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THE INFORMATION SYSTEMS STRATEGY TRIANGLE

Over the course of 87 news-filled days, the 2010 Deepwater Horizon oil spill became the largest marine oil spill in human history. The spill quickly became a public relations nightmare for BP, which quickly focused its efforts toward remedying its image by spearheading the cleanup. At one point, and estimated four million barrels per day flowed freely into the gulf waters, straining the marine ecosystem and threatening the shoreline from Texas to Florida.

After a lengthy investigation, BP concluded in its internal report that “a sequence of failures involving multiple companies and work teams” caused the explosion that subsequently allowed oil to spill freely into the gulf. While repeated failures to follow safety procedures were at the heart of the catastrophe, when looking at the timelines of the accident rather than focusing on who was to blame, one finds a series of IT failures coupled with organizational misalignments that ultimately catalyzed the accident.

This crisis highlighted the need for proper alignment of business strategy, information systems (IS) and organizational mechanisms and practices when designing the safety mechanism for an oilrig. When high pressure forced methane gas to the surface of the rig, causing it to ignite and explode, most workers evacuate by lifeboat. However, even with the lack of human control after the explosion, the rig's information systems and organizational control mechanisms should have both prevented the accident and the resulting spill of oil. Automated systems failed, including a key emergency disconnect system that failed to initialize, and would have prevented oil from escaping once the blowout preventer proved ineffective. But the early monitoring systems appeared to have worked. One indicated problems with oil flow almost an hour before the explosion, but an investigation indicated that managers and engineers on the rig may have ignored test results earlier that day. And the aftermath also highlighted issues in organizational culture, process, and leadership at BP.¹

This case emphasizes the point made in the introduction: General managers must take a role in decisions about IS. Even though it is not necessary for a general manager to have a deep technical knowledge of their IS, it is necessary to aggressively seek to understand the consequences of using technologies relevant to the business's environment and to ask questions when it's not clear. General managers who leave IS decisions solely to their IS professionals often put themselves and their companies at a disadvantage. Although IS can facilitate the movement, exchange, and processing of information, an IS that is inappropriate for a given operating environment can actually inhibit and confuse things. This is especially true in crisis environments, such as the oil spill disaster at BP. The IS department is not an island within a firm. The IS department manages an infrastructure that is essential to the firm's functioning. Further, this case illustrates that a firm's IS must be aligned with the way it manages its employees and processes. In BP's case, it became clear that personnel policies needed to be adjusted to insure engineers and crew followed all procedures associated with monitoring results, and additional processes were needed to insure quality standards were appropriate and met from vendor-supplied systems.

This chapter introduces a simple framework for describing the alignment necessary with business systems and for understanding the impact of IS on organizations. This framework is called the Information Systems Strategy Triangle because it relates business strategy with IS strategy and organizational strategy. This chapter also presents key frameworks from organization theory that describe the context in which IS operate, as well as the business imperatives that IS support. Students with extensive background in organizational behavior and business strategy will find this a useful review of key concepts. The Information Systems Strategy Triangle presented in Figure 1.1 suggests three key points about strategy.

Successful firms have an overriding business strategy that drives both organizational strategy and IS strategy. The decisions made regarding the structure, hiring practices, vendor policies, and other components of the organizational strategy, as well as decisions regarding applications, hardware, and other IS components, are all driven by the firm's business objectives, strategies, and tactics. Successful firms carefully balance these three strategies—they purposely design their organization and their IS strategies to complement their business strategy.

FIGURE 1.1 The Information Systems Strategy Triangle.

IS strategy can itself affect and is affected by changes in a firm's business and organizational strategies. To perpetuate the balance needed for successful operation, changes in the IS strategy must be accompanied by changes in the organizational strategy and must accommodate the overall business strategy. If a firm designs its business strategy to use IS to gain strategic advantage, the leadership position in IS can only be sustained by constant innovation. The business, IS, and organizational strategies must constantly be adjusted.

IS strategy always involves consequences—intended or not—within business and organizational strategies. Avoiding harmful unintended consequences means remembering to consider business and organizational strategies when designing IS deployment. For example, deploying and expecting employees to use iPads or tablets without an accompanying set of changes to job descriptions, process design, compensation plans, and business tactics will fail to produce the anticipated productivity improvements. Success can only be achieved by specifically designing all three components of the strategy triangle.

In the BP case discussed earlier, the IS Strategy Triangle was out of alignment at the time of the explosion. The organizational strategy (e.g., personnel policies about responding to monitoring tests, and safety policies and practices) did not support the IS strategy (e.g., dispersed network of systems that monitored, managed, and aborted automated drilling processes in a crisis situation). Both of these strategies did not adequately support their purported business strategy (creating profits though, in part, drilling in environmental-sensitive areas without disrupting the ecosystem while also protecting their reputation).

Of course, once a firm is out of alignment, it does not mean that it has to stay that way. To correct the misalignment described earlier, BP replaced CEO Tony Hayward with American Bob Dudley, changed its processes regarding monitoring and test systems, restructured its upstream business into three separate divisions to provide increased visibility into operations, risk management, standards, processes, and “human and technical capability.”² Further, it changed its culture to make sure checks and balances are in place. The new systems realign people, process, and technology to decrease the risk of deep water drilling and most closely align with the business's goals of environmental sustainability and oil/energy production.

What does alignment mean? A book entitled Winning the 3-Legged Race defines alignment as the situation in which a company's current and emerging business strategy is enabled, supported, and unconstrained by technology. The authors suggest that although alignment is good, there are higher states, namely synchronization and convergence, toward which companies should strive. With synchronization, technology not only enables current business strategy but also anticipates and shapes future business strategy. Convergence goes one step further by exhibiting a state in which business strategy and technology strategy are intertwined and the leadership team members operate almost interchangeably. Although we appreciate the distinction and agree that firms should strive for synchronization and convergence, alignment in this text means any of these states, and it pertains to the balance between organizational strategy, IS strategy, and business strategy.³

A word of explanation is needed here. This chapter and subsequent chapters address questions of IS strategy squarely within the context of business strategy. Studying business strategy alone is something better done in other texts and courses. However, to provide foundation for IS discussions, this chapter and the next summarize several key business strategy frameworks and organizational theories. Studying IS alone does not provide general managers with the appropriate perspective. To be effective, managers need a solid sense of how IS are used and managed within the organization. Studying details of technologies is also outside the scope of this text. Details of the technologies are relevant, of course, and it is important that any organization maintain a sufficient knowledge base to plan for and adequately align with business priorities. However, because technologies change so rapidly, keeping a text current is impossible. Therefore, this text takes the perspective that understanding what questions to ask and having a framework for interpreting the answers are skills more fundamental to the general manager than understanding any particular technology. This text provides readers with an appreciation of the need to ask questions, a framework from which to derive the questions to ask, and a foundation sufficient to understand the answers received. The remaining book chapters build on the foundation provided in the Information Systems Strategy Triangle.

BRIEF OVERVIEW OF BUSINESS STRATEGY FRAMEWORKS

A strategy is a coordinated set of actions to fulfill objectives, purposes, and goals. The essence of a strategy is setting limits on what the business will seek to accomplish. Strategy starts with a mission. A mission is a clear and compelling statement that unifies an organization's effort and describes what the firm is all about (i.e., its purpose). For example, Mark Zuckerberg, the CEO of Facebook, noted that he initially built Facebook as a product but what ended up “after we started hiring more people and building out the team is I began to get an appreciation that a company is a great way to get a lot of people involved in a mission you're trying to push forward. Our mission is getting people to connect.”⁴

In a few words the mission statement sums up what is unique about the firm. Figure 1.2 demonstrates that even though Zappos, Amazon, and L.L. Bean are all in the retail industry, they view their missions quite differently. For example, Zappos' focus is on customer service, Amazon is about customer sets, and L.L. Bean is about the merchandise and treating people the right way. It's interesting to note that while Zappos was purchased by Amazon, part of their agreement was to keep Zappos running independently. (In 2009, all the stockholders of Zappos agreed to sell their stock to Amazon, but the agreement included clauses to keep Zappos independent, and it has remained so both culturally and physically. Zappos is located near Las Vegas, NV while Amazon is in Seattle, WA.)

FIGURE 1.2 Mission statements of three retail businesses.

Are these companies accomplishing their missions? It is hard to determine whether Zappos customers are receiving the “best customer service.” That is why Zappos, like other firms, sets measurable objectives and performance targets. Once the objectives and performance targets are set, the measurable objectives and performance targets can help ensure that a firm is accomplishing its mission. And then the firm needs to decide on a business strategy to meet its objectives and performance targets.

A business strategy is a plan articulating where a business seeks to go and how it expects to get there. It is the means by which a business communicates its goals. Management constructs this plan in response to market forces, customer demands, and organizational capabilities. Market forces create the competitive context for the business. Some markets, such as those faced by delivering packages, manufacturers of laptop computers, and issuers of credit cards, are characterized by many competitors and a high level of competition such that product differentiation becomes increasingly difficult. Other markets, such as those for airlines and automobiles, are similarly characterized by high competition, but product differentiation is better established. Customer demands comprise the wants and needs of the individuals and companies who purchase the products and services available in the marketplace. Organizational capabilities include the skills and experience that give the corporation a currency that can add value in the marketplace.

Consider Dell, originally a personal computer company. Initially Dell's business strategy was to sell personal computers directly to the customer without going through a middleman. Reaching customers in this way was less expensive and time consuming than selling the computers in retail stores. The Internet, combined with Dell's well-designed IS infrastructure, allowed customers to electronically contact Dell, who then designed a PC for a customer's specific needs. Dell's ordering system was integrated with its production system and shared information automatically with each supplier of PC components. This IS enabled the assembly of the most current computers without the expense of storing large inventories. Cost savings were passed on to the customer, and the direct-to-customer model allowed Dell to focus its production capacity on building only the most current products. With small profit margins and new products arriving quickly to replace existing products, this creative use of IS aligned with Dell's business strategy. The strategic use of IS ultimately results in cost savings, reflected in the price of systems. In addition, Dell executives achieve a strategic advantage in reducing response time, building custom computers for one of the industry's lowest costs, and eliminating inventories that could become obsolete before they are sold. Thus, this business strategy was consistent with Dell's mission of delivering the best customer experience in the markets it serves.

But things aren't always as they seem. If the direct-to-customer strategy was so effective, why is Dell now also selling its computers at major retail outlets such as Walmart, Staples, and Best Buy? It is likely that the sales figures and profit margins were not measuring up to Dell's stated objectives and performance targets. Consequently, Dell adjusted its business strategy and we can expect to see changes in their organization design and information systems to reflect their altered direction.

The classic, well-accepted model developed by Michael Porter still frames most discussions of business strategy. We review the Porter generic strategies framework, as well as dynamic environment strategies.⁵ The end of this section introduces key questions a general manager must answer to understand the strategy of the business.

The Generic Strategies Framework

Companies sell their products and services in a marketplace populated with competitors. Michael Porter's framework helps managers understand the strategies they may choose to build a competitive advantage. In his book Competitive Advantage, Porter claims that the “fundamental basis of above-average performance in the long run is sustainable competitive advantage.”⁶ Porter identified three primary strategies for achieving competitive advantage: (1) cost leadership, (2) differentiation, and (3) focus. These advantages derive from the company's relative position in the marketplace, and they depend on the strategies and tactics used by competitors. Figure 1.3 summarizes these three strategies for achieving competitive advantage.

Cost leadership results when the organization aims to be the lowest-cost producer in the marketplace. The organization enjoys above-average performance by minimizing costs. The product or service offered must be comparable in quality to those offered by others in the industry so that customers perceive its relative value. Typically, only one cost leader exists within an industry. If more than one organization seeks an advantage with this strategy, a price war ensues, which eventually may drive the organization with the higher cost structure out of the marketplace. Through mass distribution, economies of scale, and IS to generate operating efficiencies, Walmart epitomizes the cost-leadership strategy.

FIGURE 1.3 Three strategies for achieving competitive advantage.

Source: M. Porter, Competitive Strategies (New York: Free Press, 1998).

Through differentiation, the organization qualifies its product or service in a way that allows it to appear unique in the marketplace. The organization identifies which qualitative dimensions are most important to its customers and then finds ways to add value along one or more of those dimensions. For this strategy to work, the price charged customers by the differentiator must seem fair relative to the price charged by competitors. Typically, multiple firms in any given market employ this strategy. Progressive Insurance is able to differentiate itself from other automobile insurance companies by breaking out of the industry mold. Its representatives are available 24/7 (i.e., 24 hours a day, 7 days a week) to respond to accident claims. They arrive at an accident scene shortly after the accident with powerful laptops, intelligent software, and the authority to settle claims on the spot. This strategy spurred Progressive's growth and widened its profit margins.

Focus allows an organization to limit its scope to a narrower segment of the market and tailor its offerings to that group of customers. This strategy has two variants: (1) cost focus, in which the organization seeks a cost advantage within its segment, and (2) differentiation focus, in which it seeks to distinguish its products or services within the segment. This strategy allows the organization to achieve a local competitive advantage, even if it does not achieve competitive advantage in the marketplace overall. As Porter explains how the focuser can achieve competitive advantage by the way it focuses exclusively on certain market segments:

Marriott International demonstrates focus in the business and related IS strategies of two of its hotel chains. To better serve its business travelers and cut operational expenses, Marriott properties have check-in kiosks that interface with their Marriott Rewards loyalty program. A guest can swipe a credit card or Marriott Rewards card at the kiosk in the lobby and receive a room assignment and keycard from the machine. She can also print airline boarding passes at the kiosks. Further, the kiosks help the Marriott chain implement its cost focus. The kiosk system is integrated with other systems such as billing and customer relationship management (CRM) to generate operating efficiencies and enhanced corporate standardization.

In contrast, stand-alone kiosks in the lobby would destroy the feeling that the Ritz-Carlton chain, acquired by Marriott in 1995, creates. To the Ritz-Carlton chain, CRM means capturing and using information about guests, such as their preference for wines, a hometown newspaper, or a sunny room. Each Ritz-Carlton employee is expected to promote personalized service by identifying and recording individual guest preferences. To demonstrate how this rule could be implemented, a waiter, after hearing a guest exclaim that she loves tulips, could log the guest's comments into the Ritz-Carlton CRM system called “Class.” On her next visit to a Ritz-Carlton hotel, tulips could be placed in the guest's room after querying Class to learn more about her as her visit approaches. Class, the CRM, is instrumental in implementing the differentiation-focus strategy of the Ritz-Carlton chain.⁸ Its strategy allows the Ritz-Carlton chain to live up to its very unique motto (mission): “We are ladies and gentlemen serving ladies and gentlemen.”⁹

For example, airline JetBlue adopted a differentiation strategy based on low-costs coupled with unique customer experience. It might be called a “value-based strategy.” It is not the lowest cost carrier in the airline industry; at 9.80 cents per passenger seat mile, JetBlue has one of the lowest costs but Virgin America, Spirit, and Allegient had lower per-seat mile costs in 2011. But JetBlue does manage its operational costs carefully, making decisions that keep its per passenger costs among the lowest in the business such as a limited number of airplane models in its fleet, gates at less congested airports, paperless cockpit and for other operations, and snacks instead of meals on flights. JetBlue has one of the longest stage length averages in the industry and the longer the flight the lower the unit costs. Network carriers, often larger competitors, may have different pay scales from having been in the business longer and with a different composition of staff, and higher maintenance costs for their fleets, which may be older and more diverse. Should its plans for growth be fully realized, while maintaining its low cost structure, JetBlue could move from its cost focus based on serving a limited, but growing, number of market segments to a cost leadership strategy.¹⁰

While sustaining a cost focus, JetBlue's chairman believes that JetBlue can compete on more than price and that is part of its unique differentiation strategy. It is why the airline continually strives to keep customers satisfied with frills such as extra leg room, leather seats, prompt baggage delivery, DirectTV, and movies. It has been recognized with many awards for customer satisfaction in the North American airlines industry.

Dynamic Environment Strategies

Porter's generic strategies model is useful for diagnostics, or understanding how a business seeks to profit in its chosen marketplace, and for prescriptions, or building new opportunities for advantage. It reflects a careful balancing of countervailing competitive forces posed by buyers, suppliers, competitors, new entrants, and substitute products and services within an industry. As is the case with many models, they offer managers useful tools for thinking about strategy.

However, the Porter model was developed at a time when competitive advantage was sustainable because the rate of change in any given industry was relatively slow and manageable. Since the late 1980s when this framework was at the height of its popularity, newer models were developed to take into account the increasing turbulence and velocity of the marketplace. One example, the hypercompetition model, offers managers an especially useful tool for conceptualizing their organization's strategy in turbulent environments. Organizations need to be able to respond instantly and change rapidly, which requires dynamic structures and processes.

Discussions of hypercompetition take a perspective different from the previous model. Porter's model focus on creating competitive advantage, whereas hypercompetition models suggest that the speed and aggressiveness of the moves and countermoves in any given market create an environment in which advantages are rapidly created and eroded. Trying to sustain a specific competitive advantage can be a deadly distraction, since the environment and the marketplace change rapidly. To manage the rapid speed of change, firms focus on their capability to dynamically adjust their organizational resources, valuing agility itself as the competitive advantage. Business strategies based on hypercompetition still focus on customer satisfaction, profit maximization, and other goals consistent with the business's values and beliefs, but build in components of business intelligence. These components include the ability to predict new opportunities, organizational designs that can sense, restructure and respond quickly, and strategic signaling and actions that both surprise and confuse competitors.

Since the 1990s a competitive dynamic has emerged in the marketplace that is characterized by wider gaps between industry leaders and laggards, more concentrated “winner-take-all” environments, and greater churn among sector rivals. This pattern of turbulent “creative destruction” was first predicted over 60 years ago by the economist Joseph Schumpeter. Coincidentally (or maybe not), the accelerated competition has occurred concomitantly with sharp increases in the quality and quantity of information technology (IT) investment. The changes in competitive dynamics are particularly striking in sectors that spend the most on IT.¹¹

An application of these dynamic models is the destroy your business (DYB) (i.e., “creative destruction”) approach to strategic planning that was implemented by leadership guru Jack Welch at General Electric (GE). Welch recognized that GE could only sustain its competitive advantage for a limited time as competitors attempted to outmaneuver GE. He knew that if GE didn't identify its weaknesses, its competitors would relish doing so. DYB is an approach that places GE employees in the shoes of their competitors.¹² Through the DYB lenses, GE employees develop strategies to destroy GE's competitive advantage. Then, in light of their revelations, they apply the grow your business (GYB) strategy to find fresh ways to reach new customers and better serve existing ones. The goal of the DYB planning approach is the complete disruption of current practices, so that GE can take actions to protect its business before competitors hone in on its weaknesses. The implicit assumption underlying DYB is that GE would not be able to sustain its position in the marketplace over the long term.

A similar strategy of cannibalizing their own products was used by Apple and Gillette. Steve Jobs, the founder and CEO of Apple, felt strongly that if a company was not willing to cannibalize their own products, someone else will come along and do it for them. That was evident in the way Apple introduced the iPhone while iPod sales were brisk, and the iPad while its Macintosh sales were strong.¹³ Apple continues to exhibit this strategy with subsequent releases of new models of all of its products. Likewise Gillette, known for its innovative razors and shaving products, is famous for introducing new razors while their current products are in demand. While the Mach3 razor was selling well, Gillette introduced the Fusion, and spent resources to convince customers to upgrade to the newer and more expensive product.

Why Are Strategic Advantage Models Essential to Planning for Information Systems?

A general manager who relies solely on IS personnel to make IS decisions may not only give up any authority over IS strategy, but also may hamper crucial future business decisions. In fact, business strategy should drive IS decision making, and changes in business strategy should entail reassessments of IS. Moreover, changes in IS potential should trigger reassessments of business strategy—as in the case of the Internet, where companies that failed to understand or consider its implications for the marketplace were quickly outpaced by competitors who had. For the purposes of our model, the Information Systems Strategy Triangle, understanding business strategy means answering the following questions:

1. What is the business goal or objective?
2. What is the plan for achieving it? What is the role of IS in this plan?
3. Who are the crucial competitors and partners, and what is required of a successful player in this marketplace?
4. What are the industry forces in this marketplace?

Porter's generic strategies framework and the dynamic framework (summarized in Figure 1.4) are revisited in the next few chapters. They are especially helpful in discussing the role of IS in building and sustaining competitive advantages (Chapter 2) and for incorporating IS into business strategy. The next section of this chapter establishes a foundation for understanding organizational strategies.

FIGURE 1.4 Summary of strategic approaches and IT applications.

BRIEF OVERVIEW OF ORGANIZATIONAL STRATEGIES

Organizational strategy includes the organization's design as well as the choices it makes to define, set up, coordinate, and control its work processes. The organizational strategy is a plan that answers the question: “How will the company organize to achieve its goals and implement its business strategy?” A few of the many models of organizational strategy are reviewed in this section.

A classic framework for understanding the design of an organization is the business diamond, introduced by Harold Leavitt.¹⁵ Shown in Figure 1.5, the business diamond identifies the crucial components of an organization's plan as its information/control, people, structure, and tasks. All of the components are interrelated. Over the years, there have been variations on this model, substituting terms like business processes, culture, and management systems for Leavitt's original terms. This simple framework is useful for designing new organizations and for diagnosing organizational troubles. For example, organizations that try to change their people but fail to change the way they manage and control cannot be effective, since all of these components impact each other.

FIGURE 1.5 The Leavitt business diamond.

Source: Adapted from¹⁵ H. J. Leavitt, Managerial Psychology, (University of Chicago Press, 1958, p. 286).

FIGURE 1.6 Managerial levers model.

Source: M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985, 1998).

A complementing framework to the business diamond for organizational design can be found in the book by Cash, Eccles, Nohria, and Nolan, Building the Information Age Organization.¹⁶ This framework, shown in Figure 1.6, suggests that the successful execution of a business's organizational strategy comprises the best combination of organizational, control, and cultural variables. Organizational variables include decision rights, business processes, formal reporting relationships, and informal networks. Control variables include the availability of data, the nature and quality of planning, and the effectiveness of performance measurement and evaluation systems, and incentives to do good work. Cultural variables comprise the values of the organization. These organizational, control, and cultural variables are managerial levers used by decision makers to effect changes in their organizations. These managerial levers are discussed in detail in Chapter 3.

Our objective is to give the manager a set of frameworks to use in evaluating various aspects of organizational design. Using these frameworks, the manager can review the current organization and assess which components may be missing and what options are available looking forward. Understanding organizational strategy means answering the following questions:

1. What are the important structures and reporting relationships within the organization?

   

   FIGURE 1.7 Summary of organizational strategy frameworks.

2. Who holds the decision rights to critical decisions?
3. What are the important people-based networks (social and informational) and how can we use them to get work done better?
4. What are the characteristics, experiences, and skill levels of the people within the organization?
5. What are the key business processes?
6. What control systems (management and measurement systems) are in place?
7. What are the culture, values, and beliefs of the organization?

The answers to these questions inform the assessment of the organization's use of IS. Chapters 3, 4, and 5 use the organizational strategy frameworks, summarized in Figure 1.7, to assess the impact of information systems (IS) on the firm. Chapters 7 and 8 use this same list to understand the business and governance of the IS organization.

BRIEF OVERVIEW OF INFORMATION SYSTEMS STRATEGY

IS strategy is the plan an organization uses to provide information services. IS allows a company to implement its business strategy. JetBlue's vice president for people explains it nicely: “We define what the business needs and then go find the technology to support that.”¹⁷

Business strategy is a function of competition (What does the customer want and what does the competition do?), positioning (In what way does the firm want to compete?), and capabilities (What can the firm do?). IS help determine the company's capabilities. An entire chapter is devoted to understanding key issues facing general managers concerning IT architecture, but for now a more basic framework is used to understand the decisions related to IS that an organization must make.

FIGURE 1.8 IS strategy matrix.

The purpose of the matrix in Figure 1.8 is to give the manager a high-level view of the relation between the four IS infrastructure components and the other resource considerations that are keys to IS strategy. Infrastructure includes hardware, such as desktop units and servers. It also includes software, such as the programs used to do business, to manage the computer itself, and to communicate between systems. The third component of IS infrastructure is the network, which is the physical means by which information is exchanged among hardware components, such as through a modem and dial-up network (in which case, the service is actually provided by a vendor such as AT&T), or through a private digital network (in which case the service is probably provided by an internal unit). Finally, the fourth part of the infrastructure is the data. The data includes the bits and bytes stored in the system. In current systems, data are not necessarily stored alongside the programs that use them; hence, it is important to understand what data are in the system and where they are stored. Many more detailed models of IS infrastructure exist, and interested readers may refer to any of the dozens of books that describe them. For the purposes of this text, the matrix will provide sufficient information to allow the general manager to assess the critical issues in information management.

SUMMARY

The Information Systems Strategy Triangle represents a simple framework for understanding the impact of IS on businesses. It relates business strategy with IS strategy and organizational strategy and implies the balance that must be maintained in business planning. The Information Systems Strategy Triangle suggests the following management principles.

Business Strategy

Business strategy drives organizational strategy and IS strategy. The organization and its IS should clearly support defined business goals and objectives.

• Definition: A well-articulated vision of where a business seeks to go and how it expects to get there
• Models: Porter's generic strategies model; dynamic environment models

Organizational Strategy

Organizational strategy must complement business strategy. The way a business is organized either supports the implementation of its business strategy or it gets in the way.

• Definition: The organization's design, as well as the choices it makes to define, set up, coordinate, and control its work processes
• Models: Business diamond; managerial levers

IS Strategy

IS strategy must complement business strategy. When IS support business goals, the business appears to be working well. IS strategy can itself affect and is affected by changes in a firm's business and organizational strategies. Moreover, IS strategy always has consequences—intended or not—on business and organizational strategies.

• Definition: The plan the organization uses in providing information systems and services
• Models: A basic framework for understanding IS decisions relating architecture (the “what”) and the other resource considerations (“who” and “where”) that represent important planning constraints

Strategic Relationships

Organizational strategy and information strategy must complement each other. They must be designed so that they support, rather than hinder each other. If a decision is made to change one corner of the triangle, it is necessary to evaluate the other two corners to ensure that balance is preserved. Changing business strategy without thinking through the effects on the organizational and IS strategies will cause the business to struggle until balance is restored. Likewise, changing IS or the organization alone will cause an imbalance.

KEY TERMS

business diamond (p. 34)

business strategy (p. 27)

collaboration (p. 33)

cost leadership (p. 28)

differentiation (p. 29)

engagement (p. 33)

focus (p. 29)

hypercompetition (p. 31)

innovation (p. 33)

IS strategy (p. 36)

Information Systems Strategy Triangle (p. 24)

managerial levers (p. 35)

mission (p. 26)

organizational strategy (p. 34)

social business strategy (p. 33)

strategy (p. 26)

DISCUSSION QUESTIONS

1. Why is it important for business strategy to drive organizational strategy and IS strategy? What might happen if business strategy was not the driver?
2. Suppose managers in an organization decided to hand out tablets (iPad) to all salespeople without making any other formal changes in organizational strategy or business strategy. What might be the outcome? What unintended consequences might occur?
3. Consider a traditional manufacturing company that wanted to build a social business strategy. What might be a reasonable business strategy, and how would organizational and IS strategy need to change? How would this differ for a restaurant chain? A consumer-products company? A nonprofit?
4. This chapter describes key components of an IS strategy. Describe the IS strategy of a consulting firm using the matrix framework.
5. What does this tip from Fast Company mean: “The job of the CIO is to provide organizational and strategic flexibility”?¹⁸

CASE STUDY 1-1
LEGO

Lego has long been an industry leader in children's toys with its simple, yet unique building blockstyle products. The privately held company was founded in 1932 by a Danish carpenter whose family still owns Lego today. But by 2004, the company found itself close to extinction, losing $1 million a day. A new CEO was brought in, and five years later, sales were strong, profits were up, and naysayers who felt the new strategy was going to fail were proved wrong.

With the advent of high-tech forms of entertainment such as the iPod and PlayStation Lego found itself more antique than cutting edge in the toy world. When new CEO Jorgen Vig Knudstorp, a father and former McKinsey consultant, took over, the company struggled with poor performance, missed deadlines, long development times, and poor deliver record. The most popular toys would run out and Lego was unable to ship enough products or manage production of its more complicated sets. Retail stores were frustrated, and that translated into reduced shelf space and ultimately to business losses.

Knudstorp changed all of that. He reached out to top retailers, cut costs, and added missing links to the supply chain. For example, prior to the new strategy, 90% of the components were used in just one design. Designers were encouraged to reuse components in their new products, which resulted in a reduction from about 13,000 different Lego components to 7,000. Since each component's mold could cost up to 50,000 euros on average to create, this reduction saved significant expense.

Lego was known for their traditional blocks and components that would allow children to build just about anything their imagination could create. The new strategy broadened the products, targeting new customer segments. Lego managers created products based on themes of popular movies, such as Star Wars and Indiana Jones. They moved into video games, which featured animated Lego characters sometimes based on Hollywood movies. They created a product strategy for adults and engaged the communities who had already set up thousands of Web sites and blogs featuring Lego creations. They embraced the community who thought of Lego as a way to create art, rather than simply a building toy. And they designed a line of Legos aimed at girls, since the majority of their products had primarily targeted boys.

The culture of Lego changed to one where nonperformance was unacceptable. The company's past showed a tendency to focus on innovation and creativity, often at the expense of profits. But that changed. “Knudstorp made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed . . . Its business may still be fun and games, but working here isn't,” describes the current culture at Lego.

Some of the most drastic changes came from within Lego's organizational structure. After racking up massive losses in 2004, Lego switched its employee pay structure, offering incentives for appropriate product innovation and sales. Key Performance Indicators encourage product innovation that catalyzed sales while decreasing costs. Development time dropped by 50% and some manufacturing and distribution functions were moved to less expensive locations, but the focus on quality remained. The creation of reusable parts alleviated some of the strain on Lego's supply chain, which in turn helped its bottom line.

Lego also expanded into the virtual world, extending into video gaming and virtual-interaction games on the Internet. Thinking outside their previous product concepts cut costs while encouraging real-time feedback from customers across a global market. Additionally, Lego created brand ambassadors who organized conventions across the world to discuss product innovation and building communities of fellow customers. With increased revenue, Lego managers considered entering the movie-making business—a risky proposition for a toy company. However, Lego's success with Hollywood-type action figures fueled its interest in a movie-making endeavor.

The growth put strains on the information systems supporting the business. Order management and fulfillment were particularly affected, resulting in the inability to meet customer demands. Employee management systems were stretched as new employees were added to support the growth and additional locations. Product design and development, especially the virtual and video games, required new technology, too.

To solve some of these problems, Lego managers used the same approach they used for their blocks. They created a modularized and standardized architecture for their information systems, making it possible to expand more quickly and add capacity and functionality as it was needed. They implemented an integrated enterprise system that gave them new applications for human capital management, operations support, product life cycle management, and data management. The new systems and services, purchased from vendors such as SAP and IBM, simplified the IT architecture and the management processes needed to oversee the IS.

One manager at Lego summed it up nicely, “The toy world moves onwards constantly, and Lego needs to re-invent itself continuously. Significant corporate re-shaping introduced new energy to the company.” He went on to say that simplifying Lego's IT systems and implementing an efficient product development process that was able to maintain quality and cost favorably positioned Lego to respond to the fast changing pace of the toy industry.

Discussion Questions

1. How did the information systems and the organization design changes implemented by Knudstorp align with the changes in business strategy?
2. Which of the generic strategies does Lego appear to be using based on this case? Provide support for your choice.
3. Are the changes implemented by Knudstorp an indication of hypercompetition? Defend your position.
4. What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?

Source: Adapted from http://www.nytimes.com/2009/09/06/business/global/06lego.html; Brad Wieners, “Lego is for Girls,” Bloomberg Businessweek (December 19, 2011), pp. 68–73; and http://www-01.ibm.com/software/success/cssdb.nsf/CS/STRD-85KGS6?OpenDocument.

CASE STUDY 1-2
GOOGLE

Started in the late 1990s, Google grew rapidly to become one of the leading companies in the world. Google's mission is “to organize the world's information and make it universally accessible and useful.” It is operating on a simple but innovative business model of attracting Internet users to its free search services and earning revenue from targeted advertising. In the winner-takes-all business of Internet search, Google has captured considerably more market share than its next highest rival, Yahoo!. This has turned Google's Web pages into the Web's most valuable real (virtual) estate. Through its two flagship programs, AdWords and AdSense, Google has capitalized on this leadership position to capture the lion's share in advertisement spending. AdWords enables businesses to place ads on Google and its network of publishing partners for as low as 25 cents per thousand impressions. On the other hand, it uses AdSense to push advertisements on publishing partners' Web sites targeting specific audience and share ad revenue with the publishing partner. This creates a win–win situation for both advertisers and publishers and developed Google into one giant sucking machine for ad revenue.

Even as a large company, Google continues to take risks and expand into new markets. It currently offers over 120 products or services. Sergey Brin and Larry Page, the founders, declared in Google's IPO prospectus, “We would fund projects that have a 10% chance of earning a billion dollars over the long term. ...We place smaller bets in areas that seem very speculative or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas.” They further add that they are especially likely to fund new types of projects when the initial investment is small.

Google promotes a culture of creativity and innovation in a number of ways. IT encourages innovation in all employees by allowing them to spend 20% of their time on a project of their own choosing. In addition, it offers benefits such as free meals, on-site gym, on-site dentist, and even washing machines at the company for busy employees.

Despite open and free work culture, a rigid and procedure-filled structure is imposed for making timely decisions and executing plans. For example, when designing new features, the team and senior managers meet in a large conference room. They use the right side of the conference room walls to digitally project new features and the left side to project any transcribed critique with a timer clock giving everyone 10 minutes to lay out ideas and finalize features. Thus, Google utilizes rigorous, data-driven procedures for evaluating new ideas in the midst of a chaotic innovation process.

Google's vice president for search products and user experience, Marissa Mayer, outlines nine notions of innovations embedded in the organizational culture, processes, and structure of Google¹⁹:

1. “Innovation; not perfection” – Google employees can take a good idea and experiment to improve upon it.
2. “Ideas come from everywhere”: All Google employees can innovate.
3. “A license to pursue dreams”: To help promote innovation, Google employees get one “free” day each week to work on their pet ideas.
4. “Morph projects don't kill them”: Google employees should always to find something salvageable in projects that aren't pursued
5. “Share everything you can” – Google employees have a lot of collective knowledge. To encourage sharing, each employee writes an e-mail on Monday with five to seven bullet points of what they learned earlier and Google then consolidates this information and makes it available to the employees.
6. “Users, users, users” – Google will be successful if we can please the users; advertisers (and their money) will follow the users.
7. “Data is apolitical” – Design is a science at Google. Good ideas must be supported with evidence.
8. “Creativity loves constraints” – Google employees work best when they are challenged and have to think outside the box.
9. “You're brilliant? We're hiring” – Google likes to hire really smart people — even if they may not have a lot of experience.
10. Worry about usage and users, not money: Provide something simple to use and easy to love. The money will follow.

Keeping up with the organizational strategy of Google, its IT department provides free and open access to IT for all employees. Rather than keeping tight control, Google allows employees to choose from several options for computer and operating systems, download software themselves, and maintain official and unofficial blog sites. Google's intranet provides employees information about every piece of work at any part of Google. In this way employees can find and join hands with others working on similar technologies or features.

In building the necessary IT infrastructure, Google's IT department balances buying and making its own software depending on its needs and off-the-shelf availability. For example, it uses Oracle's accounting software, whereas it built its own customer relationship management (CRM) software, which it then integrated with its ad systems. It also supports open source projects both by extensively using open source software within the organization and by paying college students to contribute to them through programs like Summer of Code. In addition, Google also develops generic applications such as GoogleApps for both internal and external use.

Given the nature of business, security of information resources is critical for Google. For instance, its master search algorithm is considered a more valuable secret formula than CocaCola's. However, rather than improving IT security by stifling freedom through preventive policy controls, Google puts security in the infrastructure and focuses more on detective and corrective controls. Its network management software tools combined with 150 security engineers constantly look for viruses and spyware, as well as strange network traffic patterns associated with intrusion.

Discussion Questions

1. How is Google's mission statement related to its business strategy?
2. How does Google's information systems strategy support its business strategy?
3. How does Google's organizational strategy support its business strategy?
4. Which of Porter's three generic strategies does Google appear to be using based on this case? Provide a rationale for your response.
5. Analyze Google's strategy and the type of market disruption it has created using a dynamic environment perspective.

Source: The Google Case is adapted from Michelle Colin, “Champions of Innovation,” BusinessWeek (June 19, 2006), Issue 3989, pp.18–26; and Vauhini Vara, “Pleasing Google's Tech-Savvy Staff,” Wall Street Journal (March 18, 2008), p. B6.