The strategic management of information systems building a digital strategy 4th edition joe peppard

Strategic Management of Information Systems: Building a Digital Strategy 4th Edition Joe Peppard

Visit to download the full and correct content document: https://textbookfull.com/product/the-strategic-management-of-information-systems-bui lding-a-digital-strategy-4th-edition-joe-peppard/

More products digital (pdf, epub, mobi) instant download maybe you interests ...

Management information systems managing the digital firm Fourteenth Edition Laudon

https://textbookfull.com/product/management-information-systemsmanaging-the-digital-firm-fourteenth-edition-laudon/

Management Information Systems: Managing the Digital Firm, Global Edition Laudon

https://textbookfull.com/product/management-information-systemsmanaging-the-digital-firm-global-edition-laudon/

Management Information Systems Managing the Digital Firm Kenneth C. Laudon

https://textbookfull.com/product/management-information-systemsmanaging-the-digital-firm-kenneth-c-laudon/

Strategic Analytics Integrating Management Science and Strategy Martin Kunc

https://textbookfull.com/product/strategic-analytics-integratingmanagement-science-and-strategy-martin-kunc/

Management Information Systems: Moving Business Forward 4th Edition R. Kelly Rainer

https://textbookfull.com/product/management-information-systemsmoving-business-forward-4th-edition-r-kelly-rainer/

Health Care Information Systems: A Practical Approach for Health Care Management 4th Edition Karen A. Wager

https://textbookfull.com/product/health-care-information-systemsa-practical-approach-for-health-care-management-4th-editionkaren-a-wager/

Knowledge Management as a Strategic Asset 4th Edition

Jon-Arild Johannessen

https://textbookfull.com/product/knowledge-management-as-astrategic-asset-4th-edition-jon-arild-johannessen/

Building Information Systems in the Construction Industry Garrigos

https://textbookfull.com/product/building-information-systems-inthe-construction-industry-garrigos/

Management Control Systems 4th Edition Kenneth A. Merchant

https://textbookfull.com/product/management-control-systems-4thedition-kenneth-a-merchant/

THE STRATEGIC MANAGEMENT

OF INFORMATION SYSTEMS

Building ADigital Strategy ·

Joe Peppard and John Ward

THE STRATEGIC MANAGEMENT OF INFORMATION SYSTEMS:

2016 j ohn Wiley & Sons Ltd

All effort has been made 10 trace and acknowledge ownership of copyrighL The pu blisher would be glad 10 he ar fro m any copyright ho lders whom it has not been possible to contact.

Registcr-ed office

J o hn Wiley & Sons Ltd , The A1rium, Southe rn Gate, Ch iches1er, We:., .:>ussex, P019 8SQ , Uni 1ed Kingd o m

Foe dc1a1 ls of our g loba l edi1orial offices, for custo mer services and for informati on abo ut h ow to app ly for pe rmission to reuse the copyrig ht materia l in this book please see our website at www.wilcy. com.

The nghlS of Joe Peppard and john Ward to be identified as the auth ors of this w o rk h as been asserted in acco rdan ce with the UK Copyright, Designs and Paten ts A ct 1988.

All rig hts reserved No part of 1h is publication may be reprodu ced, s to red in a retrieva l s ys tem , or trans · nutted , m any fonn or by any m eans, electronic, mechanica l , ph o tocopying, re c ording o r oth e rwise e xce pt as permitted by the UK Copyright, Designs and Paten lS Act 1988, without the prior pc nn ission of th e publi s her

\'\' ll cy publi s hes in a varie ty of p rint and electronic forma lS and by print-on -demand Some material in cl ud e d w11h s ta ndard print ve rsions of th is book may no1 be inclu ded in e-books or in print-o n -dem:rnd If th1 book refe rs to me dia su c h as a CD o r DVD th at is not included in the version you purc ha sed , rou m:i y do wnload th is nta tc ria l al http://booksupport wiley com For more infonnation about Wile y prod· u us www wdey co m

Dc:-.1g 11;111 o ns use d by co mp::inies to di s11nguish their products are often claimed as tradem a rk s All b ran d n :i n11.::. ::ind p rodu c t nam es used in thls book a re trade nam es, service marks, tradema rks o r regi s tered tra de ma rk s o r their res pe ctive owners The publisher is not associa ted with a ny p roduct or ve ndo r me n11 o nc <1 in thi s boo k This publi c:llion is designed to provide accu rate and authoritative info m1::ui o n in re gard to the s ubjec l matte r covere d l t is s old on the u nd ers tanding 1hat the publisher is n o t engaged 1n re nd e ring pro fess io na l services If professional advice or o the r expert assistance is required, th e sc r· vices o f a c olllpc te nt professional shou ld be so ught.

ISBN 978047 00 546 75 ( pbk)

IS BN 9 78 1 11 92 15479 (e bk)

Library of Co11grcss Catalogi11g-i,,,_Pllblicalloti Data

Names. Peppa r d, Joe, autJ1or. I Ward, J o hn , author.

litlc ll1e s trategi c man agem e nt of information systems : building a digital strategy I J oe Peppard and j o hn Ward

Oth e r litl es: Strate gic pl a nning for information systems

Desc ripti o n · fo urth Edition I Hoboken : Wiley, 2016 I Revised edition of 1he a utl1 or.; ' Stra tegic planning for informat io n systems, 2002 I Inclu d es bibliograph ica l refe re nces and index.

ld enullers: LCCN 20 1600055 1 (print) I LCCN 2016000829 (ebook) j ISBN 9 780 470034675 (pbk ) I ISBN 978 1119239567 (pdO I ISBN 978 111 9215479 (epub)

LCS H: Bu siness- Da ta processin g I Man agement information s yste ms I l3u s iness-Communica1io n systems I S1rateglc pl anning

Cl.i illcatio n : I.CC H F5548 2 P4 67 201 6 (print) I LCC H F5548 2 (ebook) I DOC 004 oG8/4-dc 23

LC re cord ava il a bl e at http ://lcc n loc .gov/2016000 55 1

A ca t:i lo g ue record for th is book is avai lable fro m th e Brilis h Library

Se t in 10/ 12 pt ITC Gara mo nd Sid by SPi Global

Pn ntc d in Unit ed Kin gdom by TJ Inte rnati o na l

4

Summary

Endnotes

7 D e t e rmining the Bu s in ess Information Sys tem s Strategy

Bus ines s Strategy a nd IS/IT

Tools for IS/IT Strategy Formu lation and Thei r Relati onships

A Framework for Using the Tools and Techniques Effec tively

Id e ntifying h ow IS/IT Could Imp act th e Business Strategy

Establishing th e Relat ive Priorities for IS/ IT Investments

Large Organiza tion s, Multiple SBUs and Strategy Consolid:ui o n

Summ ary

Endn ote

8 Man ag ing the Portfolio of Business Application s

Conclus ions from Various Portfolio Models

Classifying lhe Appli cations in the Portfolio

Recon c iling Demand and Supply Issues in t he Ponfolio

Gen eric Application Management Strategies

Ponfolio Management Principles Ap plied to th e Applicati o n Portfolio

Aligning Development Approac h es to the Ponfolio Segments

Th e 'Specia l Case' of Enterprise Systems

Managin g A p pli cation Portfolios in Multi -unit Organizations

Summary

Endnotes

9 Ju s tifying and Managing Information Systems and Tec hno l ogy Inve s tments

Inves tm e nt and Pr iori ty Se tting Poli cies

J ustifying and Evaluating IS/IT Investments

Justifying Busi n ess App lications

Justifyin g Infrastructure In ves tmen ts

Asses:.ing anJ Ma n aging In ves tm e nt Risks

Managing the Portfolio of Inves tments

Secti ng Priorities amongs t IS/lT Invest me nts

Organizatio n a l IS/ IT Ponfolio and Investment Management

Matu r ities

Summary

Endnotes

10 An Organ i zi n g Framework for the Strategic Management of IS/IT

Th e Strategic Manageme nt Req uirem e n t

Positioning and Managing IS/IT in an Orga n iza t io n

Without doubt , informati o n te chnology (IT) is one of the greatest disruptive for ces confronting organi za ti o n s today. Organizatio ns of all sizes from every ind ustry, including the publi c sec tor and not-for-profit , a rc being impac ted by th e in e xorable adva nces in techn o logy according to researc h from th e lik es of IBM , McKinsey, De loitte, PwC , Roland Be rg e r and BCG 1 \Xfh il e it might be legi tim ately argued that th ese all have a vested interes t in promoting th is view, the im pact o f technology is visible for all to see, n o t on ly in business but in th e da il y li,·es of the majority of p eop le across th e world .

Over the la st decad e we have see n techn o logical innovations fundamentally re define industries such as gambling, music , med ia, retail, travel and insurance. Th ey have also created new indu stries just not possible or com me rci ally viable without technology such as global auction sites (e.g. e Ba y -a g loba li zcd version o f th e ca r boot sale), marketpla ces for perishable services suc h as fli g hts, hote l rooms and restaurant reservations (e .g. La stminu te , Late rooms and Tabl e Pou ncer) and daily d ea l coupons with Groupon and Cityd ea ls. New ' platform' compan ies like Ube r, Airbnb and Alibaba have harn esse d in formation in novel ways to ente r established industries and carve out s ignifica nt p ositions Owning no taxis, real estate o r merchand ise, they are now res pec tive ly the largest taxi com p any, accommodation c hain a nd retailer in the world. Uber and Airbnb are examples of o rganiza ti o n s shaping th e so-called 'sharing economy'. Technology has a lso crea ted new ways of compe ting in established industri es, such as betting e xc han ges in gambling, and enab led new business models in industries from aero s pa ce to e ne rgy and automoti ve.

Actua lly, this journey of industry tran sformation began ove r 40 years ag o - indu stry lea ders have always exploited opportunities provided by IT - but this h as probably accelerated since the turn of the century. Cu sto mer int eractions and exper iences are in c reasingly shaped by technology. Business processes and su pply networks con tinu e to be digitized. Comp a ni es a re actively seeking out opportuniti es to harness so-ca ll ed 'big data . and social m edia , d e ploy mobil e apps, create n ew bu s iness m ode ls and ' informate' their produ cts and services. The publi c secto rs of most count ries are b e in g similarly transformed as more and more servi ces arc b ei ng d e livered th rough d igital chan nels, taking out significant costs as as improvi ng th e ir avail a bility and a ccess to ci ti zens. Indeed, cit izens are increas ingly lik e ly to judge public sector serv ice performance against custome r-ce ntric co mmercia l e xp e ri e nces and channels.

' Digital' is now an issue on the agenda s of mos t f3 oa rds of Directors , chief executive officers (CEOs) and their leadership team s, alt houg h they differ in how they d ea l with it. 2 It is not th e first time IS/IT has held this po le position: in the la se 40 years it has happened several times, in waves, bu t ea c h tim e executive inte rest waned quite quickly. The firsc wave of in te res t was probabl y during th e 1980s w h e n some organ izations

b ega n co look for oppo rtunities to gai n a competitive ad va n tage fr om IT The business re -e ngineering b oom of the early 1990s also elevate d IT as a means of taking out significant costs and improving effic iencies. Th e commercializa tion of the In ternet later in the 1990s saw another wave, particularly for developing websites and e-commerce srrategies and building el ec t ronic channels to customers and suppliers. The imp ending 'doo m' that Y2K threatened also ensured that IT attracted se rious, if negative, atte ntion in th e years leading up Lo the new millennium . More recently, big data, cloud, social med ia a n d mobility, together with th e In ternee of 111ings and perhaps even rhe reve la tions about NSA snooping, have again elevated information te chn o logy co th e top of t he agenda. T he challenge is to now keep it

Al the same time there have b ee n mixed messages regarding the competitive pote ntial or IS/ IT. Nicholas Carr's 2003 article ' IT doesn't matter', publ ished in the influential Haivard Business Review, 4 bad a devastating impact on bus iness management interest and involvement in IS/IT Carr argued investment in IT, while profoundly important, is less and less likely co deliver a competitive edge to an individual company. 'No one would di spu te that information technology has become the backbon e or commerce,' Carr says, but 'The point is, howeve r, that the technology 's potential for diffe rent iating one compa n y from the pack - its strategic potential - inexorably diminishes as it becomes accessible and affordable to all.' We would agree with hi m that IT per se doesn't really maner, but how a n orga nization chooses to harness it is critical!>' important. But tl1is is n ot how the argument wa s pre sented or, indeed, interpre ted by ma ny business leaders and it gave them the ju s tification they needed to take it off the agenda.

It is now 14 years since the th ird edition o f t his book appeared. And while many thin gs have cha nged, many oc h ers have stayed th e same.

For one, we have cha nged th e t itle of th e b ook from Strategic Planning for I nformation Systems co The Strategic Managemenl of Information Systems. We flagge d this possible c ha n ge in t h e concluding paragraph of the previous edi ti on as it reflects more accura tely what is requ ired co successfully leverag e information systems and tech n o lo gy (IS/ IT). Success with IS/ IT is only partly about h aving a comprehensive , co here nt IS/ IT s trategy and a plan for its execution. Success a lso requi res a su stained , s trateg ic approach to managing all a spects of IS/IT from devising t he strategy, through invest ment justification, co impl ementation a nd t h en using infonnacion, applica t ions an d techno logy effectively and beneficia lly Even if a n organization d oes n o t intend t o see k any co m petitive adva n tage from IS/IT, it w ill s till require a strategic approac h co the management of IS/IT, if only co avoid being di sadvantaged by the ac ti o n s of othe rs

On many occasions over the years, w e have been asked by our academic c0 lleagues when th e 'new' edit io n is to a pp ea r. One of the reaso n s frequently given for the qu es tion is th at the refere n ces h ave become dated! We cann ot d eny it , but are also somewha t conce rn ed when we he a r it. Take the discipline of ma th ematics ; some of its fund a m enta l theorems and principl es da te ba c k centu ries, ye t are a s valid t oday as wh en firs t derived . Si milarly, some of th e semina l models and fra meworks th at we pre sen t in this book may date back decades, but just because th ey arc seeming ly 'o ld ', thi s does n ot ma ke chem irre leva nt. Sometimes the langu age need s to b e modernized, but ma ny of th e b asic messages and presc riptions rem ain as valid as ever. Yo u w ill see many examples of such proven frameworks, findings and ideas throughout th e b oo k, as well as newer ideas and co n cepts.

Others have point e d to the enormous advances th a t have been made in IT since th e last editio n , especially fo r personal or social uses . We agree that the tec hn o log ica l innovations h ave bee n impressive: cloud computing, analytics, social media, ma c hine le arning, the Internet of Things (IoT) and mobile are just some examples. Bue these are just technologi es; for most organizations t his is not where the problems usually li e. The challenge is, as it has always been, to harn ess t hese technologi es in suppo rt of ente r prise objectives and to c reate new strategies. Where, when and bow co invesc are the key questions Lhat managers have to grapple with. This is why a digita l or IS/ IT s trat egy is requi red. That in turn depend s on having an appropriate organizational environment t hat supports and promotes open, inform ed and effective conversations between business man ageme nt and IS/IT specialists.

Since the third e diti o n , rhe term digital has gain ed co nsid e rable tra c ti on. Many ve ndors, s u pp lie rs, a n a lysts and consultants now promote their wares un der th e labe l of digital and would have you b e li eve that it is so me how different fr om IS/IT of old. It is not. What mosr hav e done is simp ly replace what they p reviously called 'IT' by the 'digita l' t ag . For exam ple , IT- enab led business transformation from th e 1990s has n ow become digital bu siness tra n sforma ti o n But, as we illustrate early in Chapter 1, the distinction between IS and IT (w hi c h is fundamental to our approach) is actually very powerful in understanding digital: we argue that ' digita l' has boch IS and IT components, and conse quently throughout the book we use Lhe labels IS/IT strategy and digital straregy interchangeably. To re flect this, we have given the book the subtit le Building a Dig ital Strategy.

The IT indu s try's re labe lling of concepts to present them as either diffe rent or n ew is an irrit at ing pra c ti ce: data is now 'big data', decision support systems (DSS) are now analytics and so o n In 1985 , Micha e l Porter and Victor Millar wrote an a rticle in th e Harvard Business Review titled ' I-fow information g ives you a compecicive advantage'. I n the pi ece th ey wrote about the impending data deluge w h ich, if harne ssed appropriately, cou ld be a source of compet iti ve differentiacio n Th ey didn't u se th e label 'b ig data' as it hadn't been invented, but if it had been around chen we are su re they would have ; inst ea d, they u se d the label ' information revolution', a labe l that was de rigeur during the 1970s. Yet the mes sage of th e piece re so n ates wich w h at is bei n g writte n to day abo u t big data. The opportuni t ies have inc reased due to the developments in tec hnology, but the issues involve d in successful exp loitatio n have become no easier to reso lve.

Since th e third ed iti on, muc h more has been learned about the p racti ca lities of man aging IS/IT s trat egica ll y and the factors rhac i11fluence the s u ccess of the process in both the short an d the lo ng te rm. This edition co n side rs both t he implicati ons of the d e ve lopments in IS/IT and the most useful of th e recenc thinking and expe rif"nces co ncerning both b11siness and IS/ IT strategic ma n agement. Howeve r, we b elieve tha t t here is stil l a s ignifica n t 'knowing-doing' ga p; the k n owledge of wha t s h ou ld and can b e do n e is we ll estab lishe d , but the evi d ence is th at it is unfo r tun a te ly not followed in pract ice often enough.

Managing IS/IT s uc cess fully is pe rhaps even more difficult in today's environment of un ce r tainty, complexity a nd faster bu s iness c h a nge, combined with greater choices in th e supply of IT se rvi ces a n d infra st ructure, than it w as wh e n we wrote th e p rev ious edir io n . Th e curbul e n ce in borh business a nd IS/IT environments may explain why, desp ite rhe in creasi ng c ricicality of IS/IT for business, surveys continue to show that mo s t st ill srruggle to d e live r ex pected benefits fr o m lS/iT

investments. Many more are still concerned that IS/IT expenditure does not produce demonstrable 'value for money'.

As stated in the preface to the first edition, the following problems can and often do still result from the la ck of a co herent strategy for IS/IT investment, even some 25 years later:

• Business opportun ities are mis sed; the business may even be disadvantaged by the IS/IT o r digital developm e nts of others.

• Application and infra structure investrnencs do not support the business objectives and may even become a constraint to business development.

• Lack or integration of applications ineffective information management produce duplication of effort and inaccurate and inadequate information for m a n aging th e business.

• Priorities are not based on business needs, resource levels are not opt imal and investment plans are consistently changed. Business performance does not improve, costs are high , solutions are of poor qualicy and value for money is low.

• Techn o logy strategy is incoherent, incompatible o pti ons are se lected and La rge sums of money are wasted attempting to fie things together retrospectively.

• Lack of understandi ng and agreed direction between users, senior management a nd the IS/IT specialists leads to conflict, inappropriate solutions and a misuse o f resources.

It is against this background that this book considers how digital or IS/ IT strategic management development can be brought about a nd then sustained. The intention is to provide a structured framework and practical approach, expressed primarily in the la nguage of business and management. This ca n be u sed jointly by senior manage ment, line managers a nd IS/ IT professionals (and even suppliers) to combi n e Lheir knowledge and skills to identify what needs to be done and how best to do it. Si n ce n ew technologies continually co me and go, the pursuil of opportunities through IT mu s t be driven not only by what is technologically feasible but by what is s trategically desirable. A key objective of this book is to prov ide this stra tegic focus for IS/IT Clearly, an IS/IT strategy is an increasing ly important compone nt of th e business strategy, which impli es that IS/IT strategy development must become an integra l part o f the business s t rategy process and it mu st be understood and own ed the bu si n ess management if it is to be implemenced successfully.

Some compan ies, such as Uber, Facebook, Amazon a nd AJibaba , are born digital and are adept at leveragi ng info rmat io n a nd innovating bus iness models and custo mer experiences w ith tec hnol ogy. Us ually, it is th e more establis h ed companies, so met imes w ith long and s u ccess ful his to rie s, th at n eed to e m b r ace digi tal if they are to p rospe r in the futu re. Ma ny s till do n ot see information, sys cems a nd IT as co re to thei r bu s iness and so m e even st ill see them as an administrative expense and a cost to be minimized. Conseq uently, th ey do not recognize th e opportunities o r the dis advantages t hey might be suffering. Others acknow ledge that they need to manage lS/lT more st rategically, but struggle to do it. This book is inte nd ed to he lp establis h ed compan ies 'e mb race digital' and we hope that some of the conte nt will a lso be valuable to the m ore tec hn ology-oriented compa ni es Th is is n ot just a book for CIOs and IT professionals and consulcancs; we see it as valuable reading for executives and manage rs from a ll busi n ess disciplines and cypes of organiz ati o n .

Indeed, a fundam e ntal me ssage of this book is th a t business mana gers must play a cen tra l role if an organization is to be success ful in ma naging IS/IT stra tegica ll y.

We also know that the book is wide ly adopted in masters' degree programmes, as well as on MBA programmes and some undergraduate cours es, and a ra n ge of e xec utive education courses. This has made it somewhat of a challenge to write for two audiences. Th e forme r ofle n do not ha ve the sa me level of knowl e dge or practical expe rience as b u s iness man;gers and professionals, where as th e lau e r are often looking for frameworks a nd know ledge to make sense o f siruations ch a t th e y ha, e expe rienced

In ge n e ra l, pracr icione rs d o not find academic research accessible and u sc: ful. > This is o ften because th e style of writing and structu re d e manded by jo urnal s c an make it difficult to draw out relevant findings, tran sfe rabl e lessons and pra cti cal implications. We ha ve to admit that we also struggle to find the relevan ce of so me re sea rc h. that makes its way into jo urnals! Howe ve r, we have drawn exten s ive ly o n findings fro m academic stud ies, but tried to describe and explain th em in a way th at it is both accessible a nd re leva n t. We recognize th e contr ibutions that th ese resea rc he rs and w riters have made to the cont ents at approp ri ate p oints in the b oo k We h o pe that we have been ab le to b ring it all together in a coherent and rea dabl e volume. Over th e years, we have worked with hundreds of busin ess and IS/ IT e xe c utives and managers. Th eir Knowledge, in sights and experience and th e ir u se o f many of the id eas, models and frameworks in thi s book h ave en s ure d that th e approac hes describ ed ca n be applied successfu lly in practice.

Although the book is focused primarily on the strateg ic man agement of IS/ IT in comme rcia l organizati ons, and the la nguage us ed generally reflects this, the maj o rity or the co ntent is equally applicable to governm ent agencies, the publi c sec to r and n OL-for-pro fit orga n izations. As already men tioned, chey are n ot immun e fro m th e o pportu ni ties that IS/IT provides nor from th e n eed for a more strategic ap p roac h to IS/IT investme nts . While not ope rati ng in competitive marketplaces, the y fa ce ma ny o f the sa me issues and c halle nges in respect of IS/IT. We do present so me e xa mpl es and cases from t he public sector; howeve r, reade rs fr o m n on-conunercial organizations will sometimes n ee d to interpret what we writ e for their parti cular cont e xt. f-or e xa mpl e, usually when writing abo ut 'che busin ess', we are re ferr ing to organizati o n s in the general sense; often wh a t is said about c u stomers as users of products and serv ices can be equally applicable to citizens a nd p atients in their intera cti o ns with a gove rnmental agency or h e althcare provid e r.

Whil e the overall struc ture of the book is s imil ar to the previous edi ti o n, we have imp roved the layout of the c h a p ters and the index. We are aware chat many re ad e rs dip in and out of c hapte rs rath er than read the book fr om cover to c ove r Some readers may be interesced in follo wing up in more detail some of the points mad e. mode ls used or resea rch findin gs drawn upon - the extensive chapt e r endnot es will guide th e m to the original source. To he lp th e reade r n av igate thro ugh t h e co nt e nt of the book, Figure 0. 1 illu s trates the ove ra ll structure.

Th e book is essentially sp lit into two parts. The first p a rt , Ch apters l - 7, is co nc e rn e d with introdu c in g and describing the conte nt , co ntext, nature and processes o f IS/IT or digital strategy development and th e associa ted tools and te c hniqu es. Chap te rs 8-11 address th e issues involved in delivering op e ratio n al a nd s tra te g ic b e nefits through the execution o f the strategy, including managing IS/ fT im·es cm e nts and risks in appli cations and infrastructure , orga n izing a nd governan ce , making so urci n g decisions and man agi ng the IS/ IT su pply c h ain.

Chapter 1

A strategic perspective ol IS/IT (or Digital)

• Establ ishing a h.

; framework·.-.·

SOarci1ing 1o< '*competrtiVe ojiportunilics to sha?,e Strategy

Chapter 7

Oetermnng the IS strategy

ISllT(or Digital) • strategy: ,·toots and '" t echniques «

FI G URE 0 . 1 Overview of boo k structure

Chapters 8-9 \ . . . ·.. ""'"' Mat\3 ' . the ' '.poittolto , . "" l • J)Jsfilying and managing tSl1T investments Portfolio and "Investment

The s_trft,c::gic\ management of IT sennces and infrastructure

Organizing. • sourcing :ind infrastructure ' management '

Any organizational st rategy needs to define 'whe re we wan t to be in the future' and assess object ive ly 'where we are now ' in order to de c ide 'how to get there ', given the alternative o ptions and resources available and the cha nges needed. The first part of the book considers how an organiza tio n ca n assess where it is with regard to IS/IT, in th e context of the current eco nomic, social an d business environment, a nd what the organization wants to achieve in lh e future. The business objectives a nd o rga n izational issu es mu st be interp reted, analysed and supplemented by creative lh inking to identify potent ial innovati o ns, so that the IS/IT strategy not only su p ports the business strategy but enhances it wherever poss ib le and even creates new strategic options.

Chapter 1 sets the strateg ic concext for IS/IT. It briefly rev ie ws lhe evo lution of the use o f IS/IT in organizations and the impa ct it has had on industries, business models a nd competitiveness, includi ng contemporary examples o t "digita l disrupt io n ', lead ing to the latest thinking o n t he strategic ro le of IS/IT in organ izations• It prov ides a classificatio n of the strategic uses o f IS/ IT as well as success fac tors in their deve lop me n t. The chapter also introdu ces so me ba s ic d e fin itions and models that will frame t he res t of th e book ( • for readers interested in more o f t he academic research on IS/IT strategy, it is di sc ussed further in th e early sections of Chapter 12 .)

Chapter 2 p rovides an overview o f what is involved in strategic management a nd the imp lica tions for IS/IT strategies, including so urces of competitive advantage and t he role IS/IT can p lay in thei r c rea tion . It considers approa c hes, too ls and techniques used in bu sine ss strategy formu lati on a nd ho w they can be u sed to integrate

12

Chapter

business and IS/IT strategic thinking and ·analysis. Chapter 3 considers what is involved in establishing an effective and comprehensive approach to IS/IT or digital strategy formu lation and planning. This includes delineating roles and responsibilities, a theme which is picke d up again in Chapter 10.

Chapters 4, 5 and 6 tools and techniques that can be used in the approach, with the emphasis on their practical application. Th e focus in Chapter 4 is on achievi n g alignment between the business and IS/ IT o r digital strategies, while Chapter 5 conside rs how organizatio ns can build the capability to be innovative in their u ses of IS, IT and information. Chapter 6 then describes ways of identifying opportunities to s h ape the business strategy through the appli cati on of IS/IT - how co assess ics p otential impact on industries , business relationships and competitive strategies. Chapter 7 is a summary chapter and brings together the ideas, model s and techniqu es introduced in Chapters 2- 6 to show how the 'demand s ide' of the strategy can be cohe rently developed and adjusted as circumstances evolve.

Chapters 8 to 11 consider how the range of rcquiremencs and d ema nds can best be satisfied in terms of 'supply-side' strategic manag eme nt. Chapter 8 describes ways in which the current and future portfolio of IS/ IT applications, bo th individually and collectively, can be assessed in terms of their business contribution. Th e most appropriate means of mana gi n g each appl icatio n and the mix req uired to manage the whole portfolio can then be se lec ted. Chapter 9 presents approac hes to justifying , evaluating and managing IS/IT application and infrastructure investmencs, including setting priorities to gain the best overall return and realize th e maximum organizational benefics.

Chapter 10 discusses th e strategic manage menL aspects related to structuring and organizing resources and the governan ce of IS/IT. In particular, it addre sses the q uestion of where IS/IT should best be managed from, in order to establish th e app ropriate balance between centralized and devolved rol es and responsibiliti es. The aim is to produce a relevant set of man agemen t policies and principles and a partnership between business staff and IS/ IT spec iali sts cooperating to achieve common goals. Chapter 11 reflects on some of the key st rateg ic iss ues associate d with the management of IT infrastru cture and th e provisioning of the different types of IT serv ices needed to satisfy the organization's application, inform a ti on ::ind technology requirem e n cs. O u tsourcing is discussed in d e pth as well a s th e managem e nt approaches to address che ri sks associated with IS/IT.

The effects o f IS/IT on every enterprise - its strategy, products and services, opera ci ons, relationships with c ustomers and business partners 'Ind eve n its organizacion structu re a nd management process es - are cominuing, ste::idily and inexorably, to become more p rofound a n d compl e x year on year. Chapter 12 considers the long e r-term implications of c urren c trends and emerging issues, which will h ave a signi fica nt in fluence on organizations' future bu s in ess and IS/ IT s tralegies and how they are managed.

The overa ll purpose of the book is to dem o nst rate why the stra tegic man agement of IS/IT is essential to organizacional success and that it is also feas ib le, even in times of i ncreasingly rapid c hange. To obtain th e whole range of benefits available from IS/IT and avoid th e potential pitfalls, eve ry o rgan izati on must manage IS/ IT as an integral pare of its business stra tegy, co support that and enable the c reat ion of n ew s trategic opportunities. The approaches described in this b ook are intend ed to enable greater und e rs tanding of both what needs lO be done and how it can be done.

While the core principles and precepts of building a digital strategy are enduring, in the years between editio ns of this book we, a n d many others, continue to conduct resea rch a n d work close ly wit h organizations to develop new ideas and expand our understanding of the issues and challenges. Rather than have the reade r wait u n til the 5th edition of the book appears to make these availab le, we will use digita l channels to ensure this new content becomes accessible soone r To this end we have set up boch a Linkedln Group (hnps://www.linkedin.com/groups/8468959) and a Facebook page (www.facebook.com/strategy4digital). We also hope that these platforms facilitate an ongoing conversation both with and amongst our readers and that together we will co -create content by posting relevant research, case studies and insiglll'> and experiences from practice. Addicional material to supplement the book 's core content and chemes will also be available from www.joepeppard.com

I. ll. Brown , J. Sikes and P W11lmou, "llullish on digital · McKinse y global survey results', McKinsey Quarterly, August, 2013 , 1-8; Ten fr-enabled Business Trends/or the Decade Ahead, McKinsey Global lnstirute, May 2013; M. Fitzgerald, N. Kruschwitz , D. Bonnet and M. Welch, Embraci ng Digital Technology: A New Strategic Imperative, MIT Sloan Management Review, Researc h Reporc, 2013 ; High /'(!lforn1ers in IT: Defined by Digital, fnsightsfrom Acce11trire'sfourth High Performance ff Research, 2013 ; 711e Great Sojtwai-e Transfonnation: How to \Vin a s Tech11ology Changes the \Vorld, Boston Consulting Group, 2013; and 711e Digital Transformation of Industry: How important is it? Who are tbe winners? What must be d one now? A European study commissioned by the Fed era tion of German Indu stries (llOl) and conducted by Roland Berger Strategy Co nsu ltants, 13erlin Undated

2. See]. Peppard and]. Thorp, 'What every CEO should know and do abouc IT', under review al California

Management Review; 7be Customer-activated Enterpnsc: Insights from the Global C-suite Studies, IBM Institute for Business Value, New York , 2013

3 For example, McKin sey has recognized this and published an article about galvanizing the c-suice behind big data. See B. Brown , 0 . Court and P. Willmou, 'Mobilizing your c-suitc for big data analytics', McKmsey Quarterly, November, 2013

4 N. Carr, 'IT doesn't maner', Harvard Business Review, May, 2003 , 5-12 .

5 Despite all the IS Strategy research tha.t has been published, it has been asserted 'that practitioners large ly ignore academic literature and do not use it in support of their SISP endeavors' See R.A Teubner, 'Strategic information systems planning: A case study from che financial services industry', journal of Strategic Information Systems, 16, 1, 2007, 105-125.

J oe P e pp a r d 'is a Professo r at th e European School of Manageme nt a nd Technology, 13erlin, Ge rm any and a n adjunc t professor al th e Uni vers ity of So uth Au strali a. The focus o f his resea rc h, tea c hing a nd co n su lting is in th e areas of l ead e rship, strategy, innovati o n , orga nizatio n des i g n an d b usiness va l ue realizati on in the context of digita l technol ogies. findings from his resea rc h h ave been wide l y published in academic and gene ral busine:.s and managemen t journals, in cl uding the p restigious I l arva rd Bus i11 ess Review, and he regu larl y presents his wo rk at inte rnational co nferences. Professor Peppard is also a Direc to r o f IT Alli an ce G roup, a n outsou rci ng and mana ged se rvi ce provid e r, and a me mbe r o f frc l and 's eHealth Comm inee.

J o hn Ward is Emeritus Professor al Cranfield Uni versity, School of Management. He was previ ous !}' Professor of Strategic I nformation Syste ms and was Direc to r of Cranfield 's I S Research Centre from 199.)-2004. I l e has published many papers in leading academic and business j o urna l s and is also co -author o f Bellejits Management: / l ow to I ncrease tb e Busin ess Valu e of your/'/' Projec t s, pub li sh ed by j o hn Wi l ey. Pri o r to joining Cranfi e l d h e w o rke d in indu stry for 15 years and h e has acted as a consulta nt t o a range o f m ajor intern ati ona l co rp orat i ons and public sec to r organisations. H e i s a Fellow of th e Cha rt ered Instit u te of f\ l an agement Accou m ancs and served rwo terms as Pres ident o f the UK Acadc:my for I nform at i on Sys tems.

• Infor mation Syst ems (IS), Information Te c hnology (IT) and 'Di gital'

• 'D igit al Di srup tio n': The Impact of IS/I T

• A Three -era Model o f Evolving IT Application in Organ iza ti o n s

• A Cl assi fi catio n of the S tr a t egic Uses of IS/IT

• Success Fa c tor s in Stra t egic Inform a t io n Systems

• A Portfolio Manag e ment Persp ec t ive on IS/IT Investments

• What Is an IS/IT or Dig ital Strat egy?

• From Stra t e gi c Alignment to Strategy Co -evo lution

• Di gital S trateg ies for the 21 s t Centu ry : Buil ding a Dynam ic Ca p abi lity to Leverag e IS /I T

Most o rganizations in all sectors o f indu stry, comme rce, n o t-for-profit, and govemment are now fund amentally dependent on their information systems (I S) and informa ti on technology (IT) In industries such as tel ecommuni ca ti o ns. m edia, enterta i nment, gambling and financial services, where the product is already, or is being inc reasingly, digicized, th e very exi stence o f an organi zation d epends o n the effec tive application of I S/IT. Since the comme rc ializatio n of the Internet, the :,1sc of techno l ogy bas bl"rome the exp ec ted way of co nduct ing m any aspects of bu siness and some businesses exi st purely onli n e. Governments and public administrations have l aunched many d i gita l services. The ubiquity o f mobile devices and n ew forms o f socia l media are raising consumer deman ds for immed iacy of access and speed of respo nse. Th e inc rea sing p erva siveness o f smart co nnected d evi ces and 'things' o f all kinds i s o p ening up opp ortunici es fo r new products and services, further opcra 1ion::i l efficie nci es and new types of businesses and business m odel s.

Whi l e organ i zation s want to deve l op a more 'strategic' approach to harne ss ing and expl oiti ng I S/IT, m os t have arrived at th eir cu r rent situatio n as a resu lt of many sh ort- ter m, ' tactica l ' decisions. M an y would no d oubt like to re think th ei r irl\'cstm ents, or even begin again with a 'clea n sheet', but unfortunately h ave a ' l egacy' resulting from a l ess th an strategi c app roach to I S/IT in th e pa st ; many organization s in clud ing banks, insurance companies and pub lic admi n is t ratio n s still depend o n sys tem s first developed ove r 30 years ago Even investments th at we re once see n a"

'strategic' eventually become p a rt of a cos tly and complex legacy. Learning from previo u s experience - the successes and failures of t he past - is p erha ps one of the mo st imp o rtant as p ects of strategic management. Much of the learning about the capability of IT is experiential, and organizations tend to lea rn to manage IS/IT by doing, not app reciating the challenges unti l they have faced th e m .

However, few orga nizati o ns a re likely to have been ex po sed to the whole range of IS/IT experie n ces; nor is it likely th at those experiences have been eva luated objecti vely. T his chapter provides an overview and appraisal of the general tion of IS/IT in o rga ni zations, fr om w hi ch lessons can be learned for its future strategic management . Thi s evolution is considered from a number o f viewpoints, using a variety of m ode ls, some of which are funher developed and used later in the book, when consideri n g the particular approaches required in thinking and planning strateg icall y for IS/IT in vestm e n ts.

A nu mbe r of forces affect the pa ce and effectiveness of progress in using IS/IT and in delivering operational and strategic benefits. The relative importance of each factor varies over time, and will also vary from one organization to another. These factors include:

• tl1e capabilities of the t echnology and 1he applications that are feasible;

• th e economics of acquiring provisioning, deploying :ind maintaining ch e technology: applications, services and infra s tru cture ;

• the skills and abilities available, ei 1hcr in-house or from external sou rces, to d es ign and implement the appli ca ti ons;

• the sk ill s an d competences within the organization to use the applicacions and in formatio n ;

• che capab ili ty to manage any orga ni zatioml changes accompanying technology deploym e nts ;

• the pressures on the partic ular organization or its industry to improve performance or adapt to changing circ umstances, such as a new regulatory enviro nm ent or 'digital disruption'.

1his li s t is n ot meant to be exhausti ve and could be expressed in othe r tenns - but it is p resented in a deliberate sequence of increasing 'stress', as th e complexity and criticality of management decision making becomes more strategic. Most assessments of the evolutio n of IS/IT in organizations tend to focus on one or two aspects of its deve lopme nt, such as organizational, a p plica tions, management o f technology o r planning, but in this chapter these various perspectives will be b rought together, as much as possihle.

Befo re cons id er ing a s tra tegi c perspecc ive, it is important to have a clear understanding o f the terms information systems (I S) and information cechnology (IT) and how th ey a re distinguished. While IS and IT arc often used interchangeably or eve n casua ll y, it is import ant to differenciate between them co create a meaningful dialogue between business sta ff a nd IS/lT spec ia lists; this is essential if successfu l IS/IT strategies are to be deve loped. Recencly the term 'digita l' is being used more frequently in many organ iza tions and in the pra ct itio n er and academic literature' - so how di gital rel ates to IS/IT is a lso impo rta nt to recognize.

Informa tion systems (IS) existe d in organizations lo ng befo re lhe advent of informa tion t echnology (IT) a nd , eve n today, th e re are s till many 'systems' present in organizations with technolo gy nowhere in sight. IT re fers s p ec ifically to lechnology, esse ntially hardware, software and telecommuni ca tion s networks, including d ev ices of all kinds: compute rs, se nsors, cables, satellites, serve rs, routers , PCs, p ho n es, tablets ; and all types of software: ope rating sys tems, data enlerp ri se and soci a l a pplica tions and personal productivity tool s. IT facilitates the acqu isitio n a nd co ll ect ion , processing, sto ring, deliveiy, sha rin g and prese n tation o f information a nd other digital conte n t, such as vid eo a n d voice. So metimes the term Information and Communication Technologies (ICD is used ins tead of IT to recogni ze the co"nvergence o f traditio n a l comput e r technology and telecommuni ca tions Information systems (IS) a re th e mea ns by whi ch p eo ple a nd organizations, in c reas ingly utili zing tec hn o logy, gather, pro cess, s tore, use and disseminate informa tion. 2 The domain of interest for lS researchers inclu des the s tudy of theories and practices re lated lo th e soc ial and technological phe nomena which determine the development, use and effect5 or informa1ion systems in organ izations a n d society. It is thus conce rned with the purp ose ful utilization of info r mation technology, not the technology per se. IS is part of the wider domain of hum a n language, cognitio n , behaviour and communication. Conseque ntly, ' IS will remain in a scare of concinual developme n t and change in response b ot h co technol ogica l innovation and to its mutual inte raction with human society as a wh o le.' 3

So me information s ystems a re totally automated by IT. For e xamp le, airlines, comparison websites, banks a nd some publi c agenci es have systems where no huma n intervention is required.• Dell went furth e r with its 'bu ild -to-order' model for its PCs, including an e leme nt of ' inte lligence ' to help the cusrome r in making decisio ns rega rding the configuration of components, ensu ring t hat 'non -optimal' confi gu rati o ns or con figurations n ot technica ll y possib le a re n ot selec te d Once a custo me r order h as been confi rm ed, purchase o rd ers for components are automatica lly ge n era ted and e lec tro ni ca lly transmitted to suppliers. This enables Dell co ach ieve a s to ck turn of 30 7 times p e r year (competitor Lenovo has a stoc k turn of 22 .2). 5 Dell also feeds rea l-tim e data from te chnical support a n d manufacturing lines direc tly through to suppliers o n a minute-by-minute basis. Thi s 'su ite' of inte rconn ected information systems is underpinned by a vari ety of different tec hnol ogiesserve rs, storage, software, routers, sensors and n etw orks.

People can find it diffi c ull di sti nguishing between IS and IT because the tec hnology ( rh e T o f IT) see ms to overwhelm t heir th inking, obscuring the bus in ess informa ti on s yste m that the te c h nology is intended to support or e nable. 6 Th is p e rhaps a lso gives a clue as to why o rgan izations may fail to realize benefits fr o m ma ny of lheir inv est ments in IT Tec hn o logy investme nts are often made wit h o ut un de rs tandin g or id e ntifying the bu s in ess benefits that co uld or s h ould re s ult from improving th e p e rformance of activities by us in g IT. We have even h ea rd scories recounted of se ni o r e xec utives returning from bus in ess trips abroad, demand in g th at a n ew techno logy b e purchased or a n ew app lica tion be implement e d beca use th ey have see n an a dve rti se ment in an airline's in-flig ht magazin e! It is important to acknowl e dge that IT has n o inh ere nt value - che me re purchase o f IT d oes n ot confe r any b e n efits on che organ ization; these benefits mu s e be unl ocked,' n ormally by making changes to the w ay business is conducted, how th e organ izat ion operates o r how people work. 8 Ach ie v ing organizat iona l c h a n ge on any sca le can be d iffi c ult , eve n wichouc th e introduc cion o f new technology.

An o ther term thar is frequenc ly used along with IS and IT is application, i.e. a n appl icati on of IT to handle informati on in some way Esse ncially, an appli ca tion refers to sofcware , or a combination of software and ha rdw are, us ed to address o r enab le a bu siness or pe rso nal activity: for examp le, in busin esses for ge neral accoun ting, production scheduling, patient adminis tration, cu sto me r o rd e r ma nageme nt or enabling co llab orative working ; or for an individual to boo k th eatre ti ckets , c hec k in for a flight o r pay for parking. Other examples include gen e ral uses o f hardware and software to carry out casks such as word pro ce ss ing, e mail , prepari ng presentation materials or conducting online meetings. Th ey are us ua lly la rge, ge ne ral -purpose progra ms that can do many diffe rent things, built o n top of operating systems .

These appli cations can be purchased, pre-written software prog ra ms for a parti cular business activity or deve loped 'i n-hou se' to pro vide parti cular functionality. Many appli cati o ns for pe rsonal productivity as we ll as business use are now de live red via mobil e dev ices of all kinds an d increasingly they are bei ng pro vi sion ed fro m the cl ou d (see Box 1.1 for an overv iew of cloud computing). So me business app li ca tion software packages can be tailored o r customized to the s pe ci fic requirements of an orga nization. One of the key selling po ints of large Enterprise Resource Pl annin g ( ERP ) and Custome r Re lat ionship Man age me nt ( Cfil.-1) so ftw are suites is th at th ey ca n be co nfi gu red , to some extent , to mee t ch e specific way in which a n orga nizati o n o pe rat es. 9

{'

l. · ·Software has evolved from custom-coded. 'proprietary , : send email from any loca tion as long as they' are con · ·' apptica tiors -pr¢-packaged or, off-tf1e-she.lf apph ca- tothe Internet f. and how"-lo 'th e devefoprrient of Internee-centric No matcer how t he cloud provider is structured the l, ' .applications. fhe 'q)nvergence of and IT infra- objecuve IS a 'seamless' in which the ' StflJCICJre tO an· l nlf?inet-c entr!c environment has erW interacts only' with the The mo?t signifi· t b1ec1. of cloud cornf?u llng In i ts ·C<mt _of·a 'seamless' integration ,of services · simplest (orm.' a cloud provider i_s.,.a third-party,.service include providing the hardware ari9 software, integ rafirm that deploys, mana·ges and· a P,re· 11on .and tesfing, a reha· • · s.oftware •cent!"al!¥ ' .QJe data located .servers in ,a 'ren tar. lea se or lea91,o efltire spluIn for th_f • tiop lhe primary categories o( cloud pro"'.ided ti ori. pay1T1 e11ts •An early to date fotjowing • ••• exampfe of a service. although it :wasn't I ·; I referred ,to as such at 'th e ti rue jt was launched,-is Hoimail whi ch' p'roviOes ' add;ess with and ·access -. frd,m af)y browser · lndividu als , y.iith fiot mail :acless and '

+ Applications provisioriing - essentially providing an ;• • information handling capabili ty, either throu gh '· propri'e ta1y ap 0 plications such as property manage;· ;,,ent, speciallzed heal thcare record . ''

With th e emergence of smartphones and tablets, the co n cep t of ' an app ' has entered the lexicon and it is usually seen as differing from a n application. 10 In genera l, an app is designed for a single purpose, i.e. it has o ne piece of fun ctio nality, not as a means to an end but an end in itself. An application, on th e othe r h and, may handle a wide variety of functions Many o f the standard apps on a smartphone are small bits of what a web browser can do : stock quote s, maps, YouTube, messaging. Google.com is an app; the one function it p e rform s is searc h, and it provides a highly usable interface for that function. And , of course, Google 's search app is delivered through desktops, laptops, phones and tablets Enterprise applications from Oracle, SAP, Workday and Salesforce and most int e rn a ll y de ve loped sofcware applications contain a larger number of capabilities packed into a sing le program or suite of programs.

In recent years, 'dig ital' has been gaining attention, with the label being increasingly us ed. Many consultancies and IT vendors are now·promotin g th eir wares under the lab e l of 'digital disruption', 'digital tr:insformation ' or the 'digi tal enterprise'. Governments have relabelled e-gove m ment as 'digital government'. 11 Organizations of all types are looking to build 'digital strategies' o r 'digital bu si n ess stra tegies'. We h ave even encounte red one company where they refer to th e ir digital s trategy as socia l media, mobile devices, analytics and cloud computing (so -ca ll ed SMAC); everything else is seen as IT! In our parlance, these are all IT. The challenge is figuring out the purpose for which these are going to be used by the organization.

In this book we are using the label 'digital' to embrace both IS and IT. For us, digital has both an IS component and an IT component. We emphasize th at in b uildin g a digital st rategy it is imperative to understand how information and systems (IS) wi ll b e leveraged and used as well as the underpinning technologica l (IT) capabilities that wi ll be required.

Disruption caused by IS/lT actually began many decades ago when it was known at th e time as 'business t ransformation' or 'busi ness process re-engineering'. Today 's focus on 'big data' and analytics is another iteration of t he promised ·'info rma tion ,... revolution' that was predicted in the late 1970s, became more feasible in th e 1990s with the arrival of Data Warehousing and Online Application Processing (OLAP) tools, but as yet has been more a data deluge for many organiza t ions rather than the source of strategic opportunities. Ind eed, back in 1985, Porter and Millar wrote a sem inal article tit led ' How information gives you a competitive advantage' with prescriptio ns that still resonate today . 12 Microsoft founder Bill Gates no ted:

"I hav e a si mpl e but strong belief. The most meaningful way to differentiate your company from your competition, the best way to put distance between you and the c rowd, is to do an outstanding job with information. How you gather, manage, and use information will determine whether you win or lose. 13"

However, many still struggle with this quest.

Despite the irritating ' relabelling' habit of the IT industry, advances in IT continue to cha ll enge estab li shed, even dominant, views about organizations and organizing , markets and competition.

Digital Disruption of Organizations

ror some decades now, technology has been undermining the very logic of th e organization, particularly those that are vertically integrated. 14 Nobel economist Ronald Coase, in his seminal 1937 article 'The Nature of the Firm', 15 argued that o rganizations were created because th e ' transaction costs' of doing business in the open market were too great for complex enterprises, like building railroads, manufacturing cars or c reating telephone networks. Large, vertically integrated companies were established to reduce these transaction costs. Coase's work was later extended by Oliver Williamson with his transaction cost economics. 16

A transac Lion cost is incurred in making an economic exchange, i.e. the cost of participating in a market. ln fonnation is at its core. Transaction costs include search and information such as: those incurred in determining that the requi red good or service is available on che ma rket, which provider has the lowest price etc.; bargaining costs required to come to an acceptable agreement with the other party to the tran sac tion; drawing up an approp ri ate contract; and policing and enforcement costs to make su re the other party sticks to the terms of the contract, and tak in g appropriate action if necessa ry. 17 Many economists argue that the value of organizing (and therefo re organ izations) is based on the principle of exploiting information asymmetries (i.e. specia li zation), culminating in thinking of organizations as knowledge 'eng in es' or ' inform ation processors' operating in a knowledge economy. 18

But s in ce the co mm ercialization of the lnternet and the accelerated shift online, all these tran sactio n costs have plununeted19 as technology made it easier to search for informati o n and transact with workers, suppliers and customers - what has b e en refer red to as a frictionless economy. Companies ca n focus on their so-called core competences and outsource or buy in others. 20 For example, through automated supply

chains, information sharing and transparency; man ufacturers n o longe r have to hold raw mate rial stocks 'just in case' a supplier has produccion o r logistics probl ems. By provid ing visibility, suppliers esse n tiall y become an exte nsi o n of the manufacturer.

Work by Shapiro and Varian has highlig hted th e difference between ' physi ca l goods' and 'information goods' in the digital world and the profo und implications o f those diffe rences for strategy. 21 On e defini.!)g attribu te is that th e marke t value of inform ation goods is derived from th e informati on chey contain. Other c o re d ist inguishing fe a tures of inform ation goods a re listed in Box 1.2.

,

I 10foJ1_nation a!e· that is, the cusJ tomer has to experi ence in order to value them. , :·

"' .. ," How do you know the.value of-a 0ewspaper umil you

have read it? Or wlietheryou like a piece.of music until you have Or a report until have read it? choice deci ·

' , sio0s are by emotional rather than cognitive product auributes. iQ 0 f9rmational inputs such as criti cs' reviews. word of advertising. . ' ·' . as well as latent product in terest; are alsb important •1 'ii. 1 !•t • . J dE:term inants of tho!s:e'.• : .- '

Hie iack of tan,.9ibie cues (or t he tQ r • , i • 1• the quality :of information product$" poses particular tor their thls; p rob· lem is to"'dis trlbu te paris of'tl1e '

°" : A f!

;-,•,

does not diminish the amount available - to others Reading a repon.'for example. does not mean that the mformation it contains is now not available to others. In facL any number of people can read t he same report at 1he same time Arid. unlike a traditional physical asset. it does not depreciate through usage. This is why the issue of transfer of ownership becomes com;Jlex. The sell er of an information product still retains the valua · ble information. matter how many people it is sold to However. by becoming wid ely available Its value . . . may reduce; scarcity often means that a higher be extra cted for particular information On the other hand. the opposite situation may also be true; it is only when an information product has beCqine i.°videly . )" : . . . known (e.g. a bOok"or a movie). or there are a sufficient

•· • , ln f9q;na t ion q and 'rep- nurnber or other comf)atible information products · whi ch i'he ' the 'mark/1, the 1nfor1nation produa ,. . 0 ha.ye '; <or - rea ches a th-us value to a' actlvity GroJ.Jp t he u sers (e.g ·or MS cQn docts in t he it avail- ' " network effec\ ' a'r.d for to its membersh!P· ' digital products of th eir of access to their analysis and reports. i>rosPe.Cis can distribut1on.b . ""'·· ' . . browse ns website t o 9ec c:! J,ne

information, products have a differenc cosr produc ts it se ll s Gar tn er has a strong brand srruciure !1\an physical prooucts. Traditiorial financial , ' that sees offi5=ers (CjOs) from tnany of m9(1els are built upon cos t, The iniual cost of creat ing the worId's larges t corporatio nslook to it for advice and the first copy of an information product-can be very _, " trends in the t echnology area. ' • • high, but the marginal cost is generally very low. with Information products afe non·rivalrous, in an t)erfect ftdeltty (no quality loss) With information • economic sense. That is. one person's consumption ·· gooas, •reproduction cos t s are dext to nothing. as are • It • • ' ! I -# "

Other organizational models are emerging that are a synt hesis of firms and marketso fte n caUed 'pla tfonn ' com panies. Ube r (the online taxi organization) is one example - it is already a big, global compa ny a n d growing larger by s haping and creating a new marke tplace. Platform companies have been gathering momentu m, both in tem15 o f numbers and market sha res, for th e past cwo decades: for example, the onJine retail a nd aucti on markets created by Amazon and eBay, the infomiation and me dia marketplaces crea ted by Google and Facebook, or th e mus ic and app ma rkets built by Appl e. Mo re recently these n ew hybrids h ave exte n ded into human resources, with services like freelancer, TaskRabbit and WorkFusion, and eve n to clean ene rgy, at companies like Su ngevity. TI1e growth rates of th ese platform businesses are often phenomenal and they are redefining some of the boundaries o f oth er ftrrns. Platfonn and n etwork dTeclS, and the econo mics o f n etworks , are more important n ow than before and both drive the adoption of IS/IT and are enabled by IS/IT. 22

The cha n ges ca n a lso be see n at olde r, mo re es tabli s h ed industrial co m panies. T h e process of innovatio n at many firms has c h a n ged in rece n t d eca d es. T radit iona lly th e w h o le mode l for inn ovatio n was in ternal bu t n ow, betwee n government funding fo r R&D, co ll aboration with sm all companies, joi nt ven tures a nd c row c.l sourc in g ideas us ing Internet sites li ke In nocentive, it is o fte n ve ry diffe re n t. Companies n ow have to work out h ow t o inn ovate in an open and co ll abo rative environment.

Di gita l Di s rupti o n of Indu str i es

W h ile no industry is imm u n e t o the impact of IT, some h ave been mo re affec t cd th a n o th ers. 23 Gambling and rea l estate, for ex ample, h ave largely moved fr o m t h e physica l co th e vi r tual w o rld , makin g it n o longer neces sary co h ave a physi ca l presence to co rnp e te. 2 • IT a lso accel e rates th e speed o f di s rupti on. Wich its iTu nes store, it coo k Ap p le on ly fiv e ye ars to beco me America's la rgest mu s ic reta il e r, and ju s t seve n co become th e world's la rg est. I n 18 s h ort monchs, sea rc h e n gine Google erased 85% o f th e m arket capitalization o f Garmin a nd To mTom afte r launchin g its mobile maps app Ali b a b a, China's equivalent to Amazo n , be ca m e Chin a's la rgest seller of m o ney marke t funds in only seven m o nth s. Six years aft er it ca me in t o ex is t ence, Airbnb h a d more roo m s ava il a bl e th a n IHG or Hilt on, the wo rld 's top h o tel g roups. As tec hnol ogy puts n ew tools into innovato rs' hands , th e old boundaries between sec to rs

are breaking down. Amazon has transforme d bookselling, bran ched out into genera l reta il and is now experimenting wilh d e li very by drones (and even considering opening retail outlets!)

For retailers, technology advances in mobile computing and augmented reality are blurring the boundaries between traditional and online re1ailing , enabling ch e m to interact wich consumers through multiple touch points and exp os e th e m to a rich blend of off-line sensory informalion and online content. As the industry evolves towarc!S a seamless 'omnichannel re tailing ' experience, the dist in ctions between physical and on line are likely to disapp ea r. 25

As banks recover from che economic downturn, non-banks are taking advantage b y proceeding aggressively with digital innovations and capturing more and more of the banking value chain. PaymenLc;, a source of up to 25% of traditional bank revenues, a re one of the mosc concesced areas. Pay Pal is now the number one onJine payment method in some countri es, and start-up co mpani es like Square and Sllipe are earning mulci -billion dollar valuations. Apple has launch ed Apple Pay, which lets customers p ay in hundreds of thousands of scores acce pting contactless payments. Retailers are also moving in as well: nearly one-third of Starbucks' US revenues are paid through its own loyalty cards and Google recently introd uced a plastic debit card for its Googl e Wallet. Techno logy giants, telcos and reta ilers ha ve a long way to go co compete against banks product for product and service for service, and many believe that regulatory barriers will dampen di s ruption . But n ew entrants a lready pose a threat to banks by raising service expectations and creating distance b er.vee n banks and the ir custo mers. Th e risk for banks is that n e w competitors will consign them to a limite d role as back-office utilities, while non -ba nks become the n ew face of th e ir customers' financial lives.

New bu si ne ss models chat are being shaped by th e capabilicies o f n ew tec hnology are also di srup ting indu s tri es; in parcicular, harnessing informati o n to d e live r n ew value proposit ion s to customers. Gambling exchanges lik e Betaq and Be tfair offer a means for co n sume rs to n egotia te bets (and set odds) direct ly with othe r consumers and disintermediate tradic iona l betting shops. Roll s-Royce, for example, like many manufacturers, ha s moved away from se lling products to se llin g services. 26 Its value proposition is based on the availability of an engine racher than the sa le of an actual e ngi n e . To delive r chi s service requires a s ignificant a ppli cation of IS/ IT. Every engine ha s an Engine Mo nitoring Unit where sensors collect data on the ' h ealth' of the engine, which is transmitted, in real time, via satellite to an e n gine monitoring centre in De rby. Th e re, e ngineers, u s ing bot h diagnost ic and prognostic tools as we ll as advanced analytics, d e te rm ine th e hea lth of the engine a nd make maintenance decisions about not only individua l e ngines but a fleet of e ngines to maximize availability for the airline customer.

This instrumenting of physical products, assets and all 'things' phys ica l ha s le d to the eme rgence of the so -called I nt e rnet of Things (see Box 1.3). 27 These smart, connected machin es are generating prodigious amounts of data. Gas and oil co mp a ni es, for e xampl e, are looking co h arness data collected from off-shore platforms to redu ce unplanned do wntime. 28 Other companies are now seek ing to capitalize on all chis data and create innovative business mode ls and new valu e propos itions for c ustome rs. Fo r example, power generatio n corporations, energy reta il companies, domestic appliance manufacturers, h ea ting companies and even G oog le and Apple are now vying to carve out le ad e rship posicions for 'smart homes'.

Governments are also making data available for externa l parties to leverage. 29 So-called 'op e n data ' initiatives have seen new services being offe red to ci ti zens

'DIG

.. ... t •• 4•,.. :·

The Internet (loT)js the global network of • • • _. .•iw • t " • (). • • , phy sical erlibedd ed with elec troni cs, I t l \. t l" • soft ware, sensgrs a11d co n nectivity ' tQ er:iable it to - 4.. #' ach ieve by data r ...: 0 'f 0 I • with th e manufacturer, :operator and/or other con· " Each is identifiable through its embedded computing system but is able to interoperate within th e-existing Interne t infrastruct u re Typi ca lly; ioT is t o co nnectivity o f devi ces, systems· a'nd services th at g oes · heyond communicatio n and q >vers a d oma in s appli cations ' ' , ; ' -. \ ... The interconneaion ' of · these embedded d evi ces ;. > ·: _ objects) Is to usher in auto., , •'I., • •J °' t, I ""'t, • • ·.ma ti.on in neq_rly all fields; whil e er;iablin g advanced ,J\ '"· ' appli cat ions like :aSr,nart Grid for energy p rovid ers 'Things' to a variety of devices such as heart monitoring jmplants, b iochip transponders on farm cars with ,- built-iri sensors: or ·.field ope ration ( ., ' . devices that assist firefig hters in 5ea rch and rescue These devices1tofled ilata 'w ith the of various sensor tech· '·1 ; ..... ;.l, ., , '· . :i ·1.1n"· 1 , 1

nologies and other miniaturized compu ter devices and ·th en au1onomo usly now the datc; other ·, ' . . Current market incjude ,smart ttjermps!at sys- : :. terns. security alar ms <!nd that utilize WiR f()( remote operation and In t he focus is on au tomat ing inVentory real-time monitoring and controlling of operatiOns.b

Besid es the plethofa of new applicatiOf! 'areas for Internet connected automation: "the' loT is •. 4 • expected to generate l arge data from , .·· diverse locati o ns. aggregated at a very high velocity, thert?by in creasing the ' need !O be tt er index: an d · : :- , ' : process su ch data

Notes: .

'GE'refer 10 1he loT.as See P.C M Annun zia ta. lndusu ial lnternei: Pushing the Boundaries Ci Mindsa nd hf achines, GE. November 26. 20,12. ·· ··; , :'; '·

b In Germany; this is referred 10 - as lnqustry 4.0.,·See M " ::;_t':. Russrnar.n. M Lorenz. P Gerbert, M.' yYaldned P. 'Engel - ': · and M Harni sh, lnduscry 4 0 The qf Prciduct iviry and - • -.\ Growrh in Manufaccuring lnduscries, B;CG. Apnl 20 Is:'· -

base d o n apps t hat u se thi s publi c To sp ur Ci t izen c rea t1v1ty and pract ical applications, Data. gov, 31 th e data portal or the US govern m e nt , m akes available da ta from agencies s uch as th e US Censu Burea u , th e Cente rs for Disease Co ntrol , the Envi ro nment a l Prote c ti o n Ag<" nc y a nd th e Departme nt o f Int erior, without focu s ing on specific 'cus tom e r' need s. Trafikvcr ke t , th e tran spo rt a ti o n agency in Sweden, publishes rea l- tim e data on train departu re: a nd expected arrival tim es and tra ck n umbers fo r all train s trave ll ing throu g h the cou ntry. Third p a rti es have used the se data to create applications th :H all ow tr:1ve ll e rs a nd s hippers co m ake b e n e r infor m ed d ecis ions on travel modes and routes

The Characteristics of Digital Di s ruption

T h e re seem t o be a num ber o f fund a m e nt a l pill a rs that c ha ra cte rize digital disruptio n a nd che s h ifts th a l th ose buildi n g th e IS/ IT s cratcgy mu s t be aware o f ( s ee Fi gu re l.1).32

FIGURE 1.1 The pi ll ars of digitization.

From marhetplace to marlzetspace With the opening up of the Internet for commercial activ ity over 25 years ago, business has been steadily moving from b eing conducted in th e physical marketplace to the virtual marketspace. 33 Thi s online environment has a number of distinctive features. First, it is pervasive, directly reachin g end-customers, facili ta ting th e con duct of business directly with them. Second, d1e trad e-o ff between richness (the d eg ree to which an organization can facilitate the exchange of infom1ation to deliver products/services that match customers' exact wants) and reach (d1e degree to w h ich an organization can manage its activities to connect its customers) made in the physica l world d oes n ot app ly in an online environmenc.>4 Third , it is inte ractive , which is of crucial importance as mu ch business and public sector activity co nsists of interactions: h uma n and machine-to-machine (M2M) communication, data gathering, co llaborative prob lem solving and n egotiation. 35 As discussed earlier, it is th ese inte ract ions that generate the majority of transaction costs. This is a transfonnacion in much of business activ ity - moving from a physical place with fixed locations , inve nwri es a n d products to an information-defined 'virtual ' transaction space. This s hift ranges fr om basic bus in ess tra nsactions s u ch as o rdering and invoicin g to utilizing soph isticated bus iness -to-busi n ess ( 828) exchanges and electroni c m:irkctplaccs .!6 ch at bring together industry players in a n eutra l market setting. This ha s impli ca ti ons for organizatior.s' brands, for understanding trust , produ c e and service pri c ing, iss ues of locat ion, co ll aborative ventures and , as is becoming an increasingly h ot copic for governments, coll ect in g duties and taxes. 37