Unit - III

STRATEGIC MANAGEMENT
OF
INFORMATION TECHNOLOGY

Value Chain and Value Creation

Building the Networked Economy Value Chain and Value Creation: The
Notion of Value and Value Creation is Examined in Relation to Value
Chains and Business Processes. Reasons for Success and Failure of IT
Projects.

NOT FOR COMMERCIAL PURPOSE

Compiled By
Abhishek Chakraborty MBA PhD.
BIT Durg

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 Michael E. Porter, of Harvard Business School, introduced the concept of a value chain in his
book, Competitive Advantage: Creating and Sustaining Superior Performance. He wrote:
"Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the
many discrete activities a firm performs in designing, producing, marketing, delivering, and
supporting its product."

In other words, it's important to maximize value at each specific point in a

firm's processes.
Components of a Value Chain
In his concept of a value chain, Porter splits a business's activities into two
categories, "primary" and "support," whose sample activities we list below. Specific
activities in each category will vary according to the industry.

Primary Activities
Primary activities consist of five components, and all are essential for adding value and creating competitive
advantage:
 Inbound logistics include functions like receiving, warehousing, and managing inventory.
 Operations include procedures for converting raw materials into a finished product.
 Outbound logistics include activities to distribute a final product to a consumer.
 Marketing and sales include strategies to enhance visibility and target appropriate customers—such
as advertising, promotion, and pricing.
 Service includes programs to maintain products and enhance the consumer experience—like
customer service, maintenance, repair, refund, and exchange.
Support Activities
The role of support activities is to help make the primary activities more efficient. When you increase the
efficiency of any of the four support activities, it benefits at least one of the five primary activities. These
support activities are generally denoted as overhead costs on a company's income statement:

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  Procurement concerns how a company obtains raw materials.
 Technological development is used at a firm's research and development (R&D) stage—like
designing and developing manufacturing techniques and automating processes.
 Human resources (HR) management involves hiring and retaining employees who will fulfill the
firm's business strategy and help design, market, and sell the product.
 Infrastructure includes company systems and the composition of its management team—such as
planning, accounting, finance, and quality control.

Porter indicates that "a company's value chain and the way it performs individual activities are a reflection
of its history, its strategy, its approach of implementing its strategy, and the underlying economics of the
activities themselves." From fundamental perspective, the value chain framework is an approach for
breaking down the sequence of business functions into the strategically relevant activities through which
utility is added to products and services. Value chain analysis is undertaken in order to understand the
behaviour of costs and the sources of differentiation (Shank and Govindarajan, 1993). Porter (1980) argued
that a business can develop a supportable competitive advantage based on cost, differentiation, or both.
To perform a value chain analysis, the company begins by recognizing each part of its production process
and identifying where steps can be eliminated or improvements can be made. These improvements can result
in either cost savings or improved productive capacity. The end result is that customers derive the most
benefit from the product for the cheapest cost, which improves the company's bottom line in the long run.

The notion of the value chain is based on the process view of organisations, the idea of seeing a
manufacturing (or service) organisation as a system, made up of subsystems each with inputs,
transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition
and consumption of resources - money, labour, materials, equipment, buildings, land, administration and
management. How value chain activities are carried out determines costs and affects profits.
The main purpose of value chain is to measure the value delivered and profit contributed by each
link of chain. A value chain is linked set of value creating activities beginning with basic raw material
coming from suppliers, moving onto the series of value added activities involved in producing and
marketing a product or services and ending with distributors getting the final goods into the hands of
ultimate consumers (Satya Sekhar, 2009).

Most organisations engage in numerous activities in the process of converting inputs to outputs. These
activities can be classified generally as either primary or support activities that all businesses must undertake
in some form.

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Value chain analysis is a practice that yields value enhancement. There are two components of value chain
analysis: the industry value chain and the company's internal value chain. The industry value chain includes
all of the value-creating activities within the whole industry, beginning with the basic raw material and
ending with the after-sales service of the product sold. The internal value chain of a company comprises of
all the value creating activities of that specific company.
Implementation of Value Chain Analysis
There is a three-stage process to perform value chain analysis. It delivers value to customers and reviews
all processes to maximize product value.
 Activity Analysis: Ascertain the activities that contribute to the processing of the product or service.
 Value Analysis: Identify the items and/or services that customers value in the way one conducts each
activity, and then calculate the changes based on relevant structural and/or executional cost drivers.
 Evaluation and Planning: Decide what changes to make and determine how to conduct the plan.

Drawbacks of Value Chain Analysis

Value chain analysis is considered as a new strategic management accounting device and has several
operational demerits:

I. Availability of data: Company data about revenues, costs, and assets used for value-chain analysis
are obtained from financial information in a single period. Multiple-period data for long-term
strategic decision-making, changes in cost structures, capital investments and market prices may not
be immediately available.
II. Ascertainment of revenues, costs and assets: Identification of appropriate revenues, costs, and assets
for each value chain activity is quite difficult. As there is no scientific approach, and most work is
done through trial-and-error and experimentation methods.
III. Identification of cost drivers: Isolation of cost drivers for value-creating activities, identification of
value chain linkages across activities, and computation of supplier and customer profit margins
present major constraints.
IV. Identification of stages: Identification of stages in an industry's value chain is affected by the ability
to locate at least one company department that participates in a specific stage. Breaking down a value
stage into two or more stages is necessary for diagnosing abilities at various stages.
V. Opposition from employees: Value chain analysis involving strategic partners outside the company
is still a new concept and is not easily understood by all employees. It may face resistance from front
line staff as well as managers.

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LEVERAGING TECHNOLOGY IN THE VALUE CHAIN

At the business level the most common analytical tool is value chain analysis. The value chain model
highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985)
and where information systems are most likely to have a strategic impact. The value chain model identifies
specific, critical leverage points where a firm can use information technology most effectively to enhance its
competitive position. This model views the firm as a series or chain of basic activities that add a margin of
value to a firm’s products or services. These activities can be categorized as either primary activities or
support activities.

Primary activities are most directly related to the production and distribution of the firm’s products
and services that create value for the customer. Primary activities include inbound logistics, operations,
outbound logistics, sales and marketing, and service. Inbound logistics includes receiving and storing
materials for distribution to production. Operations transforms inputs into finished products. Outbound
logistics entails storing and distributing finished products. Sales and marketing includes promoting and
selling the firm’s products. The service activity includes maintenance and repair of the firm’s goods and

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services.

Support activities make the delivery of the primary activities possible and consist of organization
infrastructure (administration and management), human resources (employee recruiting, hiring, and
training), technology (improving products and the production process), and procurement (purchasing input).

Firms achieve competitive advantage when they provide more value to their customers or when they
provide the same value to customers at a lower price. An information system could have a strategic impact if
it helps the firm provide products or services at a lower cost than competitors or if it provides products and
services at the same cost as competitors but with greater value. The value activities that add the most value
to products and services depend on the features of each particular firm.

The firm’s value chain can be linked to the value chains of its other partners, including suppliers,
distributors, and customers. Figure 3-11 illustrates the activities of the firm value chain and the industry
value chain, showing examples of information systems that could be developed to make each of the value
activities more cost-effective. A firm can achieve a strategic advantage over competitors using information
systems not only by improving its internal value chain, but also by developing highly efficient ties to its
industry partners—such as suppliers, logistics firms, and distributors—and their value chains.

Digitally enabled networks can be used not only to purchase supplies but also to closely coordinate
production of many independent firms. For instance, the Italian casual wear company Benetton uses
subcontractors and independent firms for labor-intensive production processes, such as tailoring, finishing,
and ironing, while maintaining control of design, procurement, marketing, and distribution. Benetton uses
computer networks to provide independent businesses and foreign production centers with production
specifications so that they can efficiently produce the items needed by Benetton retail outlets (Camuffo,
Romano, and Vinelli, 2001).

Internet technology has made it possible to extend the value chain so that it ties together all the firm’s
suppliers, business partners, and customers into a value web. A value web is a collection of independent
firms that use information technology to coordinate their value chains to produce a product or service for a
market collectively. It is more customer driven and operates in a less linear fashion than the traditional value
chain.

Figure 3-12 shows that this value web synchronizes the business processes of customers, suppliers,
and trading partners among different companies in an industry or related industries. These value webs are
flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in
response to changing market conditions. A company can use this value web to maintain long-standing
relationships with many customers over long periods or to respond immediately to individual customer
transactions. Firms can accelerate time to market and to customers by optimizing their value web
relationships to make quick decisions on who can deliver the required products or services at the right price
and location.

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FIGURE 3-12 The value web
The value web is a networked system that can synchronize the value chains of business partners within an
industry to respond rapidly to changes in supply and demand.

Businesses should try to develop strategic information systems for both the internal value chain
activities and the external value activities that add the most value. A strategic analysis might, for example,
identify sales and marketing activities for which information systems could provide the greatest boost. The
analysis might recommend a system to reduce marketing costs by targeting marketing campaigns more
efficiently or by providing information for developing products more finely attuned to a firm’s target
market. A series of systems, including some linked to systems of other value partners, might be required to
create a strategic advantage.

Value chains and value webs are not static. From time to time they may have to be redesigned to keep
pace with changes in the competitive landscape (Fine et al., 2002). Companies may need to reorganize and
reshape their structural, financial, and human assets and recast systems to tap new sources of value.

We now show how information technology at the business level helps the firm reduce costs,

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differentiate products, and serve new markets.

INFORMATION SYSTEMS PRODUCTS AND SERVICES

Firms can use information systems to create unique new products and services that can be easily
distinguished from those of competitors. Strategic information systems for product differentiation can
prevent the competition from responding in kind so that firms with these differentiated products and services
no longer have to compete on the basis of cost.

Many of these information technology–based products and services have been created by financial
institutions. Citibank developed automatic teller machines (ATMs) and bank debit cards in 1977. Citibank is
one of the largest banks in the United States. Citibank ATMs were so successful that Citibank’s competitors
were forced to counterstrike with their own ATM systems. Citibank, Wells Fargo Bank, and others have
continued to innovate by providing online electronic banking services so that customers can do most of their
banking transactions using home computers linked to the Internet. These banks have recently launched new
account aggregation services that enable customers to view all of their accounts, including their credit cards,
investments, online travel rewards, and even accounts from competing banks, from a single online source.
Some companies, such as NetBank, have used the Web to set up virtual banks offering a full array of
banking services without any physical branches. (Customers mail in their deposits and use designated ATMs
to obtain cash.)

Computerized reservation systems such as American Airlines’s SABRE system started out as a
powerful source of product differentiation for the airline and travel industries. These traditional reservation
systems are now being challenged by new travel services with which consumers can make their own airline,
hotel, and car reservations directly on the Web, bypassing travel agents and other intermediaries.

Manufacturers and retailers are starting to use information systems to create products and services that
are custom-tailored to fit the precise specifications of individual customers. Dell Computer Corporation sells
directly to customers using assemble-to-order manufacturing. Individuals, businesses, and government
agencies can buy computers directly from Dell, customized with the exact features and components they
need. They can place their orders directly using a toll-free telephone number or Dell’s Web site. Once Dell’s
production control receives an order, it directs an assembly plant to assemble the computer using
components from an on-site warehouse based on the configuration specified by the customer.

Internet Connection

The Internet Connection for this chapter will take you to the NetBank Web site where you can see how one
company used the Internet to create an entirely new type of business. You can complete an exercise for
analyzing this Web site’s capabilities and its strategic benefits.

SYSTEMS TO FOCUS ON MARKET NICHE

A business can create new market niches by identifying a specific target for a product or service that it can
serve in a superior manner. Through focused differentiation, the firm can provide a specialized product or
service for this narrow target market better than competitors.

An information system can give companies a competitive advantage by producing data for finely
tuned sales and marketing techniques. Such systems treat existing information as a resource that the
organization can mine to increase profitability and market penetration. Information systems enable
companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch
advertising and marketing campaigns to smaller and smaller target markets.

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 The data come from a range of sources—credit card transactions, demographic data, purchase data
from checkout counter scanners at supermarkets and retail stores, and data collected when people access and
interact with Web sites. Sophisticated software tools can find patterns in these large pools of data and infer
rules from them that can be used to guide decision making. Analysis of such data can drive one-to-one
marketing where personal messages can be created based on individualized preferences. Contemporary
customer relationship management (CRM) systems feature analytical capabilities for this type of intensive
data analysis (see Chapters 2 and 11).

For example, Sears Roebuck continually analyzes purchase data from its 60 million past and present
credit card users to target appliance buyers, gardening enthusiasts, and mothers-to-be with special
promotions. The company might mail customers who purchase a washer and dryer a maintenance contract
and annual contract renewal forms.

The Window on Technology shows how the hotel industry is trying to wring more value out of its
customer data. Hotel chains are aggressively recruiting business travelers to sign up with their customer
loyalty programs to capture more detailed data about their repeat customers. The customer data they had
been collecting through their reservation systems was not sufficiently reliable or detailed for them to
develop targeted customer profiles for marketing. The hotels believe such data is key to their growth. More
examples of customer data analysis can be found in Chapters 7, 11, and 13.

The cost of acquiring a new customer has been estimated to be five times that of retaining an existing
customer. By carefully examining transactions of customer purchases and activities, firms can identify
profitable customers and win more of their business. Likewise, companies can use these data to identify non
profitable customers. Companies that skillfully use customer data focus on identifying their most valued
customers and use data from a variety of sources to understand these customers’ needs (Reinartz and Kumar,
2002; Davenport, Harris, and Kohli, 2001; Clemons and Weber, 1994).

Every business has an information value chain in which raw data is systematically acquired and then
transformed through various stages that add value to that information. The value of an information system to
a business, as well as the decision to invest in any new information system, is, in large part, determined by
the extent to which the system will lead to better management decisions, more efficient business processes,
and higher firm profitability.

Figure 1-7

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THE BUSINESS INFORMATION VALUE CHAIN

From a business perspective, information systems are part of a series of value-adding activities for
acquiring, transforming, and distributing information that managers can use to improve decision making,
enhance organizational performance, and ultimately increase firm profitability.
The business perspective calls attention to the organizational and managerial nature of information systems.
An information system represents an organizational and management solution based on information
technology to a challenge or problem posed by the environment.

Some firms achieve better results from their information systems than others. Studies of returns from
information technology investments show that there is considerable variation in the returns firms receive.
Reasons for lower return on investment include failure to adopt the right business model that suits the new
technology or seeking to preserve an old business model that is doomed by new technology.
Complementary investments include:
Organizational assets: These include a supportive business culture that values efficiency and effectiveness,
an appropriate business model, efficient business processes, decentralization of authority, highly distributed
decision rights, and a strong information system (IS) development team.

 Managerial assets: These include strong senior management support for change, incentive systems
that monitor and reward individual innovation, an emphasis on teamwork and collaboration, training
programs, and a management culture that values flexibility and knowledge.

 Social assets: These are not made by the firm but by the society at large, other firms, governments,
and other key market actors, such as the Internet, educational systems, network and computing
standards, regulations and laws, and the presence of technology and service firms.

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There are four major enterprise applications:

1. Enterprise systems

2. Supply chain management systems

3. Customer relationship management systems

4. Knowledge management systems

Each of these enterprise applications integrates a related set of functions and business processes to enhance
the performance of the organization as a whole.

Figure 2-11

FIGURE - ENTERPRISE APPLICATION ARCHITECTURE

Enterprise applications automate processes that span multiple business functions and organizational levels
and may extend outside the organization.

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 “It’s hard to fail, but it’s worse to never have tried to
succeed.” Franklin D. Roosevelt
Reasons for Success and Failure of IT Projects.
“Failure is simply the opportunity to begin again, this time more intelligently.” –
Henry Ford.
While working on a project, the main goal is always to make it a success. A successful project
means timely completion of deliverables within the allocated budget, meeting the desired quality
standards. Everyone wants to deliver a successful project still, a lot of time there is project
failure.
Here are some common reasons of IT project failure:
1. Lack of Interest from Management
2. Cost-cutting Approaches
3. Lack of Proper Planning
4. Selection of Technologies
5. Failure to Manage Scope Creep
6. Overly-optimistic Project Schedule
7. Overstaffing of Projects
8. Poor Communication
9. Data Migration by Unskilled Resources
10. Little Testing or Skipping the Testing Phase

Here we have listed 10 reasons of IT project failure, now understand each reason in detail:

Lack of Interest from Management

At times, the management is under the wrong impression that they cannot understand the IT
things and leave the IT projects to the technical team completely. This thinking results in a lack
of interest from management; as a consequence, the technical team gets more freedom in taking
their decisions.

What is tricky here? The freedom of taking decisions on their own by technical team can cause
trouble, since technical teams do not understand business objectives well and might go against
business objectives unintentionally.

The management needs to pay due attention to the IT projects and get regular project progress
updates from the team. If your technical team cannot present what they are doing, they might not
know what exactly they are doing.

Cost-cutting Approaches
All businesses want to save money, when it comes to expenditure. It feels great, but can cost
you bigger if you apply cost cutting approach to your IT projects. Allocating insufficient and

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small budgets for your projects will result in procurement of comparatively less skilled
resources.

Initially underfunded projects come back late, over budget, and are often missing features or
have quality issues. The lesson is simple. Allocate budget enough to hire right people for the
job. Allocate budget to hire all resources that are required for the success of IT projects. Only
developers do not build up a team for IT project; you need business analyst, testers and project
manager too.

Lack of Proper Planning

Techies are fast paced people – may be that is why they tend to jump in and get things started
right away. There can be multiple explanations for this attitude; however, the result of the
behaviour is same – absence or lack of proper planning for the projects.

Many IT projects are started without having a thorough understanding of the scope and project
outcome. Any project would fail if the targets are unclear and everything is managed in a
haphazard manner.

Remember, that a successful project does not only mean ‘Delivery of the final software
product’, rather it means producing the desired project outcome within the targeted time period
and budget.

The absence of proper planning brings numerous problems to the project such as:
 Unclear scope and objective
 Confusion about roles and responsibilities
 Inefficient utilization of resources
 Unavailability of resources at critical time
 Uneven workload on the team
 Incorrect time estimates
 Incorrect cost estimates
 Poor performance

Selection of Technologies
Wise selection of technologies prevents technical failure of the project. No project manager can
save your project, if the chosen tools and technologies for the IT project are wrong. It is easy to
be swayed by the latest, exciting technologies. Some project managers choose a programming
language and environment because of personal preferences; others choose what is trendy and
emerging.

The key point to remember here is to understand the business problem and examine the nature of
problem. Once you have understood the ‘why’ and ‘what of the problem, you can proceed to
unfold ‘how’ of the solution. Generally, business people are not interested in the backend
technologies, rather they want a solution that can work for them with minimal investment cost.

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A project can fail technically if you select programming language, development environment, or
operating environment that does not align with your problem. Another hurdle comes when you
make the right selection of tools and technologies, yet you don’t have skilled resources for the
selected tools and technologies. Make sure that you have the required resources who can get the
job done, when assigned any.

Besides the technical solution, you need some tools for performing supporting project
management activities and team communication. These tools are necessary to help you manage
the software development lifecycle.

Failure to Manage Scope Creep

What happens if you are presented with new ideas while developing a product? The answer is
simple, you lose focus. Yes, it is good to keep on improving but you need to put a ‘stop’ at
someplace to release the deliverables.

The right time for doing brainstorming is the early phase of the project when all the
requirements are being gathered, technologies are selected and technical processes are finalized.
The early phases of the project are used to figure out what should be build and how it should be
build. Once finalized, project team moves on to developing the agreed product.

Requirements growth becomes a problem when you keep on adding functionality without
allocating more time or budget. Similarly, modification to existing requirement might also need
more re-work, time and effort – affecting your project performance baselines. Keep in mind that
not every requirement needs to be implemented in the current version of the application. If you
are close to production and new requirements sneak in, convince the stakeholders to save those
for a later version.

There is always a room for improvement. This approach can be disastrous for your project if you
keep on improving the same deliverable again and again. This approach results in immense
scope creep if you keep coming with better ideas for your product when your product is in the
development phase.

These ideas can be a brainchild of the client, the project lead or even the project team members.
Better ideas can take many forms, such as new requirements, modification of existing features,
and change in data model, adopting better coding approach and better organization of existing
code.

Overly-optimistic Project Schedule

All of us have been a victim of situation where some boss or lead makes a commitment with the
client and imposes a deadline for the project. There can be numerous reasons behind doing so.
For example, the boss thinks that the project should be completed by a certain date or the client
wants to enjoy his holidays and wants the project completed before that.

Project managers develop overly optimistic schedules to meet random deadlines. An overly
optimistic schedule is followed by immense pressure on the team and is loathed by the team

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members. The team members might put in extra efforts to complete their deliverables on time,
but a delay in any single deliverable badly affects the others. Hence, such a schedule propels the
project towards project monitoring and controlling challenges.

Overstaffing of Projects
Another reality of an overzealous schedule often results in overstaffing of the project.
Overstaffing the project paves the ways for more means of miscommunication. This will not
only increase the project cost, it might add to the trouble as the integration of different sections
of code and integration testing is also required before delivering the release. I can recall an old
proverb which explains the scenario well i.e. too many cooks spoil the broth.

Poor Communication
Poor communication is yet another common reason of IT project failure. This problem can also
be linked to the lack of project management. Effective and efficient communication with
stakeholders, management and the project team is vital for success of a project. It is the
responsibility of the project manager to communicate the updated approved requirements and
decisions to the team members.

A project manager can handle all those required communication, but intra-team communication
remains a challenge. Common communication mistakes in the IT projects occur when some
team member is not kept in the communication loop. It might happen that you are close to
deadline and senior team members communicate more often – sidelining the junior resources.
When a team member does not feel as an important part of team, he might lose motivation
which eventually affects his performance.

Personally, I have observed that the developers are so busy in their work that they don’t find it
important to inform the quality assurance personnel about any changes in the requirement,
decided by the development team. The quality assurance personnel continue testing the
application using their previous knowledge and raise false flags. This scenario causes you cost,
time and effort.

There are several team communication tools available to facilitate the communication between
teams assigned on a single project such as Slack and Asana. You might also need to focus on
ways to improve team communication.

Data Migration by Unskilled Resources

Data migration does not occur in all projects, but this key point is generally overlooked so we
included it in the reasons of why IT projects fail. The common flaw in data migration is too few
or less skilled resources are assigned to this task. By the end of the project it becomes evident
that the data migration was a complex task which needed more attention. For example,
implementing generic data structures for data migration requires expertise. Hence, you need to
plan ahead for any data migration in the project.

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Little Testing or Skipping the Testing Phase
Some team leads for the IT projects are under the wrong impression that development tasks are
major for the success of projects. This is not true. Each phase of software development life
cycle, SDLC, is equally important. Your software product can utterly fail if you skip the testing
phase or keep it for the end.

In the software industry, we all are well familiar with the situation when the release is getting
ready for the production but new requirements come in or developers continue fixing old issues,
without giving anything to the testers for testing. This results in a reduced time line for the
testers to completely test the application. The consequence is obvious, either you don’t catch all
the issues or even if you do so, you have got little or no time for fixing the issues. Besides
missing the deadline, a mess is created.

The problem can be avoided if you continue testing the smaller components in parallel, as they
are being developed. Studies show that the cost of fixing an issue in later stages increases
exponentially so testing since the beginning of the project also helps to keep the project costs in
control.

Often, project manager overlooks the warning signs that arise during testing process or keeps
those issues to be resolved later. Such issues might also cause big trouble or cost at the end, as
the cost of fixing any issue increases exponentially. A regular and diligent testing process is
essential to ensure delivery of a quality product to the customer.

A good project manager can steer your project towards success by planning properly, selecting
the right technologies, advocating accurate time and budget estimates, handling the scope creep,
managing all.

Assign a project manager to your IT projects. I repeat, assign a project manager, not a ‘technical
lead’. A technical lead plays an important role to handle the technicalities of the project, yet
there are many areas which need the expertise of a project manager. Project managers have the
skills to balance several aspects of a project and don’t get trapped in technicalities alone.
Project fail when project managers are not able to do to any of the following:

 Make decisions
 Manage scope
 Manage schedule
 Manage budget
 Manage risks
 Track project progress
 Measure performance
 Communicate effectively
 Resolve problems
Remember that a project cannot go from being well managed, on-budget and on-schedule to
outright failure overnight. There is always a ‘troubled’ phase in between. Your project manager
needs to be cautious of any warning signals and take appropriate actions timely.

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