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Please see attached Diagnostics quiz.. This is due tomorrow so please if you can get back to me sooner would be great. diagnostics_quiz.docx w1_reading___it_portfolio_management___alignment_article.pdf Unformatted Attachment Preview • Question 1 Why consider an organization’s approach to IM/IT resources and services as an exercise in portfolio management? Student Response: • e.g. Forces you to relate specific IT investments with the associated business need(s) and value propositions. • Question 2 What is meant by IM/IT portfolio management? Student Response: • e.g. The organization has the following information resource management needs: • o o o o To transact To manage, control, make tactical decisions To innovate, transform, increase its strategic competitiveness Control costs and improve overall performance • Question 3 According to the authors, how does an organization demonstrate its IT savvy and how does this relate to achieving better or highest value IM/IT portfolio performance? Assess the relevance of each one of these factors as an enabler of competitive advantage. Student Response: The Elements of IT Savvy e.g. The extensive use of IT communications Their Impact on the Organizations Competitive Advantage • Demonstrates the degree of organizational integration and coordination. • The leverage of intellectual capital by the sharing of corporate knowledge through electronic channels. Question 4 For your own organization, construct a list of to-dos to increase IT savvy and ensure the highest value IM/IT portfolio performance. Student Response: • • e.g. Establish IT asset class measures and benchmarks for the use of each business unit. o CENTER FOR INFORMATION SYSTEMS RESEARCH Sloan School of Management Massachusetts Institute of Technology Cambridge Massachusetts IT Savvy Pays Off: How Top Performers Match IT Portfolios and Organizational Practices Peter Weill and Sinan Aral May 2005 CISR WP No. 353 and Sloan WP No. 4560-05 © 2005 Massachusetts Institute of Technology. All rights reserved. Research Article: a completed research article drawing on one or more CISR research projects that presents management frameworks, findings and recommendations. Research Summary: a summary of a research project with preliminary findings. Research Briefings: a collection of short executive summaries of key findings from research projects. Case Study: an in-depth description of a firm’s approach to an IT management issue (intended for MBA and executive education). Technical Research Report: a traditional academically rigorous research paper with detailed methodology, analysis, findings and references. About the Center for Information Systems Research CISR MISSION CISR RESEARCH PATRONS CISR was founded in 1974 and has a strong track record of practice based research on the management of information technology. As we enter the twentyfirst century, CISR’s mission is to perform practical empirical research on how firms generate business value from IT. CISR disseminates this research via electronic research briefings, working papers, research workshops and executive education. Recent and current research topics include: BT Group The Boston Consulting Group, Inc. DiamondCluster International, Inc. Gartner Hewlett-Packard Company Microsoft Corporation Tata Consultancy Services—America 2003 PROJECTS ƒ ƒ ƒ ƒ ƒ Business Models and IT Investments Governing IT for Different Performance Goals Assessing Architecture Outcomes Infrastructure as Variable Cost Managing IT Related Risks 2004 PROJECTS ƒ ƒ ƒ ƒ ƒ Assessing the Performance of Alternative Business Models Managing the Next Wave of Outsourcing Managing IT Architecture for Business Value Measuring IT-driven Risk Exploring the Role of the IT Unit in Leading IT-enabled Change Since July 2000, CISR has been directed by Peter Weill, formerly of the Melbourne Business School. Drs. Jeanne Ross, George Westerman and Nils Fonstad are full time CISR researchers. CISR is co-located with MIT Sloan’s Center for e-Business and Center for Coordination Science to facilitate collaboration between faculty and researchers. CISR is funded in part by Research Patrons and Sponsors and we gratefully acknowledge the support and contributions of its current Research Patrons and Sponsors. CONTACT INFORMATION Center for Information Systems Research MIT Sloan School of Management 3 Cambridge Center, NE20-336 Cambridge, MA 02142 Telephone: 617/253-2348 Facsimile: 617/253-4424 http://web.mit.edu/cisr/www Peter Weill, Director pweill@mit.edu David Fitzgerald, Asst. to the Director dfitz@mit.edu Jeanne Ross, Principal Res. Scientist jross@mit.edu George Westerman, Res. Scientist georgew@mit.edu Nils Fonstad, Research Scientist nilsfonstad@mit.edu Jack Rockart, Sr. Lecturer Emeritus jrockart@mit.edu Chuck Gibson, Sr. Lecturer cgibson@mit.edu Chris Foglia, Center Manager cfoglia@mit.edu Julie Coiro, Admin. Assistant julieh@mit.edu CISR SPONSORS Aetna Inc. Allstate Insurance Co. American Express Corp. AstraZeneca Pharmaceuticals, LP Banknorth, NA Campbell Soup Company Care USA Celanese ChevronTexaco Corporation Det Norske Veritas (Norway) Direct Energy eFunds Corporation EMC Corporation The Guardian Life Insurance Company of America ING Group Intel Corporation International Finance Corp. Merrill Lynch & Co., Inc. MetLife Mohegan Sun Motorola, Inc. National Kidney Foundation, Singapore Nomura Research Institute, Ltd. Pasco County, Florida Pfizer, Inc. PFPC, Inc. Raytheon Company State Street Corporation Telenor ASA TRW Automotive, Inc. CISR Working Paper No. 353 Title: IT Savvy Pays Off: How Top Performers Match IT Portfolios and Organizational Practices Author: Peter Weill and Sinan Aral Date: May 2005 Abstract: Information technology is major investment for most enterprises and constitutes a portfolio of investments. Just like any other investment portfolio, the IT portfolio must be balanced to achieve alignment with business strategy and the desired combination of short and long term pay off. This portfolio balancing is the role of senior management and should be integrated into firms’ IT governance processes. Top financial performers have matched particular organizational practices and competencies with IT portfolio allocations to achieve specific business goals. In short, they have more IT savvy and it pays off. Keywords: Retail, business model, IT and information management, IT enabled strategy, outsourcing. 12 Pages IT Savvy Pays Off: How Top Performers Match IT Portfolios and Organizational Practices1 Sinan Aral, Phd. Student, MIT Sloan School of Management Peter Weill, Director, CISR, MIT Sloan School of Management Matching IT Investments and Organizational Practices Enhances Returns 7-Eleven Japan, with over 10,000 stores, is the most profitable retailer in Japan. 7-Eleven Japan “counselors” visit each store at least twice a week. The counselors work with the store franchisees or managers to improve the business, often by using data from their information systems to manage and order more effectively.2 By matching practices and information technology (IT) investment, the typical 7-Eleven store offers an industry leading 70\% new items for sale per year. This product mix agility has contributed to the average store’s daily sales doubling from 1977 to 2004. 7-Eleven CEO Toshifumi Suzuki, explains: “It is not enough to exchange information. The information has no value unless it is understood and properly integrated by the franchisees and makes them work better.” 7–Eleven’s “total information system” connects 70,000 computers in stores, at headquarters, and at supplier sites providing transparency across the entire value chain. Recent sales, weather conditions and product range information are provided graphically to each store for ordering fresh food. Fresh food is ordered and delivered three times a day into stores. The result is that on hot days Tokyo’s 7-Eleven stores have plenty of Bento boxes while on cold days there are lots of hot noodles for sale. But these practices alone are not enough—7-Eleven Japan has worked hard to develop firm-wide IT skills and business management involvement to conceive of, and reinforce, these practices. The company counselors’ visits increase the IT skills of the store operators while reinforcing the IT practices. One reason why 7-Eleven’s average daily sales is approximately ¥200 thousand ($1670) higher than competitors’ is that each of the total 200,000 store owners and clerks, including part time workers, is expected to participate in ordering, often testing hypotheses for new product offerings. The collaboration leads to more effective ordering, optimizes employees’ capabilities, and maintains motivation— differentiating 7-Eleven Japan from its competitors. The matching of practices, capabilities and IT has helped steadily increase profitability with gross margins per store increasing from 5\% to over 30\% from 1977 to 2004. The impact is also apparent in store and supply chain efficiency with the average number of deliveries to downtown stores dropping from 77 to ten per day over the same period and stock turn decreasing from 25 to ten days. 7-Eleven Japan has made effective IT investments for their business strategy and matched the resulting IT portfolio with IT practices and capabilities to create industry leading financial returns over more than 20 years. We call this reinforcing set of practices and capabilities “IT savvy.” We found this pattern of success is repeated by top performing firms that have stronger IT savvy and derive greater value from each dollar invested in their IT portfolio. We studied 147 firms over five years and found that top performers had developed value enhancing IT savvy to support their IT portfolio. Top performers have matched particular practices (e.g., the percent of firm transactions that are digital) and competencies (e.g., IT skills of all staff) with IT portfolio allocations to achieve specific business goals (e.g., growth, profit or innovation). 1 The authors gratefully acknowledge the support for this research from all the MIT CISR Patrons and Sponsors (http://mitsloan.mit.edu/cisr/) and the National Science Foundation, grant number IIS-0085725. In particular, we would like to acknowledge the input of Jeanne Ross of MIT Sloan CISR and Shafeen Charania of Microsoft. 2 For more information see K. Nagayama & P. Weill “7-Eleven Japan Co., Ltd.: Reinventing the Retail Business Model,” MIT Sloan CISR Working Paper 338, January 2004. © 2005 MIT Sloan—Aral & Weill Page 1 About the Research Why Use IT Portfolios for IT Investment To better enable senior executives to match IT investments with strategy, many firms use IT portfolio management.3 Just as investors address their risk and return objectives using portfolios of financial investments, firms have portfolios of IT investments. We found there are four different management objectives that motivate firms’ investment in IT. Each objective results in a different IT asset class with a unique risk-return profile. Just like any other investment portfolio, the IT portfolio must be balanced to achieve alignment with the business strategy and the desired combination of short and long term pay off. This portfolio balancing is the role of senior management and should be integrated in the firm’s IT governance processes.4 Four Management Objectives Leading to Four IT Asset Classes We found business leaders have four different management objectives for investing in IT: This paper is based on a survey of CIOs and IT managers at 147 U.S. firms and supplemented by discussions with IT managers in large U.S., European and Asian firms over the last five years. The survey was designed at the Center for Information Systems Research (CISR) and the Center for eBusiness at MIT and conducted in person and over the telephone in 2001/2/3 by the research firm Harte Hanks. The firms surveyed accounted for $448 billion in output in 2001 and provided three years of data on IT investments and organizational practices between 1999 and 2001. Performance data was obtained for four years between 1998 and 2002 from the Compustat database. The total IT investment includes all centralized and decentralized IT spend (expenses and depreciated capital) both in-house and outsourced, plus all employees dedicated to IT services and management. The survey sample is composed of 58\% manufacturing and 42\% services firms, which mirrors the composition of the S&P 500 and the Fortune 1000. The results are all statistically significant from regression analysis controlling for size, industry, R&D and advertising expenditure. Interviews and discussions with CIOs and other senior executives were conducted to further understand how IT savvy was implemented during 2003/4/5. For more details on the technical analysis see—Weill, P. & Aral, S., IT Assets, Organizational Capabilities and Firm Performance: Asset and Capability Specific Complementarities, MIT Sloan CISR Working Paper No. 343, August 2004. • Transactional – to cut costs or increase throughput for the same cost (e.g., a trade processing system for a brokerage firm). For 7-Eleven Japan, the store ordering system, which efficiently processes millions of transactions a day, is a transactional investment. • Informational – to provide information for any purpose including: to account, manage, control, report compliance, communicate, collaborate or analyze (e.g., a sales analysis or reporting system). For 7-Eleven Japan, the sales analysis to identify what products are (or are not) selling well is informational. • Strategic – to gain competitive advantage or position in the market place (e.g., ATMs were a very successful strategic IT initiative for the innovating banks increasing market share). A successful strategic IT initiative for 7-Eleven Japan was the introduction of a bill payment service where customers can pay their utility and other bills in stores. The service is growing at 20\% per year. In a few years this strategic initiative will lose its competitive advantage as other outlets provide the same service and what was once strategic will become transactional. 3 See 1) Jeffery & Leliveld, “Best Practices in IT Portfolio Management,” MIT Sloan Management Review, Spring 2004, who report 24\% of firms had effectively implemented IT portfolios and 78\% expected implementation by the end of 2004; 2) Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology, P. Weill and M. Broadbent, Harvard Business School Press, 1998; 3) P. Weill and J. Ross, Managing the IT Portfolio (Update Circa 2003), MIT Sloan CISR Research Briefing, Vol. III, No. 1C, March 2003 available in CISR Working Paper 340 “CISR Research Briefings 2003”; and 4) P. Weill and J. Ross, Managing the IT Portfolio: Returns from the Different IT Asset Classes, MIT Sloan CISR Research Briefing, Vol. IV, No. 1A, March 2004 available in CISR Working Paper 351 “CISR Research Briefings 2004.” 4 See P. Weill and J. Ross, IT Governance: How Top Performers Manage IT Decision Rights for Superior Results, Harvard Business School Press, 2004, Chapter 3. © 2005 MIT Sloan—Aral & Weill Page 2 • Infrastructure – the base foundation of shared IT services used by multiple applications (e.g., servers, networks, laptops, customer databases). Depending on the service, infrastructure investments are typically made with the objective of either reducing IT costs via consolidation and/or providing a flexible base for future business initiatives. In 7-Eleven Japan, the satellite, ISDN and mobile network linking the stores, headquarters and suppliers supports many different applications and is a large infrastructure investment. Investments in the four management objectives become an IT portfolio with four distinct asset classes (see Figure 1). The average firm studied allocates 54\% of their total IT investment each year to infrastructure. Utilizing the infrastructure are the transactional systems, accounting for 13\% of average IT investment. Informational systems conceptually sit on top of and use both the transactional and infrastructure systems, accounting for 20\% of average IT investment. Similarly, strategic systems use both the transactional and infrastructure systems and account for 13\% of average investment. Just like a personal investment portfolio with cash, bonds, equities, property etc., the four IT asset classes have different historic risk-return profiles and must be re-weighted as objectives change. Figure 1: Rethinking IT as an Investment Portfolio • Increased control • Better information • Better integration • Improved quality • Faster cycle time 20\% • (Innovation) • (Major Change) • (Facilitation) • (High Value Added) • (Interact with customers) • Increased sales • Competitive advantage 13\% • Competitive necessity • Market positioning INFORMATIONAL STRATEGIC 13\% • Cut costs • Increase the Firm’s IT Skills throughput ( ) = public sector TRANSACTIONAL 54\% INFRASTRUCTURE • Business integration • Business flexibility • Reduced marginal cost of BU’s IT • Reduced IT costs • standardization Adapted from: Weill & Broadbent Leveraging the New Infrastructure: How market leaders capitalize on IT, Harvard Business School Press, 1998. Percentages reflect data collected in 2001/02 from 147 firms. Investment for any single project can be allocated over one or more asset classes. For example, the senior executives of a large technology firm allocated their recent multimillion dollar investment in a customer relationship management system (CRM) as 60\% informational (providing customer information), 5\% strategic (to gain competitive advantage), 25\% transactional (to cut costs) and 10\% infrastructure (to provide shared IT services). This allocation raises a critical issue about the role of technology. The same technology can be applied with different managerial objectives in different firms. The technology firm was relatively late in adopting CRM and expected only 5\% of the benefits would be strategic. They also had much of the infrastructure needed for the implementation and thus only 10\% of the investment was for shared infrastructure. By comparison a competitor had successfully implemented CRM three years earlier with a higher total project cost and a different allocation of resources—more strategic and infrastructure and less informational. The portfolio allocation works because it underscores the importance of how firms use © 2005 MIT Sloan—Aral & Weill Page 3 technology instead of the technology itself. Making a sensible allocation of an IT project investment into the asset classes requires senior management clarity about what they wish to achieve and who will be held accountable—a matter of strategy rather than of technical specifications. Figure 2: Different IT Assets Deliver Different Value Investments in these IT assets are associated with the following average changes in cost, profitability, innovation and market value the year after the investment is made4 Informational Strategic Transactional Infrastructure Lower Cost of Goods Sold Infrastructure Transactional Profit1 Innovation2 Market Value3 - - + + Informational + Strategic R&D Advertising - + + + 1 Profit is Measured by Net Margin = Income Before Extraordinary Items/Total Sales. Innovation is measured by Sales from Modified and Enhanced Products/Total Sales and Sales from New Products/Total Sales. 3 Market Value is measured by Tobin’s q – the Market to Book value of company stock, in the same year the investment is made. 4 +/- = Statistically significant impacts controlling for industry, firm size, R&D expense, and advertising expense. 2 The Returns from the Four IT Asset Classes IT investments in the transactional asset class aim to reduce costs and increase productivity. Firms that invested more heavily (than their competitors) in transactional IT had superior productivity (measured by sales per dollar of assets ... Purchase answer to see full attachment