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The link between business strategy and information systems

Michael Gleeson Dublin Institute of Technology, Kevin Street, Dublin 8, Ireland. mailto: [email protected] phone: +353(0)1 4027006

Abstract An investigation into the interconnection between business strategy and information systems. Both of these have external factors affecting them but also a core relationship now exists. This paper aims to highlight different systems that enable a corporation to achieve a core competency and therefore competitive advantage. It also discusses various related issues and topics and also includes an explanation of well known management tools such as Porters three generic strategies, Porters value chain and Kaplan and Norton's balanced scorecard. The author also puts forward a detailed model to assist the reader in understanding the relationship between business strategy and information systems. Keywords: Information systems, Business Strategy, IS return, corporate strategy, competitive advantage, outsourcing, core competency, interaction, balanced scorecard.

Section one gives a brief introduction to the origins of strategy and information systems. It explains how information systems have evolved from initial idea of automation of tasks to modern information systems which are an integral part of a corporation's business strategy. It also questions information systems in relation to Return on Investment (ROI). Section two explains the basics involved with strategy and information systems. Topics such as the need for strategic flexibility in the current market place are covered. This section introduces the reader to a model developed by the author to show how information systems and business strategy interact. This is a basic model and will be expanded further on in the paper. A table developed by Kramer et al (1999) which links business strategy and goals for information systems is included in this section. Finally, strategic alignment is discussed. The third section explains four generic areas where information systems can and should add value. This explains expense containment, process improvement, customer advantage and talent leverage. These are explained in general terms rather that using actual financial metrics. Section four discusses different problems encountered by corporations when integrating information systems and business strategy. As a corporation utilises information systems as a core competency there are problems which may be encountered. These are business sponsorship, resource allocation and prioritization, culture adoption and technology readiness.

Introduction

This paper provides a broad overview of how business strategy and information's systems interact and vice-versa. It discusses the original uses of information systems and how this has evolved with time. It will deal with such issues as aligning business strategy with goals for information systems. It introduces the idea of strategic alignment and also two new models developed by the author which will assist the user understanding the link between information systems and business strategy. The paper is divided into nine sections. Throughout these sections different aspects of both information systems and business strategy will be explained in detail. The paper is intended for both IS and Business unit managers who wish to understand the relationship between IS and business strategy. It will produce two

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The link between business strategy and information system ­Michael Gleeson

1.

In the fifth section various models are introduced and discussed. These are Porters generic strategies (1995) and Value chain (1990). Each of these maybe used to show how corporations can use information systems to both gain and sustain competitive advantage. There is a difficulty in trying to sustain a corporation's competitive advantage as competitors will try to imitate or substitute another corporation's competitive advantage. Sustainable competitive advantage can flow from the effective use of information and an effective information system provides this information. Section six explains some of the information systems that allow corporations to create value and sustain competitive advantage are Enterprise Resource Planning (ERP) systems, Customer Relationship Management (CRM) systems, Supply Chain Management (SCM) systems, Business Intelligence (BI) systems and Knowledge Management (KM) systems. The seventh section deals with how a corporation can use the outsourcing of its information system as a core competence. Information systems have currently never been more critical to business success and corporations must be cautious when outsourcing. A corporation can retain all the attributes of quality information systems without all the associated overheads and this section deals with issues involved. The eight section presents a new detailed model expanding that shown in section two. This model builds upon the previous one and is aimed at helping the reader to further understand how information systems and business strategy are inter-connected. This model incorporates a central or core interrelationship between business strategy and information systems. Also included are external factors affecting a corporations business strategy and information systems, which are interlinking and affect each other. Finally the Balanced Scorecard (Kaplan and Norton, 1992) is used to analyse investment and gauge value or return. This in turn leads to creating value or realising profits and ultimately achieving the corporations' goals or objectives. Section nine shows the balanced scorecard and briefly explains all the parts of it. The balanced scorecard is used in the model put forward to explain the relationship between business strategy and information systems.

Origins of strategy and information systems

Strategy and Information Systems (IS) are inextricably linked. The strategic impact of information systems is hard to quantify but exists all the same. The effect of information systems and technology on a business's strategy can create a competitive advantage for that business. Information systems and technology can put a business in a stronger position to compete, than other business (Nickerson, 2003). Change has emerged as a major characteristic of the current business environment, changes in both business and technology are requiring rapid adoption of roles and structure for corporations. Information systems are therefore central to a business's initiatives such as reengineering, knowledge management, the creation of electronic channels of distribution, and in the recent past the development of digital business strategies (DiRomualdo and Gurbaxani, 1998). The most noticeable example of this is shown by the Dell computer corporation (Dell, 1999). The return on investment in information systems is a contentious issue; while there is evidence to support a positive return there is still a huge amount of skepticism surrounding the issue of whether IS creates value for individual corporations (Kramer et al, 1999a). The role of information systems has evolved since information systems were first developed. The initial idea was of automation of existing manual and pre-computer mechanical processes, which was quickly succeeded by the rationalisation and integration of systems. Traditionally in these forms, IS was regarded primarily as an operational support tool, and secondarily as a service to management (Clarke, 1995) and was not even considered as a core competency of the corporation. However during the 1980s, another capability was recognised. Information systems had become, in some cases been critical to the implementation of a corporation's strategy. This led to the development of the term Strategic Information System (SIS). A strategic information system (SIS) is an information system which supports an organisation in fulfilling its business goals (Clarke, 1995). An alternative interpretation of the term is that it is not necessary a particular IS, but rather the combination of those parts of an organisation's cluster of information systems which provide information into its strategic planning processes (Higgins, 1999).

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The link between business strategy and information system ­Michael Gleeson

2. The Basics ­ Strategy and IS

Businesses are currently experiencing more volatile marketplaces, global competition, shortened product life cycles, customer pressures for tailored offerings and tighter performance standards, they increasingly depend on new information systems to gain or maintain competitive advantage. The IS components in business solutions must be constructed rapidly and effectively despite the massive changes in information systems product capability, a restructured supply industry, potential shifts in system development approaches, and new ambiguities in terms of what should be regarded as a business-side versus a technical specialist task (Feeny and Willcocks, 1998). It is essential that a corporation's ability to change and be flexible is dynamic in the current economic environment. The underlying idea is that in the context of ever increasing competitive environments, corporations require higher levels of strategic flexibility (Byrnjolfsson and Hitt, 1995). This in turn demands more flexible organizations and processes, which in turn requires more flexible underlying IT infrastructures to accommodate this (Broadbent and Weill, 1997). The need for flexibility in organizational arrangements and alliances is prompting a move away from tight integration toward loosely coupled arrangements (Sanchez, 1997). In IS terms this would correspond to a mainframe, a traditional `monolithic', inflexible, stable and tightly coupled system to a technology such as Web Services, a proprietary, loosely coupled, hybrid and flexible system. Web services can be viewed as the adoption of loosely coupled technologies to implement loosely coupled strategic and organizational arrangements. It is important to recognize that the use of information systems alone does not derive business benefits; benefits flow from the use of information systems. Information systems enable people to do things differently and these actions produce the benefits. To realise this potential it is necessary to identify the role of the information system function (key practices) and identify how IS can be exploited for competitive advantage (Kearns, 1997). The diagram above shows a simple graphical representation of the interaction between business strategy and information systems. It shows how both can dictate each other and vice versa. Then this leads into creating value and therefore realising the corporation's objectives. This model is developed further and explained in detail in section eight.

Underutilisation of information systems is a serious problem for many corporations, many technology based competitive opportunities can be over looked due to a number of factors such as (i) ignorance of information systems and its potential uses, (ii) poor communications and understanding between the information's systems group and the rest of the business, (iii) resistance to change from both information systems personnel and business personnel, (iv) lack of focus on opportunities for competitive advantage and (v) lack of methods to measure benefits (Bakos and Treacy, 1986) Alignment of information systems strategy with the business strategy is an important objective if organizations are to use information technology resources effectively (CSC, 2000). The alignment of business strategy and information systems in organizations is defined by Luftman as "applying Information Technology (IT) in an appropriate and timely way, in harmony with businesses strategies, goals, and needs". This means that it is necessary for IS and the general direction of the IS departments goals to be consistent with the general business strategy. An example of strategic alignment is where business strategy would correspond to sell products globally, IS strategy would provide a global sales information system to facilitate the selling of goods globally (Nickerson, 2003). The following table shows the linkage between business strategy and goals for information systems.

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The link between business strategy and information system ­Michael Gleeson

Information systems supports business strategy

Information Systems

Strategy utilizes information systems

Business Strategy

Analyze Investment / Value/Return

Value Creation / Competitive Advantage

Realize Profit/Objectives

Achieving Objectives

Fig. 2.1 - A simple model for understanding Business Strategy and Information Systems (Author, 2004) Although IS spending growth was down in 2002, estimates for US spending growth in 2003 average 4% to 6%; estimates for worldwide spending growth are 5% to 7%. Corporation's IS spending utilizes a considerable percentage of the annual operating budget (Bye and Rau, 2003). This Business Strategy Operational Effectiveness Efficiency Effectiveness Strategic Positioning Reach Structure indicates that IS has become a major resource for an organisation attempting to fulfil its strategic goals (Earl et al, 1996). Alignment is especially important for companies which use information technology (IT) as a strategic resource.

Goals for Information Systems Internal Reduce costs, increase productivity and speed Enhance overall organisational effectiveness External Extend existing market and geographical reach Change industry or market practices

Table 2.2. - Linking business strategy with corporate goals for Information systems (Kramer et al, 1999a).

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The link between business strategy and information system ­Michael Gleeson Strategic alignment is a two way process. Firstly, it is necessary for IS management to become formally or informally involved in top level management and be present when business strategies are decided. Secondly, it is essential for IS management to contribute to overall management philosophy and thinking through identifying business threats and opportunities (Earl et al, 1996). Business strategy and IS strategy are often treated as separate and Henderson and Venkatraman (1993) and Prairie (1996) suggests that a corporations inability to realise sufficient value from IS is in part due to an absence of strategic alignment. Despite significant progress in evaluating the productivity payoffs from information systems, business executives remain critical of IS performance. It is necessary in order to attempt to improve understanding of IS return, to analyse the impact of IS on key business activities (Kramer et al, 1999a). A business can gain competitive advantage when it can provide some activities in the value chain (Porter, 1980) so that, value to customer is increased, or cost of performing activity is decreased. These can be achieved through the use if IS and IS investment that provides value or decreases cost can be strategic (Nickelson, 2003). There are a number of well known success stories, most notably American Airlines SABRE reservation system and McKesson's ECONOMOST inventory control system. However there are also a number of different examples of IS systems, such as Remingtons EDI system. There is a lack of evidence linking IS investment and businesses performance.

Business Priorities

Business Strategy

IS Strategy

Technology Trends

Fig. 2.3. - Strategic Alignment (Earl et al, 1996)

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The link between business strategy and information system ­Michael Gleeson

3.

Analysing IS return

Corporations that are heavily dependent on IS for transaction processing, product development, marketing and delivery spend large percentages of their operating budgets on IS to support business activities. How do the corporations stakeholders know that all this investment is worth it? To figure this out it is necessary to understand and identify where and how information systems can add value. This can involve metrics to evaluate information technology employee performance and Information Technology links to business success to the intangible asset of innovation. Depending on the strategic focus of a particular organisation, value definitions may change however there are four main generic areas where IS can and should add value (Bye and Rau, 2003). These four areas are Expense Containment, Process Improvement, Customer Advantage and Talent Leverage. These are explained in the following four subsections.

Another financial metric is Return on Investment (ROI) which is very similar to Cost-Benefit Analysis in the way it is measured by the total investment and the benefits obtained. The difference is in the expression of the benefits which are assumed to be a percentage incurred over time rather than putting an actual figure on it. A simplified example of this is if a company invested 100,000 in a system and accrues a benefit of 12,000 per year, the annual ROI would be 12%. This would need to be adjusted on a regular basis to incorporate initial capital outlay and depreciation (Devaraj and Kohli, 1966).

3.2. Process improvement

Process improvement refers not to replicating a current business process but improving them through the application of technology and systems to that particular process. Information systems have the ability to provide more focused and faster access to information which creates business intelligence. This more focused and relevant business intelligence leads to good decision making, and this is where competitive advantage can lie. Examples of were process improvement can add value are lowering product defect rates, improving information relevancy and speeding up the time-to-market in new and innovative ways (Bye and Rau, 2003). This improved productivity can vary from organisation to organisation depending on the nature of the work and the industry. Process improvement can be applied to two areas; efficiency and quality. Efficiency metrics are measured by the comparison of the output on an operation to the resources consumed. An example of this can be shown by McDonalds; by linking the order taking register to a kitchen preparation monitor can increase the efficiency of kitchen staff by 30 seconds per sandwich (Devaraj and Kohli, 1966). Improved quality of work that reduces rework of a product or service can have a value added impact on productivity. IS systems can be used to simulate processes and assembling of parts into the final product and therefore reduce rework and its associated costs.

3.1. Expense containment

Traditionally the idea of this was to reduce or replace high cost manpower with lower cost, more efficient and reliable technology. This goes back to the original focus of most data processing applications. In today's modern computing environment, expense containment can mean achieving a level of flexibility or loose coupling which allows a corporation to adapt or change quickly in order to incorporate new technologies or align with new business alliances without disrupting existing business infrastructure (Bye and Rau, 2003). A flexible supply chain management system would be an example of an information system that limits expense. Financial metrics exist that are used to gauge the profitability of an organisation. These approaches generally take the form of `bottom line' evaluation. Two such techniques are Cost-Benefit Analysis and Return on Investment. Cost-Benefit involves examining the difference between the cost incurred and the benefits obtained from an investment. For a system to be deemed successful if is necessary for benefit to outweigh the costs, however this is not always possible to do. Estimating initial costs such as hardware, software, consulting and accompanying costs including training, maintenance, licensing and upgrades is possible to some extent. Estimating benefits is much more difficult; benefits may come in the form of productivity or customer value which is not tangible (Devaraj and Kohli, 1966). Solely from a financial perspective, for a system to be declared a success, an organisation would require the benefits to exceed the investment costs.

3.3. Customer advantage

Often a corporation investing in an Information system does not see direct benefits in profitability or productivity, however the customer benefits from it. Previous applications of information systems related to limiting customer transaction errors, and in this way limit the amount of customer complains. This may have also led to the customer's perception of the corporation being a `reliable' one. Information systems such as customer relationship management (CRM) are being utilised to build customer loyalty, gain long-

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The link between business strategy and information system ­Michael Gleeson term customer retention, improve customer productivity and perform a more focused marketing techniques. In Ireland an excellent example of this is supermarket chain Superquinn's CRM system. This can also have an adverse effect on the customer depending on their perception of invasion of privacy (e.g. receiving direct marketing communications automatically generated by a CRM database). Another advantage that can be gained is the ability to analyse and understand the data held in a CRM database and subsequently predict market needs, wants or trends (Bye and Rau, 2003). power for any IS project or development. This is difficult to do as to measure the impact of IS on a corporation is difficult to determine (Rooney, 2003).

4.2. Resource allocation and prioritization

There must be a system in place to prioritize available resources, albeit monetary or a human resource. Without a system, small, less valued and more focused projects will be completed, while more long term, strategic and cross organisational beneficial projects will be neglected and may never be completed (Rooney, 2003).

3.4. Talent leverage

Information systems can play a significant role in improving employees work environment and also foster innovation (Bye and Rau, 2003). This is an intangible but significant value added component of information systems. Information systems enable good corporations to be well positioned to maximise the talent within the corporation, through new hardware, software, networking tool and a virtual environment which is conductive to innovation (Bye and Rau, 2003). The value of reducing time and therefore increasing profit per employee must also be taken into account, this is one of the more reliable measures and can also be incorporated into improving productivity (Keen, 1997)

4.3. Culture Adoption

To maximise its technology investments it is essential for the users of the Information System to adopt and appreciate the value it adds to the corporation. If the users fail to do this, the full potential of the information system will never be fully realised (Rooney, 2003).

4.4. Technology readiness

It is inadvisable for a corporation to leap in and aggressively pursue a policy of investment in Information Systems without having a sufficient base to initially start from. A strong technological foundation is an advisable pre cursor before a corporation can begin to initiate strategy through the use of Information Systems (Rooney, 2003).

4. Problems integrating IS and corporate strategy

For an organisation to enable corporate strategy to its greatest extent, that organisation must exploit the competencies that it has to its maximum potential. Information systems can be a critical catalyst for corporate strategy and it is beneficial that it is fully utilised (Rooney, 2003). IS has previously offered corporations a way to develop new offerings, proactively improve customer experiences, and build collaborative structures internally within the corporation. These are all different initiatives and important benefits from IS but they do not align strategy and IS (Rooney, 2003). There are a number of different challenges facing corporations in focusing strategic attention to its IS competencies. Four of these challenges according to Rooney (2003), are set out now.

5. Sustainable competitive advantage through IS

Sustainable competitive advantage derives from a core competency of a corporation. It is an outcome of competitiveness, i.e. cultivating the unique strengths and competences of a corporation and defending them against imitation by other corporations (Agasti et al, 2003). Obvious examples are the Coca-Cola brand and Microsoft's control and domination of the personal computer operating system market. These strengths and competences are a corporation's competitive advantage. There are two basic types of competitive advantage a corporation can possess, low cost or differentiation. These two types combined with the scope of activities for which a corporation seeks to achieve them leads to three generic strategies for achieving the above average performance which is required to gain competitive advantage in an industry. They are cost leadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus (Porter, 1985).

4.1. Business sponsorship

Without showing explicitly the manner in which IS will reduce cost, increase efficiency or promote collaboration the business budget owners, being non technical personnel may allocate only minimal resources and spending

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The link between business strategy and information system ­Michael Gleeson

Competitive Advantage

Lower Cost Differentiation

Broad Target

Cost Leadership

Differentiation

Competitive Scope

Narrow Target

Cost Focus

Differentiation Focus

Fig. 5.1. - Three generic strategies (Porter, 1985) Porter (1985) devised a framework which shows the generic strategies that corporations can use to gain competitive advantage. There is a difficulty in trying to sustain a corporation's competitive advantage as competitors will try to imitate or substitute another corporation's competitive advantage (Porter, 1985). Competitive strategy is the choice of how an organization or business unit is going to compete in its particular industry or market (Porter, 1985). The following shows and explains Porters' Generic Strategies (1985). rewarded for its uniqueness with a premium price (Porter, 1985). There are diverse methods by which differentiation may be applied depending on the particular industry. Differentiation can be based on such factors as the product itself, the delivery system by which it is sold or the marketing approach (Porter, 1985). Companies can pursue differentiation from many unique angles for example, Dr. Pepper's unique taste, superior engineering and design of Mercedes cars or the prestige and distinctiveness of Rolex (Thompson and Strickland, 2001).

5.1. Cost Leadership

In cost leadership, a corporation specifically sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors (Porter, 1985). A low cost producer must find and exploit all sources of cost advantage. Low cost producers typically sell a standard, no frills product and place emphasis on scale or quantity (Porter, 1985). If a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average (Porter, 1985). The airline industry has recently utilised cost leadership with companies such as Ryanair and easyJet (Thompson and Strickland, 2001).

5.3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others (Porter, 1985). By doing this the corporation gains a competitive advantage in its chosen market segment while at the same time not possessing any advantage in the market overall. The focus strategy has two variations, cost and differentiation. In cost focus a firm seeks a cost advantage in its target segment, while in differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry (Porter, 1985). The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments (Porter, 1985). Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in certain segments (Porter, 1985). An example of focused strategy is Cannondale in top of the range mountain bike and Callaway in top of the range golf equipment. Both of these corporations invested heavily in research and

5.2. Differentiation

In a differentiation strategy a corporation seeks to be unique in its industry along some dimensions that are perceived to be widely valued by buyers (Porter, 1985). It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is

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The link between business strategy and information system ­Michael Gleeson development to make high quality equipment that can command a premium price (Thompson and Strickland, 2001). Section six addresses current Information Systems which can be used to enable competitive advantage. These are Enterprise Resource Planning (ERP) systems, Customer Relationship Management (CRM) systems, Supply Chain Management (SCM) systems, Business Intelligence (BI) systems and Knowledge Management (KM) systems. By utilising these systems, enterprises create value for their customers. The ultimate value an enterprise creates is measured by the amount customers are willing to pay for its product or services. A firm is profitable if this value exceeds the collective cost of performing all of the required activities. To gain competitive advantage over its rivals, a firm must either provide comparable value to the customer, but perform activities more efficiently than its competitors (lower cost), or perform activities in a unique way that creates greater buyer value and commands a premium price (differentiation) (Porter, 1980). The common function in both of these strategies is that of `value creation'. A method to evaluate value created is Porters (1980) value chain. The main or primary value adding activities of a corporation are activities surrounding production, marketing, inbound and outbound delivery and servicing of a product or service (Agasti et al, 2003). In Porters model they are viewed or linked as a chain. Support activities include purchased inputs to the corporation, such as technology, human resources and overall infrastructure functions to support the primary activities (Porter, 1980). Through coordination of linked activities a corporation should be able to reduce transaction costs, gather better information for control purposes, substitute less costly operations in one activity for more costly ones elsewhere and reduce the combined time required to perform these activities. Thus creating value for the corporation. Bank ATMs offer a perfect example of a competitive advantage based on technology. This offered customers easier access to services, therefore increasing service requirement levels and the automation had a knock on effect of requiring reduced over the counter transactions which added value by reducing the required level of employees, while also maintaining and actually increasing service provided. This however was not sustainable. Competitors successfully deployed the same ATM technology and in doing so made an ATM an expected service for the customer or a hygiene factor.

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The link between business strategy and information system ­Michael Gleeson

Firm Infrastructure Human Resource Management Technology Development Procurement M A R G I N Marketing and Sales After Sales Service

Support Activities

Inbound Logistics

Operations

Outbound Logistics

Primary Activities

Fig. 5.3. - Porters Value Chain business process. A typical example such as order fulfilment would involve taking an order from a customer, distribution of it and 6. Systems that enable competitive invoicing for it. ERP would allow for when a advantage customer service representative takes an order, Gaining competitive advantage requires that a from system setup all the required information corporation's value chain be administered as a is on a central database. Details such as the system and not as a collection of independent credit rating and order history of the customer and separate parts. Therefore coordination is are available, so too inventory is immediately increasingly essential in order to gain available. All appropriate users in the company competitive advantage. Sustainable can view the same information and have access competitive advantage can flow from the to the central database that holds the effective use of information and an effective information. When one department finishes information system provides this information. with the order, it is automatically routed via the This means a corporation can sustain ERP system to the next department. It is competitive advantage though this information possible to track the order at any point by even thought rival corporations may have logging on to the system (Koch, 2001). access to the same technology. Some of the information systems that allow corporations to 6.2. Customer relationship planning create value and sustain competitive advantage The idea of Customer relationship planning are Enterprise Resource Planning (ERP) (CRM) is that it helps businesses use systems, Customer Relationship Management technology and human resources to gain insight (CRM) systems, Supply Chain Management into the behaviour of customers and the value (SCM) systems, Business Intelligence (BI) of those customers (Deck, 2001). CRM has systems and Knowledge Management (KM) many technological components to it but systems. overall it is a strategy used to learn more about customers' needs and behaviours in order to 6.1. Enterprise resource planning develop stronger relationships with them. This Enterprise resource planning or ERP is a in turn then leads to a corporation gaining software application which integrates all a competitive advantage. CRM offers many corporations departments and functions into potential benefits such as provide better one central database (Koch, 2001). A customer service, make call centres more corporation typically has many departments, efficient, cross sell products more effectively, for example sales department, human resources help sales staff close deals faster, simplify and finance department which in turn have marketing and sales processes, discover new their own Information Systems. ERP attempts customers and increase customer revenues to automate the tasks necessary to perform a (Deck, 2001). Apart from the technical aspect

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The link between business strategy and information system ­Michael Gleeson of CRM systems it is also essential that the corporation decide on the kind or type of customer information it is looking for and it must decide what it intends to do with that information. A CRM system is ineffective or will not add value if the information that it holds about customers is not relevant to the corporation. It is necessary to point out that the descriptions and explanations of the Information Systems above that enable competitive advantage are only brief. Each of these systems has many different capabilities, functions and technological requirements. There are numerous different vendors and user communities that have specialised within each of theses systems and the above could be developed further into an individual paper on each. This is not required within the scope of this paper.

6.3. Supply chain management

Supply chain management (SCM) is an attempt to coordinate the processes involved in sourcing, manufacturing, and distributing goods or services through Information systems. More specifically it generally applies to large corporations with large suppliers and is concerned with improving the way the corporation finds the raw components it needs to make a product or service, manufactures that product or service and then delivers it to its customers (Koch, 2002).

7. IS outsourcing as a core competency

While Information Systems are fundamental to business initiatives such as business process reengineering, knowledge management (or business intelligence), the creation of electronic channels of distribution and the development of digital `e-business' strategies (DiRomualdo and Gurbaxani, 1998). Information is critical to any organisation but operating the technology which creates and processes it can be a drain on valuable resources. Corporations are currently outsourcing core activities of their IS departments, an obvious example is that of Bank of Ireland outsourcing its complete IS department to Hewlett Packard. Information systems have currently never been more critical to business success and corporations must be cautious when outsourcing. If outsourcing is undertaken by a corporation it can become a core competency for that corporation as a corporation can retain all the attributes of quality information systems without all the associated overheads. Another view is where corporations want to concentrate on their core competencies and outsource their non-core business processes, such as accounting, finance, human resources and procurement. However currently IT is still the predominant operation that a corporation most frequently hands over to a third party. When a corporation decides to outsource some or all of its IT/IS functions the main motivation behind it lies in a need to reduce costs. Academic literature and business press enforce this singular focused motivation. Basic outsourcing services can curb direct costs but outsourcing also helps lower "indirect" costs and achieve efficiencies in related areas, such as business processes (for example call centre management). At the highest level, outsourcers can enable companies to achieve strategic goals and transform the way they do business. Outsourcing projects can also help a corporation speed up efforts to undertake business in new ways. For example, a company

6.4. Business intelligence

Business intelligence systems or BI systems provide directed background data and reporting tools to support and improve a corporations' decision-making process. The intent of BI is to gather and analyze data to determine what's needed to increase business process efficiency. Business intelligence systems are normally used in conjunction with Knowledge management systems.

6.5. Knowledge management

Knowledge management (KM) is the process through which a corporation generates value from its intellectual and knowledge-based assets (information). In general terms this means generating value from such assets involves sharing them among employees, departments and even with other companies in an effort to devise best practices. It is important to note that while KM is often facilitated by Information Systems, Information Systems by themselves are not KM (Santosus and Surmacz, 2001). A KM program should help an organisation do one or more of the following. Foster innovation by encouraging the free flow of ideas, improve customer service by streamlining response time, boost revenues by getting products and services to market faster, enhance employee retention rates by recognizing the value of employees' knowledge and rewarding them for it, streamline operations and reduce costs by eliminating redundant or unnecessary processes. These are the most common examples. A creative approach to KM can result in improved efficiency, higher productivity and increased revenues in practically any business function (Santosus and Surmacz, 2001).

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The link between business strategy and information system ­Michael Gleeson that does not have the expertise or capital to ramp up e-commerce activities quickly may take advantage of an outsourcing company that can use its own economies of scale to offer cost-efficient web services. In this case the costs of doing business in a new way are lowered, while long-term strategic goals, such as using the internet to expand sales, are met.

Agree an open book approach with the supplier and define financial incentives for both sides to innovate and secure continuing improvements in value for money. Look to build a soundly based partnership and win-win relationship.

7.1. Essentials for outsourcing

John Handby (2003) who is chief executive at CIO Connect noted key points to note in relation to outsourcing corporations considering using outsourcing. Be clear about what is being outsourced; the boundaries and deliverables. Look for companies with particular expertise/skills that you want to take advantage of. Define agreed Service Level Agreements (SLAs) and improvement targets. Ensure that the arrangements are in place within the company to properly monitor and manage the contract.

7.2. Potential for failure

Handby also states factors which ensure outsourcing relationships do not work or fail when: The decision is taken without the proper involvement of IT management. Expectations are not properly set. The contract is ill-defined. A closed book approach is adopted. The spirit of partnership is absent. The client is hell bent on cutting the supplier's margin to the bone and/or the supplier just views the contract as licence to print money (Handby, 2003)

8. Business strategy and information systems interaction

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The link between business strategy and information system ­Michael Gleeson

Technology Environment and Opportunities

Corporate Strategy

Information systems supports business strategy

Information Systems

Dictates

Business Strategy

Strategy utilizes information systems

Technology Driven Business Change

Analyze Investment/ Value/Return

Strategic Capability

Balanced Scorecard

Achieving Objectives

Fig. 8.1. - A detailed model for understanding business strategy and information systems (Author, 2004) During research into business strategy and information systems a detailed model for understanding the factors and interactions that affects a corporation was developed, furthering on from a previous basic model. The detailed model developed, shown in Figure 8.1 incorporates a central or core inter-relationship between business strategy and information

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The link between business strategy and information system ­Michael Gleeson systems. Also included are external factors affecting a corporations business strategy and information systems, which are interlinking and affect each other. Finally the Balanced Scorecard (Kaplan and Norton, 1992) is used to analyse investment and gauge value or return. This in turn leads to creating value or realising profits and ultimately achieving the corporations' goals or objectives. In the first section of this paper it was explained that Information Systems and Business strategy are inextricably linked. This is the core inter-relationship of the detailed model for understanding business strategy and information systems. This core interrelationship that exists whereby information systems support the corporation's business strategy and business strategy utilizes information systems. There is also a factor whereby business strategy can dictate information systems direction and also information systems can dictate business strategy. There are a number of external factors which influence a corporation's information system. These are technology driven business change, technology environment and opportunities. These three have been grouped together as they each interact and are not mutually exclusive. New technology offers a corporation an opportunity to exploit that new technology to its advantage, this new technology comes from the state of the current innovative technology environment. This then in turn leads to technology driven business change. Technology driven business change is proprietary and leading edge hardware or software that may enable a corporation to do things differently and thus gain a competency or competitive advantage. The state of the current technology environment is also a factor as if investment capital is not available for research and development then innovative new hardware or software will not be developed, these are opportunities that exist that may be exploited to gain competitive advantage. The corporation's business strategy may utilize the capabilities of information systems to support its strategy. This is again the core inter-relationship however, in a reverse fashion. There are two external factors which affect a corporation's business strategy. Corporate strategy exists at the highest level of the corporation. It encompasses the scope of the organisations' strategies, the relationship between separate parts of the business (for example manufacturing, financial and sales) and how the corporate centre adds value to various different parts. This can be done through increasing efficiency and expertise, synergies between different divisions or rollout of standards and performance assessments (Johnson and Scholes, 1984). Business strategy is a level just below corporate strategy. Business strategy requires the identification of bases of competitive advantage arising from an understanding of both markets and customers, and special competences that the organisation has. This may take the form of different strategies such as `no frills', low price, differentiation, hybrid or a focused differentiation. Corporations may take different directions, for example one corporation may expand by diversification and others may seek to concentrate on the existing market and grow market share. Also within this one direction may be to enter new products or enter new markets and methods may include expanding by merger/acquisition, alliances or internally (Johnson and Scholes, 1984). Strategic capability means developing organizational capabilities which in turn develop the corporation's ability to do something. With experience this capability can then begin to translate into a competence for the corporation. With success the organization refines the capability beyond its rivals and it becomes a distinctive or core competence (Martsolf, 2004). Strategic capability is a term used in conjunction with SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. SWOT analysis provides information that is used to match the corporations' resources and capabilities to the competitive environment in which it operates. It is an instrument in strategy formulation and selection. SWOT analysis is a basic, straightforward model that provides direction and serves as a basis for the development of Strategic capability. It accomplishes this by assessing an organizations strengths (what an organization can do) and weaknesses (what an organization cannot do) in addition to opportunities (potential favourable conditions for an organization) and threats (potential unfavourable conditions for an organization) (Danca, 2000). The role of SWOT analysis is to take the information from the environmental analysis and separate it into internal issues (strengths and weaknesses) and external issues (opportunities and threats). Once this is completed, SWOT analysis determines if the information indicates something that will assist the firm in accomplishing its objectives (a strength or opportunity), or if it indicates an obstacle that must be overcome or minimized to achieve desired results (weakness or threat) (Danca, 2000).

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The link between business strategy and information system ­Michael Gleeson

9. The balanced scorecard

The balanced scorecard was developed in response to the lack of adequate information being provided to management by traditional financial performance or operational performance measurement techniques. The balanced scorecard allows managers to look at the business from four important perspectives customer, internal, innovation and learning and financial perspectives. The questions `How do customers see us?', `What must we excel at?', Can we continue to improve and create value?' and `How do we look to shareholders?' are all asked. While giving managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. The balanced scorecard forces organizations to focus on the handful of measures that are most critical (Kaplan and Norton, 1992). The following sub-sections will explain the different aspects of the Balanced Scorecard and is graphically shown in Figure 9.1.

9.3. Innovation and learning perspective

The previous two perspectives identify the parameters that the company considers most important to gain competitive success. The targets for success keep changing, intense market pressures requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities (Kaplan and Norton, 1992).

9.4. Financial Perspective

Financial performance measurements indicate whether the company's strategy, implementation and executing are contributing to bottom line improvement. Many financial measurement techniques are backward looking and have an inability to reflect value-creating actions. Shareholder Value Analysis (SVA), which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more forward looking (Kaplan and Norton, 1992).

9.1. Customer perspective

Many companies have a customer focus in their mission statements "To be number one in delivering value to customers" is a typical mission statement, therefore this is a priority for management. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers. Customers' concerns fall into four categories: time, quality, performance and service (Kaplan and Norton, 1992).

9.2. Internal business perspective

These customer based measures must be translated into measure of what the company must do internally to meet its customer's expectations. It is necessary to focus on critical internal operations that enable the organization to satisfy customer's needs. This second part of the scorecard gives the managers that internal perspective. The internal measures for the balanced scorecard should stem from the business process that have the greatest impact on customer satisfaction, factors that affect cycle time, quality, employee skills and productivity (Kaplan and Norton, 1992).

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The link between business strategy and information system ­Michael Gleeson

Financial Perspective Return on Investment Return on Assets Profitability Stock Price

Customer Perspective Customer satisfaction Number of returning customers Customers referred by other customers Market share

Internal Perspective Downtime Work in progress Rework Cycle time Maintenance expenses

Innovation and Learning Perspective % New products Number of patents Number of employee suggestions Revenue per employee

Fig. 9.1. ­ An example of an IS related balanced scorecard

Conclusion

The role of information systems has evolved since information systems were first developed. The initial idea was of automation of existing manual and pre-computer mechanical processes, which was quickly succeeded by the rationalisation and integration of systems. Traditionally in these forms, IS was regarded primarily as an operational support tool, and secondarily as a service to management. Currently, businesses are experiencing more volatile marketplaces, global competition, shortened product life cycles, customer pressures for tailored offerings and tighter performance standards. They increasingly depend on new information systems to gain or maintain competitive advantage. The IS components in business solutions must be constructed rapidly and effectively despite the massive changes in information systems product capability, a restructured supply industry, potential shifts in system development approaches, and new ambiguities in terms of what should be regarded as a business-side versus a technical specialist task. This paper shows a detailed model for understanding the factors and interactions that affect a corporation's business strategy and its information system. This model was developed to incorporate a central or core interrelationship between business strategy and information systems. Also included are external factors affecting a corporations business strategy and information systems, which are interlinking and affect each other.

Strategy and Information Systems are inextricably linked. The strategic impact of information systems is hard to quantify but exists all the same. The effect of information systems and technology on a business's strategy can create a competitive advantage for that business. This competitive advantage can ultimately lead to the success and/or survival of the corporation and allow a corporation to achieve its objectives.

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The link between business strategy and information system ­Michael Gleeson

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The link between business strategy and information system ­Michael Gleeson Deck, S. (2001), "What is CRM?", http://www.cio.com/research/crm/edit/ crmabc.html, accessed April 2004. Dell, M. (1999), "Direct from Dell: Strategies that Revolutionized an Industry", NY Harper Business, New York.

References

Agasti, Khurana and Bhubaneswar (2003) "Creating Sustainable Competitive Advantage through Information technology", http://www.indiainfoline.com/bisc/cre a.pdf, accessed April 2004. Bakos and Treacy (1986), "Information Technology and Corporate Strategy: A Research Perspective" MIS Quarterly (10:2). Broadbent and Weill (1993), "Improving Business and Information Strategy Alignment: Learning from the Banking Industry", IBM Systems Journal, (32:1) Broadbent and Weill (1997), "Management by Maxim: How Business and IT Managers Can Create IT Infrastructures", Sloan Management Review, Volume 38. Bye and Rau (2003), "Are you getting value from your IT?", Journal of Business Strategy, May/June 2003. Byrnjolfsson and Hitt (1995), "Productivity, Business Profitability and Consumer surplus: Three different measures of Information Technology value", MIS Quarterly, 20 (1995). Clarke, R. (1995), "The Path of Development of Strategic Information Systems Theory",http://www.anu.edu.au/peopl e/Roger.Clarke/SOS/StratISTh.html, accessed April 2004. CSC (Computer Sciences Corporation), (2000) "Critical Issues in Information Systems Management", Annual Survey. Danca, A. C. (2000), "SWOT Analysis", http://www.stfrancis.edu/ba/ghkickul/s tuwebs/btopics/works/swot.htm, accessed April 2004.

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The link between business strategy and information system ­Michael Gleeson Kaplan and Norton (1992), "The Balanced Scorecard ­ Measures That Drive Performance", Harvard Business Review, Jan-Feb 1992. "Information technology as competitive advantage: The role of human, business and technology resources", Strategic Management Journal, (18). Prahalad and Hamel (1990), "The Core Competence of the Corporation", Harvard Business Review, May-June. Kearns, G. S. (1997), "Alignment of Information Systems Strategy with Business Strategy: Impact on the Use of IS for Competitive Advantage", Unpublished Ph.D. Dissertation, University of Kentucky. Keen, P. (1991), "Shaping the Future: Business Design through Information Technology", Harvard Business School Press, Boston. Koch, C. (2001), "What is ERP?", http://www.darwinmag.com/learn/cur ve/column.html?ArticleID=39, accessed April 2004. Koch, C. (2002), "The ABCs of Supply Chain Management", http://www.cio.com/research/scm/edit /012202_scm.html, accessed April 2004. Kramer, Tallon and Rieger (1999 a), "When Context Matters: Making sense of Executives Perceptions of IT Payoffs using Strategic Intent for IT", CRITO/IBM Joint Publication, November 1999. Kramer, Tallon and Vijay (1999 b), "A Value based assessment of the contribution of information technology to firm performance", CRITO publication. Martsolf K. (2004), "Strategy and Competitive Advantage" http://www.martsolf.com/downloads/ Download.html, accessed April 2004. Nickerson R. (2003), "The Strategic Impact of Information Systems", http://online.sfsu.edu/~rnick/, accessed April 2004. Porter, M. (1980), "Competitive Strategy", NY Free Press, New York. Porter, M. (1985), "Competitive Advantage", NY Free Press, New York. Powell and Dent-Micallef (1997), Prairie, P. (1996), "Benchmarking IT Strategic Alignment" in J. N. Luftman (Editor), "Competing in the Information Age: Strategic Alignment in Practice", Oxford University Press, New York. Rooney, C. (2003), "How to integrate IT with corporate strategy", Database Trends and Applications, Vol 17 No. 3. Sanchez, R. (1997), "Preparing for an Uncertain Future- managing organizations for strategic flexibility", International Studies of Management & Organizations (27:2). Santosus and Surmacz (2001), "ABCs of Knowledge Management", http://www.cio.com/research/knowled ge/edit/kmabcs.html, accessed April 2004. Thompson, A. & Strickland, A. (2001), "Strategic Management: Concepts and Cases", McGraw Hill, New York. Weill, P. (1992), "The Relationship between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector", Information Systems Research, 3:4 December. Willcocks, L. (1994), "Information management - The Evaluation of Information Systems", Chapman and Hall, London.

Copyright © 2004 Michael Gleeson The author(s) assigns to Dublin Institute of Technology a non-exclusive licence to use this document for personal use and in courses of instruction provided that the article is used in full and this copyright statement is reproduced. The author(s) also grant a non-exclusive licence to Dublin Institute of Technology to publish this document in full on the World Wide Web (prime sites and mirrors) and in

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