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Lowest industries
Metals and natural resources
Construction and Engineering
Automotive
IT spending in IT industry relatively high, not as high as others though
Dot com boom and other years spending was very high
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Big Data: Data generated by users in social media (Web 2.0) and smart objects in IoT
Creates problem regarding cost of storing data
Cloud computing can create this solution
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Gartner Hype Cycle: Graphic representation of the maturity, adoption and business application
of specific technologies
Illustrates over enthusiasm or hype
of new product and subsequent
disappointment that happens with
new tech
Only when new tech moves beyond
the hype will it offer practical benefits
and be accepted
5 Stages
1. Innovation Trigger: Technological
breakthrough or proof of concept
2. Peak of Inflated Expectations:
Unrealistic expectations where
5. Plateau of Productivity: Mainstream adoption takes off because of early adopter success
(early majority adopters start here)
Not actually based on hard evidence or scientific fact, just Gartners own analysis
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Proposition 1a: Time from introduction of new tech until end of peak of inflated expectations
reflects approximately one standard deviation
Proposition 1b: Period from introduction of new technology to late stages of slope of
enlightenment reflects period of approximately two standard deviations
Innovators and early adopters likely to adopt new technology up to the late stages of slope of
enlightenment
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AFM 241 IT Chapter 2
Overview
Gauge firm performance (absolute vs relative performance)
Business modes
Industry structure view
Resource based view
Value chain
Porters 5 forces
Financial performance measures related to market structure and business strategy
Sustained vs temporary competitive advantage
Sustained = a competitive advantage that resists a competitors attempts to copy it
Temporary = can be copied by competitors
Business Strategies: Specific actions that firms take to neutralize threats or exploit
advantages by leveraging their resources in order to gain a competitive advantage within a
specific market or industry
Corporate strategies: Trying to gain an advantage across several markets or industries
Focus this chapter is business strategies
Relative firm performance: Firms performance in regards to its competitors
Zero economic profits
Positive economic profits
Most people use accounting profits instead
Doesnt account for risk
Only measures past performance
Divided into three groups
Efficiency
Asset, inventory turnover
Cost
COGS, Opex ratios
Profitability
RoA, RoE
Business Models
Management decides via the business model
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No internal focus as what happens internally in a firm such as crazy new R&D has a
profound impact on the market as well
Resources and Capabilities
Value Chain: Chain of technology and economically distinct activities that a firm performs in
order to do business in a specific industry
Primary Activities: activities involved in the physical creation of product, its marketing,
delivery to buyers, support and servicing after the sale
Support Activities: Activities that provide the inputs and infrastructure in order for the primary
activity to take place
Human resources, firm infrastructure, IT, R&D, procurement, accounting, etc
Firms that are able to coordinate across all organizational lines and value chains
Barriers of imitation
Casual Ambiguity: Reflects to the extent in which relationships between inputs and outputs
is understood
If source of firms competitive advantage is not easily understood then it is hard to
replicate
Path dependence
Early choices one takes in order to do things
Historical advantages
Firms that take a certain resource while it is still historically advantageous for them to
do so
Expensive to replicate
Porters Generic Business Strategies
Cost Leadership
Gain a competitive advantage by reducing its cost below that of competitors
i.e. Wal mart, Southwest airlines, Hyundai
Does this by
Specialized equipment only feasible via economies of scale
Building larger more efficient facilities and factories
Using specialized employees
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Spread overhead cost in a higher number of units and products sold
Can ward off competitors via
Lower priced products to deter threat of new entrants
Afford to enter price war to defend against rivals
Price products competitively to eliminate threat of subsets
They can absorb high cost of inputs
Product Differentiation
Will try to increase the perceived value of its product or service relative to competitors
Will leverage leading cutting edge R&D and superior customer service
Can charge a premium for its price, generates brand loyalty
i.e. Apple, Rolls Royce, Louis Vuitton, etc
Ways to differentiate include
Changing properties or features of product or service
Linkages between functions within the firm that provide a unique advantage to a firm
Introducing the product at the right time
Physical location of firms (i.e. vacation spots)
Mix of products and services
Product differentiators will generally enjoy higher gross or operating or profit margins
Cost leadership firms will focus on operating efficiency and asset turnover etc
Appendix 2A
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3.2.1 IT and Basis of Competition
As mentioned, two types of firms, cost leaders, product differentiators and focused firms
IT can help both differentiate products and stay a cost leader
IT can help shift a company away from cost leadership to product differentiation as well and
vice versa
Google Apps vs Microsoft Office 365
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4. Capital Requirements
Large IT requirements can increase barriers to entry for small companies
However, cloud computing decreases this barrier
5. Incumbent advantage
Cost or quality advantage due to proprietary or hereditary tech
I.e. encyclopedia Britannica
Got wrecked by wikipedia and crowdsourcing though
6. Access to Distribution Channels
Acts as barrier to entry for new comers since they have to secure new distribution channel
Introduction of e-commerce has made physical market obsolete
7. Government Policy
Bureaucratic contraints, controls and regulations
i.e. Government privacy restrictions for health records or Facebook
3.2.3 IT and Balance of Power
Can use IT to alter balance of power between buyer and supplier
Can use IT to work collaboratively with other businesses to
Reduce safety inventory
Increase forecasting accuracy
Increase sales revenue
i.e. Wal mart partnering with Listerine to make sure enough stock is always stocked
i.e. John Deere tractors have built in wireless support and alert mods in case anything goes
wrong
This will increase customer loyalty and decrease wasted resources on fixing parts via
preventative measures
3.2.4 IT and New Products
Lots of new products due to IT
Most notable of products include mass customization
3.2.5 IT and Hyper Competition
IT makes information more transparent and harder for firms to sustain their competitive
advantage
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Hyper Competition: Market that is marked by very rapid changes in competition where firms
cannot sustain an advantage
Four causes
IT tech
Customers changing and fragmenting of customer preferences
Falling geographic and industry boundaries
Deep pockets among competitors due to gigantic global alliances
3.3 General Views Regarding Role of IT
Will share most common views senior executives have regarding role of IT in firm
Two types of roles
Functional role of IT
Positional role of IT
3.3.1 Functional Roles of IT
Automation: Replacing human labour by automating business processes
Executives tend to replace expensive and unreliable human labour with IT
Primarily cost reduction and quality improvement view
Execs who adopt this view view IT as an overhead cost that must be managed
Informate Up: IT provides information to higher levels of organization making it easier and more
efficient for senior executives to exercise organizational control and facilitate activities
Executives see IT as means of facilitating access to information regarding firms operations
Provides them with timely information to make more appropriate decisions
Informate Down: IT is used to direct information from top to bottom
Senior executives can focus on systems to provide critical and timely information to front line
managers and employees
These executives see IT as an agent of empowerment and autonomy and more likely to treat
IT as agent of organizational transformation
Transform Senior executive view that IT is a vehicle that fundamentally alters structure and
competitive forces of the industry
Means of changing firms relationships with suppliers & customers, altering products, markets,
organizational structures, boundaries, etc
3.3.2 Firms Disposition Towards IT
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Following classifications for IT adopters
Leader of Follower
Innovative or Conservative
Offensive or defensive
Innovative versus Conservative Players
Key difference is in firm objectives and approach to IT investment
Innovators
Want to be IT leaders in industry
First in industry to try and capitalize new IT initiatives
Conservatives
More cautious approach with IT investments
Invest in IT only after it has proven to be successful in the industry
Offensive versus Defensive Approach to IT
Relates to firm related IT priorities
Defensive
Firms that rely on delivering efficient, secure and un interrupted services prefer defensive
approach
Tend to invest in IT to continue firms operations rather than to leverage IT to improve
competitive position
Offensive
Wants reliable IT but also IT initiatives that can improve firms competitive position
IT initiatives from offensive firms tend to be more ambitious in terms of expected returns
and thus naturally risky due to substantial organizational change
Will adopt offensive stance if they want to attack to gain advantage or position of industry
leadership
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Turnaround Mode/Quadrant
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Hard to envision
Somewhat like a firm is implementing a new information system but relies on old system to
support firms day to day core operations
System will not be used until carefully tested and fully implemented
Once new system is operational firm will go into factory or strategic mode
Turnaround is characterized by
Substantial investment that can account to more than 50% of firms annual expenditures
Very high expected returns
Implementation risk is very high as these IT investments require substantial change of the
firms business processes
Planning and execution is allocated to senior level executives
Strategic Mode/Quadrant
Firms here allocate a significant portion of CapEx to new IT projects
Very important relationship between CEO and CIO
3.4.5 McFarlans Strategic Grid: Benefits
Numerous benefits which include
1. Provides simple framework that can be used to assess the alignment of individual IT projects
with business operations and strategy
2. Can be used to assess firms overall IT portfolio of all IT initiatives to assess where the firm
is overall
3. Can be used to benchmark firms IT performance with other firms in industry
4. Can be used to develop IT governance (deals with such issues as who should be
responsible for making IT related decisions and how to implement the firms iT strategy)
McFarlands grid stresses two things
We need to understand role that IT plays within firm
IT strategy must align with the companys strategic priorities
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Operational Focus
Goal of IT here is to increase operational effectiveness
Reduce operating costs, enhance overall effectiveness of operations
Quality
Speed
Flexibility
Time to Market
Executives view this focus as the ability to gain greater control over internal processes through
IT and thus better respond to environmental uncertainty and emergence of new competitors
Strategic Positioning Focus
Will use IT to create or enhance value proposition to customers
i.e. Try to leverage information systems to better differentiate among different customer
segments
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Can better understand customer needs
Dual Focus Quadrant
Senior business and IT executives will choose goals that align both revenue growth and cost
efficiency
No Focus Quadrant (For IT operations at least)
For firms that still ave other operational or strategic focuses, firm has made choices that it
does not want to compete in IT and IT is not critical to its operations
Simply chooses to be a follower in terms of IT
However, a firm that has no real focus in operational effectiveness or strategic positioning is a
firm that has no strategy
Will probably not remain viable of long
Business strategy that aligns with IT strategy will achieve superior financial performance and
improve competitive positioning
3.6 Payoffs from IT Spending Part 2
Mere acquisition of asset does not grant competitive advantage
Capability: Firms ability to leverage assets and resources in order to achieve particular
outcome
3.6.1 IT Capabilities
Effective Implementation Capability
Significant percentage of IT projects will fail during implementation or meet objectives
Successful project is completed on time and on budget with original features and
functions intact
Challenged project is completed and operational but went over budget or time estimate
and offers fewer features and functions than originally planned (runaway projects as
dubbed by KPMG)
Failed or impaired project is project that at some point cancelled
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IT project implementation tend to go over budget, take more time to complete and tend to
deliver less than the original planned functionality
IT Infrastructure Capability: Firms portfolio of IT based resources
Contain
Tangible resources (physical IT infrastructure)
Human IT resources (technicians and managers)
Intangible IT-enabled resources (knowledge of assets, customer orientation, synergy)
Human IT Capability: Technicians ability to program and managers ability to envision how IT
can contribute to firm value
Organizational IT Capability: (page 166)
IT Capable Firm: Firm that can mobilize and deploy IT based resources (Also possesses IT
capability)
Using IT capabilities to measure relative pay offs
No standard to measure IT pay offs
Instead of measuring IT spending and firm performance, measure companies that are
successful users of IT vs companies that have no such recognition
3.6.2 Revisiting Effect of IT Spending Relative Performance
Firms that spend money on IT should be reflected in market valuation
This includes both good and bad valuations
SEC required firms to report IT spending briefly during Y2K
Companies used this opportunity to increase IT spending into full blown enterprise
resource planning systems
These ERPSes could integrate entire organization through a common database as
opposed to the older legacy systems that could not
Shareholder value associated with Y2K spending was in fact many times greater than
spending itself
Based on this logic companies actually underspent during Y2K for IT
Read pg 168 for more details
Small IT budget = limited resources to meet service requests and leverage installed
technologies
Too big budget = too much slack and inefficient use of firm assets
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IT budget levels are positively associated with subsequent firm performance and
shareholder returns
3.6.3 Market Reaction to IT Investment Announcements
Firms that invest in operational efficiency IT initiatives have temporary business advantage
Must do this for necessity or competitors will win
IT that exploits functional role of communication (informate up or down) also has temporary
competitive advantage
Firms that leverage transformational IT investments have sustainable competitive advantage
i.e. new tech bypasses certain value chain participants or creates new value space
Very risky however
AFM 241 SE Notes Chapter 4
4.1 Introduction
As mentioned in chapter 3, hyper competition is very real
Success in hyper competition will come in prediction and what customers want in advance via
IT
i.e. more investment in point of sales systems, customer relationship management (CRM)
systems, supply chain management (SCM) systems and social media and media
Big data refers to data that comes in high volume, high velocity, high speed and needs to be
dealt with in timely manner
This + Moneybag movie created interest in business analytics
Growing demand of business Analytics has created these two results
Democratization of BA tools
New BA tech such as scalable data warehouses, faster, deer query has become more
affordable
More and more small companies can use BA tools and putting it in front of front-line
decision makers
Increased incidents of firms that face competition fro unanticipated competitors
i.e. competitor uses auto-decision IT to re-stock hot products at lightning speed
Chapter is built into two parts
1. Business analytics from decision maker standpoint and two most popular approach to
business analytics
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2. Best and most celebrated example of firm that has pioneered and integrated business
analytics in its strategy (Harrahs Entertainment)
4.2 Business Analytics
4.2.1 Relationship between Business Analytics and Decision Makers
BA can help on three levels for decision makers
Operational
Managerial
Tactical
Operational Level
These are front line decision makers
Page 199
Tactical Level
These are managers or departments
Require semistructured and summary reports generated from operational level
Tactial decisions generally related to allocation of firm resources and aim to achieve maximum
return
Strategic Level
Firms senior executives
Tend to deal with unstructured information
i.e. firm decision to enter new market is based on internal summary reports regarding firm
health and R&D, operational and marketing capabilities
4.2.2 Categories of Business Analytics Pg 200
Classification Proposed by INFORMS (Institute for Operations Research and
Management Science)
Three categories for BA
1. Descriptive
2. Predictive
3. Prescriptive analytics
Descriptive Analytics: Preparation and analysis of historical data to identify patterns and report
trends
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4. Submit and record payment
Capturing data for each stage is key
Minimum data to be collected should include
1. All individuals or organizations involved in each activity i.e.
salespersons, customer name, supplier name
2. All assets that are exchanged as a result of this activity
3. All locations where activity took place
4. Time periods related to compeltino of activity
^ examples on Pg 238
Database Management System: program for capturing, accessing and managing data
Data = facts about people, places, transactions, etc in their rawest form
Information: Data that is refined into something useful i.e. tables, bar graphs, pie charts
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o This wil create some null values though
Many to Many relations
- Does not allow us to extend chain of inference from one table to the
other
- Many to many relationships must be removed from database design or
else it will not work
- Intersection Table: Table that provides a bridge with records that
relate to a pair of occurrences from the original tables
Cardinality: Refers to the maximum and minimum number of occurrences that must be
included in a relation
- Direction of association matters
- Salesperson to Customer cardinality and Customer to Salesperson
cardinality is different
Relations can be classified as (pg 249)
- Optional: When entity on one side of relation can be represented with
corresponding occurrence but not needed to
o i.e. products can be in the order table but dont have to since
some products might never be sold
- Mandatory: Occurrences between both sides of a relation must exist
o An invoice must have a product ID to exist
-
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Second Normal Form (2NF)
- Meets all conditions of 1NF
- No partial dependencies
o Ensure that non-candidate key fields are fully dependent on
value of primary key
Third Normal Form (3NF)
- Meets all conditions of 1NF
- Does not have any transitive dependencies
5.5 Business Value: Accounting/Finance Angle
How do databases help accounting and finance?
- Industry under increasing pressure to report fraud
- Can use data analysis techniques to mine transactional data to
uncover fraud
- Computer-assisted audit techniques (CAATs)
o These CAATS analyze 100% of all transactions instead of
reasonable assurance via sample tests
- Can identify outliers relatively quickly
- These data analytic techniques can be used in a proactive
manner to deter fraud
o Notifying employees when they are doing sketchy shit regularly
will help deter them from doing it again
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Types of Implementation Strategies
1. Phased Rollout/Cascaded Roll out
a. Change occurs over extended period of time
2. Big Bang
a. All at once
b. Much cheaper but much more risky
3. Parallel Adoption
a. Both legacy system and new system running at same time
b. Problems can be identified without it causing much disruption
c. Much more costly
Resource Allocation Scope: How much resources and how firm will fund ES project
- Depends on all other scope related choices
6.2.3 Critical ES Success Factors
ES implementation is very risky and costly
- Many factors influence successful implementation below
o Top Management Support
o Change Management
o Managing Cultural Change
o Communication Plan
o Team Morale and Motivation Employee Retention
o Choosing right consultant + correct plan of knowledge transfer
o Job Training and Redesign
o Data Conversion and Integrity
Top Management Support: Top management team (TMT) will set tone at the top and this
tone will trickle down to the rest of the company
- If TMT sends message that ES adoption is high priority more users will
try harder to succeed
- Important from a psychological standpoint
- Steering Committee: Committee composed of top management from
different corporate functions to involve themselves more and convince
company that ES aligns with business strategy
o Project champion needed as well
o Team responsible should provide appropriate vision and
planning
o Probability of success increases if following conditions are met
Team has developed specific and measurable objectives
There is a main plan and contingency plans
Incorporated some degree of risk
Clear articulation of tasks to be completed at each stage
Implementation progress benchmarked against internal
and external best practices
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o This team should have best and brightest employees from
variety of backgrounds
Change Management: Consider implications of ES adoption for management and users
- Top priority for change management is to build user acceptance and
build positive employee attitude towards it
o Educate users on benefits of ES
o Educate users on need for ES
Managing Cultural Change: Implementation team must be aware of different cultures for a
high physical scope project
- Ie. Culture in North America is not the same as in South East Asia
Communication Plan: Plan to ensure proper line of communication with business, IT
personnel and customers and suppliers
Team Morale and Motivation Employee Retention: Because ES implementation stress can
be high, need to nurture a high level of employee morale as low morale = low staff retention
Choosing Right Consultant + Knowledge transfer: Have a strong consultant and well
defined plan to transfer knowledge from the consultant to the company to decrease dependency
on the vendor/consultant
Training and Job Re-design: Hands on training with IT skills, take into account how staff
may be moved, etc
Data Conversion and Integrity: Ensure that data being transferred during the conversion
process is accurate
6.3 Expected ES Benefits Pg 286
6.3.1 Benefits: Management Standpoint
Operational Level
- Automation can help
o Cost reduction
o Cycle time reduction
o Productivity improvement
o Quality improvement
o Improved customer service
Managerial/Tactical Level
- Managers must allocate resources properly relying on summary and
exception reports
- ES will help them dissect information from the operational level and
provide better information to super high level management
o Better resource management
o Improved decision making and planning
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o Improved performance in different operating divisions of the
organization
Strategic Level
- Shifts focus to firms competitors
- Senior management focused on how firm can enjoy an IT competitive
advantage (offensive) or maintain its current IT advantage (defensive)
- Can deliver better links to trading customers, better response time,
better firm response time, etc listed below
o Business growth
o Alliances
o Innovation
Cost reduction
o Differentiation
o External Linkages
6.3.2 Benefits: Accounting Standpoint
Accounting Information Systems (AIS) offer managers transaction processing, report and
information support
- Provides more automation, effectiveness, efficiency and real time data
- Historically accounting modules one of the first ES modules firms
implement
- Benefits include
o Increased flexibility in information generation
o Increased integration of applications
o Improved quality of reports
o Reduction of time for issuing of reports
o Improved decisions based on timely and reliable accounting
information
6.3.3 Benefits: IT Infrastructure
IT Infrastructure: All sharable and reusable IT resources
- Ie. Telecommunications networks and servers, etc
- ES isnt really tangible infrastructure but its sort of intangible since its
such a large investment anyways
- Provides benefits in the way that
o More business flexibility for future changes
o Reduced IT costs and marginal cost of business IT
o Increased capability for prompt and economic implementation of
new applications related to ES
6.3.4 Benefits: For Competing with Business Analytics
ES can help in decision support systems (DSS) and business intelligence (BI) systems
- Helps lay the foundations for a firm to compete in the grounds of
business analytics
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Firms can leverage the thousands of tons of data ES stores and use
them in their DSS and BI systems to make better decisions
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Profit Margin Per Unit = (Price per unit COGS per unit)Price per unit
Ending Inventory = (Cost of Goods Sold x DSI)/365
Inventory reduction levels are incremental and affect only one year not multiple
(Read in book rest, Pg 309)
7.3 Limitations of Capital Budgeting Analysis Pg 311
7.3.1 Measuring Expected Benefits and Costs
Benefits can be both
- Tangible: lower costs, higher revenues
- Intangible: Increased customer satisfactions, more timely information
Hard to say if we want to quantify these intangible benefits
Managers typically fail to account for all possible costs
- Must consider both direct and indirect costs
o Direct costs include: hardware, software, consulting, training
Excluding benefits or costs will alter NPV
7.3.2 Assessing Riskiness
Typical evaluation of capital investment is discounted via firms cost of capital that is taken
from the markets view of firm risk
Other reasons to adjust discount rate include
- Technical Risk: Staff will not be able to generate very accurate
estimates with new technology
- Project Risk: The larger the project, the more likely it is to failed. The
more the experienced the firm, the more likely it is to succeed
- User Related Risk: Developers may not have captured the needs of
the users properly in their IT system or users refuse to take part in it as
they fear they will be replaced by IT
- Systemic Risk: Transformative, strategic changes from large IT
investments may precipitate unanticipated response from competitors,
customers or regulators
Not a lot of firms actually adjust their discount rate due to the above factors though
- Recommended that managers do sensitivity analysis to see how NPV
would change
7.3.3 Interpretation
First Message
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Customer Perspective
- Measures objectives for firms customers and firms value prop to them
- Quality, performance/service, translate these goals into specific
measures
o Ie. # of repeat customer sales per year
Internal Perspective
- Critical internal operations that add value to customers and achieve
desired financial objectives
- Need to determine what processes and competencies they must excel
and specify measures for each
- How does firm increase firm exceed customer expectations? >> make
a higher quality process via internal operations
Learning and Growth Perspective
- Companys ability to innovate, improve and learn ties directly to the
companys value chain
8.2.2 Bluebikes: Causality Example
Typical Balanced scorecard process works like below
- Look at financial perspective first
o Look for drivers in financial profitability, tie certain aspects to
customer perspective
Ie. repeat sales from customer loyalty
- Then look at customer perspective
o Look for area that ties into internal processes
Ie. Customers care about effectiveness and efficiency in
product delivery
- Then look at internal processes, identify areas the company has to
excel in order to achieve the effectiveness and efficiency in deliveries
o Look for ways to help improve its effectiveness and efficiency via
learning and growth
Ie. In order to improve quality and process cycle time, firm
must have skilled employees
- Now look at learning and growth side
8.2.3 Alignment between Strategy & Operations
One of the main benefits of balanced scorecard is that of aligning firms strategy to operations
- Gets all employees to understand companys strategy and how they
play a role in it
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Corporate Perspective
- Top management is financial perspective
- Main concern for TMT is whether IT accomplishes firm goals and
contribute to value of firm
- IT initiatives can be broken into
o Short term
o Long term
- IT budget as a percentage of sales is a useful metric to contain IT
spending
User Perspective
- If users are involved in implementation of IT then more likely to
succeed
- Ability to extract value will increase as well
- Therefore it is logical that the customers perspective will be driver
behind corporate contribution metrics
o Metrics for gauging user perspective effectivenss on pg 345
Internal Process Perspective
- Two principle points include effectiveness and efficiency
- Metrics for internal process perspective on Pg 346
Learning and growth perspective
- Metric for learning and growth perspectives on Pg 346 & 347
Success of IT balanced scorecard depends on many factors
1. Firms management and employees will have to buy in
2. Metrics will have to be well selected and relatively small in number
3. Targets must be realistic and gradually increasing
4. Employees should be able to see how their actions could affect their
metrics and help them achieve their target (causality must be clear)
8.3.2 An ERP Balanced Scorecard
Since ES implementation is so complicated, it makes sense to break down the scorecard into
two components
1. ES implementation balanced scorecard
a. Achieve implementation on time, on budget and desired
functionality
2. Balanced scorecard monitoring ES use
a. This should focus on users ability to extract value from system
Typical multi-business unit organization can experience this disaster
1. Every business unit is fighting over scarce IT resources
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2. Units are dissatisfied with current IT system performance due to
scarce resources resulting in delays
3. Everyone blames ITO for lackluster business unit performance and
justifying deliberate or unauthorized decentralization of IT functions
and purchasing of segmented IT hardware and software
4. Higher technology costs for firm overall due to uncoordinated efforts
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b. Office space, furniture, maintenance, property taxes, supplies
c. Does not include cost for space dedicated to IT functions ie. Data
center
IT Budget: Operational and Strategic
Classify IT budget between operational and strategic
- Operational: IT spending that is needed to keep organization running
o Critical and key software upgrades, etc
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IFRS says costs should be expensed in initial research phase and capitalized in development
phase once design and specifications of project have been more clearly defined
GAAP
Require projects that are delayed to be registered for impairment (AFM 291)
9.5 Drivers of IT Budget Levels
IT budget to be influenced by multiple factors
9.5.1 External Industry Factors and IT Budget Levels
- Less firms = less competition = more profit
- Firms less likely to invest in IT if they know it is not going to increase firms economic profits
or competitive position
- More uncertainty in industry = more complexity of IT investments & budgets
Industries have been classified for IT spending as
1. Automate
a. Technology used is mature, main objective is to lower costs via IT
b. Initiatives that aim to build and incrementally enhance robust
technologies
2. Informate
a. Industries that have dynamic product markets but technology
used is relatively stable
b. These investments require large complementary investments in
human capital and structural capital
3. Transform
a. Technology used to transform the competitive environment
IT innovation also raises potential of IT spending substantially
9.5.2 Internal Factors and IT Budget Levels
Internal factors that affect IT spending include
1. Diversification
2. Affordability
3. Growth Opportunities
Diversification
Number of nature of markets firm chooses to enter (diversification) will affect IT spending
Depends on if firm goes into related markets (related diversification) or unrelated markets
(unrelated diversification)
If related diversification, there is need to maintain tightly integrated IT system across units
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Unrelated diversification, units can operate independently and therefore more complex IT
systems not needed
IT Spending higher for related rather than unrelated diversification
Affordability
IT spending less when firms are doing poorly
Also affected by level of debt, prior investments,
- Higher levels of debt and leverage reduce cash available for IT
investments
- Higher the debt levels, lower the IT budget
If large projects were taken on before, these projects will require budget maintenance reducing
budget for current/future cash flow for new projects
Sales Growth
Firm with more growth options have multiple other projects with high NPV
- High growth potential in other areas is a resource constraint for
discretionary spending such as IT
9.6 Funding and Cost Allocation Pg 378
Three most common methods of funding IT spending
1. Corporate budget
2. Chargeback
3. Allocation
Corporate Budget
- Treats all IT costs as overhead direcrtly into the firms corporate budget
- Compares operational and strategic benefits of new IT initiatives with
corresponding benefits of other types of investments
- If IT investments are complementary to other investments, it is more
likely to be approved
Chargeback
- Cost of IT is charged back to departments or business units based on
usage
- Similar to how you pay for utilities every month
- Considered one of the fairest methods, this is a pro
- Cons include
o IT department must collect significant data regarding usage by
each department, this is a lot of work
o Likely to discourage business units to invest in new innovative IT
projects as they have to pay for it later
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Allocation
- IT cost Is divided among departments based on some metric other
than usage
o # of employees, users, desktops, etc
- Much simpler and departments know amount they will be charged, can
put it in their budgets
- Major drawback are freeriders: organization that uses a lot of IT will be
subsidized by ones who dont really use a lot
9.7 IT Portfolio Management PG 380
IT projects should consider portfolio on part of interrelated portfolio of all firm initiatives
Basic idea is that IT initiatives should be balanced like a financial portfolio
- Risky investments should be balanced with safer investments such as
government bonds
9.7.1 Steps in IT Portfolio Management
1. Establish a portfolio of IT investments
Want to know both current year and future year portfolio
Firm can classify IT initiatives into 4 types
1. Transactional Investments (Transactional Assets)
a. Motivated by desire to cut costs or increase output for same cost,
automation
2. Informational Investments (Information Assets)
a. Provide information strengthen reporting, accounting,
communication, etc
b. Aim to strengthen informate down or informate up
3. Strategic Investments (Strategic Assets)
a. Aim to provide firm with competitive advantage
b. Transform competitive environment
4. Infrastructure Investments (Infrastructure assets)
a. Foundation of shared IT services
Record all new IT investments such as
- Project name, description, champion, organizational or business unit,
estimated duration, cost, etc
2. Establish a process for evaluation of IT projects
Each proposal should be evaluated via strategic objectives (ch3), NPV or IRR (ch7) and risk
assessment
- Types of risk on Pg 383
o New technology tends to be riskier
o Size of company and IT investment makes larger proportion
investments more risky
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o Need for re-training, # of people being re-educated, those kinds
of risk
Once assessment has been complete, IT committee must prioritize projects
3. Review actively manage your portfolio
- Like financial investment portfolios, IT steering committee will have to
actively monitor and manage IT initiative portfolio
9.7.2 Why ITPM (IT portfolio management)?
Some benefits include
- Avoid misaligned projects
- Approval process/prioritization
- Accountability
What can you do with ITPM?
- Maximize value while minimizing risk
- Improve communications with business leaders
- Encourage business unit leaders to think as a team and take
responsibility for projects
AFM 241 SE Notes Chapter 10: IT Governance
Epilogue Pg 394
Growing importance of IT due to
- Cyberattacks
- Industrial espionage
- Passing of Sarbanes-Oxley
IT Governance: The processes that ensure effective and efficient use of IT in enabling an
organization to achieve its goals
- Controls in place to regulate IT implementation and strategy
It is important to get TMT to be more sensitive and actively involved with IT
- Companies with strong IT governance and exercised it generated 20%
more profits
- Board members should be able to measure the payoffs from IT
investments
Boards approach to ITG (information technology governance) depends on specific context
- Company history
- External environment (industry structure)
- Current competitive and financial position
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Concerned with two things
1. IT ability to deliver value
a. Alignment of IT to business strategy
2. Mitigation of IT risk
a. Embedding accountability into enterprise will help
Main Areas of Delivery include
1. Strategic Alignment
2. Risk Management
3. Resource Management
4. Value Delivery
5. Performance Measurement
10.1 Concluding Remarks Pg 399
Nave to think spending more on IT = more value
- IT initiatives are risky and only firms that mange this risk will obtain
expected results
Not all firms need to be IT innovative
- All firms need to align their IT initiatives with their corporate priorities