MAKING THE CASE FOR NETWORKED BUSINESS

Chapter 4

Example of Industrial Economies of Scale

In the early 1900s, Ford Motor Company executives demonstrated that industrial technologies and management principles could enable the company to dramatically lower the cost and increase the output of cars in its assembly plants.
Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

Example of Industrial Economies of Scope:

Because of the specialized nature of the technology and processes used, Ford Motor Company executives found that economies of scope were limited. The decision to introduce new products, like trucks, required that new plants be built. In fact, assembly plants were closed for several weeks each summer to enable new models of cars or trucks to be built in existing plants.
Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

Network Economies of Scale and Scope

Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

Dave Perrys View of How Network Economies E n able Market Makers to Create Value

Market Maker Value -Added

Market makers are spending money, but not yet generating significant value.

Market makers must capture 80% or more of a market to begin to generate value

0%

20%

40%

60%

80%

100%

% of Buyers/Sellers Involved in Market

Source: Applegate, Lynda M., Rober t D. Austin, and F. War ren McFa rlan, Corporate I nformation Strategy and M anagement . Bur r Ridge, IL: McGr aw-Hill/Irwin, 2002.

Chapter 4 Figure 4-3

A Scenario-Based Approach to Valuation

Step 1: Define the purpose for the value assessment Step 2: Pick a point in the future when you expect your business strategy to deliver value Step 3: Analyze the business concept and strategy and forecast market size, your share, and revenues. Step 4: Analyze the capabilities and resources required to reach the future state and forecast the cost of building those capabilities and acquiring resources. Step 5: Based on this analysis, construct estimates of financial performance and market value that reflect the "most likely" assumptions.
Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

A Scenario-Based Approach to Valuation

Step 6: Factor in the uncertainty in your assumptions by developing several scenarios that represent upper and lower bounds on key variables in your forecasts. Step 7: When appropriate, validate your model by using alternative approaches, such as Discounted Cash Flow and Comparable Company Analysis. Step 8: Discuss the value analysis scenarios you have constructed with others and critique the findings and assumptionsnot just oncebut on a regular basis.
Source: Applegate, L.M; Austin, R. D; McFarlan, F. W; Corporate Information Strategy and Management, 6 th Edition, Irwin McGraw Hill, 2002

The IT Business Value Score Card

Categories of Benefits Goals and Measures Internal External

Type I: Benefits from Investments in a Networked IT Infrastructure

Functionality and Flexibility

Improve infrastructure performance; increase the functionality and range of strategic options that can be pursued

Create an efficient, flexible online/offline platform for doing business with customers, suppliers, and partners

Sample Measures: Sample Measures: Decrease the Decrease the cost / improve the cost / improve the performance of doing business performance of internal IT online; decrease the time, cost operations; new IT and risk of launching new online applications to be created at business initiatives; lower cost, in less time, and with less risk; expand the range of internal IT initiatives

The IT Business Value Score Card

Categories of Benefits Goals and Measures Internal External

Commerce

Improve internal operating efficiency and quality Sample Measures: Internal process performance and work flow improvements; cost savings or cost avoidance; increased quality; decreased cycle time

Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels Sample Measures: Supply chain or distribution channel performance improvements; cost savings or cost avoidance for the organization and its customers, suppliers, or partners; decrease time to market or just-in-time order replenishment; enable new channels to market and/or extend the reach and range of existing channels

The IT Business Value Score Card

Categories of Benefits Goals and Measures Internal External

Content / Improve the performance of Improve the performance of knowledge Knowl knowledge workers and workers in customer, supplier, and edge enhance organizational partner organizations; add learning information value to existing Sample Measures: products and services; create new Enable individuals to information-based products and achieve and exceed services personal performance Sample Measures: goals; increase the speed Provide information to customers, and effectiveness of suppliers, and partners that enables decision making; better decision-making; charge a increase the ability of price premium for products and the organization to services based on information valuerespond quickly to added; launch new informationthreats and opportunities based products and services; increase revenue per users and add new

The IT Business Value Score Card

Categories of Benefits Goals and Measures Internal External

Community

Attract and retain top talent; Attract and retain high quality increase satisfaction, customers, suppliers, partners, and engagement, and investors; increase external loyalty; create a culture stakeholders satisfaction, of involvement, engagement, and loyalty motivation, trust, and shared purpose Sample Measures: Customer, supplier, Sample Measures: Length partner satisfaction and lifetime of time to fill key value; average revenues per positions; attrition rate, customer and trend over time; level trends in hiring and of personalization available and % retaining top talent that use it; churn rate (over time, by industry, by region)

Comparing the three eras of IT Evolution

Timeframe Mainframe Era 1950s to 1970s Microcomputer Era 1980s & Early 1990s Stand-alone microcomputer and enduser tools (e.g., word processing, spreadsheets) Information Management Entrepreneurial Organization Decentralized Intelligence Provide information and tools to improve decision making and knowledge worker performance Network Era 1990s to present Mainframe, stand-alone applications, databases Client-server, Internet, browser and hypertext Knowledge Management Networked Business Community Shared Intelligence Transform organizations and markets to create business value

Dominant Technology

Data Management Hierarchy Centralized Intelligence Automate back-office activities

Organization Metaphor

Primary IT Role

Comparing the three eras of IT Evolution

Timeframe Mainframe Era 1950s to 1970s IT specialists Computer room Microcomputer Era 1980s & Early 1990s Network Era 1990s to present Everyone Everywhere Business development and strategic planning Typical User Location of Use

IT literate business analysts

Desktop

Planning Process

Yearly budgeting

Individual expense

Justification

Cost savings

Increased decision quality and personal performance Ad-hoc

Business value

Implementation

Independent projects

Strategic initiatives

Benefits of Investments in Infrastructure

$(+)

Return on Investment
Decreased initial investments

$(-)

Increased cumulative benefit from IT portfolio

Time

Source: Applegate, Lynda M., Robert D. Austin, and F. Warren McFarlan, Corporate Information Strategy and Management. Burr Ridge, IL: McGraw-Hill/Irwin, 2002. Chapter 4 Figure 4-5

Some Cases

BigCo Appendix 3 A

Questions