STRATEGY FORMULATION METHODOLOGIES MICHAEL S. SCOTT MORTON November 1986 CISR WP No. 149 Sloan WP No. 1845-86 90s WP No. 86-028 ¢ 1986 Massachusetts Institute of Technology Center for Information Systems Research Sloan School of Management Massachusetts Institute of Technology Strategy Formulation Methodologies Michael S. Scott Morton Sloan School of Management, M.I.T. Premises The short topic of formulating a strategy is a hard one to address in a space of time. Concepts that help with strategy formulation are evolving of one clear and information technology itself is changing, so the impact on the about other is complex. the the substance the world underlying of and the the way assumptions before beginning to address question. it As such, it seems important to be There are some basic beliefs about operates which underlie the arguments developed in this paper. The first strategies of are premises is that information technology (I.T.) most effective when they are developed in the context of business to know where the organization is headed before one begins to work on the question and corporate strategies. Thus a critical first step is of what a sensible direction for the use of information technology should be. II -2Such an explicit, statement the "rational one to use. the years, Science decision Simons terms, in Decision "intelligence," interactive it seems this published in 1960. In this view solve alternatives "design" and "choice" being the three phases. useful In In to light of work since Simon's add a fourth step namely "action." model an organization, or an individual, first defines problem, would one of the earliest was Herbert Simon in his New Management publication the This model has been espoused by a series of authors over making is thought of as falling into a series of phases. principle Thus actor" model of the organization is the most effective perhaps of of strategy assumes implicitly that that that is' clarifies it, then creates alternatives that particular problem, then selects the best of these following which they go through implementation, that is, a set of actions are taken. This work "rational that is formulation. research, as it actor" going paradigm implicitly underlies much of the on in corporate strategy and strategy The 'rational actor' paradigm dominates the writing and particularly relates in the area of methodologies and even more so to information technology since many who work in this area come out of an engineering and science background. However, equally well example, follow there there a primarily the are several activity that alternative models which describe takes place in organizations. For is a large group of managers who seem to successfully problem-solving process which basically acts first, based on intuition, then examines the results in an intuitive way -3- and if senses through to a next decision making second. Such on. results seem set actions. the of action to be good. comes In first They then cycle back this view of management and the analysis comes a view turns the standard methodologies for strategy upside down and there is little prescriptive or normative formulation writing the for managers or academics with this view of the world to act the In comments follow, that the rational actor model is dominant but is not in any way meant to be exclusive. second premise that underlies this paper is that the need for The an explicit of an that view of the organization's strategy is necessary because increasingly external environment. turbulent The premise is next decade is more likely to be one of "economic war" than the "economic It seems peace". overcapacity discontinuities; that in we are industry, entering an increasingly era global expectations both of the quality of products and competition, rising services well as expectations as to one's standard of living. indeed as we are management the entering systems If a period of continuing economic change then and ways of doing business that will be in such a period of change will be different from those in successful past. the of is assumed that incremental "business as usual" will It not be adequate in the years ahead. Although years of than these social, the pace of change is assumed to be higher in the coming it was in the '60s and '70s, it is not assumed that most changes are I.T. related. In fact, quite the reverse; political, global economics, and technologies such as genetic l1 -4- engineering are enables organization they the occur argued technology example, activities in South and to the way. Information However, facilitating technology to facilitate and mediate these changes as information for added organizations. and impact on the organization. that change, driving live Africa As an aside, it could be facilitates television a faster coverage in rate of America on has undoubtedly increased the awareness political pressure for America to respond in some by and change large, or information technology seems to be enabling it to happen rather than driving it in a causal way. A third several external second premise levers by world imperative. they occur that an which and premise, is that information technology is merely one of an organization adjusts to changes in the in management practices. there Strategy is to no As is suggested in the assumption of a technological be effective has to be driven by ideas as to informed capable managers. On balance, it is unlikely effective strategy will be driven by the technology in a way that brooks no alternatives. than The fourth premise is that strategy formulation is more of an art a science and to be effective it should be the province of line management. Hence; formulation. differently If in the resulting and others the built-in difficulty of I.T. strategy corporate strategy formulation is an art practiced different strategy scarcely at organizations by different managers and if is articulated in some firms in great detail all, then clearly there is no "science" of -5- It is an observable fact that good strategic formulationl strategy is all strategic management is capabilities among general traditionally not information are and the information have technology field. correspondingly those who understand the often are technology uninformed of the corporate to be effective there needs to be a shared process Hence strategy. of out technology information of come managers Line managers. I.T. of knowledge the of lack the scarcity of good this of top who know their corporate strategy are often ignorant of those Hence, On rare. too management strategy formulation. This is hard since both bodies of knowledge changing rapidly and to some extent one is asking art and science to mix constructivelyl Definitions and History Terminology and information that I.T. for many management terms have widely different that people. different to definition field such as management is woefully undefined a out it turns meanings in of purpose the (I.T.) technology only is not are two terms which require There this paper. The most important point is itself. There computers. The first of these is is no way clean of categorizing I.T. but it consists of at least of the following: 1. - Computers information these through computers technology. are of course a central component of There is a full smorgasbord of  ranging from large mainframe computers all the way to the recently arrived personal computers l1 -6- even the and Together form. micro computers, that exist in chip smaller, mainframes to information that spectrum this with exists micros, is available wealth the to an from computers of of and data organization in an electronic form. 2. telecommunications has only recently begun to be - Telecoms as recognized of part a partner full with the computer itself as main structure of information technology. the The range of telecom options can be thought of as follows: External Internal Broad Be Narrow E In world telecommunications an which part of the are organization. must deal with, is the additional complexity of having both public and there private is cells four these to addition networks hard computer to available to fill each of these cells. capture the powerful difference between It a that is isolated, and what the computer becomes in of the user when it is linked into a network and the hands has flexible access other organizations. to information, other computers and -7- 3. White as Collar office thought the standard tools letters, such and could be such as as writing paychecks done are Here with information a computer-based workstation for Similarly, there are workstations for worker. clerical support clerical tasks, well-structured technology Tools - these are commonly known partial robotics for clerical workers. as typing and and automation of routine, Productivity workers that with management support systems in various forms. deal 1986, in Typically in the form of computer-based terminals managerial these take the form of decision support systems and executive support systems [2, 3]. 4. Blue Collar Productivity Tools - the most obvious case of blue collar productivity tools are factory many automation. and related However, it is interesting that a great other professional workstations are now being installed the prime purpose is for the production of the service where These itself. machine tools terms of workstations and are used by humans not by are closely related to the shop floor in computer-aided However engineering. such robotics design and computer-aided there are other interesting examples as loan officers in banks evaluating loan possibilities through the use of an interactive work station. 5. Smart Products - in addition to the above four categories of information technology technology into the there product is also the inclusion of the itself. Thus we have in a -8- modern car anti-skid several computers in the car to control fuel, brakes as well as information supposedly useful to the driver in terms of computed fuel consumption, etc. The important information important that point to make in the context of this paper is that technology are must the is other only four partially computers. Equally categories of information technology be thought of when one thinks about formulating strategies for I.T. in the context of a corporate strategic move. of The second this paper hundreds of or that on Some of strategy strategy and central range future, There are literally management examples are Strategic Management: in the A New View of Policy and Planning by Dan Schendel and Charles W. Hofer  Hax and Nicolas Majluf . these itself. strategic more recently Strategic Management: Arnoldo of is books literature. Business definition which is important to make for the purpose kinds of books An Integrative Perspective by This article assumes the content is well understood to the reader. The point is that strategy is not long range planning, if by long planning starting we mean this laying from the out the step by step path into the present and assuming incremental progress of existing businesses and markets. The original Greek word from which strategy comes means "the art of the (military) General." -9- For the formulation to position the reality and the purposes this here, can be translated into strategy being about how to create an appropriate mission, and as organization to accomplish this mission in light of the its internal strengths and weaknesses, its customers of environment. external Strategy formulation is concerned about the desired positioning of the firm and how to get there. If one at business strategy historically one can see five looks phases in the development of the field up to the present time. 1. An early phase desirability landmark merely of book functionally range long made established a planning. strong (marketing, based for the first time the case Steiner  in his for making explicit a finance, etc.) production, plan that covered several years into the future. 2. By the early business 1970s planning the interest had shifted to a focus on To oversimplify this point of view, . basically one of executives giving top down guidance it was to the organization and bottom up plans then coming from the division and functional levels. These were then put together for an overall corporate plan. 3. The by . third was that of portfolio planning as espoused phase Bruce in his 1970s book on Portfolio Planning Henderson The corporation essence as a of series this of approach separate was to strategic see the business -10- units (SBUs) markets which and their needs appropriate the corporation. These and balance of relative and large had independent products, missions. cash reality by growth in the market possibilities to identify an of sustainable to position looked at in terms of portfolio maximum Important were this SBU's given the growth point of view for the was the vis-a-vis the competition and the growth potential of the markets served. 4. Industry stage Here the structure in the and generic strategies  was the next evolution strategy formulation methodologies. the analysis was focused on the competitive position of firm in industry. the The context premise different structures understand these of was and before the infrastructure that of its as industries have very dynamics identifying it is the important to possible generic strategy appropriate for the firm itself. 5. The fifth strategic which and most recent phase in the evolution of planning is focused on a value chain  approach turns organization. the attention back to the inside of the This technique analyses the internal steps by which an organization adds value to its product or service. The there suspect point has to note with all of these various approaches is that been a steady progression of ideas. that we have reached any kind of There is no reason to end point in this -11- progression purposes and for change. that which This will strategy in light strategy of the turbulent environment the formulation must be undertaken will in turn will demand newer techniques and new concepts prove powerful in helping organizations to formulate their in formulation strategy indeed an effective way. is a moving formulation to Thus it can be seen that strategy target, and this suggests that linking changing information technology is going to require unusual effort and flexibility. Conceptual Frameworks If strategy follows that answer. as a creative line management task then it is no formula or technique that will produce an it is possible to use frameworks and methodologies of stimulating ideas, aiding consensus among management, and generally helping to maintain perspective. It is frameworks from the two of the phases mentioned above that appear to be particularly valuable IT there However ways last is indeed as a way of stimulating powerful creative methods of linking use for suggested the ways corporate of strategic looking thrusts. There are a host of at the linkage that have come out of the major business schools of the last five years . At internal its core, strategy formulation inevitably involves analysis of strengths opportunities. problem. This and weaknesses is a fundamental and external equation threats and in any strategic III -12- it As an example is possible developed in book was he literature draw it of a framework being used to stimulate creativity to focusing to technology. used This known Porter framework that he Review. is used within is suggestive the Industrial In this particular Organizations the framework itself. to has most Business generate well look been visible economic He then proceeded to of the framework for corporate strategy. be the on establish also perhaps the his book Competitive Stratecy . implications can take However, at the implications for information done article by a number of academic authors; is by McFarlan in the Harvard Arguably it is the process by which this framework the firm that is its principle value. The framework and has some useful categories but there is no way to "answers" unless it is creatively and knowledgeably used by experienced line managers. Using of Porter's forces it is opportunities with a others the small by come buyers possible to go through the four areas and identify each. group In some organizations this is done formally of dimension up (i.e., customer diagram (Figure A) of the major categories line managers including an I.T. person, in different combinations of the line and staff. "buyer" might their in basic an needs, with its Focusing on of Porter's diagram, for example, the company an idea customers) for an electronic linkage between its and itself. The linkage gives the ability to directly choose items that most closely match the process product to the customer. also markedly speeds up delivery of the -12AFIGURE A THREAT OF NEW ENTRANTS BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS 1: Q THREAT OF SUBSTITUTE PRODUCTS 11 -13- A example of a conceptual framework that has proved to be second effective for understanding the strategic opportunities inherent very the internal aspects of the organization is the use of the "value chain." One of the first published references to its use occurred in 1980 a in as (SPA), of a its clients to chain. classes found it based on the "value added latter analysis is management's critical book concept and leverage points in the value (Competitive Advantage, 1986) drew expanded its application. The value a product activity, the support to those percent of cost organization's makes the to those goods direct Figure B shows the two customer. directly associated with the process of and services and those that are necessary Organizing this "value chain" as a steps. leads to insights and provides a way of focusing on that steps offer the initial stages of what it does through to the from of of in, as it adds value to its product or service engages "manufacturing" also most This Porter's the it moves delivery that analysis the SPA work by SPA was not followed up in the academic early to organization those application, is a pictorial representation of the sequence of activity the chain as the until attention both practical leverage." to This literature In is, on the cost of the value adding steps) and one based as judgement work that Strategic Planning Associates consulting firm in Washington, DC, did with some . added "value some utilize (that cost" of strategic effective on result cost clearly account structure. for a large proportion of the Such steps very often are the ones the greatest potential for I.T. application. it clear which steps might be linked Such a view to other -13A- FIGURE 1 INTERNAL: The Value Added Chain Management Support: Accounting! Legal Personnel R & D PURCHASING MANUFACTURING MARKETING omputer DISTRIBUTION SELLING SERVICE 11 -14- organizations chain in be might joint ventures, or perhaps which piece of the value all together and contracted out to somebody removed else. To repeat made above, the concepts are merely vehicles a point management to discuss the potential of their businesses and hence for information technology might be used. where is step one on dependent that is much less dependent on hard costs and much more informed judgement. management's Value added leverage to those steps in the "value chain" where management feels the refers has organization a advantage unique greatest leverage unimportant relatively or where there is the most For example, an oil company arguably gets form of leverage. powerful its The value added leverage from finding oil in the first place. It is efficiently it manages the manufacturing how delivery process if it is in fact sitting on huge supplies of low and In this case, the exploration stage in the "value chain" oil. cost is the one with the greatest leverage, although its costs may be proportionately small. These two particularly think about changed, as frameworks useful (industry because structure and value chain) are together they force the organization to how it does its business and ways in which that could be well as explicitly variables which impact the firm. forcing attention on the external -15- Both these of "electronic strategy. points powerful been some itself. use by to managers jobs, the having an impact that on suggest corporate particularly most well methodology known of these is Rockart's which was developed initially in planning their information needs . the in the by overshadowed is the process of thinking through strategy The managers success initial one of the major ways frameworks on Factors be technology may be utilized there has also which work Success Critical of domain use of the information as technique systems has Its been a mechanism to get think through what are the critical dimensions of their ones to which they must pay undivided attention. if an organization can agree on those things that must be uniquely well for it to be successful it has gone a long way in Obviously, done at useful formulation for beyond to seems technology However, then, encourage thinking about view, which integration" information which of points identifying its strategic thrusts. Recent work of managers share. assumptions get to that and sharing numerous of what adds the a __ He has shown it is important to get at the the critical success factors in order to really and thinking definitive needs creativity to be done to move the organizations to be by managers. The CSF process that results in articulating organization's direction. changed behavior [16, 17]. ______  has built on the foundation that These two conceptual frameworks are being used forward. stimulate methodology underlie core the organization to Henderson established by identifying the Critical Assumption Set that a Rockart group by analytically These have been shown in useful and to result in -16- There yield more is another perspective which is being explored and seems to a different pervasive This third fundamental first of research these who this he book same that obvious been of done done by streams the 1950s and 1960s. the of The Alfred Chandler, a business In thesis that an organization's strategy as it changes, the organization adjusts its Although this point is regarded Leavit produced an article  At about the based on an of the organizational behavior literature and studies that it and At in important important book in the early '60s . to that point. could sets of forces. was two it is nonetheless a powerful point. Harold (in employs, In this article he established a case be thought of not some the the organizations information e.g., ways people its in and technology telephone, time, it in fundamental research. as consisting of four These were the tasks that the organization strategy), the organization the organization the technology that is utilized. technologies, etc. were an organization structure case out work and, accomplish skills, arose that wrote time done an to in the first two analytical frameworks. is the today time, important has those to match the new strategy. evaluation had insights that are in many ways wider and developed over structure as than of framework historian, changes set this was so materials, and their The technology in this much as it was any of the manufacturing process, a novel and powerful way of viewing had the added advantage of being well grounded -17- In of to Chandler and Leavit there was also at this period addition time strategy lists development the but "scenario" school of corporate the heart of their work was the idea that the external at could most usefully be examined in context of its social, environment political, influence the school developed both methodologies and check This . of economic and technical components. Their work had a big in the '60s but fell out of favour until its recent revival . If three streams of work are combined together one arrives these at the diagram given below. EXrtERAL SOC:O - COO This diagram  recognizes that an tC^*GAIt, / ~[ O~ tetOWCaL rC.OLOGICA. S~muCUm! [~v~mOtoot AC,*ott curt j \\TEY t[W ORG4 ST · PPO CTEESS I //0CES COLOGY , o can organization in a state strategy, dynamic be thought of as a set of forces existing equilibrium. On the one hand you have its the mission it wishes to accomplish, and all the tasks that that mission. make up more importantly structure ~""""~"'~""""""~"'-' of usefully / become - You also have its organization structure and, perhaps, alive and the corporate vibrant. culture that makes the You also have the people, and -18- only the people themselves, but the roles they are being asked to not For play. that are available, defined systems the the of information technologies as the budgeting, and the control planning, All these sets of forces exist in an does its business. which environment economic head well as the informal processes that represent the way the as external the Holding all these four forces together are the processes; organization consists factors. technical and of the social, political, These changing factors can impact of the sets of organizational forces although principally of one any particularly previously. management becomes he/she fourth major set of forces are the technologies The manufacturing. when than individual different as head of marketing becomes a very a person example, course they are reflected in the strategy of the organization. In be to be a force in its own right and it certainly has a direct seen to mechanism the gave ordering situation where competitors terminal competitive sustainable advantage in the AHS took information technology, gave its customers a cost customer and An Supply (AHS)  and its choice of a and allowed the customers to order directly from AHS. terminal, quality them give place. market their Hospital is American example gave strategies that are available to an organization. the on impact of this diagram then, information technology can context the quicker and response and higher the ability to know more about its customers, AHS patterns both savings This and parties their tastes. gained. The combination was a It was also true that AHS's had a hard time breaking through the barrier of installe) systems to sell to these customers. There are hundreds of -19- of experience whole if likely Similarly, if the is inconsistent with the that Such an outcome is made even more processes and reward schemes continue to old ways of doing business and not the new. attempt that any thinking very carefully would fail. will seen be culture are inconsistent with of peoples' expectations then it is likely management the the reflect organization the reality the and culture the in people the impact this technology of technology assumes a set of skills and attitudes vision strategic clearly which is likely to come to nothing. it then idea this In addition, there are corporate and structure organization accomplished. One can have the best idea in the world but if the linkage. strategy be forces of sets other three to strategy the enabling for hold is merely technology the strategy, the for force driving major suggests, the external environment is the diagram this as However, advantage. competitive for uses I.T. similar of [231 examples to strategies without about the implications that such a strategy structure, the I.T. formulate Thus it can the and the processes, is people, likely to fail. An origin expanded of in involving 15-20 corporate sponsors the impact information processes, -1II1--_1I_. of this line of thinking was the conceptual project at the Sloan School of Management at MIT called a Management on _iaPI_ version 1990s . the faculty at the This is a five year research program Sloan School together with ten of who are giving MIT $5 million to conduct research information technology strategy, Xli--llll_--^. ..._ per se technology. but the Our concern is not with impact it will have on the structure, people, and human resource practices -20- in Our sponsors consist of three manufacturing firms, organizations. British Service Revenue namely and BellSouth, papers in are the although of series the public conferences and working conferences. papers domain remain and are limited ideas and conclusions become better formed. there has and in been many of Internal The research program is in its third year and is and MCI. a whole producing the Ltd., Digital Equipment Corporation, Computers International and involved in information technology firms four Young, Arthur Express, American organizations, Motors, and Eastman Kodak, three service General Petroleum, available from The MIT' to the sponsors until the Already it is clear that a major impact on organizations as a result of I.T. the most successful cases this impact has gone straight to the core of the way they do their basic business. The Future The the impacts of information technology which the researchers in 1990s program are finding would not be of such major significance if it were not for the fact that there is no indication that changes are slowing down. That is, the external environment shows every sign Management in the 1990s Research Program Massachusetts Institute of Technology Sloan School of Management 1 Amherst Street Cambridge, MA 02139 (617) 253-0585 -21- of continuing to experience major changes over the next several years. These changes will in turn demand that organizations adapt to them. Such adaptation can technology. information be This facilitated by the creative use of is itself continuing to technology Recent technological breakthroughs suggest that the changes change. will affect some areas in major ways. The of first continuing drop architecture these in have machine at hardware/software domain. the plus costs developments The in software in machines that have now fallen below a For example in 1986 it is possible to buy a "LISP" around particularly in hardware resulted threshold. cost is the suitable level which can deal with languages $15,000 for qualitative knowledge and its manipulation and be coupled with a knowledge base of a usefully realistic size. The in second is conceptual in nature. Herbert Simon the 1950s first raised the idea of heuristics and its place in the field of Artificial Intelligence. work by many able knowledge of so-called do so "expert to concepts in to concept used have got us to the point  very which limited This has resulted in the are an interesting development in of However, systems" and artificial intelligence can be "expert "expert domains and therefore are of marginal strategy over the next ten years. corporate build of systems" experts. But to the extent they replace human judgement they can only importance the that researchers acknowledged field. the Since then there has been a lot of it is possible to capture and work with judgemental qualitative where _ breakthrough support systems" (ESS). These take the "expert systems" but apply them to an interactive system _I_1XII___II____ Ih1 -22- a manager very much in the loop in a crucial part of the leaves that decision making process. The breakthroughs conceptual an software for drop cost in the directly the for the . information in time gives us the tools to attack first qualitative data from passage This with working of challenge information judgemental in the early 1960s to the 1970s to knowledge in the 1980s is of fundamental opens and significance build to of the hardware has resulted in an economically viable which combination one system" coupled with the enormous support "expert allow that another up class of problems for which an organization must have an effective strategy. "knowledge This last the over touched been scarcely repetitive tasks activities of on viable together and tasks organization. telecommunications that it credit more been have well the do have understood, routine, with the transaction processing More recently we have begun to work has The advent of low allowed us to link remote sites of inventory things. routine risk a tightly with the organization. affected entry, order day-to-day components workers and capture transaction processing data closer to the source integrate payroll, the an help to knowledge We have done a lot with computers far. to have that since physical manufacturing process via robots. the cost thus years 25 matters era" of a have been largely clerical, such as control and keeping track of the More judgemental areas such as assessing possible complicated However, the loan candidate or configuring the customer order do not yield to the old -23- and concepts work with hardware architecture that we have had to "sequential" thus far. The and heuristics, capturing at architectures" science new the of knowledge engineering, availability of "parallel prices offer the tools that will allow reasonable us to increasingly deal with these judgemental areas. Given the technology continuous challenge managers of firms and an I.T. strategy is tricky. of in the It must both getting In addition, it involves the I.T. professionals and the line thus far From the evidence we in the 1990s program, it would appear that have used I.T. successfully are the ones who have starting such a which dialogue. In order to get this succeeded in effective dialogue it appears that one way to start, is to start. certainly seems those of who clear that the -I business It world is not waiting for are slow to begin this process as is evident from the host corporate The 1990s it appears will continue to be a takeovers. time of change. 1_1__1_( _11____ environment engage in a constructive dialogue. to collected the the the management of change. with effectively have formulation the in line managers thinking creatively and it must involve dealing involve the changes · ____ -24- References 1. Scott Morton, Michael S. "Decision Support Systems - Emerging Tools for Planning," TIMS-ORSA Conference Proceedings, New Orleans, May 1979. 2. "Chief Executives Define Their Own Data Rockart, John F. Needs," Harvard Business Review, March-April, 1979, pp. 81-93. 3. Keen, P.G.W. and Scott Morton, Michael S. Decision Support An Organizational View, Addison Wesley, Boston, HA, Systems: 1978. 4. 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