How does kickstarter manage the collection and transfer of pledges

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A Look Toward the Future of Information Technology1

Chapter

Learning Outcomes � Describe IT and management issues, opportunities, and challenges.

� Identify management’s top concerns and the most influential ITs.

� Assess the role of IT agility, IT consumerization, and changes in competitive advantage in the second part of the Information Age.

� Explain the strategic planning process, SWOT analysis, and competitive models.

� Realize how IT impacts your career and the positive outlook for IS management careers.

Quick Look

Case 1, Opening Case: Need Start-up Cash? Try Crowdfunding at Kickstarter.com

1.1 IT and Management Opportunities and Challenges

1.2 Top Management Concerns and the Most Influential ITs

1.3 IT Agility, Consumerization, and Competitive Advantage

1.4 Strategic Planning and Competitive Models 1.5 Why IT Is Important to Your Career, and IT Careers

Key Terms

Chapter 1 Link Library

Evaluate and Expand Your Learning

• IT and Data Management Decisions • Questions for Discussion & Review • Online Activities • Collaborative Work

Case 2, Business Case: Building a Sustainable Big City with a Competitive Edge

Case 3, Video Case, Public Sector: ACCESS NYC—IT Strategy and Transformation

Data Analysis & Decision Making: Online Interactive Demo: Estimating Cost-Savings from Switching to the Cloud

References

Part I Maximizing the Value of Data and Information Technology

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In this opening chapter, you read about management’s top concerns and the information systems (ISs) they consider most influential to their organizations. Understanding sen- ior management’s priorities is a smart starting point for your career. You learn about the latest information tech- nology (IT) trends that are important across all industry sectors—small and medium businesses (SMB), multina- tionals, government agencies, healthcare, and nonprofits. Faced with business challenges, as a manager you need to implement IT solutions and track how well they improve performance. Faced with the latest new technology, as a manager you need to be able to determine whether to invest in it and how to acquire or implement it.

The power of IT to turn challenges into opportunities, to create new markets and industries, to disrupt the way work is done, and to make commerce more social and mobile stems from the creativity and talent of managers— not the capabilities of technology. Managers and workers now need talents and skills that weren’t part of our vocabulary five to ten years ago—or maybe five to ten months ago.

The opening case describes how Kickstarter responded to a universal business challenge facing entre- preneurs and artists—getting enough start-up cash—with crowdfunding.

QUICK LOOK at Chapter 1, A Look Toward the Future of Information Technology

Figure 1.1 Kickstarter.com gives entrepreneurs and those in creative industries online access to money to fund their artistic or business ideas.

If you have a brilliant idea for a film, music album, street art, or cool tech gadget, where would you get start-up money to make it happen? Hint: It’s unlikely that you’d get a bank loan and certainly not easily. Huge numbers of cash-challenged entrepreneurs and artists could not achieve their visions because of the lack of financing options available to them.

That is, until crowdfunding. In simplest terms, people who need money ask for donations to reach their financial goal and explain what they will produce if they reach that goal; and citizens of the Internet—the “crowd”—decide whether to donate and how much.

Kickstarter is the world’s largest crowdfunding site for creative projects. Kickstarter is to crowdfunding as eBay is to auctions. They’re IT platforms with payment systems that became fun and popular social commerce sites.

Crowdfunding Opportunities for Cash-Challenged Artists and Entrepreneurs Crowdfunding bypasses banks, family, and friends as funding sources. Crowdfunding needs an IT platform that makes it easy and secure to request, donate, and collect online contributions.

CASE 1 OPENING CASE Need Start-Up Cash? Try Crowdfunding at Kickstarter.com

Crowdfunding is a way to raise money (capital) for new projects by asking for contributions from a large number (crowd) of people via the Web. It’s peer-to-peer funding. Also known as crowdsource fund- ing or crowdfinancing.

Kickstarter is the world's largest crowdfunding platform for cre- ative projects.

Project creator is the creative person who posts his or her proj- ect with a video, a description of the concept, and target dollar amount on Kickstarter.com.

Backer pledges money to a proj- ect, in effect making a financial vote of confidence in the project and creator.

Funding goal is the amount of money requested by the project creator. If this goal is not reached, the deal is off.

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CASE 1 Opening Case 3

Project creators build a website where they explain their projects with a video, a description, and target funding goal. A deadline is set.

Each pledge is treated as a financial transaction. The pledge amount is charged to the pledger’s Amazon account, where the funds are held until the project’s deadline.

If the project does not hit its target by the deadline, all pledges are returned to the backers and no fees are charged.

If a project hits its target by the deadline, the project creator receives the money from Amazon Payments Services as an electronic fund transfer (EFT) to their bank account, minus fees. Kickstarter charges 5% commission, and 3% to 5% is deducted for Amazon’s service.

Visitors to the website make pledges.

Figure 1.2 The crowdfunding process.

Anyone with a creative project—called project creator—can post an online pitch to potential backers across the world on Kickstarter.com. Every week, tens of thousands of people (the crowd) pledge typically from $1 to $1,000—totaling millions of dollars—to film, music, art, technology, design, food, publishing, and other creative projects. The crowd decides which projects are worth their investments by pledging funds. Project creators keep 100% ownership and control over their work. Figure 1.2 shows how crowdfunding at Kickstarter works.

Social Commerce and Incentives Kickstarter provides the IT platform and payment systems that enable people-to-people commerce, or social commerce. Clever incentives and exclusive memberships are offered to backers, which provide the forum for social commerce. Here are three examples:

1. Two California design students in their early twenties, Jesse Genet and Stephan Angoulvant, set a $12,000 goal to launch Lumi Co., a new textile printing technology. They raised $13,597 from 188 backers. To entice backers to pledge $500 or more, they offered a personalized leather envelope, invitations to their launch party and an exclu- sive event at their Los Angeles offices for the fashion line release, and exclusive newslet- ters and discounts.

2. TikTok�LunaTik kits turn an iPod nano into a multitouch watch. Project creators asked for $15,000; but raised nearly $1 million from 13,512 backers. Backers who pledged $500 were offered a LunaTik Kickstarter Backer Edition including an 8GB iPod Nano that was laser-signed by designer Scott Wilson. It’s now a real product and for sale in the Apple store.

3. Designers of PID-Controlled Espresso Machine, which brings the consistency of expen- sive espresso machines to a low-cost machine, set a $20,000 goal. They raised $369,569 by its January 20, 2012, deadline. The $1,000 backers were offered a free custom-built machine. Every Kickstarter backer was able to buy the $400 machine for only $200.

In 2012, Kickstarter reported that $100 million was pledged into projects in 2011 with $84 million going into projects that were actually funded. Movies and music projects were the largest funded areas. Over $32 million was pledged for films and video—leading to 3,284 successful projects. For music, backers pledged close to $20 million for 3,653 successful projects. These 2011 stats roughly tripled the 2010 stats.

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4 Chapter 1 A Look Toward the Future of Information Technology

LIKE, FOLLOW, FAN, SNAP, SHARE, JOIN, SIGN UP, WATCH

Consider how often and in how many ways companies or brands ask you to connect with them, as shown in Figure 1.3.Why do businesses ask you to like, follow, fan, snap, share, sign up, watch, join, or download?

Like us on Facebook Join our circle

Follow us on Twitter

Watch us on YouTube

Be a fan Snap our tag

Download our app

Share us on LinkedIn

Sign up for mobile alerts

Figure 1.3 Common requests from companies and brands to connect with consumers and prospects via social media or mobile devices.

Crowdfunding—a Creative Integrated IT Solution Crowdfunding—which is an integration of social networking, e-commerce, and financing and payment systems—clearly is responsive to the needs of the market. In tough economic times, Kickstarter and other crowdfunding platforms offer the ability to support economic growth by funding project creators worldwide.

Sources: Compiled from Kickstarter.com (2012), Pogue (2012), lumi.co (2012), and lunatik.com/ (2012).

Discuss 1. Visit Kickstarter.com and review the “Project of the Day.” What is the project? Review

the offerings and number of backers in each level. Which two pledge levels ($1 through $1,000) have the highest number of backers? Which pledge levels are sold out, if any? Do the answers to these questions suggest that backers are actually customers making purchases (pre-sales) rather than donors making selfless contributions?

2. Explain crowdfunding and its advantages to new entrepreneurs. 3. Compare Kickstarter and eBay. 4. What characteristics make Kickstarter a social commerce site?

Decide 5. Research how Kickstarter and two other crowdfunding sites manage or provide for the

collection and transfer of pledges. Based on what you learn, is there a site that you would recommend. Explain why or why not.

Debate 6. Crowdfunding could be viewed as a technology that disrupts the financing industry. Or

it could be viewed as so unique that it has created a new industry. Create two teams, and have each team select one of these views. Debate which of view better reflects the impact of crowdfunding.

1.1 IT and Management Opportunities and Challenges The first section provides background on IT (information technology) and manage- ment trends, issues, challenges, and/or opportunities discussed in this chapter.

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The short answer is to get access to consumers and data about them to improve performance. Three examples are:

1. Overstock.com. Jonathan Johnson, a retail executive at Overstock.com, explained: “We’re not trying to use social media as a sales piece as much as an information- gathering piece. Finding out what our customers want; whether they like a product; how could we sell it better” (Jopson et al., 2011). See Figure 1.4. 2. Best Buy. Electronics retailer Best Buy learned how unpopular its restocking fees were through social media. The company changed its product-return policies elimi- nating those fees that were hurting sales. 3. Starbucks. Coffee retailer Starbucks prepared to monitor customers’ tweets about a new coffee flavor on the day it was introduced. Managers were surprised to learn that a huge majority of tweets were not about the coffee’s intense taste, but were complaints about the higher price. By the next day, they had dropped the price.

Like many companies, Overstock, Best Buy, and Starbucks are making every effort to learn how to improve performance. Several examples of learning efforts to improve performance are listed in Table 1.1.

1.1 IT and Management Opportunities and Challenges 5

Figure 1.4 Overstock.com uses data analytics to discover what their customers want, whether they like a product, and how they can sell it better.

TABLE 1.1 Common Learning Efforts to Improve Performance

• Which marketing campaigns are the most and least effective and why • What products to develop • What customers value and dislike • How to appeal to key customer groups • How to select and implement enterprise apps that will make a competitive difference • What perks strengthen customer loyalty most cost-effectively

NEXT BIG TECH TRENDS FOCUSED ON COMPETITION, GROWTH, AND INNOVATION

Four current technology trends that offer valuable business opportunities are social, mobile, cloud, and data analytics. These ITs are often used in combination to gain a competitive edge, to expand market reach, and to develop new features or ways of doing business. They make it easier and cheaper to connect with customers and sup- pliers, to work with others from anywhere, and to manage files and data.

Tech Note 1-1

The state of Wyoming switched to cloud computing in 2011. This was done by putting 10,000 employees on Google Apps for Government.

The financial impact of mobility because employees could work from anywhere and better collaboration among employees led to a savings of over $1 million per year.

A short video about Wyoming’s Story is posted on the Google Apps for Government site google.com/apps/intl/en/government/.

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6 Chapter 1 A Look Toward the Future of Information Technology

DATA ANALYTICS— FIGURING OUT WHAT THE DATA MEANS

Simply collecting data has no effect on performance. Data needs to be analyzed. Data analytics refers to the specialized software, capabilities, and components all geared toward exploring huge volumes of data to provide greater insight and intelligence— and doing so quickly. Why is it important to analyze quickly? One reason is to be able to know how a particular sale or marketing campaign has influenced sales.

The processes needed to prepare for and conduct data analytics are complex and expensive—and require expertise in statistics and modeling. Data analytic processes include:

1. Locating and collecting reliable data from multiple sources that are in various formats. 2. Preparing the data for analysis. Collected data is not usable until it has been organized, standardized, duplicates are removed (called deduping), and other data- cleansing processes are done. 3. Performing the correct analyses, verifying the analyses, and then reporting the findings in meaningful ways.

In the early 2000s, the ability to perform data analytics in real time, or near-real time, improved when vendors and consulting companies started offering it as a serv- ice. In the 2010s, vendors offered pre-built, hosted analytics and advanced analytics solutions that reduced total cost of ownership (TCO) and made it feasible for com- panies to implement data analytics.

Macys’ and other large retailers used to spend weeks reviewing their last season’s sales data. With data analytic capabilities, they can now see instantly how an e-mailed discount code or flash sale for athletic wear played out in different regions. Charles W. Berger, CEO of ParAccel (ParAccel.com), a data analytics provider said: “We have a banking client that used to need four days to make a decision on whether or not to trade a mortgage-backed security.They do that in seven minutes now.” Data analytics is used by Wal-Mart stores to adjust its inventory levels and prices; and by FedEx for tweaking its delivery routes. IT at Work 1.1 identifies other users of data analytics.

IT at Work 1.1w

Data analytics have interesting applications. Here is one famous example of data analytics in action.

Watson is a computer system created by a team of 25 IBM scientists over four years. In 2011, Watson competed against Ken Jennings for Brad Rutter on the game show Jeopardy (see Figure 1.5) in a three-day tournament and won. Watson received the clues as electronic texts at the same time they were made visible to Ken and Brad. Watson would then parse the clues into different keywords and sentence fragments in order to find sta- tistically related phrases. Watson won by using its ability to quickly execute thousands of language analysis algorithms simultaneously to compile potential answers and determine its level of confidence in any given answer.

Questions

1. Explain how Watson figured out the most likely response to win the tournament.

2. View the IBM demo, “Turning insight into outcomes,” at ibm.com/smarterplanet/us/en/business_analytics/article/ outperform_with_smarter_analytics.html.

3. Discuss how companies in various industries are using the insights from analytics to achieve significant outcomes in cus- tomer satisfaction and retention, operational efficiency, finan- cial processes, and/or risk, fraud, and compliance management.

Watson Wins Jeopardy, Leaving Human Champions in its Silicon Dust

Figure 1.5 Using data analytics, Watson beats Ken and Brad playing Jeopardy.

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Data analytics can help companies achieve these business outcomes:

• Grow their customer base • Retain the most profitable customers. • Continuously improve operational efficiency. • Transform and automate financial processes. • Detect and deter fraud.

One example is Florida Power and Light (FPL). Mark Schweiger, a senior business analyst at FPL, helped implement a data analytics program to detect electricity theft. Theft was being detected using visual inspection by meter readers and field investi- gators. FPL knew that an advanced metering infrastructure system would provide data that could flag suspicious accounts for closer examination. In 2009, FPL began implementing a meter data analytics program with the help of vendor DataRaker (dataraker.com) estimated for use by 2013.

FPL feeds its vendor meter and customer data, which the vendor crunches to create meaningful red flags indicating electricity theft. The program helps detect when someone is using an unauthorized meter, is bypassing an approved meter, is using a powerful magnet to suppress usage (and billing) data, and has reconnected service without authorization.

1.2 Top Management Concerns and Influential ITs 7

MESSY DATA As you know from your own experience, a lot of data is now text—and text is messy. Messy data is the term used to refer to data (e.g., tweets, posts, click streams, images, including medical images) that cannot be organized in a way that a computer can easily process. Data sources include smartphones, social networks, microblogs, click streams from online activities, location-aware mobile devices, scanners, and sensors that automatically collect everything from inventory movement to heart rates. Michael Olson, CEO of Cloudera (cloudera.com) explained:

The old days were about asking,“What is the biggest, smallest, and average?”Today it’s,“What do you like? Who do you know? “It’s answering these complex questions.

In 2012, research firm Gartner predicted that data will grow 800 percent over the next five years, and 80 percent of the data will be unstructured.

BIG DATA ANALYTICS— THE NEXT FRONTIER OF OPPORTUNITIES

Huge sets of messy data from sources such as multi-petabyte data warehouses, social media, and mobile devices are called big data. Research by the McKinsey Global Institute found that big data analytics, which is the ability to analyze big data sets, is the next frontier of opportunities for competition, productivity growth, and innova- tion (Manyika, 2011). Most other research and consulting firms agree that data ana- lytics to gain insights and a competitive edge is one of the biggest opportunities and challenges facing managers.

Questions 1. Why do businesses ask you to like, follow, fan, or interact with them via social

networks or web sites? 2. Why is data analytics challenging for companies? 3. Explain messy data. 4. What are the sources of messy data? 5. Explain big data analytics.

1.2 Top Management Concerns and Influential ITs What do managers consider the most critical building blocks to improving their abil- ity to do their jobs and organizational performance? What ITs are most influential? You will read answers to these questions in this section.

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8 Chapter 1 A Look Toward the Future of Information Technology

BUSINESS PERFORMANCE DEPENDS ON QUALITY INFORMATION AND IT CAPABILITIES

Business performance is directly related to the quality of information. Table 1.2 describes the key characteristics of high-quality information.

An important principle is that what a company can accomplish or achieve depends on what its ITs can do. And for many, business survival depends on IT innovation. Oana Garcia, vice president and Chief Data Officer at Citigroup New York, pointed out that “business and technology teams need to work together and understand the benefits of smart, cost-effective, and collaborative data manage- ment, and the implementation of this knowledge is key (McKinsey Quarterly, 2011).

Managers of a large U.S. retailer experienced this principle in 2011 as they strug- gled to understand why their sales were dropping.They had been implementing new online promotions, yet continued losing market share in several profitable segments to a major competitor. When senior managers researched their competitor’s prac- tices, they discovered that their problem ran deeper than they had imagined. The competitor had invested heavily in ITs to develop capabilities to collect, integrate, and analyze data from each store and every sales unit. Data was used to run real- world experiments prior to making business decisions. In addition, the competitor had linked its databases to suppliers’ databases, which made it possible to adjust prices in real time, to reorder hot-selling items automatically, and to shift items from store to store easily. Their rival’s agility and flexibility enabled them to gain an edge and market share.

Despite potential benefits, managers must be careful to avoid “paralysis of analy- sis.” They should not lose agility and flexibility in the hope of gathering perfect data when making time-sensitive decisions.

PRIORITIES DRIVE INVESTMENTS

Another well-known principle states what’s important gets done.With economic and business conditions recovering slowly, but not steadily, from the worldwide 2008–2011 recessions, budgets and resources are tight. Investment options are

TABLE 1.2 Summary of Characteristics of High-Quality Information

Quality Characteristic Description

Relevant Information is either relevant or irrelevant to a decision. Irrelevant information interferes with the process—no matter how interesting it is—because it wastes time or causes confusion or delay. Irrelevant information is a persistent problem because ISs are good at generating lots of it.

Timely This characteristic means that the decision maker receives the information when he or she needs it—that is, when it would be meaningful to the decision.

For example, the manager of a retail chain needs daily information on stores’ performance and products that are selling unusually high or low, so that immediate cor- rective action can be taken. Receiving performance information at the end of the month leaves thirty-day gaps in corrective actions.

Reliable, accurate This characteristic means that the information can be trusted and that the decision maker has confidence that information is free from errors, to the extent possible. For example, calculations are correct and data are in correct categories. When information is trusted, it elimi- nates wasting time having to verify it. Typically, it is more important for the information to be timely than to be perfect.

Easy to understand This characteristic means that information is presented and use clearly, and concisely, and is well-documented.

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1.2 Top Management Concerns and Influential ITs 9

Figure 1.6 Top 5 management concerns and 5 most influential ITs. These findings are based on survey responses from 472 organizations—172 U.S., 142 European, 103 Asian, and 55 Latin America—in mid-2010.

• Business productivity and cost reduction • IT and business alignment • Business agility and speed to market • Business process reengineering (BPR) • IT reliability and efficiency

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• Business intelligence (BI) • Cloud computing • Enterprise resource planning (ERP) • Software as a service (SaaS) • Collaboration and workflow tools

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scrutinized to determine their value potential. With limited resources available, pri- orities (those with the highest payoff potential) get funded, while non-priorities get cut when budget decisions are made.

A helpful way to understand business priorities, issues, challenges, and trends is to look at what managers in the United States, Europe,Asia, and Latin America have reported as their top concerns and the ITs that are most influential to success. Refer to Figure 1.6.The two top 5 lists summarize the Society for Information Management (SIM) survey responses from 472 organizations—172 U.S., 142 European, 103 Asian, and 55 Latin American—in mid-2010. In previous economic downturns, business executives typically had cut back on IT budgets (as well as advertising and new prod- uct development) to reduce costs. But in the latest recession, which was worse than prior ones, the opposite has occurred.Taking both top 5 lists into consideration indi- cates that executives are relying on IT to help cut costs and boost productivity. You read about the ITs listed in Figure 1.6 in the next sections and chapters.

TOP 5 MANAGEMENT CONCERNS

Business productivity and cost reduction. Business productivity and cost reduc- tion were the top concerns by a wide margin. Productivity is a measure of efficiency and can be represented by the following model (formula).

Types of outputs depend on the industry. Outputs can be the number of units manu- factured or sold, the number of customers serviced, or the value of new deposits. Inputs are the resources used to produce the outputs. Examples are the number of labor hours, amount of raw materials, and technology. Productivity gains can be achieved by:

• Increasing output, while maintaining the same level of inputs • Maintaining output, while reducing the level of inputs • A combination of the above

IT and Business Alignment. Aligning IT with business means leveraging opportu- nities for IT to support business strategy and improve success. IT-business alignment depends on the IT department understanding strategy, risks, opportunities; and the business understanding IT’s potential and limitations.

Business Agility and Speed to Market. Boom economic conditions typically pro- vide companies with plenty of opportunities to improve performance. But during downturns and global financial crises, opportunities are harder to find, and the risk of failure rises.As markets recover from a worldwide recession, managers are explo- ing new strategies to improve business performance, or profitability. One approach

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10 Chapter 1 A Look Toward the Future of Information Technology

Video 1-1 Business Processes youtube.com/watch?v=JUInjQvz IkE&feature=related

5 MOST INFLUENTIAL ITs Business Intelligence (BI). You’re familiar with the importance and role of intelli- gence in national security and the military. Intelligence activities also improve the suc- cess of business strategy and operations. BI technologies can help to run the business more efficiently, identify trends and relationships in organizational data, and create or take advantage of business opportunities. Implementing BI successfully is extremely challenging technically because it requires the integration, computation, and analysis of massive data repositories, which is not easy to do. Chapter 11 covers BI in depth.

Cloud Computing. The cloud is a term for networked computers, including the pub- lic Internet. Often “cloud” means “Internet.” Cloud computing (or cloud infrastruc- ture or cloud services) does not refer to a specific arrangement, but rather to various computing and network arrangements. To maximize the benefits of cloud comput- ing, companies can build a private cloud, public cloud, or leverage their current IT environment to build a hybrid cloud. See Tech Note 1-2 for more details.

Cloud computing makes it possible for almost anyone to deploy tools that can scale on demand to serve as many users as needed. Many users can access the same apps and from any networked location because they are stored (hosted) on a pow- erful shared infrastructure in the cloud.

is to develop the agility needed to identify and capture opportunities more quickly than rivals. The importance of being an agile enterprise, which is one that has the ability to adapt and respond rapidly, has never been greater because of struggling economic recoveries and advances in mobile and social technologies.

Business Process Reengineering (BPR). A business process is a series of tasks per- formed by people or systems that are designed to produce a specific output or achieve a predetermined outcome.Tasks are carried out according to certain rules, standards, or policies. Examples of business processes are customer order processing, credit approval, opening a new account, order fulfillment, processing an insurance claim, and shipping a product. The credit approval process involves a series of steps and decisions to determine whether or not to extend credit and the terms of the loan. Processes range from fully-automated to manual. For additional examples of busi- ness processes, view Video 1-1. In a business process, electronic or hard copy business records or documents are created, used, and changed.

The goal of business process reengineering (BPR) is to eliminate the unnecessary non–value added processes, then to simplify and automate the remaining processes to significantly reduce cycle time, labor, and costs. Cycle time is the time required to com- plete a given process. For example, reengineering the credit approval process can cut time from several days or hours to minutes or less. Simplifying processes naturally reduces the time needed to complete the process, which also cuts down on errors.

IT Reliability and Efficiency. Managers and others need to know that they can trust the data—be able to rely on the accuracy, availability, security, and accessibility of data and information systems. Federal and state regulations have made data privacy and protection a legal requirement and impose huge fines for violations.

Tech Note 1-2

Companies may lease a cloud computing solution from a service provider. This is known as a public cloud. A public cloud allows companies to avoid purchasing and managing certain hardware and software while still delivering their IT services.

For other companies, the most effective way to deliver IT services is to leverage exist- ing IT infrastructure alongside public and private cloud resources to build a hybrid cloud. By building a hybrid cloud, companies get the benefits of a public cloud while main- taining control and security.

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1.2 Top Management Concerns and Influential ITs 11

In 2011, the U.S. government issued the Federal Cloud Computing Strategy that describes cloud computing as a:

profound economic and technical shift (with) great potential to reduce the cost of Federal Information Technology (IT) sys- tems while . . . improving IT capabilities and stimulating inno- vation in IT solutions.

The strategy is designed to facilitate federal agencies’ adoption of cloud computing, support the private sector, and improve the information available to decision makers.

The chart in Figure 1.7 shows the government estimates shift- ing $20 billion of IT spending to cloud computing from its current environment. The benefits of the shift are listed in Figure 1.8.

Questions 1. Why did the federal government shift to the cloud?

2. What external pressures are motivating the shift to cloud com- puting?

3. What three types of benefits did they expect?

4. In your opinion, was this shift to the cloud a smart decision for taxpayers? Explain.

Federal Cloud Computing Strategy

IT at Work 1.2w

Figure 1.7 Estimated portion of Federal IT spending that is able to be moved to cloud computing. 1. Based on agency estimates as reported to the Office Management and Budget (OMB). © Federal Cloud Computing Strategy, February 8, 2011, cio.gov/documents/Federal-Cloud-Computing-Strategy.pdf

$80 Billion

Total IT spending Potential spending on cloud computing

$20 Billion

Figure 1.8 Three categories of cloud benefits are efficiency, agility, and innovation. © Federal Cloud Computing Strategy, February 8, 2011, cio.gov/documents/Federal-Cloud-Computing- Strategy.pdf.

EFFICIENCY

AGILITY

INNOVATION

Cloud Benefits

Cloud Benefits

Current Environment

Current Environment

Current EnvironmentCloud Benefits

• Improved asset utilization (server utilization > 60–70%)

• Aggregated demand and accelerated system con- solidation (e.g., Federal Data Center Consolidation Initiative)

• Improved productivity in application development, application management, network, and end-user

• Low asset utilization (server utilization < 30% typical)

• Fragmented demand and duplicative systems

• Difficult-to-manage systems

• Purchase “as-a-service” from trusted cloud providers

• Near-instantaneous increases and reductions in capacity

• More responsive to urgent agency needs

• Shift focus from asset ownership to service management

• Tap into private sector innovation

• Encourages entrepreneurial culture

• Better linked to emerging technologies (e.g., devices)

• Years required to build data centers for new services

• Months required to increase capacity of existing services

• Burdened by asset management

• De-coupled from private sector innovation engines

• Risk-adverse culture

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12 Chapter 1 A Look Toward the Future of Information Technology

IT at Work 1.3w

The Internet of things refers to a set of capabilities emerging because of physical things being connected to the Internet or net- worked via sensors. Networks link data from products or operations, which can generate better information and analysis. These networks capture huge volumes of data that flow to computers for analysis.

Application of the Internet of things: Embedded sensors When devices or products are embedded with sensors, companies can track their movements or monitor interactions with them. Business models can be fine-tuned to take advantage of this behav- ioral data. How a company generates revenue from its assets is determined by its business model. A business model describes how a company actually operates—how work is done, the degree of automation, the pricing and design of products or services, and how the company generates sales revenue and profit to sustain itself.

The Internet of Things

For example, an insurance company offers to install location- sensors in customers’ cars. By doing so, the company develops the ability to price the drivers’ policies on how a car is driven and where it travels. Pricing is customized to match the actual risks of operating a vehicle rather than based on general proxies—driver’s age, gender, or place of residence.

Objects are becoming embedded with sensors and gaining the ability to communicate. The resulting information networks promise to create new business models, improve business processes, and reduce costs and risks. For example, sensors and network connections can be embedded in rental cars. Zipcar has pioneered this business model, which includes renting cars by the hour. See Figure 1.9. Cars are leased for short time spans to reg- istered members making rental centers unnecessary. Traditional car rental agencies are starting to experiment with sensors so that each car’s use can be optimized for higher revenues.

Enterprise Resource Planning (ERP). ERP also refers to technology infrastructure and/or apps that support essential business processes and operations. ERP systems are commercial software packages that are bought as modules. Examples of mod- ules are accounting, inventory management module, supply chain management man- ufacturing, financial, human resources, budgeting, sales, and customer service. The modules that are bought are integrated—and the result is an ERP. ERP solutions are often cloud-based, as you read in Chapter 10.

Software as a Service (SaaS). Software-as-a-service (SaaS) is pay-per-use arrange- ment. Software is available to users when they need it. Since pay-per-use is the arrangement for most utilities (electricity, water, gas) other terms for SaaS are on- demand computing, utility computing, and hosted services.

It’s tough to understand how SaaS differs from cloud computing. Cloud com- puting enables users to access data, software, or services via the Internet. SaaS is an arrangement where instead of buying and installing enterprise apps, users access those apps from a SaaS vendor over a network via a browser. Usually there is no hardware and software to buy since apps are used over the Internet and paid for through a fixed subscription fee, or on a pay-per-use basis such as electricity or gas.

Collaboration and Workflow Tools. These tools help people work together in an organized way and manage their tasks more effectively regardless of their location. Employees and managers expect to be able to do work from their mobile and digi- tal devices. Hendrick Motorsports is one of the most famous and highest-winning NASCAR racing teams. For details on how the crew uses Group Chat to collabo- rate on racetracks, view Video-1-2.

These sets of five business priorities and influential ITs provide a helpful foun- dation and framework for understanding the strategic and operational role of IT in small and medium businesses (SMB), multinationals, government agencies, health- care, and nonprofits. IT at Work 1.3 describes not a single IT, but a concept made possible by a group of ITs.

Questions 1. What are the top five concerns of management? Briefly explain each. 2. What are the five most influential ITs? Briefly explain each. 3. Describe a business process. 4. Explain the Internet of things.

Video-1-2 Collaboration NASCAR and Hendrick Motorsports microsoft.com/casestudies/ Microsoft-Lync-Server/Hendrick- Motorsports/NASCAR-racing- team-uses-Lync-to-put- themselves-in-a-position-to- win-the-race/4000011091

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1.3 IT Agility, Consumerization, and Competitive Advantage 13

1.3 IT Agility, Consumerization, and Competitive Advantage Agility means being able to respond quickly. In Figure 1.8, a benefit of a scalable cloud IT infrastructure is that the IT function can be more responsive to urgent agency needs. Responsive means that IT capacity can be easily scaled up or down as needed. In contrast, with a traditional non-cloud environment, it took months to increase the capacity of existing IT services because of the need to acquire and install additional hardware and software. Agora Games had the same time lag before tran- sitioning to cloud storage. The benefit of IT agility to business operations is being able to take advantage of opportunities faster or better than competitors.

Closely related to IT agility is flexibility. Flexible means having the ability to quickly integrate new business functions or to easily reconfigure software or apps. For example, mobile networks are flexible—able to be set up, moved, or removed easily, without dealing with cables and other physical requirements of wired networks. Mass migration to mobile devices from PCs has expanded the scope of IT beyond traditional organizational boundaries—making location irrelevant for the most part.

IT agility, flexibility, and mobility are tightly interrelated and fully dependent on an organization’s IT infrastructure and architecture, which are covered in greater detail in Chapter 2.

IT CONSUMERIZATION With mobile devices, apps, platforms, and social media becoming inseparable parts of work life and corporate collaboration and with more employees work from home, the result is the rapid consumerization of IT.

Figure 1.9 A Zipcar reserved parking sign in Washington, DC.

many of these signs remotely and continuously, giving practi- tioners early warning of conditions that could lead to expen- sive emergency care. Better management of congestive heart failure alone could reduce hospitalization and treatment costs by $1 billion per year in the U.S.

• In retail, sensors can capture shoppers’ profile data stored in their membership cards to help close purchases by providing additional information or offering discounts at the point of sale.

• Farm equipment with ground sensors can take into account crop and field conditions, and adjust the amount of fertilizer that is spread on areas that need more nutrients.

• Billboards in Japan scan passersby, assessing how they fit con- sumer profiles, and instantly change the displayed messages based on those assessments.

• The automobile industry is developing systems that can detect imminent collisions and take evasive action. Certain basic appli- cations, such as automatic braking systems, are available in high-end autos. The potential accident reduction savings result- ing from wider deployment of these sensor systems could exceed $100 billion annually.

Questions and online activity

1. Research Zipcar. How does this company’s business model dif- fer from traditional car rental companies, such as Hertz or Avis?

2. Think of two physical things in your home or office that, if they were embedded with sensors and linked to a network, would improve the quality of your work or personal life. Describe these two scenarios.

3. What demands does the Internet of things place on IT budg- ets or data centers?

4. What are some privacy concerns?

Opportunities for improvement Other applications of embedded physical things are:

• In the oil and gas industry, exploration and development can rely on extensive sensor networks placed in the earth’s crust to produce more accurate readings of the location, structure, and dimensions of potential fields. The payoff would be lower development costs and improved oil flows.

• In health care, sensors and data links can monitor patient’s behavior and symptoms in real time and at low cost, allowing physicians to better diagnose disease and prescribe tailored treatment regimens. Sensors have been embedded in patients with heart or chronic illnesses so that their conditions can be monitored continuously as they go about their daily activities. Sensors placed on congestive heart patients can now monitor

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14 Chapter 1 A Look Toward the Future of Information Technology

IT consumerization is the migration of consumer technology into enterprise com- puting environments.This shift has occurred because personally-owned IT is as capa- ble and cost-effective as its enterprise equivalents.

IT at Work 1.4w

The Information Age is in its second half, according to Gartner, Inc., which differs significantly for the first half. In the Information Age’s first 80 years, the primary focus was the technology itself. This led to enormous growth and profits for IBM, Microsoft, and other giant IT providers. To a large extent, organizations gained competitive advantages from access to ITs from these providers: for instance, by investing more capital in IT or by having better skills at installing IT in their businesses. The opportunities to gain a competitive edge in these ways don’t exist anymore.

Mark Raskino, vice president and Gartner Fellow predicted:

In the second half of the age, as technology becomes ubiq- uitous, consumerized, cheaper and more equally available to all, the focus for differentiation moves to exploitation of the technology and to the information it processes.

It is already noticeable that the great fortunes of the sec- ond half of the age are being made by companies like Google and Facebook, which are not traditional makers of technology.

In this period, the majority of companies that enjoy com- petitive advantage will gain it from a differential ability to see and exploit the opportunities of new kinds of information (Gartner, December 2011)

Despite the weak and uncertain economic situation, no dra- matic cuts to enterprise IT budgets were expected through the mid-2010s. Budgets are being scrutinized closely, and companies have conservative business plans, but IT investments are looked at as critical for ongoing business success.

Questions and Online Activity

1. Explain the differences in the first and second halves of the Information Age, according to Gartner.

2. Register for a free account at gartner.com. Search for the lat- est webinar on hot IT trends, such as The Gartner Hype Cycle Special Report. Watch the webinar. In a report, identify the title and URL of the webinar; then describe three important trends and their impacts that were covered in the webinar.

Radical Change in Opportunities to Gain a Competitive Advantage

COMPETITIVE ADVANTAGE

Two key components of corporate profitability are:

1. Industry structure: An industry’s structure determines the range of profitability of the average competitor and can be very difficult to change. 2. Competitive advantage: This is an edge that enables a company to outperform its average competitor. Competitive advantage can be sustained only by continually pur- suing new ways to compete.

IT plays a key role in competitive advantage, but that advantage is short-lived if competitors quickly duplicate it. Research firm Gartner defines competitive advan- tage as a difference between a company and its competitors that matters to cus- tomers. IT at Work 1.4 describes changes in opportunities for leadership.

It is important to recognize that some types of IT are commodities, which do not provide a special advantage. Commodities are basic things that companies need to function, like electricity and buildings. Computers, databases, and network services are examples of commodities. In contrast, how a business applies IT to support busi- ness processes transforms those IT commodities into competitive assets. Critical busi- ness processes are those that improve employee performance and profit margins.

The next section focuses on technology issues and provides an overview of core IS and IT concepts.

Questions 1. What are the characteristics of an agile organization? 2. Explain IT consumerization. 3. What are two key components of corporate profitability? 4. Define competitive advantage. 5. What is a business model?

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1.4 Strategic Planning and Competitive Models 15

1.4 Strategic Planning and Competitive Models Strategy planning is critical for all organizations, including government agencies, health care, education, military, and other nonprofit ones. We start by discussing strategic analysis and then explain the activities or component parts of strategic planning.

Strategic technologies are those with the potential for significant impact on the enterprise during the next three years.

WHAT IS STRATEGIC (SWOT) ANALYSIS?

There are many views on strategic analysis. In general, strategic analysis is the scan- ning and review of the political, social, economic, and technical environment of the organization. For example, any company looking to expand its business operations into a developing country has to investigate that country’s political and economic stability and critical infrastructure. That strategic analysis would include review- ing the U.S. Central Intelligence Agency’s (CIA) World Factbook (cia.gov/library/ publications/the-world-factbook/).The World Factbook provides information on the history, people, government, economy, geography, communications, transportation, military, and transnational issues for 266 world entities. Then the company would need to investigate competitors and their potential reactions to a new entrant into their market. Equally important, the company would need to assess its ability to com- pete profitably in the market and impacts of the expansion on other parts of the com- pany. For example, having excess production capacity would require less capital than if a new factory needed to be built.

The purpose of this analysis of the environment, competition, and capacity is to learn about the strengths, weaknesses, opportunities, and threats (SWOT) of the expansion plan being considered. SWOT analysis, as it is called, involves the evalu- ation of strengths and weaknesses, which are internal factors; and opportunities and threats, which are external factors. Examples are:

• Strengths: Reliable processes; agility; motivated workforce • Weaknesses: Lack of expertise; competitors with better IT infrastructure • Opportunities: A developing market; ability to create a new market or product • Threats: Price wars or other fierce reaction by competitors; obsolescence

SWOT is only a guide. The value of SWOT analysis depends on how the analy- sis is performed. Here are several rules to follow:

• Be realistic about the strengths and weaknesses of your organization • Be realistic about the size of the opportunities and threats • Be specific and keep the analysis simple, or as simple as possible • Evaluate your company’s strengths and weaknesses in relation to those of com- petitors (better than or worse than competitors) • Expect conflicting views because SWOT is subjective, forward-looking, and based on assumptions

SWOT analysis is often done at the outset of the strategic planning process. Now you will read answers to the question, “what is strategic planning?”

WHAT IS STRATEGIC PLANNING?

Strategic planning is a series of processes in which an organization selects and arranges its businesses or services to keep the organization viable (healthy or func- tional) even when unexpected events disrupt one or more of its businesses, mar- kets, products, or services. Strategic planning involves environmental scanning and prediction, or SWOT analysis, for each business relative to competitors in that business’ market or product line. The next step in the strategic planning process is strategy.

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16 Chapter 1 A Look Toward the Future of Information Technology

Video-1-3 Five Competitive Forces That Shape Strategy, by Michael Porter youtube.com/watch?v= mYF2_FBCvXw

WHAT IS STRATEGY? Strategy defines the plan for how a business will achieve its mission, goals, and objec- tives. It specifies the necessary financial requirements, budgets, and resources. Strategy addresses fundamental issues such as the company’s position in its indus- try, its available resources and options, and future directions. A strategy addresses questions such as:

• What is the long-term direction of our business? • What is the overall plan for deploying our resources? • What trade-offs are necessary? What resources will it need to share? • What is our position compared to our competitors? • How do we achieve competitive advantage over rivals in order to achieve or max- imize profitability?

Two of the most well-known methodologies were developed by Porter. Their essentials are presented next.

PORTER’S COMPETITIVE FORCES MODEL AND STRATEGIES

Michael Porter’s competitive forces model, also called the five-forces model, has been used to identify competitive strategies.The model demonstrates how IT can enhance competitiveness. Professor Porter discusses this model in detail in a 13-minute YouTube video from the Harvard Business School.

The model recognizes five major forces (think of them as pressures or drivers) that could influence a company’s position within a given industry and therefore, the strat- egy that management chooses to pursue. Other forces, such as those cited in this chap- ter, including new regulations, affect all companies in the industry, and therefore may have a rather uniform impact on each company in an industry.Although the details of the model differ from one industry to another, its general structure is universal.

According to Porter, an industry’s profit potential is largely determined by the intensity of competitive forces within the industry, shown in Figure 1.10.A good under- standing of the industry’s competitive forces and their underlying causes is a crucial component of strategy formulation, which is the building of defenses against the com- petitive forces, or finding a viable position in an industry where the forces are weaker.

Basis of the Competitive Forces Model. Before examining the model, it’s helpful to understand that it is based on the fundamental concept of profitability and profit margin.

PROFIT � TOTAL REVENUES minus TOTAL COSTS. Profit is increased by increasing total revenues and/or decreasing total costs. Profit is decreased when total revenues decrease and/or total costs increase.

PROFIT MARGIN � SELLING PRICE minus COST OF THE ITEM. Profit mar- gin measures the amount of profit per unit of sales, and does not take into account all costs of doing business.

Five Industry Forces. According to Porter’s competitive forces model, the five major forces in an industry affect the degree of competition, which impact profit mar- gins and ultimately profitability. These forces interact so while you read about them individually, their interaction determines the industry’s profit potential. For exam- ple, while profit margins for pizzerias may be small, the ease of entering that indus- try draws new entrants into that industry. Conversely, profit margins for delivery services may be large, but the cost of the IT to support the service is a huge barrier to entry into the market.

Here is an explanation of the five industry (market) forces.

1. Threat of entry of new competitors. Industries that have large profit margins attract others (called entrants) into the market to a greater degree than small margins. It’s the same principle as jobs—people are attracted to higher-paying jobs, provided that they can meet or acquire the criteria for that job. In order to gain market share, entrants typically sell at lower prices or offer some incentive. Those companies already in the

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industry may be forced to defend their market share by lowering prices, which reduces their profit margin. Thus, this threat puts downward pressure on profit mar- gins by driving prices down.

This force also refers to the strength of the barriers to entry into an industry, which is how easy it is to enter an industry. The threat of entry is lower (less power- ful) when existing companies have ISs that are difficult to duplicate or very expen- sive. Those ISs create barriers to entry that reduce the threat of entry. 2. Bargaining power of suppliers. Bargaining power is high where the supplier or brand is powerful, such as Apple, Microsoft, and auto manufacturers. Power is determined by how much a company purchases from a supplier.The more powerful company has the leverage to demand better prices or terms, which increase its profit margin. Conversely, suppliers with very little bargaining power tend to have small profit margins. 3. Bargaining power of customers or buyers. This force is the reverse of the bar- gaining power of suppliers. Examples are Dell Computers, Wal-Mart, and govern- ments. This force is high where there a few, large customers or buyers in a market. 4. Threat of substitute products or services. Where there is product-for-product sub- stitution, such as Kindle for Nook or e-mail for fax, there is downward pressure on prices. As the threat of substitutes increases, profit margin decreases because sellers need to keep prices competitively low. 5. Competitive rivalry among existing firms in the industry. Fierce competition involves expensive advertising and promotions, intense investments in research and development (R&D), or other efforts that cut into profit margins. This force is most likely to be high when entry barriers are low; threat of substitute products is high, and suppliers and buyers in the market attempt to control. That’s why this force is placed in the center of the model.

The strength of each force is determined by the industry’s structure. Existing companies in an industry need to protect themselves against these forces. Alternatively, they can take advantage of the forces to improve their position or to challenge industry leaders. The relationships are shown in Figure 1.10.

Companies can identify the forces that influence competitive advantage in their marketplace and then develop a strategy. Porter (1985) proposed three types of strategies—cost leadership, differentiation, and niche strategies.

In Table 1.3, Porter’s three classical strategies are listed first, followed by a list of nine other general strategies for dealing with competitive advantage. Each of these strategies can be enhanced by IT, as will be shown throughout the book.

1.4 Strategic Planning and Competitive Models 17

Figure 1.10 Porter’s competitive forces model.

Threat of New Entrants

Supplier Power (Bargaining Power of Suppliers and Brands)

Buyer Power (Bargaining Power of Buyers and Distribution Channels)

Rivalry

Competing Companies

Our Company

Threat of Substitute Products or Services

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Primary activities are those business activities through which a company pro- duces goods, thus creating value for which customers are willing to pay. Primary activ- ities involve the purchase of materials, the processing of materials into products, and delivery of products to customers. Typically, there are five primary activities:

1. Inbound logistics, or acquiring and receiving of raw materials and other inputs 2. Operations, including manufacturing and testing 3. Outbound logistics, which includes packaging, storage, delivery, and distribution 4. Marketing and sales to customers 5. Services, including customer service

The primary activities usually take place in a sequence from 1 to 5. As work pro- gresses, value is added to the product in each activity. To be more specific, the incom- ing materials (1) are processed (in receiving, storage, etc.) in activities called inbound logistics. Next, the materials are used in operations (2), where significant value is added by the process of turning raw materials into products. Products need to be prepared for delivery (packaging, storing, and shipping) in the outbound logistics activities (3). Then marketing and sales (4) attempt to sell the products to customers, increasing prod- uct value by creating demand for the company’s products. The value of a sold item is much larger than that of an unsold one. Finally, after-sales service (5), such as warranty service or upgrade notification, is performed for the customer, further adding value. The goal of these value-adding activities is to make a profit for the company.

Primary activities are supported by the following support activities:

1. The firm’s infrastructure, accounting, finance, and management. 2. Human resources (HR) management. For an IT-related HR trend, see IT at Work 1.5.

18 Chapter 1 A Look Toward the Future of Information Technology

TABLE 1.3 Strategies for Competitive Advantage

Strategy Description

Cost leadership Produce product/service at the lowest cost in the industry. Differentiation Offer different products, services, or product features. Niche Select a narrow-scope segment (market niche) and be the

best in quality, speed, or cost in that segment. Growth Increase market share, acquire more customers, or sell

more types of products. Alliance Work with business partners in partnerships, alliances, joint

ventures, or virtual companies. Innovation Introduce new products/services; put new features in

existing products/services; develop new ways to produce products/services.

Operational effectiveness Improve the manner in which internal business processes are executed so that the firm performs similar activities better than rivals.

Customer orientation Concentrate on customer satisfaction. Time Treat time as a resource, then manage it and use it to the

firm’s advantage. Entry barriers Create barriers to entry. By introducing innovative products

or using IT to provide exceptional service, companies can create entry barriers to discourage new entrants.

Customer or Encourage customers or suppliers to stay with you rather supplier lock-in than going to competitors. Reduce customers’ bargaining

power by locking them in. Increase switching costs Discourage customers or suppliers from going to

competitors for economic reasons.

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3. Technology development, and research and development (R&D). 4. Procurement, or purchasing.

Each support activity can be applied to any or all of the primary activities. Support activities may also support each other, as shown in Figure 1.11.

Innovation and adaptability are critical success factors, or CSFs, related to Porter’s models. CSFs are those things that must go right for a company to achieve its mission.

1.4 Strategic Planning and Competitive Models 19

Accounting, legal & finance

Human resources management

INBOUND LOGISTICS Quality control, receiving, raw materials control

OPERATION

Manufacturing, packaging, production control, quality control

OUTBOUND LOGISTICS Order handling, delivery, invoicing

SALES & MARKETING Sales campaigns, order taking, social networking, sales analysis, market research

SERVICING

Warranty, maintenance

Procurement

Product and technology development

Legal, accounting, financial management

Personnel, recruitment, training, staff planning, etc.

Supplier management, funding, subcontracting

Product and process design, production engineering, market testing, R&D

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Figure 1.11 A firm’s value chain. The arrows represent the flow of goods, services, and data.

IT at Work 1.5w

Managers at a global energy services company could not find or access their best talent to solve clients’ technical problems because of geographic boundaries and business unit barriers. The company’s help desks supported engineers well enough for com- mon problems, but not for difficult issues that needed creative solu- tions. Using Web technologies to expand access to experts worldwide, the company set up new innovation communities across its business units, which have improved the quality of its services.

Dow Chemical set up its own social network to help managers identify the talent they need to carry out projects across its diverse business units and functions. To expand its talent pool, Dow extended the network to include former employees and retirees.

Other companies are using networks to tap external talent pools. These networks include online labor markets, such as Amazon Mechanical Turk and contest services, such as InnoCentive that help solve business problems.