Strategic Role of IT
Dr. Merle P. Martin
MIS Department
CSU Sacramento
Agenda
IT strategic roles
 IT as a competitive tool
 Reengineering
 Where are we going?
 Strategic IT Planning
 Foundation Health Corporation
Strategic IT Plan

IT Strategic Roles
As competitive tools
 To reengineer business
processes
 For interorganizational linking

IT as Competitive Tool

Watchwords for 90’s
(Hammer)
innovation (IT)
speed (delivery)
service (tailoring)
quality (TQM)
IT Competitive Tools
Market Share Strategies
“Beat the other guys”
“Stay in the game”
Be acquired by others
 IT role

To Stay in Business
Catch up to innovators
 Galiler / Amodeus
European airlines
global reservations system
Keep up with American
and United Airlines

To Gain Market Share
Porter’s Competitive
Threats Model
 Threats:
Customers
Suppliers
Substitute products
Potential entrants
 Use of IT to mitigate threats

Porter Model
Bargaining
Power
Threat
Industry
Threat
Substitutes
Bargaining
Power
Buyers
Suppliers
New
Entrants
Mitigating Threats
Suppliers - GM / Conrail
 Buyers - Amer Hosp Sup
 New Entrants Supermarket scanning
IT as market barrier
 Substitues
Determine market strategy
Use IT to enhance strategy

Market Strategies
Lowest cost - IT in
Production
Distribution
 Market niche - IT in
Advertising
Market Research
 Market barriers - IT pioneer
 Product differentiation - R&D, Mrkt
Rsrch

Reengineering
“ . . . fundamental rethinking
and radical redesign
of business processes
to achieve dramatic improvements
in critical contemporary
measures of performance such as
cost, quality, service, and speed”
Reject Industrial Model
Adam Smith’s Principles
 Industrial Revolution
division of labor
specialists
economies of scale
big is better
hierarchical control

Reengineering Isn’t
Downsizing
 Reorganization
 Software Reengineering
 Busting bureaucracy
 TQM

Issue
Is your firm reengineering?
Why don’t more firms reengineer?
What’s the “downside” to
reengineering
WHAT DO YOU THINK?
Where Are We Going?

Peter Keen’s 8 scenarios
25-80% cashflow systems
on-line rather than batch
Point of Sale (POS)
electronic payments
Image technology
Electronic Data Interface (EDI)
Electronic Data Exchange (EDI)
Bentonville
Vendors
Stores
Keen’s Scenarios
Distributed work
 Work location dependent
 Reorganization frequent,
not exceptional
 Electronic business partnerships

Electronic Business
Partnerships

Typical markets:
firm’s products / services
stand alone
judged by comparison with rival
judgment determines market share
zero-sum game
first with innovation (IT) gains
competitive edge
Interrelatedness
Markets involving IT
atypical
 Effect of IT is subtle
can accelerate competition
can soften competition
 Interrelatedness sources:
networks
concern for compatibility

Networks
Value increases with size
 # transactions = N ( N - 1 )
 Western Union example
2 cities (A and B)
Can send a dollar each way
Value = 2 ( 2 - 1 ) * $1 = $2
Add 3rd city
Value = 3 ( 3 - 1 ) * $1 = $6

Sharing Networks
CIRRUS / ATM led to
larger network
 Increase network quality
different users with
different services
Airline reservations

Compatibility
Interconnectivity
DEC connecting
different vendors
 Human skills
QWERTY standards
 Complementary products
plug-in peripherals
IBM Repository CASE product

IT Planning Sequence
Strategic
Planning
Management
Control
Operational
Control
Strategic Plan
Tactical
Plan
Operational Plan
Level of Management
Operational
Short
Range
Tactical
Strategic
Planning Horizon
Long
Range
IT Planning Cycle
Develop Mission
Statement
e.g, 15% market share
increase sales volume by 10%
 Identify strategic units
 Define Critical Success Factors (CSF)

Critical Success Factors
John
Rockart, MIT
Translation of firm’s
critical factors for strategic
success down level by level
to measurable goals all levels
Example:
Key strategic factor:
Retain profit level
CSF: Profit-to-sales ratio
IT Planning Cycle
Identify IT enhancing CSFs
 Consider industry and
technological trends
 Categorize potential IT
new versus redesign
matches strategic goals
potential ROI
potential risk

IT Planning Cycle

Set IT portfolio strategy
eliminate non-strategic
contenders
allocate resources to IT
with high ROI or low level of risk
Leave 5 to 15% of technology
budget for Research and
Development (R&D)
Issue
Does your company do
IT strategic planning?
If not, why not?
If so, do what steps do they follow?
Tell us your experiences!
FHC Example
Foundation Health
Corporation
 Organizational goals
 IT vision
 IT goals
 IT guiding principles
 IT tactics

Who is FHC?
Fortune 500 company
 Rancho Cordova, CA
 Managed care services
12 states
3.1 million people
 Specialty health services
17.2 million people
every state in union

Organization Goals
Leader in U.S. managed
care market
 Cover over 6 million
medical risk lives
 Over $2.5 billion annualized revenue
 Upper quartile in market share

Organization Goals
Satisfied, long-term
customer relationships
 Top quartile ROE
(public companies)

NOTE: Goals are measurable
11 3
System Development Vision
ID and Exploit Business Opportunities
via Technology
Address business needs within
business dictated time and cost
Address business needs
within estimated time/cost
Problems resolved
within 4 hours
All systems networks 98%
available
Business Partner
Solution Provider
Application Provider
Service Provider
System Provider
Where Are We?
We are in the beginning
stages, here
Business Partner
Solution Provider
Application Provider
Service Provider
System Provider
IT Goals
IT contribute to
organization goals
 State-of-the-art
administrative process
 IT flexible to customer needs
(both anticipated and unanticipated)
 Define “TO BE” IT environment
manageable transition plan

IT Guiding Principles
Technology leader
(health care)
 Use proven, reliable
technology
 Move to real-time settings
 Leverage investment in current
systems
marketing tools

IT Principles
Common systems
for common functions
 Incrementally improve
systems
 Move towards “Enterprise Systems”

Development Tactics
Development costs
capitilized
 Cost / benefit for major projects
 Major projects analyzed
develop in-house?
off-the-shelf package?
outsource?
 IT pay benchmarked

Organization Structure
Tactics
IT governed by steering
committee (chief executives)
 “Major Development”
separate department
 CHAMPUS separate department
 Data responsibilities centralized
 Functional area support tems

Ops Mgmt Tactics
Mainframe reliance
 7-day, 24 hour availability
 Centrally managed storage
 Data center automation
 Enterprise network architecture
 Enhance data center
recovery process
 End-user computing strategy

Discussion
What does FHC’s strategic
IT planning tell us about
the firm’s change culture?
(e.g., conservative, pioneer, etc)
 How could FHC’s IT strategic
planning process be improved?

WHAT DO YOU THINK?
Points to Remember
IT strategic roles
 IT as competitive tool
 IT for reengineering
 Keen’s 8 scenarios
 IT Strategic Planning
