management, call center, business process, or supply chain, there are multiple ways to approach outsourcing. As with any significant transformation of an organization’s business model, it is always best to follow an organized and methodical approach. The exact approach chosen will be determined by many things, including the following:

• An organization’s familiarity with outsourcing in any areas other than the one being currently considered
• What currently exists in-house that can be used as a foundation for the outsourcing process
• Level of outsourcing sophistication of the procurement and legal groups
• Whether an organization is just exploring the possibilities of outsourcing or has definite outsourcing objectives

The Five-Phase Outsourcing Life Cycle

Jeff Richards of CIO Professional Services proposes a five-phase outsourcing life cycle, comprising a total of 12 distinct stages (Richards, 2016).

Depending on an organization’s maturity, changing business conditions, or recognition of new information, it can choose to enter or exit the outsourcing life cycle at any point in the process. Just be aware that each entry or exit point has associated risks, costs, and benefits.

Here is a “top level” description of each phase of the outsourcing life cycle shown in Figure 12.7:

• Phase 1 This is the preparatory phase, where you assess opportunities and develop your overarching strategy and process- or geography-specific business cases for outsourcing.
• Phase 2 In this phase, you prepare and issue the request for proposal (RFP), evaluate the proposals that are submitted, and select a service provider.
• Phase 3 Once a service provider has been selected, the next step is to develop and negotiate the contract that will serve as the framework for your relationship with your new business partner.
• Phase 4 Once the contract is in place, it’s time to plan and execute the service transition. This is the point at which all of your and the service provider’s efforts either come to fruition or go off the track. Time invested in Phases 1 to 3 will mitigate that risk.
• Phase 5 Finally, with everything in place, the last phase is all about the ongoing management of the Service Level Agreements (SLAs) and the service provider relationship.

Using this type of phased outsourcing strategy, organization can optimize what, where, and when they acquire IT assets and services.

Tech Note 12.2 discusses a sourcing challenge and solution.

Today, the critical question is no longer whether cloud computing will be a fundamental deployment model for enterprise systems, such as ERP and SCM. Rather, the question is “How can companies profit from the capabilities that cloud computing offers?”

Organizations use a combinations of IT Strategies:

• in-house
• onshore or domestic sourcing
• offshoring
• cloud computing
• SaaS

Managing IT Vendor Relationships

When sourcing IT projects, the starting point in building a positive and strong vendor relationship is vendor selection. If a company makes a bad selection or enters into a vaguely worded service contract, most likely the software, app, or implementation will fail, and the vendor will not be able to resolve the problems fast enough, if at all. Failures are usually followed by lawsuits.

Contracts: Get Everything in Writing

SLAs are designed to protect the service provider, not the customer, unless the customer takes an informed and active role in the provisions and parameters.

By making both parties aware of their responsibilities and when they may be held liable for failing to live up to those responsibilities, a strong SLA can help prevent many of the disruptions and dangers that can come with sourcing or migrating to the cloud. The provisions and parameters of the contract are the only protections a company has when terms are not met or the arrangement is terminated. No contract should be signed without a thorough legal review.

There is no template SLA, and each cloud solution vendor is unique. Certainly, if a vendor’s SLA is light on details, that alone may be an indicator that the vendor is light on accountability. Additionally, if a sourcing or cloud vendor refuses to improve its SLAs or negotiate vital points, then that vendor should not be considered.

Concept Check 12.3

The Balanced Scorecard

The balanced scorecard provides companies with a blueprint for selecting strategic measures to improve performance and facilitate strategy implementation by enhancing strategic awareness and closer business–IT alignment.

In 1992, Kaplan and Norton introduced the concept of a BSC in their Harvard Business Review (HBR) article, “The Balanced Scorecard – Measures that Drive Performance” (Kaplan and Norton 2008).

Kaplan and Norton compared the BSC to the screens and indicator displays in an airplane cockpit. They explained that during the complex task of flying an airplane, pilots need detailed information about fuel, air speed, altitude, bearing, and other indicators that summarize the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization requires that managers be able to view performance in several areas simultaneously. A BSC or a balanced set of measures provides that valuable information. What was novel about BSC in the 1990s was that it measured a company’s performance using a multidimensional approach of leading indicators as well as lagging indicators.

The BSC is typically used at the end of the strategic planning process to review performance on a regular basis. For example, in the opening case, Intel took a BSC approach to measure its business performance in the final step of its six-step IT strategic planning process.

Using the Balance Scorecard

The BSC can be used to translate strategic plans and mission statements into a set of business objectives and performance metrics that can be quantified and measured to evaluate how well objectives are being achieved.

Objectives set out what the business is trying to achieve. They are action-oriented statements that define the continuous improvement activities that must be done to be successful, that is, achieve a return on investments (ROI ) of at least 10% in 2017. Well-thought-out objectives should meet the five “SMART” criteria shown in Figure 12.8.

Select the caption to view an interactive version of this figure online.

The BSC is widely accepted as one of the most influential management ideas of the past 75 years. Using the balanced scorecard methodology, performance is measured and evaluated from four different perspectives to ensure that limited resources are invested to achieve the highest possible ROI. These perspectives are as follows:

1. Financial To succeed financially, how should we appear to our investors and shareholders?
2. Customer To achieve our vision, how should we provide value to our customers?
3. Business processes To satisfy our shareholders and customers, what business processes must we focus on and excel at?
4. Innovation, learning, and growth To achieve our vision, how will we sustain our ability to innovate, learn, change, and improve?

The BSC method is “balanced” because it does not rely solely on traditional financial measures. Instead, it balances financial measures with three forward-looking nonfinancial measures, as shown in Figure 12.9.

Select the caption to view an interactive version of this figure online.

The BSC is not a template that can be applied to business in general or even to an entire industry. Different market situations, product strategies, and competitive environments require different scorecards. Business units need to devise customized scorecards to fit their mission, strategy, technology, and culture. Some examples of measurement criteria that can be used within each of these perspectives are shown in Table 12.8.

Companies use BSCs to improve their strategic planning process by the following:

• Clarifying or updating a business strategy
• Linking strategic objectives to long-term targets and annual budgets
• Integrating strategic objectives into resource allocation processes
• Increasing companywide understanding of the corporate vision and strategy

Applying the BSC

BSC converts senior management priorities into visible, actionable objectives by identifying ways to measure progress against agreed-upon targets.

Assume that a low-cost airline bases its profitability on the following interrelated factors: lower costs, increased revenue, percent of flights departing and arriving on time, competitive pricing, maximum fly time or minimal time jets are on the ground, and the ability of the ground crew to learn to do their jobs faster. Objectives, measures, and targets are diagrammed and detailed in Figure 12.10.

Using the results of the BSC methodology, management teams have an agreed-upon set of objectives and measures that are used to identify and set targets and the actions to achieve them that are appropriate for the company’s business model.

Consider JetBlue and Southwest Airlines—both compete to a large extent on price. Yet JetBlue allows one free checked bag while Southwest allows two free checked bags. Now consider the value drivers—time the jet sits on the ground and on-time arrivals. The time it takes to board passengers impacts the ability to take off, which in turn impacts on-ground time and arrival time. Since JetBlue has assigned seats, the terminal crew can control boarding starting at the back of the plane to minimize bottlenecks in the aisle. In contrast, Southwest has open seating, which typically occurs from the front of the jet and can clog the aisle. Now the differing free-baggage policies make sense because the more baggage brought on board, the longer boarding tends to take. By allowing two free checked bags, Southwest attempts to reduce carry-on bags in order to offset the extra time needed for the open-seating boarding process.

By measuring how well targets for on-ground times and arrival times are achieved, both airlines can determine if their actions are optimal or need to be revised. Based on these examples, it is easier to understand the processes involved in the BSC methodology, which start with the business vision and strategy. The general steps include the following:

1. Identify performance metrics (as in Table 12.4) that link vision and strategy to results—financial performance, operations, innovation, employee performance.
2. Select meaningful objectives (Figure 12.10).
3. Select effective measures and targets (Figure 12.10).
4. Determine the actions needed to achieve the targets (Figure 12.10).
5. Implement necessary tracking, analytics, communication, and reporting systems, including sensors, data visualization, mashups, and dashboards via social and mobile channels.
6. Collect, analyze, and compare performance data with targets.
7. Revise actions to improve performance gaps and take advantage of new opportunities.

BSC is used to clarify and update the strategy, align the IT strategy with the business strategy, and link strategic objectives to long-term goals and annual budgets.

Concept Check 12.4

Strategic Technology Scanning

To achieve their corporate vision, organizations need to have a structured process in place to identify suitable strategic technologies. In an era of rapid technological change, technology scanning is a critical strategic activity for any organization. To enhance their IT strategy, every organization needs to continually scan for emerging technologies. Understanding the performance improvements provided by new technologies, such as cost savings or service improvements, can range from incremental to revolutionary. Certain strategic technologies can create a basis for significant improvements, while other technologies may address relatively narrow needs and opportunities.

To be most effective, it’s useful to establish a structured approach to strategic technology scanning. The five steps listed in Table 12.10 provide a framework to guide technology scanning activities.

Finding Strategic Technologies

One approach to finding possible strategic technologies is to look at what is going on at major research centers and technology industry conferences, such as COMDEX, IBM Inter-Connect, Google Next, Adobe Summit, and HIMSS. Another approach is to look for entirely new areas of technology that are emerging based on fundamental advances in the technology industry, such as Internet of Things (IoT), digital mesh, artificial intelligence, and cybersecurity.

Concept Check 12.5