Module 1: Strategic Imperatives

Cisco Press

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Now, organizations are focusing on what they do best and allowing other organizations to complete secondary tasks. For example, a car manufacturer designs and assembles cars, tasks that it is typically good at performing. Parts and partially assembled items are sourced from specialized manufacturers, tasks that the car manufacturer is typically not the best at conducting. This allows the car manufacturer to reduce costs, improve efficiencies, and increase quality. By integrating the information systems of the supplier and contract manufacturer with the information systems and processes of the car manufacturer, a virtual organization is created. This virtual organization acts as a single company that ultimately increases the value, efficiency, and overall financial performance of the car manufacturer.

The Internet and the positive experience it creates for customers have increased customer expectations. Customers know that they can receive excellent service and purchase high-quality products at competitive prices online. Exceptional service, high quality, and competitive pricing have become the baselines that consumers use to judge a firm.

Looking at the travel industry, for instance, customers who have traditionally called an airline agent to book a ticket might now go online to research schedule and fares and buy their own airline tickets. They can make these arrangements whenever they want, from wherever they want, without spending any time on the telephone with an agent. Bookings are almost instantaneous, and the power that the customers have to select their preferences is great. Customers can select the dates and times they want to travel, in addition to choosing their preferred airline, their seat number, and whether they want a paper ticket or e-ticket.

The speed of commerce has increased. Customers are more knowledgeable of products and comparable, competitive products. Product life-cycles are becoming shorter as manufacturers collaborate with other suppliers to shorten development cycles and combine offers to create new products and services that can increase competitive advantage. Businesses have to address emerging market opportunities more quickly. This compressed value-add cycle is forcing these organizations to partner effectively and to manage their business processes more efficiently.

Addressing the Global Trends

The Internet and IT are driving profound changes in the global economy. The rate of change can make it hard for businesses to keep up. Fortunately, the same technologies that promote change also allow businesses to master that change. Organizations are using IT to address the global business trends. Specifically, they are using IT to for two purposes:

  • To integrate disparate internal processes

  • To increase collaboration with suppliers, customers, and partners

This section examines both of these points.

IT can help integrate processes by linking disparate systems. Using networked applications allows companies to do the following:

  • Increase the efficiency of their business processes

  • Reinvent business models

  • Reconstruct value chains, which are the sequence of activities that produce a value, or a particular good or service

Operational efficiency has become critical in some industries where competition is intense. Through the use of the Internet, organizations can reduce costs by putting information online for these purposes:

  • To automate processes

  • To connect people

  • To remove administrative costs

  • To grow profits

  • To increase margins

An organization can integrate its core business processes with suppliers, customers, and partners by using new technologies to increase collaboration. This reduces cycle times and controls costs, so the organizations can remain competitive and viable in the global economy.

IT also allows businesses to cope through the promotion of collaboration. By tying together an organization with its suppliers, customers, and partners, costs are reduced, cycle times improved, and customer satisfaction increased.

Conclusion

Using the Internet and IT to enhance collaboration even moderately can bring benefits to the organization. For example, a recent study indicated that even moderate levels of external integration, such as allowing customers, suppliers, and partners to view the information for an organization online, cut costs by an average of 14 percent (NerveWire 2002, 14). As Figure 1-2 illustrates, as the level of integration increases, benefits increase. Such benefits allow the organization to remain competitive in a global environment.

Figure 1-2

Benefits of Increasing Levels of External Integration

There has been massive growth and adoption of the Internet by the public and private sector worldwide in just one short decade. In this section, you learned how the Internet could do the following:

  • Drive productivity and competitiveness

  • Affect business in the public and private sectors

  • Influence current global business trends

  • Help organizations respond effectively to new trends

You should now have some ideas about how the Internet and IT will affect your organization and how you might compete more effectively in the global economy.

Exercise

In the following space, list some of the ways that the Internet is likely to impact your business. List the ways in which your business can utilize the Internet to improve your operations.

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IT and Its Effect on the Organization

In the previous section, you were introduced to the Internet and some of the ways in which it is impacting the global business environment. You also learned how an organization can utilize the Internet to become more efficient and profitable. This section examines the ways in which IT impacts the organization. You will see how IT can boost productivity, increase efficiency, develop innovation, improve customer satisfaction, and enhance quality.

In this section, you will learn about the positive financial impact that IT can have on an organization, specifically in the following areas within the organization:

  • Productivity

  • Efficiency

  • Innovation

  • Customer satisfaction

  • Quality

IT and the Organization

As noted in the Introduction, the Internet is emerging from under the dark cloud that was the dot-com bubble burst of the first years of this century. It is becoming apparent that business is no longer separate from IT. In fact, it is fundamentally enabled by IT. As a consequence, IT must be pursued in a way that improves the essential business functions that produce revenue. IT can do this in numerous ways.

The use of Internet-enabled applications allows companies to increase the efficiency of their business processes, reinvent business models, and reconstruct value chains. Organizations are using the Internet for several purposes:

  • Put information online

  • Automate processes

  • Connect people

  • Reduce administrative costs

  • Grow profits

  • Increase gross margins

The Internet also enables the centralized knowledge and core functions within organizations to be distributed, shared, and adapted by anyone in the organization. This allows organizations to provide better customer service, address new market opportunities, quickly adapt to changing conditions, and form virtual teams to create new value. From this networked intelligence comes global competition. With more competition, organizational efficiency needs to rise, and more focus needs to be put on the value chain so that the organizations will not just survive but thrive.

In essence, the use of Internet-enabled applications amplifies the efforts of employees so that they can produce more value for a given amount of work. As a consequence, IT can be thought of as a force multiplier.

IT and Productivity

This notion of force multiplication is at the heart of productivity. Productivity involves doing more with fewer resources. In the case of business, it is increasing the revenue generated per employee through the greater ability of employees to deliver goods and services to customers willing to pay for them faster and more efficiently.

IT can enhance productivity by enabling growth and scaling operations. An increase in productivity can be achieved in several ways with IT. For example, reducing delays in the supply chain and sales process of an organization also reduces cycle time. Therefore, the organization can create more products in less time, which translates into increased output and revenues.

IT enriches productivity by enabling employees to acquire and retain satisfied customers. IT also enables an increase in the production of goods and services for better revenues at improved margins. Each of these activities, prior to the Internet, had a force multiplier of 1. That is, one employee could only do what one employee was capable of accomplishing with his own knowledge and resources. With Internet-enabled IT, force multiplication is well beyond 10 to 1 compared to business processes that are not IT enabled. For some industries, the force multiplier can be in excess of 100. No end is in sight to the force multiplier as firms integrate technology with business processes. With productivity increases of 3 percent or more per year, this compounding will double the overall force multiplication in less than 24 years. By the end of the century, IT-enabled productivity gains will increase productivity by more than 1500 percent.

However, productivity gains by themselves do not create profitable companies. A company can be extremely productive and still go out of business. More is needed.

IT and Efficiency

Another requirement of a successful business is efficiency. What this means in practice is that the company needs to utilize its means of production in ways that maximize the output for a given input. Unlike productivity, which seeks to maximize the output in absolute terms, efficiency seeks high productivity with minimum extraneous cost. Efficiency is high productivity with minimum waste.

IT shines in the efficiency department. With Internet-enabled IT, companies can track their business processes, inputs, and outputs to reduce process time, decrease waste, and maximize throughput. IT does this by simplifying and automating transactions and by involving the customers in the delivery of goods and services by enabling them to conduct their own transactions.

IT can improve efficiency by reducing or avoiding costs related to head count, materials, travel, transaction time to completion, and transaction costs. Internet-enabled applications that are focused on the reduction of administrative tasks can decrease the cost and advance the efficiencies of administrative staff to process applications and remove human latency and potential for errors. As shown in Figure 1-3, organizations lower the cost of sales and order fulfillment by linking internal systems and processes from order entry to delivery.

Figure 1-3

Efficiency Through Automation

However, a piece is missing from the business equation. As noted previously, the business of business in the twenty-first century is intellectual property, or the creation of good ideas. As Peter Drucker (Innovation and Entrepreneurship, 1985) noted, intellectual property can be thought of as a direct replacement for capital, money, and labor. As the dot-com has illustrated, small companies armed with good ideas can outperform much larger companies.

The production and application of good ideas is innovation.

What Is Innovation?

In practice, innovation is the process of making practical use of an invention or good idea to do the following:

  • Produce new products or services

  • Improve existing products or services

  • Improve the way in which products or services are produced or distributed

Innovation is used to gain competitive advantage or social benefit. From the standpoint of business, however, innovation is the fuel that drives revenue generation. Few businesses can expect to produce the same product for the same price for any length of time. Global competition ensures that competitors will surface that can do the same thing cheaper, faster, and better.

It is the concept of innovation that is the most powerful influence in business. Even if a company chooses not to innovate, innovation will still take place within the competitive market because competition forces innovation. At the very least, a company must match its competition to remain in business. To do so, it will either innovate or adopt the innovation of its competitors. No other alternatives exist.

Innovation is implicit in the development of new products and services (product innovation), the application of goods and services (application innovation), the way in which goods and services are produced (process innovation), and the way in which all these things are managed (business process innovation).

IT and Innovation

Just as IT is essential to productivity and efficiency, it is proving to be critical to the innovation process. The Internet and IT are driving innovation in these ways:

  • By enabling companies to create unique products and services by combining offers over the web

  • By enabling customers to customize products ordered over the Internet

  • By creating a unique customer experience by providing multiple channels and tools to buy products and receive services

  • By enabling businesses to differentiate customer value propositions (for example, leasing versus buying, online coupons, or combined offers)

Innovation and Efficiency Case Example

The use of IT allows organizations to adopt and develop innovative technology, which in turn gives them a competitive advantage.

For example, Wal-Mart, a giant American retailer, invested in IT to create a sophisticated information network. As shown in Figure 1-4, the network linked company suppliers directly to sales information from its thousands of stores. This allowed Wal-Mart to record, analyze, and manage product inventory information immediately. Wal-Mart was able to order only what it needed from its suppliers, thus keeping inventory costs down and bringing sales up. In the past, with a disparate system, Wal-Mart was not able to track this kind of activity in a timely manner.

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