1 SESSION – IV BUILDING NETWORKED BUSINESS. 2 THE NEED FOR NEW CAPABILITIES Hierarchy Organization...

1

SESSION – IV

BUILDING NETWORKED BUSINESS

2

THE NEED FOR NEW CAPABILITIES

Hierarchy

Org

aniz

atio

n

Complex andGlobal

Single andLocal

Stable andcertain Environment

Dynamic andUncertain

EntrepreneurialOrganization

The Organization Design Challenge

3

THE NEED FOR NEW CAPABILITIES

Hierarchy

Org

aniz

atio

n

Complex andGlobal

Single andLocal

Stable andcertain Environment

Dynamic andUncertain

EntrepreneurialOrganization

The Organization Design Challenge

+

+

+

SharedIntelligence

Hierarchical Organization& Mainframe Tech.

Networked OrganizationAnd Networked

Technology

4

A COLLABORATIVE NETWORKS

Issuers

Clearance Settlement

Issuers Support Firms

Brokers-Dealers

Brokers-Dealers

Brokers-Dealers

Investor Support Firm’s

ECN

Issuers




Investor

Investor Support Firm’s

Regulator

PartnershipNetwork

Orchestrators

5

BUILDING VALUE NETWORKS

Two fundamental questions :

1. Which activities should be performed inside and which should be outsourced from the outside.

2. How should we relate to outside parties, including customers, suppliers, distributors, business partners, and others?

Where should activities be performed?

Options Description

Vertical Integration

Locate all but the most routine, transaction-oriented activities inside the firm.

Selective sourcing

Source selected activities from the outside. Traditionally, sourced activities were controlled through short-term contracts

Virtual Integration

Become parts of a network of highly specialized, independent parties that work together to perform, coordinate, and control value chain activities

6

How should we relate to Market Participants?

Options Transaction

(Market)

Contract

(Hierarchy)

Partnership

Basis of interaction

Discrete exchange of goods, services, and payments (simple buyer/seller exchange).

Prior agreement governs exchange (e.g. service contract, lease, purchase agreement)

Shared goals and processes for achieving them (e.g. collaborative product development)

Duration of interaction

Immediate Usually short-term and defined by the contract

Usually long-term and defined by the relationship

Level of business integration

Low Low to moderate High

7

How should we relate to Market Participants?

Options Transaction

(Market)

Contract

(Hierarchy)

Partnership

Coordination and control

Supply and demand (market)

Terms of contract define procedures, monitoring, and reporting

Inter organizational structures, processes, and systems; mutual adjustment

Information flow

Primarily one-way; limited in scope and amount; low level of customization

One or two-way; scope and amount usually defined in the contract

Two-way (interactive); extensive exchange of rich, detailed information; dynamically changing; customizable

8

IMPACT OF INFORMATION TECHNOLOGY ON MARKET EVOLUTION

2000S?

1980 & Early 1990s

1950s

Relationships

Str

uct

ure

PartnershipContracts

(HIERARCHY)

Transaction(MARKET)

Sel

ect

ive

sour

cing

(ALL

IAN

CE

S)

Virt

ual I

nteg

ratio

n(C

OM

MU

NIT

Y)

Ver

tical

Int

egra

tion

(CO

RP

OR

AT

ION

)

9

Proprietary Capabilities and Infrastructure Create Walls inside an Organization and among the Members of a Value Chain Network

Suppliers ProducersMarketing

FirmsLogistics

FirmsDealer, SalesAnd services

Ind. ServiceProviders

Customers

Capabilities and Infrastructures

10

Covisint’s Role in the Virtually Integrated Global Automobile market

Suppliers Channel Partners Manufacturers

DELPHI-II

JOHNSONCONTROLS

VPNIExtranet DAIMLERCHRISLER

Shared Leadership

Shared Management

Shared Operations

Shared Infrastructure

Ford

GM

NISSAN

RENAULT

Public Internet& VPN

Tier 1 :Key Suppliers

Contract &Transaction

(19)

Tier 2 & 3 :CommoditySuppliers

(thousands)

Public Internet& VPN

Contracts &Transaction

Partnerships Contracts &Transaction

Technology Partners

3rd Party LogisticsProviders

(thousands)

ORACLECOMMERCE

ONE

penske Other Technology Providers

Sun

Contracts &Transaction

11

AOL Time Warner’s Virtually Integrated Organization

within a Vertically Integrated MarketContent Business

Traditional Publishing IndustryConsumers

Distribution Businesses

Traditional Filmed Entertainment Industry

Traditional Music Industry

Traditional Dial-Up/ISP

Traditional Cable

AOL Time Warner Interactive

Shared Leadership

Shared Management

Shared Operations

Shared Infrastructure

IntranetIntranet

Public Internet

Public Internet

New Media

Market Facilitation

IntranetIntranet

AOL Time Warner

AOL Time Warner

AOL Time Warner

AOL Time Warner

AOL Time Warner

AOL Time Warner

BARNES&NOBLE

HMV

amc

AOL

HBO ER

citigroup

12

Time Warner Financial Estimate by First Union in June 2000,

Excluding Effect of the Merger

Revenue

Year Ended June 30 % Change

1998 1999 2000E 2001E 1999 2000E 2001E

Cable Network

WB Network

Cable Systems

Filmed entertainment

Music

Publishing

Time Warner digital media

Inter segment elimination

Total revenues

EBITA

Cable Networks

WB Network

Cable Systems


Music

Publishing



Total EBITA

Amortization

Operating Income

Other income, net

Minority interest(-)

Corporate expenses(-)

Pretax income

Provision for income taxes (-)

Extraordinary items (-)

Net income (loss)

EBITDA

Cable Network

WB Network

Cable Systems


Music

Publishing



Total EBITDA

Earning (loss) per share diluted

Weighted average shares outstanding-diluted

5,377

260

5,342

7,978

4,025

4,496

0

-1,234

26,244

1,160

-93

1,694

695

464

507

0

-94

4,433

-1,311

3,122

2,112

266

158

588

418

0

168

1,1276

-92

2,5858

867

536

687

0

-94

5,378

-50,31

1,378

6,111

384

7,040 8,096

485

6,853

9,274

4,080

4,884

0

-1,456

32,216

1,936

-26

2,138

902

493

868

-105

-105

5,980

-1,320

4,660

-2,120

353

187

2,000

1,017

0

983

2,088

-26

3,143

1,054

581

954

-225

-105

7,764

0,74

1,384

13,7%

47,75

0,65

1,25

-4,75

3,75

-10,15

4,1%

20,4%

1,1%

131,8%

43,5%

-3,2%

11,9%

65,4%

93,85

9,45

78,6%

3,2%

497,3%

19,8%

1,1%

84,2%

33,0%

-2,4%

10,6%

49,2%

911%

15,2% 15,0%

7,0%

13,4%

6,8%

5,0%

6,0%

9,6%

9,6%

18,2%

54,2%

11,4%

8,7%

8,0%

12,0%

13,0%

17,3%

15,1%

15,0%

8,0%

101,1%

17,3%

54,2%

10,8%

8,5%

7,7%

11,1%

12,0%

20%

13

AOL-Time Warner Quarterly Financials with Salomon Smith Barney Forecast, July 19, 2001

(in $ millions except per-share items)

Revenue

1999 2000

Q1A Q2A Q3A Q4A FY Q1A Q@A Q3A Q4A FY

AOL

Revenue ($M) yly*growth

EBITDA ($M) yly growth

Margin

Cable Systems



Margin




Margin

Cable Networks



Margin

Music



Margin

Publishing



Margin

Total AOL-Time Warner

Revenue ($M)

Interr segment Elimination Reported

Revenue ($M)

q/q growth

y/y growth

EBITDA ($M)

Margin

1,259

243

19,3%

1,296

582

44,9%

1,697

163

9,6%

1,379

273

19,8%

956

91

9,5%

908

91

10,0%

7,495

(255)

7,240

1,443

19,2%

5,724

1,335

23,35

5,374

2,465

45,9%

8,075

892

11,0%

6,186

1,410

22,8%

3,933

497

12,6%

4,342

721

16,6%

33,634

(1,109)

32,525

7,320

21,6%

14

IMPACT OF INFORMATION TECHNOLOGY ON MARKET EVOLUTION

Relationships

Str

uct

ure

PartnershipContracts

(Hierarchy)Transaction

(Market)

Sel

ect

ive

sour

cing

(ALL

IAN

CE

S)

Virt

ual I

nteg

ratio

n(C

OM

MU

NIT

Y)

Ver

tical

Int

egra

tion

(CO

RP

OR

AT

ION

)

Virtual CoalitionNetworks

Selecting SourcingNetworks

AOLTimeWarner

Virtually IntegratedNetworked Organizations

Within VerticallyIntegrated Markets

eb Y Virtual Peer-to-peerNetworks

15

A Step-by-step Approach to Analyzing Markets and Capabilities

Step 1 : Define the stream of value-creating activities required to execute strategy

Determine which activities you will perform inside your organization and which can be performed by outside parties

Step 2 : Determine the nature of the relationship you will have with consumers, suppliers, partners, and other external market participants.

Step 3 : Define the network market model that is most appropriate for your business and industry.

Step 4 : Conduct a high-level audit of the capabilities required at the three levels specified in your business blueprint.

Step 5 : Review finding and identify strengths and weaknesses. Discuss the findings with employees, customers, suppliers, partners, and industry experts.

Step 6 : Develop a set of initiatives and prioritize. Define an agenda for change

16

COMPARING INDUSTRIAL AND NETWORK ECONOMICS

Successful Industrial Economy firms created economies of scale- the ability to produce and distribute products and services faster, better, and cheaper than competitors can- by building specialized plants, creating specialized jobs, and hiring specialized workers

Industrial Economies of Scale

17

COMPARING INDUSTRIAL AND NETWORK ECONOMICS

Industrial Economies of Scope

18

Benefits of Investments in Infrastructure

Decreased Cost and Time toLaunch New Business

Ret

urn

on

Inve

stm

ent

$ (+)

$ ( - )

0

TimeDecreased Time toBreak even

Decreased Cost toBreak even

Ret

urn

on

Inve

stm

ent

$ (+)

$ ( - )

0

Decreased Time tode commit

Decreased initialinvestment

Time

Decreased Risk

Ret

urn

on

Inve

stm

ent

$ (+)

0

$ ( - )

Increased cumulative benefitFrom IT portfolio

Decreased initialinvestment

Increased number of strategic optionsThat can be pursued

Time

19

Benefits from Doing Business on a Networked Infrastructure

Commerce Content (or knowledge)

Community Improve Infrastructure

Launch a New IT Service Business Launch and Continually Enhance Internal Web Services

Improve Knowledge Worker Performance Launch e-Procurement

Launch Customer Focused e-Commerce Generate Increasing Returns

20

BUILDING NETWORKED BUSINESS

UNDERSTANDING BUSINESS NETWORKS• “ Companies need not trade off flexibility for integration in critical cross-company processes. By managing the activities of

and relationships with suppliers as networks rather than production lines, companies can swap their tightly coupled processes for loosely coupled ones. Thereby gaining much needed flexibility and improving their performance in the bargain.1)

1) J. Seely Brown and J. Hagel, “”Loosening Up : How Process Networks Unlock the Power of Specialization”, Mc. Kinsey Quarterly, Special Edition (2002), pp. 59-69

TWO OVERARCHING DESIGN GOALS MUST BECONSIDERED IN THE DESIGN OF

BUSINESS NETWORKS

INTEGRATIONDIFFERENTIATION

HORIZONTAL DIVISION OF WORK INTOSPECIALIZED OPERATING UNITS

VERTICAL DIVISION INTO POWERAUTHORITY LEVEL

SPATIAL DIVISION INTO GEOGRAPHIC ORPRODUCT GOUPS

SOCIAL RELATIONSHIPS

INFORMATION OR EXPERTISE-BASEDRELATIONSHIPS

TASK-BASED RELATIONSHIPS

ENABLES A NETWORKTO MANAGE COMPLEXITY, DEVELOP

SPECIALIZED EXPERTISE AND ASSETS,FOCUS ATTENTION AND RESOURCES ON

ACCOMPLISHING SPECIFIC GOALS/TASKS.

DEFINES THE RELATIONSHIPSAND LINKS BETWEEN NODES, THAT ARE RE-QUIRED TO UNITE SPECIALIZED INDIVIDULAS,

UNITS AND ORGANIZATIONS TO ENABLETHEM TO ACHIEVE A COMMONN PURPOSE

AND CREATE SHARED VALUE.

21

NETWORK RELATIONSHIPS WHICH ARE TEND TO BE STRONGER, AND DEEPER ARE REQUIRED IN THE PRESENCE OF:

INCREASED SOCIAL INTERDEPENDENCE

SECONDARY TO :

INCREASED INFORMATION/

EXPERTISEINTERDEPENDENCE

SECONDARYTO THE NEED TO :

ENVIRONMENT CHARACTERIZEDBY INCREASED COMPLEXITY,

UNCERTAINTY, AND TURBULENCE

LEADER PREFERENCES FOR SHARED

VISION AND VALUES

A LARGE NUMBER OF DIVERGENT SUB-

CULTURES THAT MUST DEVELOP SHA-

RED BELIEFS AND A SENSE OF TRUST

TO WORK TOGETHER

INCENTIVES THAT REWARD COOPERATION AND

COLLABORATION ACROSSHIGHLY DIFFERENTIATED

SUBUNITS

DEVELOP AND DELIVER INNOVATIVE

AND CREATIVE PRODUCTS, SERVICES, AND SOLUTIONS

PRODUCE CUSTOMIZED PRODUCTS

OR DELIVERED SHARED SERVICES

SHARE LARGE AMOUNTS OFREAL TIME

INFORMATION

UNITES THE PERSPECTIVES

OF VARIOUS ACTORS TO MAKE SENSE OF THE

INFORMATION TOSUPPORT DEC. AND ACTIONS

INCREASED TASK INTERDEPENDENCE

SECONDARY TO THE NEED TO :

22

NETWORK PERFORMANCE IN COMPLEX,UNCERTAIN AND TURBULENCE

ENVIRONMENTS REQUIRES :

DENSE NETWORKS OF DIVERSESPECIALIZED ASSETS

ABILITY TO QUICKLY AND EFFECT-IVELY DEPLOY THOSE ASSETS TO

CREATE VALUE FOR MEMBERSAND THE NETWORK AS A

WHOLE

NETWORK PERFORMANCE

SHARED, OPEN-STANDARD NETWORKED IT INFRASTRUCTURES AND SYSTEMS CAN SUPPORT NEW APPROACHES TO MANAGING AND ORGANIZING THE END-TO-END FLOW OF ACTIVITIES AND INFORMATION THAT GREATLY IMPROVE THE ABILITY OF LARGE, DIVERSE NETWORKED TO ACHIEVE SHORT-TERM GOALS WHILE ALSO INNOVATING FOR THE FUTURE.

23

THREE KEY CATEGORIES OF DECISIONS TO DESIGN HIGH PERFORMANCE INTER-FIRM

BUSINESS NETWORKS

NETWORK DIFFERENTIATION

AND UNIT GROUPINGS

NETWORK INTEGRATION AND

INTERDEPENDENCIES

NETWORK OWNERSHIP

24

UNIT GROUPING DECISIONS ARE TIED TO

FUNCTIONS TO BE PERFORMED

PRODUCTS OR SERVICES

TO BE DEVELOPED

CUSTOMER OR GEOGRAPHIC

MARKET TO BE SERVED

25

FRAMING DECISIONS CONCERNING NETWORK DIFFERENTIATION

AND UNIT GROUPINGS

KEY DECISIONS

WHAT ARE THE KEY CAPABILITIES

AND RESOURCES REQUIRED TO

EXECUTE STRATEGY AND ACHIEVE

GOALS?

WHAT ACTIVITIES MUST BE PER-

FORMED TO ACQUIRE OR BUILD

CAPABILITIES AND RESOURCES?

HOW SHOULD THE ACTIVITIES BE GROUPED WITHIN

SPECIALIZED UNITS TO FOCUS ATTENTION AND

RESOURCES ON THE DEVELOPMENT

OF BEST-IN-CLASS PROPIETARY CAPABILITIES AND TO MOST

EFFICIENTLY AND EFFECTIVELYTO ACCOMPLISH GOALS?

26

DECISION CONCERNING UNIT GROUPINGS

ARE BASED ON DECREASING THE COST AND RISK OFCOORDINATING AND CONTROLLING ACTIVITIES

WITHIN A SPECIFIC UNIT GROUPING (NODE OF N/W)

BY ENABLING GROUPS OF PEOPLE PERFORMING THE SAMETASKS AND USING THE SAME RESOURCES TO WORK

CLOSELY TOGETHER

WITHIN A SINGLEUNIT

INDIVIDUALS MAY SET GOALSAND COORDINATE AND CONTROLWORK THROUGH DIRECT, FACE-

TO-FACE COMMUNICATIONSAND ACTIONS

MORE COMPLEXUNITS

USED MORE FORMAL ORGANIZATI-ONAL SOLUTIONS THAT INVOLVE

PROCESS DESIGN AND AUTHORITY,PLANNING, BUDGETING, PER-

FORMANCE MGMT, ANDINCENTIVE SYSTEMS

27

OPTIONS FOR DESIGNING DIFFERENTIATED UNIT GROUPINGS

UNIT GROUPINGS/ CONTEXT

DESIGN LOGIC DESIGN GOAL

FUNCTIONAL :

BEST SUITED TO DELIVERY OF STANDARDIZED PRODUCTS TO MASS MARKETS WITHIN RELATIVELY STABLE, SIMPLE BUSINESS ENVIRONMENT

CREATE UNITS CONTAINING SPECIALIZED ACTIVITIES REQUIRED TO PERFORM A COMMON FUNCTION (E.G. MARKETING, R&D, MANUFACTURING)

FOCUS ATTENTION AND RESOURCES TO ENABLE EFFICIENT AND EFFECTIVELY EXECUTION OF A COMMON TASK. BUILD TASK EXPERTISE AND RELATED PROPRIETARY ASSETS.

MINIMIZE COORDINATION AND CONTROL COST AND RISK RELATED TO TASK PERFORMANCE

28


UNIT GROUPINGS/

CONTEXT


PRODUCT OR SERVICE

BEST SUITED IN BUSINESS ENVIRONMENTS CHARACTERIZED BY RAPID GROWTH AND EVOLUTION IN THE NUMBER OR COMPLEXITY OF PRODUCTS AND SERVICES

CREATE UNITS CONTAINING ALL ACTIVITIES REQUIRED TO DESIGN AND BUILD RELATED FAMILIES OF PRODUCTS OR SERVICES.

IN COMPLEX BUT STABLE ENVIRONMENT, LARGE PRODUCT/SERVICE ORGANIZATIONS MAY BE FORMED AT UPPER LEVELS OF A CORPORATION OR AS STAND ALONE COMPANIES WITHIN AN INDUSTRY. SIMPLE FUNCTIONAL UNIT GROUPINGS ARE OFTEN PRESENT WITHIN THESE LARGE PRODUCT ORGANIZATIONS.

IN DYNAMIC ENVIRONMENT, SMALL PRODUCT GROUPS COORDINATE MULTIOFUNCTIONAL TEAMS THAT DELIVER CUSTOMIZED SOLUTIONS IN NICHE MARKET

FOCUS ATTENTION AND RESOURCES TO ENABLE EFFICIENT AND EFFECTIVE DELIVERY OF CURRENT PRODUCTS AND SERVICES AND TO SUPPORT THE DESIGN, DEVEPMNT, AND LAUNCH OF NEW PRODUCTS, SERVICES, AND BUSINESSES.

29


UNIT GROUPINGS/

CONTEXT


CUSTOMER OR GEOGRAPHIC MARKET

BEST SUITED IN BUSINESS ENVIRONMENT CHARACTERIZED BY RAPID EXPANSION INTO NEW CUSTOMER SEGMENTS, GEOGRAPHIES, AND/OR RAPIDLY CHANGING EXPECTATIONS AMONG SMALL, BUT POWERFULL, CUSTOMER GROUPS.

CREATE UNITS CONTAINING ALL ACTIVITIES REQUIRED TO MARKET, SELL AND DELIVER CUSTOMIZED PRODUCTS, SERVICES, OR SOLUTIONS TO SPECIFIC MARKET SEGMENTS.

IN COMPLEX, WIDELY DISPERSED BUT STABLE MARKETS, LARGE MARKETING AND SALES ORGANIZATIONS MAY BE FORMED AT THE UPPER LEVELS OF A CORPORATION OR AS STAND-ALONE COMPANIES WITHIN AN INDUSTRY. WITHIN THESE LARGE ORGANIZATIONS,

SIMPLE, FUNCTIONAL UNITS MAY SELL TO A SPECIFIC MARKET. IN DYNAMIC, UNCERTAIN ENVIRONMENTS, SMALL MULTIFUNCTIONAL MARKET - FACING GROUPS MAY BE NEEDED TO DELIVER CUSTOMIZED SOLUTIONS IN NICHE MARKETS.

FOCUS ATTENTION AND RESOURCES TO INCREASE LOYALTY AND LIFETIME VALUE OF KEY CUSTOMERS, MARKET SEGMENTS, AND NICHES.

30

FRAMING DECISIONS CONCERNING GOVERNANCE OF INTERDEPENDENCIES

KEY DECISIONS

WHAT ORGANIZATIONAL SOLUTIONS

ARE NEEDED TO COORDINATE

AND CONTROL KEY AREAS OF

INTERDEPENDENCE AMONG

SPECIALIZED UNITS?

WHAT CONFIGURATION OF ORGANIZATIONAL

SOLUTIONS SHOULD BE USED TO ENSUREALIGNMENT WITH

BUSINESSENVIRONMENT AND

STRATEGYTO ENABLE THE

NETWORK TOFULFILL ITS COMMON PUR-

POSE, ACHIEVE SHAREDGOALS,

AND CREATE VALUE FORALL STAKEHOLDERS?

WHAT ARE THE KEY TASK, INFORMATION/EXPERTISE, AND AFFILIATION/IDENTITY

INTERDEPENDENCIES THAT MUST BE MANAGED

BETWEEN SPECIALIZED UNITS LOCATED

INSIDE AND OUSIDE THEORGANIZATIONS?

31

CHOICE FOR ORGANIZATIONALSOLUTIONS

FOR INTEGRATING, COORDINATING,

AND CONTROLLING INTER-DEPENDENCIES AMONG DIFFERENTIATED UNITS

DEPENDS ON THE CONTEXT WITHIN

WHICH AN ORGANIZATION OPERATES

DEPENDS ON MARKETS, HIERACHIES,

AND PARTNERSHIPS

32

THE KEY INTERORGANIZATIONAL GOVERNANCE MODELS

MARKET MODELSOF GOVERNANCE

SIMPLE EXCHANGE OF GOODS,SERVICES AND PAYMENTS

BONDS OF AFFILIATION ANDIDENTITY DEVELOP AMONG

MEMBERS OF THE NETWORK

DURING A SPECIFIC TIMEPERIOD AND WITH

LIMITED INTERACTIONOR INFORMATION SHARING

BETWEEN THE PARTIES

RELATED PRIMARILY TOREPEATED PURCHASE, USE,

AND EXPERIENCE WITHA PRODUCTS OR SERVICE

33


INTERORGANIZATONAL HIERARCHICAL GOVERNANCE

FORMAL CONTRACTS AND

AUTHORITY

FORMAL “TERMS OF THECONTRACT”

DEFINES :THE ACTIVITIES, THE PRODUCT

OR SERVICES, THE PRICETHE LENGTH OF RELATIONSHIP

BASIS FOR DEFINING ANDOBLIGATIONS OF EACH

PARTY AND FOR COORDINAT-ING AND CONTROLLING

THE EXCHANGE OF GOODS,SERVICES, PAYMENTS AND

INFORMATION AND FOR MANAGING INTERDEPENDENCIES THROUGHTHE LENGTH OF THE CONTRACT

JOINT VENTURE

34


PARTNERSHIP GOVERNANCE

REQUIRED WHEN :INTERDEPENDENCIES AMONG

SPECIALIZED UNITS ARECOMPLEX, UNCERTAIN ANDCRITICAL TO THE SUCCESS

REQUIRE SHARED GOALS, COMPLEMENTARY EXPERTISE AND SKILLS, HIGH LEVELS OF TRUST AMONG THE PARTIES,

AND NETWORKED INTEGRATION OF PROCESS AND WORK

AS A RESULT :NEITHER MARKET NOR

HIERARCHY GOVERNANCEMODELS ARE SUFFICIENT

BASIS FOR DEFINING ANDOBLIGATIONS OF EACH

PARTY AND FOR COORDI-TING AND CONTROLLING

THE EXCHANGE OF GOODS,SERVICES, PAYMENTS AND

INFORMATION AND FOR MANAGING INTERDEPENDENCIES THROUGHTHE LENGTH OF THE CONTRACT

REQUIRE :INVESTMENTS IN INTER-ACTIVE GOVERNANCE

SYSTEMS

USED TO CARRY-OUT, COORDINATEAND CONTROL DENSELY NET-

WORKED AND INTERDEPENDENCEACTIVITIES

35

OPTIONS FOR DESIGNING INTER-FIRM GOVERNANCE

LEGEND MARKET HIERARCHY PARTNERSHIP

BUSINESS CONTEXT

SIMPLE, SHORT TERMS; BEST SUITED FOR DISCRETE TRANSACTIONS WITH LOW LEVELS OF INTERDEPENDENCY.

STABLE, CERTAIN, STRUCTURED; BEST SUITED FOR COMPLEX, BUT ROUTINE WORK

COMPLEX, UNCERTAIN, TURBULENT, HYPERCOMPETITIVE BEST SUITED FOR CREATIVE, KNOWLAEDGE-BASED WORK AND CUSTOMIZED SOLUTIONS.

TASK INTERDEPENDENCIES

LOW, EMPHASIZE EXCHANGE OF GOODS, SERVICES AND PAYMENTS; NO EXPECTATION THAT RELATIONSHIPS CONTINUE OVER TIME.

LOW TO MODERATE INTERDEPENDENCIES ARE “HARDWIRED”, HIGHLY STRUCTURED, AND DIFFICULT TO CHANGE; LENGTH OF TASK RELATIONSHIP IS SPECIFIED BY CONTRACTS.

HIGH; REQUIRES FREQUENT INTERACTION AND SHARED ETHIC OF CONTRIBUTION; EXPECTATION THAT RELATIONSHIP WILL LAST BEYOND SHORT-TERM CONTRACTS AND PROJECTS.

INFORMATION/EXPERTISE INTERDEPENDENCY

LOW; INFORMATION AND EXPERTISE NEEDED TO MAKE DECISIONS IS READY AVAILABLE AND NON-PROPRIETARY; FOCUS IS ON MASS MARKET; LOW LEVEL OF CUSTOMIZATION.

HIGH WITHIN UNITS; LOW ACROSS UNITS; FORMAL HIERARCHY TENDS TO SEGREGATE INTO AND EXPERTEISE WITHIN DIVERSIFIED, SPECIALIZED UNITS.

HIGH; EXTENSIVE EXCHANGE OF RICH, DETAILED INFORMATION; DYNAMICALLY CHANGING; CUSTOMIZABLE; NATURE OF THE WORK AND PROBLEM REQUIRES THAT EXPERTISE BE INTEGRATED ACROSS MULTIPLE SPECIALIZED DISCIPLINES.

36

OPTIONS FOR DESIGNING INTER-FIRM GOVERNANCE

LEGEND MARKET HIERARCHY PARTNERSHIP

AFFILIATION/ IDENTITY INTERDEPENDENCY

LOW; SHORT – TERM

LOW TO MODERATE; STRUCTURED BASED ON POSITION AND REPORTING RELATIONSHIP; LOYALTY BASED ON SELF-INTEREST (ALTHOUGH LOCAL WORK UNITS CAN ENGENDER LOYALTY)

HIGH; REQUIRES SHARED PURPOSE AND GOALS; SHARED BELIEFS AND VALUES-ESPECIALLY THOSE RELATED TO THE ATTAINMENT OF GOALS AND TOWARD THE SUCCESS OF OTHERS; LONG TERM AFFILITION AND IDENTITY EXTEND BEYOND LOYALTY TO THE INSTITUTION; HIGH LEVEL OF TRUST BASED ON MUTUAL EXPECTATIONS AND CONFIDENCE IN THE “BEHAVIORS AND VALUES” OF OTHERS.

COORDINATION AND CONTROL

SUPPLY AND DEMAND DETERMINE MARKET PRICE FOR A PRODUCT/ SERVICE OFFERING WITH A SPECIFIC BUNDLE OF FEATURES.

FORMAL CONTRACTS DEFINE JOB POSITIONS(OR ACTIVITIES TO BE PERFORMED) PROCEDURES(HOW ACTIVITIES WILL BE PERFORMED), INFORMATION SHARING, MONITORING, AND REPORTING.

FLEXIBLE, DYNAMIC, AND ORGANIC STRUCTURE, PROCESSES AND RELATIONSHIPS ENABLE AGILITY AND CREATIVITY; HIGH LEVELS OF COMMITMENT REQUIRED.

37

FRAMING DECISIONS CONCERNING NETWORK OWNERSHIPTHE THREE DOMINANT FORMS INCLUDE :- THE MAJORITY OF SPECIALIZED UNIS MAY BE LOCATE INSIDE A CORPORATION OR OTHER LEGALLY DEFINED

ORGANIZATION;- AN ALLIANCE MAY BE FORMED BETWEEN TWO( OR A SMALL NUMBERS) OF PLAYERS;- A DIVERSE COMMUNITY, ALSO CALLED AN ECOSYSTEM, OF PLAYERS REPRESENTING DIFFERENT ROLES(E.G.

SUPPLIERS, DISTRIBUTORS, BUYERS) MAY WORK TOGETHER TO ACHIEVE SHARED GOALS.

EMERGING IT-ENABLED EXTENDED ENTERPRISE MODELS

COMMUNITY

ALLIANCE

CORPORATION

OW

NE

RS

HIP

????

1980S AND EARLY 1990S

PRE-1980S

HIERARCHY MARKET PARTNERSHIP

OW

NE

RS

HIP

COMMUNITY

VIRTUAL PEER-TO-PEER NETWORK (e-BAY)

INDUSTRY-OWNED CONSORTIA(NASDAQ)

SELECTIVE SOURCING JOINT VENTURE

(AE AND MICROSOFT)

NETWORKED ORGANIZATION

(CITIGROUP)

CORPORATION

GOV ERNANCEGOV ERNANCE

HIERARCHY MARKET PARTNERSHIP

ALLIANCE

EXTENDED ENTERPRISE MODEL EVOLUTIONEMERGING EXTENDED ENTERPRISE MODEL

ELECTRONIC DATA INTERCHANGE

CORPORATE OWNERSHIP

GOVERNED THROUGH MARKET MECHANISMS

PARTNERSHIPS –STYLE OF GOVERNANCE

TRANSACTION-BASED MARKET MECHANISMS

Large & Vertically integrated Corporation

It - enabled alliance

Ecosystem

Hybrid Governance Model

INDUSTRY OWNED e-

MARKET(GHX,COVISINT)

38

FRAMING DECISIONS CONCERNING NETWORK OWNERSHIP

• WITHIN THE INDUSTRIAL ECONOMY BUSINESS ENVIRONMENT, PRE-1980’S EXECUTIVE DECISION MAKING FAVORED CORPORATE OWNERSHIP OF ALL BUT THE MOST SIMPLE, TRANSACTIONAL ACTIVITIES THAT COULD BE EASILY GOVERNED THROUGH MARKET MECHANISMS OR STRUCTURED CONTRACTS.

•

• THE LATE 1980S AND EARLY 1990S EXECUTIVES BEGAN TO BREAK UP DEEP HIERARCHIES AND SHED NON-CORE ACTIVITIES. ALLIANCES WERE FORMED TO MANAGE ACTIVITIES ACROSS ORGANIZATIONAL BOUNDARIES, AND WERE SUPPORT BY INFORMATION SYSTEMS THAT ENABLED ELECTRONIC DATA INTERCHANGE (EDI) AND THE COORDINATION AND CONTROL OF TRANSACTION ACROSS FIRM BOUNDARIES. DEPENDING ON THE LEVEL OF UNCERTAINTY AND THE TYPE OF INTERDEPENDENCE, HYBRID FORMS OF GOVERNANCE EMERGED AND FEATURES OF A PARTNERSHIP-STYLE GOVERNANCE BECAME MUCH MORE PREVALENT.

PRE-1980SPRE-1980S MARKET MECHANISMS OR

STRUCTURAL CONTRACT

MARKET MECHANISMS OR STRUCTURAL CONTRACT

LATE 1980S – EARLY 1990LATE 1980S – EARLY 1990

ALLIANCESALLIANCES

ELECTRONIC DATA INTERCHANGE

LATE 1990sLATE 1990s WIDE RANGE OF OWNERSHIP

AND GOVERNANCE STRUCTURE (HYBRID GOVN. MODEL OR COLLABORATIVE COMMUNITY GOVERNANCE MODELS)

WIDE RANGE OF OWNERSHIP AND GOVERNANCE STRUCTURE (HYBRID GOVN. MODEL OR COLLABORATIVE COMMUNITY GOVERNANCE MODELS)

INTERNET

39

DESIGNING HYBRID GOVERNANCE MODELS

MARKET

PRINCIPLES OF STRUCTURE, SYSTEMS AND AUTHORITY

USED TO COORDINATE AND

CONTROL

THE FLOW OF GOODS AND SERVICES

ACROSS LEGALLY DEFINED ENTITIES

HIERARCHY

PRINCIPLES OF SUPPLY, DEMAND,

AND PRICING

USED TO COORDINATE AND

CONTROL

THE FLOW OF GOODS AND SERVICES

INSIDE A LEGAL ENTITIES

TRADITIONAL ECONOMIC THEORY

40

DESIGNING HYBRID GOVERNANCE MODEL

TRADITIONAL ECONOMIC THEORY TRANSACTION COST THEORY

GOVERNANCE DECISION AS A CHOIICE BETWEEN MARKET

AND HIERARCHIES

GOVERNANCE DECISION AS A CHOIICE BETWEEN MARKET

AND HIERARCHIES

MARKET FORMS OF GOVERNANCE LEAD TO

GREATER EFFICIENCY AND EFFECTIVENESS

MARKET FORMS OF GOVERNANCE LEAD TO

GREATER EFFICIENCY AND EFFECTIVENESS

UNLESS THE COST AND RISK OF USING MARKET MECHANISMS TO

COORDINATE AND CONTROL INTERDEPENDENCIES > THE

COST AND RISK OF HIERARCHY

CONDITION THAT INCREASE THE COST AND RISK ASSOCIATED WITH THE MARKET FORMS OF GOVERNANCE INCLUDE THE :(1) NEED TO DUPLICATE COSTLY, PROPRIETARY ASSETS THAT CANNOT BE EASILY

LEVERAGED AND SHARED ACROSS ORGANIZATIONAL BOUNDARIES(2) NEED TO SETTLE FREQUENT DISPUTES AMONG PARTIES IN TRANSACTION(3) INCREASED COST AND EFFORT RELATED TO ACCESS AND VALIDATION OF

INFORMATION CONCERNING TRANSACTIONS AND PRICE(4) NEED TO JOIN WITH OTHERS TO INCREASE MARKET POWER

HIERARCHIECAL MODEL OF GOVERNANCE PROVIDE AN

ALTERNATIVE FORM THAT CAN BE USED WHEN THE CONDITION OF

MARKET FAILURE ARE HIGH

KEY TO ITS POWER IS THE SIMPLE FACT THAT EXECUTIVES WITHIN LEGAL ENTITY HAVE BEEN VESTED WITH :(1) AUTHORITY TO DETERMINE SHARED PURPOSE AND GOALS(2) DEFINE ACTIVITIES NEEDED TO ACCOMPLISH GOALS;(3) HIRE, COMPENSATE AND FIRE EMPLOYEES(4) MONITOR, COORDINATE AND CONTROL ACTIVITIES

ASSETS, AND RESOURCESUNIFIED OWNERSHIP AND AUTHORITY HELP TO FOCUS ATTENTION AND RESOURCES ON THE PURSUIT OF COMMON GOAL (E. G MAX OF CORPORATE PROFIT)

HIERARCHICAL FORMS OF GOVERNANCE CAN BE MORE EFFICIENT AND EFFECTIVE THAN THE MARKET WHEN HIGH LEVELS OF UNCERTAINTY OR INEQUALITIES IN POWER INCREASE THE RISK

OF MARKET FAILURE, ESPECIALLY WHEN PARTIES IN A TRANSACTION MUST INTERACT FREQUENTLYTO PERFORM A TASK, SHARE INFORMATION, INNOVATE, AND DEVELOP

EXPERTISE

WHILE MARKETS OPTIMIZE LATERAL INFO PROCESSING

AMONG PEERS,HIERARCHIES OPTIMIZE VERTICAL

INFO PROCESSING

41

HIERARCHY CAN BE FAIL

HIERARCHICAL MODEL

WORKS WELL TO REDUCE UNCERTAINTYAND OPPORTUNISM WHEN A BUSINESSOPERATING WITHIN STABLE, MATURE

BUSINESS CONTEXT

FAILS IN TURBULENT, UNCERTAIN,HYPER-COMPETITIVE BUSINESS CONTEXT

THE HIERARCHY CAN BE HIGHLY EFFICIENT AND EFFECTIVE WHEN :

STRUCTURE, STANDARDIZATION, INCENTIVES, AND SUPERVISION CAN BE

DESIGNED TO ENSURE THAT EACH INDIVIDUAL AND UNITS ACTS IN THE BEST

INTEREST OF EXECUTIVES AND OWNERS TO ACHIEVE CORPORATE GOALS.

INCREASING MORE POWERFULL INFORMATIONTECHNOLOGIES INCREASED BOTH VERTICALAND LATERAL INFORMATION PROCESSING CAPACITY TO ENABLE A NEW APPROACH TOCOORDINATING AND CONTROLLING INTRA-AND INTER-FIRM INTERDEPENDENCIES THAT RELIED ON LEARNING AND COMMITMENTRATHER THAN COMPLIANCE

EVOLVING INFORMATION TECHNOLOGY :A KEY DRIVER OF THE TURBULENT, HYPER COMPETITIVE CONDITIONS THATDESTABILIZED TRADITIONAL POWERBASES AND LED TO FAILURE OF THEMARKET AND HIERARCHY IN THEIRPURE FORM

42

LINKING IT TO THE EVOLUTION OF

PARTNERSHIPS AND TRUST

THREE DIFFERENT APPROACH FOR BUILDING TRUST IN BUSINESS NETWORKS

1. PROCESS-BASED TRUST (recurrent transaction)

2. AFFILIATION – BASED TRUST (strong feeling)

3. INSTITUTION-BASED TRUST (tied to organization feeling and social structures)

43

KEY FEATURES THAT DISTINGUISH COLLABORATIVE COMMUNITY

COLLABORATIVE COMMUNITY

SHARED PURPOSE AND VALUES STRESS AN ETHICOF CONTRIBUTION THAT REPLACES THE UNEASYCOEXISTENCE OF LOYALTY AND INDIVIDUALISMIN TRADITIONAL INTRA-AND- INTER – FIRM BUSI-

NESS NETWORKS

DEVELOPMENT OF INTERDEPENDENT FORM OFIDENTITY THAT MOTIVATES AND ENGAGES ACTIVE

PARTICIPATION AND AFFILIATION OVER TIME

ORGANIZATIONAL CONFIGURATIONS AND SOLU-TIONS SUPPORT HORIZONTAL RELATIONSHIPS

AMONG PEERS. THESE PEER-AND-PEER RELATION-SHIPS DO NOT PRECLUDE THE EXISTENCE OF

INTERDEPENDENT VERTICAL, AUTHORITY-BASED RELATIONSHIPS AND MARKET-BASED TRANSACTIONS

HAS BEEN DESIGNED TO MAXIMIZE HIGH PERFORMANCEIN COMPLEX, UNCERTAIN, TURBULENT, AND HYPER-COMPETITIVE BUSINESS ENVIRONMENT, TO BE WELLSUITED TO BUSINESS NETWORKS OF VARIOUS SIZE

AGE, ENVIRONMENT.

IT APPEARS TO BE APPROPRIATE FOR MANAGING INTERDEPENDENCIES INSIDE AN ORGANIZATION, AMONG PARTIES ENTERING INTO AN ALLIANCE, AND IN MORE DIFFUSE OWNERSHIP STRUCTURES THAT WE CALL

COMMUNITIES

FORM OF GOVERNANCE COMBINES FEATURES OF A MARKET, HIERARCHY, AND PARTNERSHIP; AND OFTEN SUPPORTED BY A SOPHISTICATED IT INFRASTRUCTURE THAT ENABLES REAL-TIME, INTERACTIVE INTEGRATION, COORDINATION AND CONTROL OF TASK, INFORMATION, AND, AT TIMES,.

44

BUILDING COLLABORATIVE COMMUNITY : LESSONS FROM THE FIELD

(THE NASDAQ AND GHX CASES)

IT + RAPID EVOLUTION OF MANAGEMENTTHEORY AND TOOLS (TQM, BUSINESS

PROCESS REENGINEERING, SELF MANAGINGTEAMS, NETWORKING AND NEGOTIATIONS)

INDEPENDENT COMPANIES TO COORDINATEINTERDEPENDENT ACTIVITIES

“VIRTUAL CORPORATION”A NETWORK OF FOCUSED BUSINESS AS

FREE AGENTS TO DESIGN, BUILD, MARKET, SELL, AND SUPPORT PRODUCTS AND SERVICES WITHIN A WIDE VARIETY OF OLD AND NEW ECONOMY INDUSTRIES

PROPOSED BENEFITSGREATER EFFICIENCY,

INCREASED RESPONSIVENESS, THE

ABILITY TO SHARE SPECIALZED ASSETS, AND TO

TAP HIGH-POWERED MARKET INCENTIVES

THE SAME FACTORS CAN ALSO LEAVE THEM

VULNERABLE

INCREASED INTER-FIRM COORDINATIONCOSTS CAN DESTROY HOPED FOR

EFFICIENCY GAINS; SELF-INTEREST AND OPPORTUNISM CAN LEAD FREE RIDING;

LACK OF TRUST CAN DELAY ADOPTION OF THE SHARED

STANDARDS AND HORIZONTAL PROCESSES

REQUIRED TO ENABLECOLLECTIVE ACTION

HYBRID FORMS OF GOVERNANCE THAT UNITE HIERARCHY,

MARKET AND PARTNERSHIP

MARKET AND HIERARCHY CANACTUALLY FACILITATE AND ENABLE COLLABORATIVE

CAPACITY AND TRUST

STANDARDS, POLICIES, AND PROCEDURES CAN BE EMBEDDED

IN TRANSACTION PROCESSING SYSTEMS THAT ENABLE MARKET-BASED TRANSACTIONS TO TAKE PLACE CONSISTENTLY, RELIABLY,AND EFFICIENTLY, ENABLE SELF-

MONITORING TO OCCURWHICH INCREASES TRUST

45

BUILDING COLLABORATIVE COMMUNITY

HYBRID FORMS OF GOVERNANCE ARE EMERGING THAT UNITE HIERARCHY, MARKET, AND PARTNERSHIP

A NETWORK ORCHESTRATOR ROLE IS EMERGING TO COORDINATE INTER-FIRM INTERDEPENDENCIES WITHIN BUSINESS ECOSYSTEMS

NETWORK ORCHESTRATORS DESIGN ORGANIZATIONAL SOLUTIONS THAT REFLECT THE INTERNETS OF ALL PARTIES

COLLABORATIVE COMMUNITY AND TRUST CO-EVOLVE OVER TIME

46

THE NETWORK ORCHESTRATOR ROLE

THE NETWORK ORCHESTRATOR

EMERGING TO COORDINATE INTER-FIRM INTERDEPENDENCIES WITHIN BUSINESS

ECOSYSTEMS

TO DESIGN ORGANIZATIONAL SOLUTIONS THAT REFLECT THE INTERESTS

OF ALL PARTIES

TO COORDINATE TASK, INFORMATION,AND AFFILIATION INTERDEPENDENCIES

WITHIN BUSINESS ECOSYSTEMS

SHARED OWNERSHIP WAS CRITICAL TOENSURING ACTIVE COMMMITMENT

TO COLLECTIVE ACTIONAND PARTICIPATION

“COOPERATIVE” ASSOCIATION MEMBERSHIP MODEL WOULD BEST ALIGN MEMBER

INTERESTS AND CONTRIBUTIONSTO VALUE CREATED AND

RECEIVED

THE BOARD OF DIRECTORS RESPONSIBLEFOR DEFINING DIRECTION, SETTINGPRIORITIES, AND OVERSEEING THE

ACTIONS TAKEN TO ENSURE THAT theCOLLECTIVE INTERESTS OF THE

MEMBERS ARE SUPPORTED

THE GHX CASE :COLLABORATIVE COMMUNITY

THAT REPRESENTED THE COMPLEX-ANDOFTEN COMPETING- INTERESTS

WITHIN AN INDUSTRY (THE SUPPLIERSIDE)

NASD CASE :AN INDUSTRY ASSOCIATION THATREPRESENTED THE INTERESTS OF

BROKER-DEALER COMMUNITY

MERGED OPERATION AND ORGANI-ZATIONS WITH NETWORKS THATREPRESENTED THE INTERESTS

OF DISTRIBUTORS AND PROVIDERSCOLLABORATIVE COMM. AND TRUST

CO-EVOLVE OVER TIME :FACE-TO=FACE NEGOTIATIONAMONG SENIOR EXECUTIVESENABLES FIVE OF THE MOST

POWERFULL COMPETITORS IN INDUSTRY TO ACHIEVE COMMONUNDERSTANDING AND “HAMMER-OUT” THE GOVERNANCE FRAMEWORK THAT WOULD SERVE AS

THE FOUNDATION FOR COLLECTIVE ACTION IN THE SUPPLY CHAIN

47

DESIGN “ON-DEMAND” ENTERPRISE

1. WHAT ARE THE KEY ACTIVITIES THAT MAKE UP THE CORE OPERATING PROCESS IN YOUR BUSINESS NETWORK? HOW HAVE YOU ORGANIZED THOSE ACTIVITIES INTO SPECIALIZED UNITS AND HOW DO YOU COORDINATE AND CONTROL TASK, INFORMATION/EXPERTISE, AND AFFILIATION INTERDEPENDENCE?

2. WHAT DECISION HAVE YOU MADE CONCERNING ACTIVITIES? WHAT WERE THE COST, RISK, AND BENEFIT TRADE-OFFS THAT YOU CONSIDERED? IT IS TIME TO REVISITED ANY OF THESE DECISIONS?

3. CAN IT AND THE INFORMATION IT DELIVERS BE USED TO SIMPLIFY, STREAMLINE, AND BETTER MANAGE END-TO-END PROCESSES WITHIN BUISNESS NETWORK?

4. ARE YOU BUILDING THE COLLABORATIVE COMMUNITY?

5. HAVE YOU SELECTED PARTNERS WISELY?

6. IS THE TECHNICAL INFRASTRUCTURE HAVE IN PLACE THE RIGHT ONE?

48

EMERGING NETWORK BUSINESS MODELS

BUSINESS MODELS

BUSINESSES BEING BUILT ANDLAUNCHED ON THE INTERNET

BUSINESSES THAT PROVIDE

THE DIGITAL INFRASTRUCTURE

BU

SIN

ES

S-T

O-C

ON

SU

ME

R M

OD

ELS

(AM

AZ

ON

.CO

M A

ND

LA

ND

SE

ND

.CO

M)

CO

NS

UM

ER

-TO

-CO

NS

UM

ER

S M

OD

ELS

(E-B

AY

)

CO

NS

UM

ER

-TO

-BU

SIN

ES

S M

OD

ELS

(PR

ICE

LIN

E. C

OM

)

BU

SIN

ES

S-T

O-B

US

INE

SS

MO

DE

LS(F

RE

E M

AR

KE

TS

, GH

E, A

ME

RIC

AN

E

XP

RE

SS

EN

TE

RP

RIS

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CO

MP

UT

ER

AN

D N

ET

WO

RK

EQ

UIP

ME

NT

PR

OV

IDE

R

(IB

M, H

P, C

ISC

O A

ND

LU

CE

NT

)

SO

FT

WA

RE

FIR

MS

(MIC

RO

SO

FT

AN

D O

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CLE

)

CU

ST

OM

SU

PP

LIE

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(DE

LL F

OR

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ME

NT

; AC

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NT

UR

EF

OR

S/W

; IB

M G

LOB

AL

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RV

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S F

OR

EM

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GIN

G B

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SIN

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S P

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SS

OU

TS

OU

RC

ING

AN

D O

N-D

EM

AN

DB

US

INE

SS

SE

RV

ICE

S)

49

BUSINESS BUILT ON THE INTERNET

FOCUSED DISTRIBUTORS PORTALS

eM

AR

KE

TS

eR

ET

AIL

ER

S

eA

GG

RE

GA

TO

RS

INF

OM

ED

IAR

IES

EX

CH

AN

GE

S

PRODUCERS

AS A DOORWAY OR GATE(AOL.COM; GOOGLE.COM, ETC.)

MA

NU

FA

CT

UR

ES

(FO

RD

, T

OY

OT

A, H

YU

ND

AY

,P

EP

SIC

O, D

AIM

LER

-CH

RY

SLE

R)

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UC

AT

OR

S(H

AV

AR

D B

US

INE

SS

SC

HO

LL,

Mc

GR

AW

-HIL

L, K

NO

WLE

DG

EU

NIV

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SE

)

SE

RV

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PR

OV

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RS

(CIT

IGR

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ME

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AM

EX

, HS

BC

, AS

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, BO

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ALL

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)

INF

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SE

RV

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(IN

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CU

RIT

IES

, TH

E W

ALL

ST

RE

T J

OU

RN

AL

INT

ER

AC

TIV

E,)

THE INTERFACE OF CHOICE FORDELIVERING INFORMATION

INSIDE AND ACROSSEXTENDED ENTERPRISE

50

A CORPORATE PORTAL FRAMEWORK

ExternalContext

ExternalServices

News andNews Web

DataWarehouses

OrganizationalKnowledge

Bases

Documents

CollaborationProducts

InternalWeb Sites

ExternalWeb Sites

External InformationResources

Internal InformationResources

BusinessIntelligence

Integration

KnowledgeManagement

Collaboration

Publishing Search

Personali-zation

CorporatePortal

Application

Access

ibility Extensibility

Security

Scalability

51

DIGITAL INFRASTRUCTURE PROVIDERS

EMBEDDED WITHIN THE FABRIC OFHOW FIRM CREATES, PRODUCES,

AND DISTRIBUTES PRODUCTS AND SERVICES

INFRASTRUCTURE PORTALS

HORIZONTAL INFRASTRUCTURE(COMCAST BROADBAND, CINGULAR

WIRELESS)

VERTICAL INFRASTRUCTURE PORTALS

(SALES. COM)

FIRMS THAT PROVIDE CONSUMERS AND/OR BUSINESS WITH ACCESS TO A WIDE RANGE OF N/W,

COMPUTING, AND APPLICATION HOSTING SERVICES

VAN VAR

DOES THE FIRM PROVIDE“GATEWAY ACCESS” TO A

COMPLETE SERV. OF N/W, DC, WEB

DOES THE FIRM PROVIDEACCESS TO HOSTED VERTI-

CAL APPL. SERVICES

ISP(COMCAST), NSP(AT&T),WHSP(IBM GLOBAL SERVICE)

ASP(SALESFORCE.COM, IBM BUS.TRANSF. OUTSOURCING,

ORACLE OD)

52

MAKING THE CASE FOR IT

NICHOLAS CARR, 20032004,BUSINESS DOT.COM

MELTDOWNIT DOESN’T MATTER

BUSINESS EXECUTIVESCHALLENGED CHIEF OFINFORMATION OFFICER

(CIO)

MANY IT APPLICATIONS AREWIDELY AVAILABLE FROM VENDORS AND SERVICE

PROVIDERS

IT AS COMMODITY,AND MORE VALUABLE

WHEN SHARED

PRICES DROP

IT IS UBIQUITOUSNOT SCARCE

IT IS INFRASTRUCTURE,NOT PROPRIETARY

THE INTERNET ISACCELERATING THE

RATE OF COMMODITI-ZATION OF NEWIT APPLICATIONS

SPEND AS LITTLE ASPOSSIBLE ON IT

FOLLOW RATHER THANLEAD WHEN ADOPTING

NEW IT

CONCENTRATE IT IN-VESTMENT ON DRIV-ING COST SAVINGS

CONCENTRATE ONMANAGING RISK

RATHER THAN SEARCHING FOR IT OPPOR-

TUNITIES

CARR’S ARGUMENT TO BE BASED ON THE TRADITIONAL MAINFRAME-BASED AND CLIENT SEVER APPROACH

53

BUILDING THE BUSINESS CASE FOR IT

THE HEART OF THE IT VALUE

IT APPLICATION THATGENERATED COST SAVINGS

AND EFICIENCY

NEW APPROACHES TO SYSTEM DESIGN AND

DEVELOPMENT

ENABLED LARGE AND COMPLEXAPPLICATIONS TO BE BUILT FROM REUSABLE MODULESLINK TOGETHER THROUGH

SHARED MIDDLEWARE SERVICES AND COMMON

INTERFACES

A WEB SERVICESAPPRO-ACH TO BUILDING ANDDEPLOYING IT INFRA-

STRUCTURE AND APPLI-CATIONS

IT VALUE FRAMEWORK

LEVERAGE INFRASTRUCTURE :INVESTMENTS IN REUSABLE,

VALUE ENABLING INFRA-STRUCTURE LOWER COSTS,IMPROVE ASSET EFFICIENCY,

AND CREATE STRATEGICOPTIONS FOR FUTURE

GROWTH

DRIVE PROFITABLE GROWTH :INVESTMENTS IN VALUE CREATING

IT APPLICATIONS DRIVE PROFIT-ABLE GROWTH THROUGH FURTHERCOST REDUCTION AND REVEBNUE

GENERATION

ACHIEVE PROPRIETARY ADVANTAGE :VALUE SUSTAINING IT APPLICATIONS

AND INFRASTRUCTURE PROVIDESTRATEGIC DIFFERENTIATION

AND PROPRIETARY ADVANTAGE(THAT > MARKET SHARE, BRAND

VALUE, MARKET CAPITAL-IZATION) AND CHANGE

COMPETITIVE POSITIONING

TO DEFINE THE BUSINESS CASE FOR IT

54

IT VALUE FRAMEWORK

ACHIEVE PROPRIE-

TARY ADVANTAGE

CR

EA

TE O

PTI

ON

S

LEVERAGE INFRASTRUCTURE

DRIVE PROFITABLE GROWTH

55

THREE CATEGORIES OF BENEFITS THAT CAN BE USED

TO DEFINE BUSINESS CASE

1. INVESTMENTS IN REUSEABLE , VALUE-ENABLING INFRASTRUCTURE LOWER COSTS, IMPROVE ASSET EFFICIENCY, AND CREATE STRATEGIC OPTIONS FOR FUTURE GROWTH.

2. INVESTMENTS IN VALUE-CREATING IT APPLICATIONS DRIVE PROFITABLE GROWTH THROUGH FURTHER COST REDUCTIONS AND, REVENUE GENERATION

3. VALUE-SUSTAINING IT APPLICATIONS AND INFRASTRUCTURE PROVIDE STRATEGIC DIFFERENTIATION AND PROPRIETARY ADVANTAGE THAT CAN BE MEASURED IN TERMS OF INCREASED MARKET-SHARE, IMPROVED BRAND VALUE, AND INCREASED MARKET CAPITALIZATION

56

LEVERAGING INFRASTRUCTURE AND CREATING OPTIONS

IT INFRASTRUCTURE

SUPPORTING ENTERPRISE PROCESSES

(PROCUREMENT, ERP, FINANCE AND HR)

IT OPERATIONS(DATA CENTER, NETWORK,

AND CALL CENTERS)

OPTIMIZE EFFICIENCY, SPEED TOMARKET, AND FLEXIBILITY DRIVE DOWN COSTS, INCREASING

IT ASSET PRODUCTIVITY ANDFUTURE OPTIONS VALUE

MOST ESTABLISHED COY IS FARFROM “BEST-IN-CLASS” TURNINGTHEIR INFRASTRUCTURE OVER TOSPECIALIZED SHARED SERVICES

PROVIDERS (IBM GLOBAL SERVICES, EDS, CSC)

BUILD THEIR BEST-IN-CLASS SHARED SERVICES INFRASTRUCTURE, OFTEN

OFFSHORING IT IN INDIA, CHINA, BRAZIL FOR TAKING LOWER COST,HIGHLY SKILLED, LABOR MARKETS.

IMPLEMENTING SHARED SERVICESINITIATIVES BY FACTORING IN THE

COST AND RISK ENGINEERINGINTRA-AND-INTER-FIRM PROCESSES

AND THE POTENTIAL BUSINESSDISRUPTIONS.

57

IT INVESTMENT CATEGORIES, EXAMPLES, AND METRIC

IT INVESTMENT CATEGORY

EXAMPLE OF PROJECTS AND INITIATIVES SAMPLE METRICS

ACHIEVE PROPRIETARY ADVANTAGE

DIFFERENTIATED PRODUCTS (e.g. INFORMATION VALUE ADDED; PRICE)ENTER NEW MARKETS OR INCREASE MARKET SPEND FROM EXISTING CUSTOMERS.LAUNCH NEW-IT ENABLED BUSINESSESINCREASE BARRIERS TO ENTRY OR SWITCHING COSTS

INCREASED MARKET SHARE.INCREASED BRAND-VALUE AND AWARENESSINCREASED MARKET-CAPITALIZATION

DRIVE PROFITABLE GROWTH IMPROVE NEW-PRODUCT DEVELOPMENT PROCESS TO INCREASE SPEED TO MARKET AND EFFECTIVENESS OF NEW PRODUCT LAUNCHES.IMPROVE CUSTOMER-FACING PROCESSES TO INCREASE CUSTOMER SATISFACTION, LOYALTY, LIFETIME VALUE, AND DEMAND.DEVELOP INFORMATION AND SUPPORT TO BUSINESS ANALYTIC.IMPROVE CUSTOMER SEGMENTATION AND PERSONALIZATIONENHANCE THE SPEED AND IMPROVE PERFORMANCE OF ACQUISITION INTEGRATION

INCREASE IT CONFRONTATION TO NET INCOME.INCREASE IT CONTRIBUTION TO REVENUES WHILE HOLDING CONSTANT OR DECREASING EXPENSES.SHIFT EXPENSES RATIO FROM FIXED TO VARIABLEADD NEW REVENUE STREAMS FROM CURRENT CUSTOMERS.

LEVERAGE INFRASTRUCTURE LEVERAGE SHARED SERVICES, CENTERS OF EXCELLENCE, OFFSHORING, AND OUTSOURCING, TO ENSURE DELIVERY OF A BEST-IN-CLASS LEAN, YET FLEXIBLE, INFRASTRUCTURE (INCLUDE DATA CENTERS; NETWORKS, PERSONAL COMPUTERS, AND DEVICES; AND SUPPORTING PROCESS SUCH AS ERP, HR, FINANCE, ETC.)CREATE IT DEVELOPMENT, DEPLOYMENT, AND OPERATING PROCESSES THAT DECREASE THE COST, TIME, AND EFFORT TO LAUNCH VALUE-CRETAING AND VALUE-SUSTAINING IT APPLICATIONSDEVELOP BEST-IN-CLASS SECURITY AND RISK MANAGEMENT SYATEMS

DECREASE TOTAL COST OF OWNERSHIP OF CURRENT INFRASTRUCTURE AND OPERATIONS. IMPROVE ASSET PRODUCTIVITY( $ OF SALES GENERATED BY EACH $ OF INFRASTRUCTURE ASSETS)DECREASE IT INFRASTRUCTURE AND OPERATIONS COSTS AS A PERCENT OF REVENUESDECREASE IT HEADCOUNT COSTS AS A PERCENT OF SALES

CREATE OPTIONS IDENTIFY OPPORTUNITIES TO DECREASE THE TIME AND COST OF PURSUING FUTURE VALUE-ENABLING, VALUE-CREATING, AND VALUE-SUSTAINING OPPORTUNITIES

> METRICS DEPEND ON THE TYPE OF OPTION.

58

COMPARING SECURITY OPTIONS WITH IT OPTIONS

IT OPTIONS

PROVIDES WITH THE RIGHT TOPURSUE VALUE-ADDED IT-ENABLED

BUSINESS OPPORTUNITIES ATA LOWER COST, MORE QUICKLY, AND WITH LESS INHERENT RISK THROUGHOUT THE USEFUL OF

TECHNOLOGY

THE CUMULATIVE VALUEFROM BUSINESS OPPORTU-NITIES THAT COULD POTEN-

TIALLY BE PURSUED

THE ABILITY TO PURSUE RISKIES OPPORTUNITIES WHERE THERE IS

A HIGHER POTENTIAL RETURN

THE LENGTHOF TIME FORCAPTURING VALUE

59

COMPARING THREE CASH-FLOW SCENARIOS COMPARING MEDCO A AND MEDCO B PATIENT

FOR MEDCO PATIENT MONITORING INVESTMENTS MONITORING INVETSMENTS

MEDCO B LEVERAGES INFRASTRUCTURE THE VALUE OF LEVERAGING IBFRASTRUCTURE

AND EXERCISES OPTIONS AND EXERCISING OPTIONS

TIME (YEARS)

0 1 2 3 4 5 6 7 8 9 10 11 12 13

0 1 2 3 4 5 6 7 8 9 10 11 12 13 0 1 2 3 4 5 6 7 8 9 10 11 12 13

0 1 2 3 4 5 6 7 8 9 10 11 12 13

TIME (YEARS)TIME (YEARS)

TIME (YEARS)

INV

ES

TC

RE

AT

E V

ALU

E

INV

ES

T

INV

ES

TIN

VE

ST

CR

EA

TE

VA

LUE

CR

EA

TE

VA

LUE

CR

EA

TE

VA

LUE

$600M

$25M

$25M

$25M

$600M

$ 0

$300M

$600M

$1.5B

$1.5B

$0

$300M

$0$0

$300M

$1.5B

$1.5B

$2B

$1.5B

60

DRIVING PROFITABLE GROWTH

IT-ENABLED REVENUE-GENERATING OPPORTUNITIES

LAUNCHED IT-ENABLED PRODUCT/SERVICE OR BUSINESS OFFERINGS

ENHANCED REVENUE-GENERATINGCAPABILITIES

EFFORTS TO IMPROVE CUSTOMER-FACING PROCESSES AND THE

PERFORMANCE OF EMPLOYEES , USES IT :

IT PROJECTS :SYSTEMS THAT PROVIDE TIMELY,

ACTIONABLE INFORMATION TO KNOW-LEDGE WORKERS AND EXECUTIVES

CUSTOMER RELATIONSHIP MGMT SYSTEMSTHAT INCREASE THE PRODUCTIVITY OF

SALES PEOPLE

REENGINERING OF PRODUCT S AND/ORBUSINESS DEVELOPMENT PROCESSESTHAT ENABLE EXECUTIVE TO IDENTIFY

BUSINESS BUILDING OPPORTUNITIES, SPEED TIME TO MARKET, AND EVOLVE PRODUCT/

MARKET CHANNEL POSITIONING.

VALUE CREATING IT APPLICATIONSTO DRIVE PROFITABLE GROWTH

REMOTE MONITORINGAPPLICATIONS

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ACHIEVING PROPRIETARY ADVANTAGE

CHANGE COMPETITIVEPOSITIONING

ACHIEVING THE NUMBER ONE OR NUMBER TWOPOSITION

IN AN ATTRACTIVWE INDUSTRYAND CAN SUSTAIN OVER TIME

SUCCESFULL ENTRY INTO A LARGE ANDGROWING

MARKET OR EXIT FROM ASHRINKING ONE

ATTRACTING LOYAL INVESTORSTHAT PAY PREMIUM OVER

OTHER PLAYERS IN A COY’SINDUSTRY OR EVEN ACROSS

INDUSTRIES

62

IBM’s DECADE OF TRANSFORMATION :“A CASE STUDY IN TURNAROUND LEADERSHIPAND DELIVERING IT-ENABLED BUSINESS VALUE”

1990 : IBM THE SECOND MOSTPROFITABLE COY IN THE

WORLD

1991- 1993 : IBM LOST A STAGGERING $ 16 BILLION

APRIL 1993 : LOU GERSTNERTOOK CHARGE

1995 : SOLID FINANCIALFOOTING

2003 : ONCE MORE BECOME THE INDUSTRY LEADER (IBM

GLOBAL SERVICE AND SERVERAND S/W BUSINESS )

IBM GENERATED $7,6 BILLIONIN PROFITS ON OVER $ 89

BILLION IN REVENUE

IT PLAYED AN IMPORTANTROLE

LEVERAGING INFRASTRUCTUREAND CREATING OPTIONS

HIRED JERRY YORK, A FORMERCHRYSLER CIO AND CHARGING :

GETTINGS COST UNDER CONTROL!

LAUNCHED :BENCHMARKING STUDY

THE RESULTS : THE EXPENSE TO REVENUE RATIO 42%

AND TO BE REDUCED BY 9% CUT COY’sEXPENSES AT LEAST $ 7 BILLION

CLEARED THE DUST : IBM INTERNAL ITINFRASTRUCTURE/MANY CUSTOMER’SWAS OUT-OF-DATE, INFLEXIBLE, AND

COSTLY TO MAINTAIN

THE RESULT : IBM’s INTERNAL IT ORGANIZATION HAD CONTRIBUTED OVER $ 2 BILLIONCOST OF OPS & RUNNING IT OPS. WAS CUT IN HALF (94-97)

REDUCING THE NUMBER OF DATA CENTER FROM 155 TO 3 REGIONAL MEGACENTERS FED BY 11 SERVER FARMS, AND A REDUCTION 60% IN

HEADCOUNT

IT LEADERSHIPO WAS CENTRALIZED128 CIO WAS REDUCED TO 1.

IBM’s INCOMPATIBLE N/W WERE CON-VERTED TO 1 COMMON PROTOCOL

INTERNET(TCP/IP) N/W

+

THE SD PROCESS WAS ALSO REENGINEERED AND IT APPLICATIONS THAT WERE

DEEMED TO BE “UNDERPERFORMINGASSETS” WERE RETIRED

WITHIN 2 -YEARS, THE NUMBER OF INTERNAL APPLICATIONS DECREASED

FROM 16,000 TO 5,200.

REENGINEERED BACK-OFFICE PROCESSES :GET COST OUT OF AS QUICKLY AS POSSIBLE “CLEAN-SHEET” THE PROCESS AND RE-DESIGN IT FOR GLOBAL USE

+

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LEVERAGING INFRASTRUCTURE AT IBM : IT OPERATIONS

IBM `SAMPLE PROJECTS AND VALUE DRIVERS SAMPLE FINANCIAL METRICS

•DECREASED DATA CENTERS FROM 155 TO 11, WHICH FEED INTO THREE “MEGACENTERS”• DEVELOPED A SINGLE GLOBAL INTERNET NETWORK TO REPLACE 31 INCOMPATIBLE NETWORKS, REDUCING NETWORK OPERATING COSTS BY OVER 50% WHILE DRAMATICALLY INCREASING NETWORK ACCESSIBILITY, FUNCTIONALITY, AND REACH.• SHIFTED TO “OPEN-SOURCE” COMMON STANDARDS FOR INFORMATION PROCESSING (LINUX) AND FROM PROPRIETARY TO INDUSTRY STANDARD ENTERPRISE APPLICATION(SAP, PEOPLESOFT, SIEBEL)• REDESIGNED SYSTEM DEVELOPMENT PROCESSES TO ENABLE MODULAR DESIGN AND REUSE• DECREASED NUMBER OF GLOBAL APPLICATIONS FROM 16,000 TO 5,200• 60% REDUCTION IN IT PROFESSIONAL HEADCOUNT; 128 CIOs TO 1

•50% REDUCTION IN TOTAL COST OF OWNERSHIP FOR DATA CENTER AND NETWORK OPERATIOONS AND INTERNAL ENTERPRISE APPLICATION DEVELOPMENT AND MAINTENANCE.•DIRECT COST SAVINGS IN INTERNAL IT EXPENSES OF OVER $2 BILLION PER YEAR BEGINNING IN 1997• IBM SPENT $ 100 MILLION BETWEEN 1994 AND 1996 TO REENGINEER ITS IT INFRASTRUCTURE PROCESSES; ROI ON THE INVESTMENT IN INFRASTRUCTURE WAS LESS THAN ONE YEAR.

LEVERAGING INFRASTRUCTURE : ENTERPRISE SUPPORT PROCESSES

• STREAMLINED, INTEGRATED, AND CENTRALIZED IT-ENABLED ENTERPRISE PROCESSES ( e.g. PROCUREMENT, ERP, HR, PAYROLL AND FINANCE)• SELECTIVELY OUTSOURCED ACTIVITIES AND PROCESSES WHERE IBM WAS NOT BEST-IN-CLASS (e.g. HR, PHYSICAL WAREHOUSE, INVENTORY MGMT, SELECTED LOGISTICS)• DECREASED THE NUMBER OF FINANCIAL CENTERS FROM 67 TO 8 AND FINANCIAL APPLICATIONS FROM 145 TO 55.•DECREASED THE CYCLE TIME FOR ACCOUNTING CLOSE FROM 187 TO 7 DAYS•eENABLED THEN DECREASED THE NUMBER OF SUPPLIERS TO 33,000, ELECTRONIC PURCHASES REACHED 95%.• CENTRALIZED AND INTEGRATED THE SUPPLY CHAIN AND OUTSOURCED TO IBM GLOBAL SERVICES; 19,000 EMPLOYEES MANAGED PROCUREMENT, INVENTORY, AND LOGISTICS FOR OVER $47 BILLION IN PARTS, EQUIPMENT AND SERVICES.•DECREASED MAVERICK BUYING FROM > 35,000 TO < 0,2%• SUPPLIER QUALITY INCREASED FROM <85% TO > 99%• PURCHASE ORDER PROCESSING TIME DECREASED FROM > 35 DAYS TO <1 DAY• ABILITY TO “SENSE AND RESPONSE” TO CUSTOMER DEMAND ENABLED IBM TO QUICKLY MEET UNEXPECTED RISE OR FALL IN DEMAND FOR PRODUCTS• SUPPLIER, EMPLOYEE, AND PARTNER SATISFACTION SCORES DOUBLED.• WINNER MIT PROCESS IMPROVEMENT AWARD AND PURCHASING MAGAZINE MEDAL OF EXCELLENCE

•$7 BILLIONS IN DIRECT SAVINGS + $2 BILLION IN COST AVOIDANCE PER YEAR FROM SUPPLY CHAIN IMPROVEMENTS.• CASH GENERATION INCREASED BY $8 BILLION FROM SUPPLY CHAIN COST SAVINGS.• HR, PAYROLL, FINANCE PROCESS COSTS REDUCED OVER 50%, REPRESENTING ALMOST $ 1 BILLION IN DIRECT COST SAVINGS PER YEAR.• PURCHASING EXPENSE/ REVENUE RATIO DECREASED FROM 3.2% TO 1.5%

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ACHIEVING PROPRIETARY ADVANTAGE

IBM SAMPLE PROJECTS AND VALUE DRIVERS

SAMPLE FINANCIAL METRICS

•BUILT IBM GLOBAL SERVICES INTO THE NUMBER 1 GLOBAL IT SERVICE PROVIDER.

• LAUNCHED UNIQUE BTO SERVICE OFFERING IN 2002 (e.g. P&G SIGNS A 4400 MILLION/MULTIYEAR CONTRACT; SPRINT SIGNS A MULTIBILLION/5-YEAR CONTRACT)

• LAUNCHED UNIQUE BUSINESS INNOVATION SERVICES OFFERING IN 2004 AND CLOSED SEVERAL HIGH PROFILE, MULTIMILLION DOLLAR CLIENT ENGAGEMENTS.

•BTO AND BUSINESS INNOVATION SERVICES PROVIDES PROPRIETARY ADVANTAGE AND STRATEGIC DIFFERENTIATIONS

•WORLDWIDE GLOBAL SERVICES MARKET ESTIMATE TO REACH $14 TRILLION IN 2010; BTO MARKET ESTIMATED TO EXCEED $ 100 BILLION IN 2006.

•MARKET SHARE : NUMBER 1 IN SERVICES AND SERVERS; NUMBER 2 IN SOFTWARE (BEHIND MICROSOFT)

• 2003 MARKET CAPITALIZATION = $159 BILLION(SECOND TO MICROSOFT); P/E RATIO = 4.42 (NUMBER 1 IN THE INDUSTRY)

65

NICHOLAS CARR REVISITED

FACTORY

SUPPORT TURNAROUND

STRATEGIC

CARR FAILS TO RECOGNIZE THAT IT CAN BE A MAJOR

DRIVER OF BUSINESS INSIGHT, INNOVATION, AND

PROPRIETARY ADVANTAGE

CARR’S ARGUMENT RECOG-IZES THE NEED FOR

FLAWLESS EXECUTIONAND RISK MGMT AS FIRMS

MOVE UP IN THE VERTICAL AXIS

IT I

MP

AC

T O

N B

US

INE

SS

OP

ER

AT

ION

S

IT IMPACT ON STRATEGYLOW

LOW

HIGH

HIGH

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TO FORECAST THE VALUE OF DIGITAL BUSINESS STRATEGIES AND THE ABILITY OF THEIR ORGANIZATIONS TO EXECUTE THEM,

WE SHOULD CONSIDER :

1. HOW WELL YOU UNDERSTAND THE LINKAGES AMONG YOUR STRATEGIES, THE CAPABILITIES AND INFRASTRUCTURE BUILT TO EXECUTE THOSE STRATEGIES, AND THE VALUE THAT CAN BE CRETAED FOR ALL STAKEHOLDERS?

2. IS YOUR BUSINESS INFRASTRUCTURES BEST-IN-CLASS? HOW CAN IT BE USED TO IMPROVE?

3. HOW WELL DO YOU UNDERSTAND THE KEY FACTORS THAT DRIVE BUSINESS PERFORMANCE?

4. CONDUCT AN AUDIT OF YOUR DIGITAL BUSINESS INFRASTRUCTURE.

5. CREATE A LIST OF IT-ENABLED BUSINESS STRATEGIES AND THE SOLUTIONS THAT COULD BE LEVERAGE AN OPEN STANDARD NETWORKED INFRASTRUCTURE.

6. IDENTIFY ONE OR MORE SIMPLE, YET POWERFUL, BIG-WINS WHERE IT COULD SIGNIFICANTLY IMPROVE BUSINESS PERFORMANCE.

7. DO YOU HAVE RESOURCES, EXPERTISE, AND SKILLS REQUIRED TO SUCCESSFULLY COMPLETE THESE PROJECTS

8. DO YOU HAVE THE POLITICAL SUPPORT REQUIRED TO ENSURE THAT THE PROJECT CAN BE COMPLETED QUICKLY AND EFFECTIVELY?

9. HAVE YOU CONSIDERED WAYS TO LIMIT THE SCOPE OF THE PROJECT?

10. HAS AN EFFECTIVE CHANGE CONTROL PROCESS BEEN IMPLEMENTED?

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BLUEPRINT FOR A “BIG-SMALL” BUSINESS

Sample Organizational

Components

Sample Technology

Components

Leading & Engaging

• Human Resource Management• Strategic Alliance• Customer Loyalty• Supplier Loyalty• Partnership

• HR Systems• Customer Relationship Management

(CRM)• Personalization• Communication Infrastructure• User Access Devices

Managing & Learning

• Planning & Budgeting• Performance Monitoring• Organization Structure and Reporting• Organization Decision Making and

Learning

• Management Reporting• Decision Support System & Tools• Business Intelligence System• Data and Knowledge Management

Operating & Innovating

• Operating Process• New Product Development• Business Venturing

• Enterprise Resource Planning• Supply Chain Management• Order Fulfillment• New Product Development• Distributed Information Processing

Infrastructure

Leading & Engaging

Managing & Learning

Operating & Innovating

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The Operating process of a firm include all the activities a firm and its suppliers and partners undertake to design, build, market, sell, and deliver products and service as well as serve and “care for” customers, suppliers, and business partners.

The key to success for companies operating in turbulent, rapidly changing environments is the ability to flexibly adapt these operating activities to address customer, market, competitive, regulatory, or environmental requirements or to adapt to business innovations or change in strategy.

There are three kinds of operation : - Hierarchical Operations - Entrepreneurial Operations - Networked Operations

Operating & Innovating Capabilities

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Hierarchical Operations

Entrepreneurial Operations Networked Operations

Rigid proceduresFunctionalStrategy and performance are set at the top and cascade down to all employeeAt lower level, detailed policies, procedures and job description

Do not depend on well defined policies and procedures or structured jobEntrepreneurial work is defined, coordinated and performed in real timeEmployees may be chosen on the basis of specific skills and experienceEmployees expected to play multiple, changing rolesUse their small size ready access to informationCapable for direct and continuous interactions to operate in real timeResponding quickly to customer needs, opportunities, and competitive threats

Must ensure precision and fast cycled innovationDesigned to fully exploit the power of both people and technologyTechnology can be used to ensure precision execution and coordination of routine tasksPeople use real-time information generated by technology-enabled transaction systems to deal with unforeseen problems and continuously improve operationsModular design with standardized interfaces between modulesInformation must be siphoned into flexible, powerful, and robust enterprise information management systems (data warehouses) Flexible, robust and fully networked digital operating infrastructures-combined with big-small company structures, processes, and incentives- is a key tool for the networked business capabilities

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OPERATING & INNOVATING CAPABILITIES

Hierarchy

Entrepreneurial

PrecisionExecution

Fast-Cycle

Innovation

Networked

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Capabilities Business Design Requirement

Precision Execution • Streamlined, integrated, and efficient operations seamlessly link activities performed inside the firm with those performed by customers, partners, and suppliers

• Cost, cycle time, and quality levels are benchmarks within the industry and exceed customer-stakeholder requirements

Fast-cycled innovation

• Flexible, modular design enable customization, personalization and continuous improvement.

• Change process are embedded within the company’s day-to-day operations• Employees are rewarded for devising new, innovative ways to serve

customers• Resources for change and widely accepted process used to develop and

present the “business case” and implementation plan for a potential idea

Customer and community connected

• Executives and employees in all parts of the organization have the information required to understand the lifetime value of customers, suppliers, and partners and have the ability and authority to make decision and take actions to improve satisfaction and loyalty

• Incentive systems reward success in attracting and retaining profitable customers, suppliers, and partners and in increasing the frequency and level of engagement.


PSA is an excellent example of a company that has exploited the power of digital technologies built in the midst1980s. By 2000 the company had launched a fully integrated and streamlined internet-based networked operating infrastructure that provided Port of Singapore is being the number one transshipment port in the world

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MANAGING AND LEARNINGThe management processes and structures of a firm include

all the activities that a firm and its business community undertake to :

• Plan strategy and how it will be executed

• Allocate resources

• Organize people into groups and coordinate work

• Monitor and measure performance

• Adjust strategies, plans, and budgets, and organizational based on learning

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MANAGING AND LEARNING

Traditional Management Process

Entrepreneurial Management Process

Networked Management Process

Planning, budgeting, and performance monitoring are often driven from the top of the firmPlanning and budgeting systems have formed the basis for routine performance monitoring and reporting systemsDaily monitoring and control of local operationsHierarchical control operations through detailed policies, procedures.Local on-site supervisors are placed in the hierarchy, and decision can be made on the spotEffective only in relatively stable business environments

Information and management decision making are timed to the rapidly changing business environmentPDAC management are informal and ad hocReal-time sharing of information and perspective and the ability to respond quickly on the basis what is being learned are fundamental to effective entrepreneurial managementThe organizations evolve divisionally from a team to a simple functional structure to a multi tiered hierarchyUnite the high level of control and integration achieved to hierarchical PMP measurement systems with the fast cycle “learning by doing” approach

Ensure efficiency and integration and learning by doing.IT enables providing access to a shared source of real-time information on market dynamics, operations, and performance monitoringInternet technologies which embedded within a company’s can operate smoothly and effectively a firm’s routine activitiesImprove access to information enables employees, customers, and partners to invent new ways of working and respond quicklyPeople must be organized and motivated to take what they learn and shared those insights with others

74

MANAGING & LEARNING CAPABILITIES

Hierarchy

Entrepreneurial

Efficiency &Integration

Learning

By doing

Networked

75


Control & Integration • Coordination and control of routine operations are embedded within the digital operating infrastructure

• Early-warning systems enable close monitoring and immediate response to threats and opportunities

• “Critical failure factors” have been identified, and “disaster recovery” procedures are in place

Learning by doing • Real-time information and interactive management systems-a mix of face-to-face decision making supplemented by high-bandwidth communication systems – enable large dispersed teams of people (not all of whom may work in the same company) to make informed decisions, take action, and receive immediate feedback..

• Key operating metrics are directly linked to financial and market results to provide real time feedback

• Shared, actionable goals provide direction and the framework within which decisions can be made and evaluated

Flexible and well managed boundaries

• Employees and partners have a clear understanding of the role they play and how to work with others to get things done. But these clearly defined roles must not limit people’s ability to work across boundaries-inside the firm and with suppliers, partners, and customers.

• In a networked organization, companies are highly skilled at forming and successfully managing strategic alliances and partnerships.

• If a company is growing by acquisition, companies must be highly skilled at identifying and effectively integrating the people, processes, and systems that unite acquired companies.

Managing & Learning Capabilities

76


Flexible and well managed boundaries

• Formal and informal communication systems support frequent two-way interactions inside and outside the firm

• Coordinating mechanisms (for example, advisory councils, governing boards, liaison roles, and information systems) enable effective coordination and control of activities that cross internal and external boundaries

Accessible knowledge assets

• The information needed to make decisions and take actions is relevant, timely, and readily available to those who need it. It is presented in a form that is immediately actionable

• People are information-literate and have the skills and incentives needed to turn information into action that is consistent with the best interests of the organization and its stakeholders.

• Information and best practices are openly shared.• Politics, bureaucracy, and poorly aligned incentives do not get in the way

of sharing and learning from information.• Process are in place to ensure that information is accurate and reliable

and that employees, partners, customers, and suppliers trust the information they receive.

• Privacy and confidentiality are safeguarded, and security procedures are strictly enforced

Managing & Learning Capabilities

77

LEADING & ENGAGING CAPABILITIES

Hierarchy

Entrepreneurial

Strategy Focus &Resource Allocation

Shared Culture &

Commitment

Networked

78

LEADERSHIP

Leadership is all about attracting and mobilizing the resources for change, both involve complementary advantage and involve :

Defining a clear, compelling vision and ensuring that it is translated into a set of actionable strategies and activities

Attracting, motivating, energizing, and retaining top talent inside an organization and within partner, supplier, and customer networks

Creates a culture and ensures that values, beliefs, and behaviors are deeply ingrained and reflected in the decisions made and actions taken.

Hierarchical Leadership

Risks were minimized by centralizing decision making, segregating activities, and structuring work rigidlyDeep hierarchical chains of command enabled direct monitoring and supervision of workSegmentation of work and authority, together with direct supervision, ensured that short of sabotage, no one had authority-or opportunity-to perform an action that would threaten the entire company.In large, established companies, employee self-interest and compliance replaced the commitment and engagement found in entrepreneurial firms, so that real time understanding of business and market dynamics and the ability to respond quickly to change were also lost.

79

LEADERSHIP

Entrepreneurial Leadership

Entrepreneurship is the ability to “create or seize an opportunity and pursue it regardless of the resources currently controlled”Entrepreneurial leadership requires to attract, motivate, and engage people, partners, and investors in the task of working together to create a new ventureEntrepreneurial leadership must be capable of energizing and inspiring others, and entrepreneurial cultures drive this engagement and motivation toward a common vision throughout organization and into dealings with customers, suppliers, and partners

Networked Leadership1

The free flow of information throughout the company enhances the ability of employees, customers, suppliers, and executives to share in defining both a clear and compelling vision for change and the necessary tactical initiatives required to achieve business goals.In Entrepreneurial organization, the close proximity and shared perspective among founders, employees, customers, and partners enables everyone to be involved in key decisions and actions and to monitor result closelyIn complex global organizations, it is more important to identify key strategic risks “critical failure factors”-and ensure that they have effective control systems in place

80


Visionary yet pragmatic leadership

• Credible leaders at all levels of the organization are able to articulate clear direction.

• Leadership is trusted and well respected and, as a result, is able to attract and retain high-quality partners and talented employees.

• “Visions” are translated into actionable strategies that can be executed and deliver results while the window of opportunity is still open.

• Leaders are able to set tangible goals and make focused decisions.• Executives are directly involved in the business; they ensure that barriers

are removed, resources are available, and employees have the skills and motivation to accomplish growth

Energized participation

• Culture and incentives foster innovation while ensuring a strong commitment to delivering results. This requires that large projects be broken into smaller, more focused deliverables and that senior management break down barriers and realign goals.

• Employees, customers, suppliers, and partners believe that managers and other leaders possess the knowledge, skills, and experience needed to run the business

• “Stretch targets” energize action and motivate everyone to achieve peak performance.

• Leaders display a strong commitment to career development and learning for all

Leading & Engaging Capabilities

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Skilled in conflict resolution, negotiation, and consensus

• Processes are in place to ensure that conflicting opinions are discussed openly without becoming destructive.

• Employees and partners are skilled at negotiating “win-win” agreements.

• Despite conflicting opinions, consensus decisions can be reached and implemented quickly

Ingrained values

• Shared values are widely communicated, routinely reevaluated, and evident in how everyone in the organization treats customers, suppliers, partners, and each other.

• The strategy of the firm and its organization design are consistent with its espoused mission and values.

• The organization considers the interests of-and fulfills its obligations to-all of its stakeholders, including customers, suppliers, partners, employees, and investors.

• The organization fulfills its obligations to society and contributes positively to the communities in which it operates.

• The company is consistently ranked as “highly admired” by industry, analysts, business and government leaders, and the general public.

Leading & Engaging Capabilities

82

FACTORS DETERMINING THE USES OF INFORMATION TECHNOLOGIES FOR COMMUNICATION

PARTICIPANTS

NATURE OF SOURCES AND DESTINATION

LOCATION

TIME

MEDIA

83

SCHEMATIC VIEW OF THE INFORMATION ARCHITECTURE

TPS MIS DSS AI EIS

FINANCE

ACCOUNTING

MANUFACTURING

MARKETING

HRM

SOFTWARE

HA

RD

WA

RE

DA

TA

NETWORKS

DATABASE

84

THE INORMATION ARCHITECTURE MODEL

Business Architecture

Data Architecture

Communication Architecture

Human Resource

Architecture

Computer

Architecture

UseComputing

Architecture Use

Computing

Architecture Operational

Managerial

Strategic

Decentralized

Centralized

85

General Types of Information Architecture Mainframe Environment PC environment Networked (distributed) environment

Client/Server and Enterprise wide Computing : Client/Server Architecture Enterprise wide Computing

Other Information Architecture EDI Legacy System

86

WEB-BASED SYSTEMS Internet Intranets Extranets

E-Commerce and Storefronts Corporate Portals

Electronic Market and Exchanges Mobile Commerce (M-Commerce)

Response Strategies : Cost leadership Differentiation

Focus

Additional Response Strategies : Growth Alliance

Innovation Improved Internal Efficiency

CRM

87

THE NETWORKED ORGANIZATION

Structure of Networked Organization

Formal

Highly structured

Manage

Control

Direct

Employees a cost

Information

Management owned

Hierarchical organizations

Risk avoidance

Individual contributions

Informal

Loosely structured

Delegate/lead

Ownership/participation

Empower

Employees an asset

Information

Shared ownership

Flatter/manageable

Organizations

Risk management

Team contributions

Classical/HierarchicalOrganization

Networked Organization

88

Linking Strategy to Execution to Results

Conceptdescribes theopportunity

and strategy

CapabilitiesDefined resources needed

To execute strategy

ValueMeasures the benefits

To investors andOther stakeholders

EBITDA Free Cash Flow Market Value

EBITDA Free Cash Flow Market Value

Revenue Drivers

Cost Drivers

Intangible AssetsEmployee LoyaltyCustomer LoyaltyPartner Loyalty

Brand and Image Tangible/Financial AssetsNet working Capital

Capital Expenditures (CAPEX)

Intangible AssetsInvestor Loyalty

PERFORMANCE DRIVERS FINANCIALRESULTS

MARKETRESULTS

89

ANALYZING PERFORMANCE DRIVERS

Business Concept

Opportunity Analysis•Market assessment•Product/service offerings and pricing*Competitive and industry dynamics*Plans for evolution and growth

Strategy

The Assumption used toforecast revenues

Capabilities

Capability Analysis •Resource requirements and availability•Organization and infrastructure•Competitive and industry dynamics•Plans for evolution and growth

The Assumption used toForecast costs

Capabilities

Operating and innovating Capabilities• Core process• Process that improves existing operations and launch new products, services and businesses• IT infrastructure

Managing and learning Capabilities• Process for plans, budgets, monitor performance• Organization design • Information knowledge management * IT infrastructure

Leading and engaging Capabilities• HRM systems• Alliance and partnership mgt. • CSRMS * IT infrastructure

Value

Value Analysis•Assessment of benefits

DriveFinancial

andMarket

performance

90

A Scenario-Based Approach to ValuationStep 1 : Define the purpose for the value assessment (e.g. seeking

funding, buying a company, investing in an established business).

Step 2 : Pick a point in the future when you expect your business strategy to deliver value (most venture capitalists choose three to five years, but you may wish to shorten the time frame).

Step 3 : Analyze the business concept and strategy and forecast market size, your share, and revenues. Identify yearly changes that reflect how your firm and the market would reach this future state. List key assumptions used in constructing revenue forecast. Talk with others and adjust assumptions.

Step 4 : Analyze the capabilities and resources required to reach the future state and forecast the cost of building those capabilities and those acquiring resources. Identify yearly costs and the resources that will be required by you and your partners, suppliers, and customers. List key assumptions used in constructing cost forecast. Talk with others and adjust.

91

A Scenario-Based Approach to ValuationStep 5 : Based on this analysis, construct estimates of financial performance

and market value that reflect the “most likely” assumptions. Clearly state the performance drivers that form the foundation for the assumptions in your model.

Step 6 : Factor in the uncertainty in your assumptions by developing several scenarios that represent upper and lower bounds on key variables in your forecast. Most plans include scenarios that reflect “the most realistic case”, “best case”, and “worst case”,. However, additional scenarios may be needed. Test the sensitivity of your forecasts based on changes in key assumptions.

Step 7 : When appropriate, validate your model by using alternative approaches such as discounted cash flow and comparable company analysis.

Step 8 : Discuss the value analysis scenario you have constructed with others and critique the findings and assumptions not just once but on a regular basis. Keep in mind that this analysis is based on highly uncertain business judgments. As a result, it is important to stay informed about what happening in the market and industry, your company, and your community. Use the analysis as a baseline and update it often based on what you learn as you execute strategy and conduct business. Finally, be sure to set up a dynamic and broad-based measurement systems that collect real-time metrics of company and industry performance

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DEVELOPING BUSINESS CASE FOR IT

Benefits from Investment in InfrastructureThe IT Business Value Scorecard

Categories of

Benefits

Goals and Infrastructure

Internal External

Type 1 : Benefits from Investments in a Networked IT Infrastructure

Functionality

and flexibility

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

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

Type 2 : Benefits from Doing Business on a Network IT Infrastructure

Commerce Improve internal operating efficiency and quality Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels

Content/ Knowledge

Improve the performance of knowledge workers and enhance organizational learning

Improve the performance of knowledge workers in customers, suppliers and partner organizations; add information value to existing products and services; create new information-based products and services

Community Attract and retain top talent; increase satisfaction, engagement, and loyalty; create a culture of involvement, motivation, trust, and shared purpose

Attract and retain high quality customers, suppliers, partners, and investors; increase external stakeholders satisfaction, engagement and loyalty

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Comparing The Three Eras of IT Evolution

Time Frame Mainframe Era

1950s to 1970s

Microcomputer Era

1980s to Early 1990s

Networked era

1990s to Present

Dominant technology Mainframe, stand-alone applications, databases

Stand-alone microcomputer and end-user tools

Client-server, Internet, browser, and hypertext

Organization metaphor “Data management”

Hierarchy

Centralized intelligence

“Information management”

Entrepreneurial organization

Decentralized intelligence

“Knowledge management” Networked business

community

Shared intelligence

Primary IT role Automate back-office activities

Provide information and tools to improve decision making

and knowledge worker performance

Transform organization and markets to create business

value

Typical users IT specialists IT-literate business analyst Everyone

Location of use Computer room Desktop Everywhere

Planning process Yearly budgeting Individual expense Business development and strategic planning

Justification Cost savings Increased decision quality and personal performance

Business value

Implementation Independent projects Ad hoc Strategic initiatives

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THE ROLES OF MANAGERS AND SUBORDINATES IN

THE DIFFERENT TYPES OF ORGANIZATIONS

Hierarchical Organization Flattened Organization Network Organization

Use authority bymanager

Area of freedomFor subordinates

Manager makeDecisionAnd announcesOr sells it

Manager presentsIdeas and Invites questions

Manager presentsTentativeDecision subjectTo change

Manager presentsProblem, getSuggestions,Makesdecision

Manager definesLimits, asksGroup to makedecision

Manager permitsSubordinates toFunction withinlimits definedBy superior

Manager allowsSituationalLeadership toOccur basedUpon whichNode of theNetworked is bestequipped toSolve problem

Empowerment using IT to employees, customers, suppliers, and business partners with knowledge

95

VIRTUAL ORGANIZATIONS

The major attributes of virtual organizations are : excellence, utilization, opportunism, lack of borders,trust, adaptability to change, and technology

Alliances with Sub-contractors

Customer Responseand Order - Fulfilment

Cluster

Alliance with aMajor Customer

Center of Competence inManufacturing

Alliance with a CompetitorWho Provides Services

That are Complementary

Alliance with Small Suppliers

Cross-Functional Team

EngineeringCompetencies Cluster

Alliance withFirm B (a Major Supplier)

Boundary of Firm A

96

SAMPLE REVENUE OPTION

COMMERCE REVENUE

REVENUE CATEGORYPRODUCT SALES

COMISSION, SERVICE, OR

TRANSACTION FEES

DESCRIPTIONSELL OR LICENSE PHYSICAL OR INFORMATION-BASED PRODUCTS

CHANGE A FEE FOR SERVICES PROVIDED,; CAN BE A SET FEE OR A PERCENT OF THE COST OF A PRODUCT OR SERVICE

CONTENT REVENUES

REVENUE CATEGORYSUBSCRIPTION FEES

REGISTRATION OR EVENT FEES

DESCRIPTIONCHANGE FOR RECEIPT OF UPDATED INFORMATION ON A PARTICULAR TOPIC OR A BROAD RANGE OF TOPICS FOR A SPECIFIED PERIOD OF TIME (e.g. ANNUAL)CHANGE A FEE FOR ATTENDANCE AT AN ONLINE EVENT, WORKSHOP, OR COURSE

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SAMPLE REVENUE OPTION

COMMUNITY REVENUES

REVENUE CATEGORYADVERTISING, SLOTTING, AFFILIATE, AND REFERALL FEES

MEMBERSHIP FEES

DESCRIPTIONCOLLECT A FEE FOR HOSTING A BANNER ADVERTISEMENT OR SPECIAL PROMOTION

COLLECT A FEE FOR AN EXCLUSIVE OR NON EXCLUSIVE PARTNERSHIP RELATIONSHIP

COLLECT A FEE EACH TIME A VISITOR CLICKS THROUGH FROM YOUR SITE TO ANOTHER COMPANY’S SITE

CHARGE A FEE TO BELONG TO A PRIVATE GROUP OR SERVICE

INFRASTRUCTURE REVENUES

REVENUE CATEGORYS/W AND H/W SALES

INSTALLATION AND INTEGRATION FEES

MAINTENANCE AND UPDATE FEES

HOSTING FEES

ACCESS FEES

DESCRIPTIONSELL OR LICENSE A TECHNOLOGY PRODUCT

CHARGE EITHER A SET OR VARIABLE FEE FOR SERVICES PROVIDED ; LARGE SCALE FIXED PRICE PROJECT S ARE OFTEN BROKEN INTO A SERIES OF DISCRETE PROJECTS WITH WELL-DEFINED TIME FRAMES AND EXPENSES INCURRED WHILE WORKING ON A PROJECT

CHARGE A FEE FOR S/W OR H/W MAINTENANCE AND UPDATES

CHARGE A FEE FOR HOSTING A S/W APPLICATION , WEB-SITE, DATA CENTER, OR NETWORK

CHARGE A FEE FOR PROVIDING ACCESS TO A NETWORK AND/OR TO AN INTERNET SERVICE.

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SAMPLE COST CATEGORIES

COST CATEGORY DESCRIPTION

PEOPLE AND PARTNERS

MARKETING AND SALES

BUSINESS DEVELOPMENT

MATERIALS AND SUPPLIES

SPECIALIZED EQUIPMENT

(ECLUDING IT)

RESEARCH AND DEVELOPMENT

PHYSICAL FACILITIES AND

INFRA STRUCTURE

INFORMATION TECHNOLOGY

(IT) INFRASTRUCTURE

COST TO ACQUIRE, DEVELOP, AND RETAIN SKILLS AND EXPERTISE NEEDED TO EXECUTE STRATEGY

COAT OF OFFLINE AND ONLINE ADVERTISING, MARKETING AND SALES

COST OF DESIGNING AND LAUNCHING NEW BUSINESESS, DEVELOPING ALLIANCES AND ACQUIRING PARTNERS, MERGERS, ACQUISITIONS, AND SPINOUTS.

COST OF PHYSICAL MATERIALS USED IN PRODUCTION OF PRODUCTS AND DELIVERY OF SERVICES; INCLUDES GENERAL PURPOSE AND SPECIALIZED SUPPLIES AND COMPONENTS

COST OF EQUIPMENT-ESPECIALLY CAPITAL EQUIPMENT-USED IN DESIGN, PRODUCTION, DELIVERY, AND DISTRIBUTION.

COST OF DESIGNING AND DEVELOPING PRODUCTS AND SERVICES; MAY OVERLAP WITH BUSINESS DEVELOPMENT AND, IN THE CASE OF NETWORK BUSINESS, WITH IT INFRASTRUCTURE COSTS.

COST OF CORPORATE AND REGIONAL H/Q, SALES OFFICES, FACTORIES, WAREHOUSES, DISTRIBUTION CENTERS, RETAIL STORES, SERVICE CENTERS, ETC.

COST OF COMPUTERS AND EQUIPMENT (e.g. PRINTERS, DATA STORAGE DEVICES)

COST TO OPERATE AND MAINTAIN DATA CENTERS

COST TO DESIGN, DEVELOP, IMPLEMENT, AND MAINMTAIN SOFTWARE

COST OF VOICE, DATA, AND VIDEO NETWORK EQUIPMENT (e.g. PHYSICAL CABLES, ROUTERS)

COST TO DESIGN, OPERATE, AND MAINTAIN NETWORKS

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SAMPLE ASSETS CATEGORIES

CURRENT ASSETS

ASSET CATEGORY DESCRIPTION

FINANCIAL ASSETS

MARKETABLE SECURITIES

ACCOUNTS RECEIVABLE

CASH AND CONVERTIBLE NOTES

INVESTMENTS MADE AS PART OF A CASH MANAGEMENT PROGRAM

TANGIBLE ASSETS

PROPERTY, PLANT, AND EQUIPMENT

INVENTORY

PHYSICAL FACILITIES

FIXED ASSETS REQUIRED TO PRODUCE GOODS AND SERVICES

ASSETS HELD FOR SALE

100


INVESTMENTS


SECURITIES

REAL ESTATE

STOCK HELD BY A FIRM TO ENABLE JOINT CONTROL OVER SHARED BUSINESS ACTIVITIES

STOCK HELD BY A FIRM IN ANTICIPATION OF A RETURN AT SOME TIME IN THE FUTURE

INVESTMENT IN PROPERTY IN ANTICIPATIONH OF A FUTURE RETURN

INTANGIBLE ASSETS


RELATIONSHIPS

STRENGTH OF ONLINE AND OFFLINE BRAND

BREADTH AND DEPTH RELATIONSHIPS WITH CUSTOMERS AND THE BUSINESS ACTIVITIES.

LOYALTY AND COMMITMENT OF CUSTOMERS AND CUSINESS COMMUNITY MEMBERS.

STRONGTH BRAND RECOGNITION AMONG BUSINESS AND CONSUMER COMMUNITIES(INCLUDES CORPORATE BRAND, BUSINESS UNIT BRANDS, PRODUCT BRANDS, AND GLOBAL BRAND)

ABILITY TO GENERATE STRONG PERSONAL IDENTIFICATION WITH BRAND.

REPUTATION AND IMAGE

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INTANGIBLE ASSETS


KNOWLEDGE AND EXPERTISE

AGILITY AND RESPONSIVENESS

INTELLECTUAL PROPERTY

GOODWILL

EXPERIENCE, SKILLS, AND INTELLECTUAL CAPABILITIES OF EMPLOYEES AND PARTNERS(ASSETS VALUE DEPENDS ON LOYALTY AND RETENTION).

TECHNICAL AND BUSINESS SKILLS AND EXPERIENCE.

UNDERSTANDING OF MARKET AND BUSINESS DYNAMICS.

SCOPE AND GRANULARITY OF STORED INFORMATION AND EXPERTISE.

FLEXIBILITY AND EASE OF ACCESSING, CUSTOMIZING, AND DISTRIBUTING INFORMATION.

INFORMATION LITERACY

ABILITY TO QUICKLY RECOGNIZE AND ACT ON NEW OPPORTUNITIES AND THREATS (“SENSE AND RESPONSE ON DEMAND”)

ABILITY TO ACCESS AND EFFICIENTLY UTILIZE RESOURCES REQUIRED BTO EXECUTE STRATEGY

ABILITY TO CAPTURE THE ATTENTION AND MOBILIZE THE COMMITMENTS OF CUSTOMERS AND MEMBERS OF THE BUSINESS COMMUNITY TO IMPLEMENT NEW STRATEGIES.

PATENTS, COPYRIGHTS, ETC., FOR WHICH AN OBJECTIVE MEASURE OF VALUE CAN BE ASSESSED.

VALUE OF AN ACQUIRED COMPANY OVER AND ABOVE CURRENT AND TANGIBLE ASSETS.

THE VALUE OF AN ACQUIRED COMPANY’S “FRANCHISE” – e.g. LOYALTY OF ITS CUSTOMERS.

THE EXPERTISE OF ITS EMPLOYEES – THAT CAN BE OBJECTIVELY MEASURED AT THE TIME OF A SALE OR CHANGE OF CONTROL

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FOCUSED DISTRIBUTOR BUSINESS MODEL

MODEL DIFFERENTIATORS

OWN SELL PRCE SET PHYSICAL

PHYSICAL ONLINE ONLINE PRODUCT

MODEL AND EXAMPLES INVENTORY SERVICE LIKELY REVENUES LIKELY COSTS

eRETAILLERS PRODUCT/SERVICE SALES ADVERTISING AND Landsend.com MARKETING; PHYSICAL Staples.com Yes Yes No Yes FACILITIES, INVENTORY AND

CUSTOMER SERVICE; R&D; IT INFRASTR.

eMarkets TRANSACTION FEES; ADVERTISING AND

GHX No Yes No No SERVICE FEES, COM MARKETING; R&D; IT INFRA

MISSIONS STRUCTURE

Eagregators REFERRAL FEES; ADVERTISING AND MARKET-

InsWeb.com No No No Possibly ADVERTISING AND ING; R&D; IT INFRASTRUC-

MARKETING FEES TURE

Infoemediary SUBSCRIPTION FEES; ADVERTISING AND MARKET-

Internet Securities No Yes Yes No ADVERTISING FEES ING; R&D; IT INFRASTRUC-

TURE; CONTENT ACQUISI-

TION.

EXCHANGE ADVERTISING AND MARKET-

eBay.com Possibly Possibly Yes Possibly DEPENDS ON MODEL ING; STAFF SUPPORT FOR

AUCTIONS(ESPECIALLY

B2B); INVENTORY AND

LOGISTICS IF INVENTORY

CONTROL; R&D; TECHNIC-

AL INFRASTRUCTURE

FOCUSED DISTRIBUTOR BUSINESS MODEL TRENDS :•FOCUSED DISTRIBUTORS THAT DO NOT ALLOW CUSTOMERS AND THE BUSINESS COMMUNITY TO TRANSACT BUSINESS ONLINE HAVE LOST POWER.•AGGREGATORS HAVE EVOLVED TO eMARKETS AND/OR VERTICAL PORTALS.•MULTIPLE BUSINESS MODELS INCREASE FLEXIBILITY AND SUSTAINABILITY.•FOCUSED DISTRIBUTORS ARE ALLIGNING CLOSELY WITH VERTICAL AND HORIZONTAL PORTALS OR ARE EVOLVING THEIR MODEL TO BECOME VERTI-

CAL PORTALS

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PORTAL BUSINESSS MODELS


GATEWAY DEEP CONTENT AFFINITY

MODEL AND EXAMPLES ACCESS AND SOLUTIONS GROUP FOCUS LIKELY REVENUES LIKELY COSTS

HORIIZONTAL PORTALS THROUGH ADVERTISING, AFFILIATION ADVERTISING, MARKETING,

Google PARTNERSHIPS WITH POSSIBLY; OFTEN AND SLOTTING FEES; AND SALES; CONTENT/

(www.google.com) YES VERTICAL AND THROUGH POSSIBLY SUBSCRIPTION INFO ASSET MGMT;

Yahoo! AFFINITY PORTALS PARTNERSHIPS OR ACCESS FEES R&D; IT INFRASTRUCTURE

(www.yahoo.com)

VERTICAL PORTALS TRANSACTION FEES; ADVERTISING, MARKETING

WebMD.com COMMISSIONS; AND SALES; CONTENT/INFO

ADVERTISING, AFFILIA- ASSET MGMT; R&D; IT

SMALL BUSINESS LIMITED YES NO TION AND SLOTTING INFRASTRUCTURE; ADMINISTRATION FEES. LEGACY SYSTEM INTEGRA-

(SBA. Gov) TION TO SUPPORT TRANS-

ACTIONS

AFFINITY PORTALS REFERRAL FEES; ADVERTISING, MARKETING.

Women’s Financial POSSIBLY FOCUSED ON YES ADVERTISING, AFFI- AND SALES; CONTENT/

Network (WFN.com) AFFINITY GROUP LIATION AND SLOT- INFO ASSET MGMT; R&D;

TING FEES; TRANS- IT INFRASTRUCTURE

ACTION FEES

PORTAL BUSINESS MODEL TRENDS :•HORIZONTAL AND VERTICAL PORTALS ARE EMERGING AS GATEWAYS TO A WIDE VARIETY OF CONTENT AND SERVICES ON THE GLOBAL PUBLIC INTER-

NET AND ON COMPANY OR EXTENDED ENTERPRISE INTRANETS.•HORIZONTAL PORTALS ARE JOINING FORCES WITH HORIZONTAL INFRASTRUCTURE PORTALS TO PROVIDE, NOT JUS ACCESS TO CONTENT AND SERVICES,

BUT ALSO ACCESS TO NETWORK AND HOSTING SERVICES•LARGE MEDIA AND ENTERTAINMENT PORTALS THAT REPRESENT CONVERGENCE OF DATA, TELEPHONE, TV, AND RADIO NETWORKS ARE EMERGING

IN THE CONSUMER SPACE. THESE PORTALS UNITE DEVELOPMENT, PACKAGING, AND DISTRIBUTION COMPONENTS OF THE VAKUE CHAIN.

* B2B PORTALS PROVIDE BOTH HORIZONTAL ACCESS TO BUSINESS NETWORKS AND VERTICAL INDUSTRYWIDE SOLUTIONS.

http://www.google.com/

http://www.yahoo.com/

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PRODUCER BUSINESS MODELS

MODEL DIFFERENTIATORSSELL

SELL PHYSICAL INFORMATION-

PRODUCT/BASED BASED PRODUCT CUSTOMIZATION LIKELY REVENUES LIKELY COST

MODEL AND EXAMPLES SERVICE SERVICE

MANUFACTURERS PRODUCT SALES; ADVERTISING, MARKETING,

Ford Motor Co. YES POSSIBLY LOW TO SERVICE FEES AND SALES; CONTENT/INFO

Procter & Gamble MODERATE ASSET MGMT; R&D;

IT INFRASTRUCTURE

SERVICE PROVIDERS COMMISSION, ADVERTISING, MARKETING Singapore Airlines SERVICE, OR AND SALES;CONTENT/INFO

(www.singaporeair.com) YES POSSIBLY MODERATE TO TRANSACTION FEES ASSET MGMT; R&D; IT -

Avis(www.avis.com) HIGH INFRASTRUCTURE

EDUCATORS REGISTRATION OR CONTENT/INFO ASSET

University of Phoenix POSSIBLY POSSIBLY MODERATE TO EVENT FEE; SUB- MGMT; R&D; IT – INFRA

(www.phoenix.edu) HIGH SCRIPTION FEE; STRUCTURE

HOSTING FEE

ADVISOR SERVICE FEE; RE- CONTENT/INFO ASSET

Booz Allen GISTRATION FEE MGMT; IT INFRASTRUC-

(www.boozallen.com) YES YES MODERATE TO EVENT FEE, MEM- TURE.

Accenture HIGH BERSHIP FEE; COM-

MISION, TRANSACTION

AND SUBSCRIPTION FEE

INFORMATION AND MODERATE TO SUBSCRIPTION FEE; CONTENT/INFO ASSET

NEWS SERVICES HIGH COMMISSION, TRANS- MGMT; ADVERTISING;

Dow Jones YES YES ACTION, OR SERVICE MARKETING, AND SALES

(www.dowjones.com) FEE IT INFRASTRUCTURE

Euromoney

(www.euromoney.com)

PRODUCER PORTAL TRANSACTION OR CONTENT/INFO ASSET;

Citigroup POSSIBLY YES HIGH SERVICE FEE; SUB- IT INFRASTRUCTURE AND

(www.citi.com) SCRIPTION OR MEM- R&D; S/W DEV.; LOGISTICS

MBERSHIP FEE; CON-

SULTING AND INTEGRATION, HOSTING FEE.

http://www.singaporeair.com/

http://www.avis.com/

http://www.phoenix.edu/

http://www.boozallen.com/

http://www.dowjones.com/

http://www.euromoney.com/

http://www.citi.com/

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INFRASTRUCTURE DISTRIBUTOR BUSINESS MODELSMODEL DIFFERENTIATORS

CONTROL PHYSICALINVENTORY SELL ONLINE PRICE SET PRODUCT OR

MODEL AND EXAMPLES ONLINE SERVICE LIKELY REVENUES LIKELY COST

INFRASTRUCTURE PRODUCT SALES; ADVERTISING, MARKETING,

RETAILERS YES YES NOT YES SERVICE FEES PHYSICAL FACILITIES; IN-Dell(www.dell.com) USUALLY VENTORY, AND

CUSTOMER SERVICE, Oracle(www.oracle.com) R&D; IT INFRA-Microsoft(www.microsoft.com) STRUCTURE

VALUE-ADDED USUALLY YES NOT USUALLY YES TRANSACTION FEES; ADVERTISING, ANDRESELLER BUT MAY BE SERVICE FEES; COM- MARKETING (VARS) & DISTRIBUTORS CUSTOMIZED MISSION; CHANNEL R&D; IT

ASSEMBLY FEE. INFRASTRUCTURETech Data(www.techdata.com)Ingram Micro (www.ingramicro.com)

INFRASTRUCTURE NO NO NO POSSIBLY REFFERAL FESS; ADVERTISING AND AGGREGATORS ADMINISTRATION MARKETING; R&D; IT CNET(www.cnet.com) AND MARKETING INFRASTRUCTURE

FEES FEES.

INFRASTRUCTURE ADVERTISINGAND EXCHANGE MARKETING; STAFFConverge Global SUPPORT FOR AUCTIONTrading Exchange POSSIBLY POSSIBLY YES YES DEPENDS ON (ESPECIALLY B2B); (www.converge.com) MODEL INVENTORY AND

LOGISTICS IF INVENTO-RY CONTROL; R&D; TECHNICAL INFRA-STRUCTURE

INFRASTRUCTURE DISTRIBUTOR BUSINESS MODEL TREND :•THE SPEED OF OBSOLENCE OF THE TECHNOLOGY, COUPLED WITH THE COMPLEXITY OF CUSTOMER SOLUTIONS AND THE SLIM MARGINS FOR TECHNOLOGY PRODUCTS/ COMPONENTS, HAS FORCE MASSIVE CONSDOLIDATION IN NETWORK AND COMPUTING TECHNOLOGY CHANNELS. FOR MANY SEVICE REVENUES ARE DRIVING PROFITABI- LITY•THOSE DISTRIBUTORS THAT OWNERSHIP OF INVENTORY ARE SEARCHING FOR INVENTORY-LESS, JUST-IN-TIME BUSINESS MODEL•DISTRIBUTORS THAT HAVE THE CAPABILITY FOR CUSTOM CONFIGURATION OF PRODUCTS AND SERVICE ARE GAINING POWER

http://www.dell.com/

http://www.oracle.com/

http://www.microsoft.com/

http://www.techdata.com/

http://www.ingramicro.com/

http://www.cnet.com/

http://www.converge.com/

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INFRASTRUCTURE PORTAL BUSINESS MODELS


INTERNET/NETWORK HOSTED APPLICATIONSACCESS AND HOSTING AND SOLUTIONS

MODEL AND EXAMPLES LIKELY REVENUES LIKELY COST

HORIZONTAL THROUGH PARTNERSHIP ACCESS FEES; COM- R&D; IT INFRASTRUCTU-INFRASTRUCTURE WITH NONINFRASTRUCTURE MISION; SERVICE, RE, ADVERTISING PORTALS AND ASPs OR TRANSACTION MARKETING, AND SALESAOL.com YES FEES; HOSTING FEES

DISTRIBUTION FEES British Telecom (www.bt.com)IBM Global Solutions (www.ibm.com)

VERTICAL INFRA- OFTEN THROUGH LICENSING FEES; ADVERTISING, MARKET-STRUCTURE PORTALS PARTNERSHIPS SERVICE AND TRANS- ING AND SALES;Salesforce.com WITH HORIZONTAL YES ACTION FEES; MAINTE- MGMT; R&D; IT INFRA-Oracle on Demand INFRASTRUCTURE NANCE AND UPDATE STRUCTURE(www.oracle.com)) PORTALS FEES; HOSTING FEESIBM TransformationOutsourcing(www.ibm.com))

Infrastructure Portal Business Model trends :•Horizontal Infrastructure portals (ISPs, Network Service Providers, and Web hosting providers), are merging or partnering with horizontal content portals to increase value created through intangible assets such as information, community, and brand.•Horizontal content portals such as AOL are vertically integrating with horizontal infrastructure providers, such as Time Warner Cable (Note: Prior to the AOL Time Warner merger, AOL was both a horizontal portal and a horizontal infrastructure portal)•Convergence of voice, data and video channels and global acceptance of a common set of standards is leading to global industry convergence at the content and infrastructure levels•Aggressive pursuit of a growing market for hosted application services is leading to confusion as players within ASPs (e.g. Oracle, Siebel, SAP) provide online access to internet enabled versions of their brand-name software; distributor-ASPs (e.g. US internetworking and Jamcracker) offer application hosting of many software brands

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INFRASTRUCTURE PRODUCER BUSINESSS MODELS


MANUFACRURE DEVELOP SERVICE/MODEL AND EXAMPLES EQUIPMENT SOFTWARE CONSULTING LIKELY REVENUES LIKELY COSTS

EQUIPMENT/ COMPO- YES POSSIBLY POSSIBLY PRODUCT LICENSE OR R&D; ADVERTISING, MARKETNENT MANUFACTURES SALES; INSTALLATION ING AND SALES; PRODUCT-IBM AND INTEGRATION FEES, ION; PHYSICAL FACILITIES,SONY MAINTENANCE, UPDATE AND INFRASTRUCTURE;GISCO AND SERVICE FEES SPECIALIZED EQUIPMENT,INTEL MATERIALS AND SUPPLIES,

IT INFRASTRUCTURE.

SOFTWARE FIRMS PRODUCT LICENSE OR R&D; ADVERTISING, MARKETSAP ) SALES; INSTALLATION ING AND SALES, PRODUCT-Siebel RARELY YES POSSIBLY AND INTEGRATION FEES ION; PHYSICAL FACILITIES,Oracle MAINTENANCE, UPDATE AND INFRASTRUCTURE; Microsoft AND SERVICE FEES. SPECIALIZED EQUIPMENT,

MATERIALS,AND SUPPLIESIT INFRASTRUCTURE

CUSTOM SOFTWARE COMMISSION ; SERVICE ACCESS TO SPECIALIZEDAND INTEGRATION POSSIBLY POSSIBLY YES OR TRANSACTION FEES. TALENT; PROFFESIONALSERVICE PROVIDERS DEVELOPMENT ANDAccenture TRAINING; TRAVELIngram Micro INFRASTRUCTURE RARELY POSSIBLY YES COMMISSION, SERVICE CONTENT/INFO ASSETSERVICES OR TRANSACTION FEE MGMT; R&D; IT INFRASTRUC

HOSTING FEE TURE.

INFRASTRUCTURE PRODUCER BUSINESS MODEL TRENDS :•MANY HARWARE AND SOFTWARE PRODUCERS WERE EARLY ADOPTERS OF ON-LINE COMMERCE, SELLING DIRECTLY TO INTERNET-SAVVY CUSTOMERS AND THROUGH ONLINE DISTRIBUTORS. FOR EXAMPLE, IN 1999, OVER 80% OF Cisco’s SALES WERE THROUGH ONLINE CHANNELS – MOST OF WHICH WAS THROUGH ONLINE DISTRIBUTION PARTNERS

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CREATE OPTIONS

IBM SAMPLE PROJECTS AND VALUE DRIVERS SAMPLE FINANCIAL METRICS

•TRANFERRED INTERNAL IBM SHARED SERVICES AND CENTRALIZED PROCESS REENGINEERING INFRASTRUCTURE AND EXPERTISE TO IBM GLOBAL SERVICES WHERE ITY BECOME THE BASIS FOR NEW SERVICE OFFERINGS, INCLUDING BUSINESS TRANSFORMATION OUTSOURCING.• LEVERAGED END-TO-END IT – ENABLED PROCESSES TO DELIVER REAL-TIME, ACTIONABLE INFORMATION TO INTERNAL IBM DECISION MAKERS AND TO CUSTOMERS, SUPPLIERS, AND BUSINESS PARTNERS.• ENABLED CONTINUOUS IMPROVEMENT AND ORGANIZATIONAL LEARNING

•SEE METRICS ASSOCIATED WITH PROFITABLE ROWTH AND PROPRIETARY ADVANTAGE

DRIVING PROFITABLE GROWTH AT IBM : REVENUE GENERATING CAPABILITIES

• BENCHMARKED NEW PRODUCT DEVELOPMENT PROCESS AND FOUND SLOW TIME TO MARKET (85% OF PROJECTS AT LEAST 1.25 X LONGER THAN BEST-IN-CLASS) AND DEVELOPMENT EXPENSE RATIO THAT WAS OVER 2X HIGHER THAN BEST-IN-CLASS.• REDESIGNED H/W AND S/W RESEARCH AND NEW PRODUCT DEVELOPMENT PROCESSES TO REDUCE TIME TO MARKET AND LOWER DEVELOPMENT COSTS

•ABANDONED PROJECT EXPENSE DECREASED BY OVER 90%.• WARRANTLY EXPENSE TO REVENUE DECREASED BY 25%.• NEW PRODUCT DEVELOPMENT CYCLE TIME: 67% FASTER TIME TO MARKET• DECREASED PRODUCT DEVELOPMENT EXPENSE RATIO BY 50%, GENERATING COST SAVINGS OF OVER 41.6 BILLION ANNUALLY

109

CREATE OPTIONSDRIVE PROFITABLE GROWTH : ACTIONABLE INFORMATION AND BUSINESS ANALYTICS

•DEVELOPED KNOWLEDGE MGMT, CONTENT, COLLABORATION, AND WEB PORTAL INFRASTRUCTURE AND TOOLS TO ENABLE KNOWLEDGE WORKERS TO DEVELOP PERSONALIZED KNOWLEDGE SHARING AND BUSINESS ANALYTICS• IBM GLOBAL SERVICES DEVELOPED A WEB-BASED KNOELEDGE SHARING PORTAL TO LEVERAGE ITS CONSULTANTS’ EXPERTISE DURING PERIOD OF RAPID GROWTH.• PARTNERED WITH SIEBEL TO REENGINEERED CUSTOMER RELATIONSHIP MANAGEMENT (CRM) PROCESSES AND LINK TO INTRANET PORTALS.• 68% OF EMPLOYEES RANK THE INTRANET AS PREFERRED CHANNEL FOR DOING BUSINESS

• CONSULTANT INTRANET LED TO DECREASED CONSULTING ENGAGEMENT TIME BY 40-80%, INCREASED REVENUES PER CONSULTANT BY 20%, AND IMPROVED CONSULTING MARGINS BY 400%.• e LEARNING SAVES $350 MILLION PER YEAR ON EMPLOYEE EDUCATION (12% YOY SAVINGS)• INTERNAL INTRANET, CONTENT MGMT, AND COLLABORATION TOOLS BECOME PRODUCTS AND GENERATE DOUBLE-DIGIT REVENUE GROWTH IN 2003

DRIVE PROFITABLE GROWTH : IT-ENABLED PRODUCT/SERVICE OFFERINGS

• LEVERAGED SHARED SERVICES INFRASTRUCTURE AND EXPERTISE TO DELIVER SERVICES TO INTERNAL IBM CUSTOMERS AND TO OFFER SIGNIFICANT ENHANCEMENTS TO ITS DATA CENTER OUTSOURCING BUSINESS• LAUNCHED NEW OFFERINGS RELATED TO BUSINESS TRANSFORMATION OUTSOURCING, E-BUSINESS, AND WEB SERVICES.•LEVERAGED PARNERSHIPS WITH BEST-IN-CLASS S/W AND SERVICES FIRM (E.G. FIDELITY IN PENSION FUND ADMINISTRATION, ADP IN HR, SAP IN ERP, AND SIEBEL IN CRM) TO LAUNCH BUSINESS TRANSFORMATION OUTSOURCING(BTO) SERVICES BUSINESS.•BY 2003, 22 OF 25 NEW BUSINESS OFFERINGS HAD TRANSITIONBED FROMNEW VENTURES TO HIGH-GROWTH BUSINESSES.

• IBM GLOBAL SERVICES REVENUES EXCEEDED $46 BILLION IN 2004, UP FROM $ 15 BILLION IN 1992 AND $36 BILLION IN 2002.•LINUX – BASED (OPEN STANDARD) SERVER MARKET REVENUES GREW AT 35% PER YEAR.•SERVER REVENUES GREW AT 32% AND CONTRIBUTION MARGIN INCREASED TO 31%.•SOFTWARE REVENUE INCREASED TO $14.2 BILLION IN 2003, UP FROM $11.1 BILLION IN 1992•FOUR NEW PRODUCT OFFERINGS GEBERATED OVER $1 BILLION IN REVENUES ANNUALLY AND THREE ADDITIONAL NEW BUSINESSES DOUBLED THEIR REVENUES.•IN TOTAL, IBM REVENUES GREW FROM $64 BILION IN 2002 TO OVER $96 BILLION IN 2004• PROFITS INCREASE FROM $3 BILLION IN 2002 TO OVER $8 BILLION IN 2004.

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Analyzing Business Models

Analyzing The Business Concept

Categories of Analysis and Best Practices Sample Measures

Market opportunity•Large and growing market•High level of demand and market readiness•Opportunity is large enough to enable evolution of the business model and generation of multiple revenue streams•Window of opportunity is long enough to support time required for development and growth of business but short enough to build barriers to entry

Size of markets served to day and in the future (number of customers, unit sold, revenues, etc.)

Anticipated rate of market growth by product category and customer segment

Total size and length of the “window of opportunity”

Current and forecasted market share and “share of wallet” (total spending across categories)

Current revenue (and revenue projections) by product category and customer segment

Committed revenue for future business

Product/service offerings•Solves a very real problem for a large customer base•Compelling benefits for all members of the community•Short, straight forward purchase decision and ease of adoption•Personalized products and services•Product/service offerings satisfy an unmet need

Subjective and objective benefits for channel customers and end consumers

Importance of product/service features to the buyer and the user (if different from the buyer)

Differentiation from alternatives

Price position vis-à-vis alternatives

Price premium related tom product/service features and attributes

Adoption cycle time and decision-making process

111

Analyzing Business Models

Analyzing The Business Concept

Categories of Analysis and Best Practices Sample Measures

Competitive dynamics and strategy•Opportunity to be number one or number two in a structurally attractive industry•No one player or group of players exerts significant influence and power•Defensible position vis-à-vis competitors and substitutes•Ease of entry, but barriers can then be erected

Key competitor and substitutes to day and in the future

Number, concentration, and power of competitors

Amount of excess versus scarce capacity today and in the future

Basis for competition and differentiation

Propensity to collaborate and compete

Entry and exit barriers today and in the future

Business context and risk•Favorable business context•Manageable risk

Nature and magnitude of risks and strategies for managing them

Presence or absence of “fatal flaws” in the business model

Strategic options•Leader in leveraging business infrastructure to expand the customer base and increase revenues from existing customers•Leader in increasing the range of products and services offered and in decreasing the cost and time of launching new products and services•Leader in ability to modularize business initiatives, projects, and investment•Leader in the ability to decrease the cost and time required to stop a project or exit a business that does not meet profitability expectations and return hurdles

Profile of business initiatives, project, activities, and investments

Revenue growth from new and existing customer base

Number of new products, services, and businesses introduced versus industry average

Cost and time to develop and launch new products and services and to enter new business or geographic markets vs industry average

1 SESSION – IV BUILDING NETWORKED BUSINESS. 2 THE NEED FOR NEW CAPABILITIES Hierarchy Organization...

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