Strategic Use of Information Technology

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Strategic Use of Information Technology

• IFMG640

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• 1. History of Strategic Uses of IT

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• 1.1. Historical Development of strategic uses of
  IT
• 1980s
• End user computing (working inward)
• Basic training for employees how to use computers
• Late 1980s
• Focus on working outward
• Objective generate competitive advantage
• Merrill Lynchs CMA (cash management account)
• Combining stock accounts with checking and saving
  accounts

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• ? 1990s
• Reengineering business processes (working inward)
• Improvement and redesigning of existing processes
  in order to raise efficiency
• e.g. ERP systems
• ? Mid-1990s
• Internet technology used by dot-coms (outward)
• Often only internal usage, e.g. Intranet

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• ? Late 1990s
• E-Business as a competition for traditional
  companies
• Burst of the dot-com bubble
• E-Business slowed down and has become more
  reality based
• ? Early 00s
• Working across comes into focus
• Establishing of linkages to other companies like
  suppliers and customers (value chain integration)
  
• SCM (supply chain management)

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2. Working Inward Business to Employee ? The
primary channel for a company to reach their
employees is via Intranet. The Intranet is only
for employees. ? Intranet is a private firm
network ? Intranet in companies is used to
provide information and policies and to afford
online transactions (of former paper-based
processes) Lots of benefits
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• 3. Working Outward Business-to-Consumer
• Companies need sophisticated computer systems to
  compete
• E.g. airlines, hotels, rental car companies
• Competitors have to follow industry leader in
  implementing IT systems in order not to find
  themselves at a disadvantage

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• 3.1. Jumping to a new experience curve
• ? Learning Curve
• Cost of using a technology decreases as the firm
  gains more experience with it
• Economies of scale and scope
• ? Primozic developed a learning curve with
  several, connected curves
• ? Each curve represents a different technology
  used by a company

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? Arriving at a new curve requires investments in
a new technology
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3.2. Getting Closer to Customers ? First wave
Web sites for e-business - basic functions like
online purchasing and customer relationship
management
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4. Working across Business-to-Business ?
Streamlining processes that cross company
boundaries ? Mostly improvement of internal
processes in the past ? Now Focus on external
processes - Hammer This is not a technical
challenge, as most have viewed SCM, but a
process and management challenge.
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4.1. Coordinating with suppliers ?
Collaborating with noncompetitors - e.g. two
companies have the same customer ? Internet
eleminates the lack of a convenient way to share
information ? Stages of collaboration - first
make internal processes efficient - then
collaborate on new joint processes - eliminate
duplicate activities and focus on customer
needs
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4.2. Establishing Close and Tight
relationships ? Working across includes
relationships with various companies, e.g.
investment banks, advertising agencies,
suppliers, distributors, retailers, competitors ?
What kind of linkage is appropriate? Loose,
close or tight? ? Loose integration - ad-hoc
access to internal data - might or might not
be confidential - processes remain distinct -
little risk or cost
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• ? Close integration
• - formal exchange of (confidential) information
• - processes remain partly distinct
• - risks increase due to shared confidentialities
• - higher cost of integration than loose
  integration
• ? Tight integration
• - sharing of business processes as partners
• - high volume of exchanged (confidential) data
• - e.g. common inventory management
• - synchronize operations to reduce costs and
  increase speed
• - high risks

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• 4.3. Becoming a Customer-Centric Value Chain
• A value chain consists of
• upstream supply chain
• suppliers of raw material and parts
• downstream demand chain
• retailers and distributors
• Rise of demand-pull systems
• instead of supply-push systems
• e.g. Dell
• customers order triggers production of good

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Introduction to ERP and SAP

• ERP evolution
• SAP basics

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Manufacturing Roots of ERP

• Materials Requirements Planning (MRP) software
  was developed in the 1960s and 70s
• MRP software allowed firms to start with a sales
  forecast and develop production and raw material
  plans
• Electronic Data Interchange (EDI) allowed a
  company to communicate its purchase requirements
  electronically
• Sharing long-range production schedules between
  manufacturers and suppliers was the beginning of
  supply chain management (SCM)

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Functional Business Model

• Alfred P. Sloan developed the functional
  organizational model in the 1930s as chairman of
  General Motors
• The functional model was very successful for
  decades, but foreign competition in the 1980s
  highlighted problems with the model
• Flexibility and rapid decision-making were not
  possible
• Organizations had become overstaffed and
  top-heavy
• Ability to respond to change was limited

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Information and material flows in a functional
business model
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Business Process Model

• In a process-oriented company, the flow of
  information and management activity are
  horizontalacross functions
• The horizontal flow promotes flexibility and
  rapid decision-making
• Michael Hammers Reengineering the Corporation
  encouraged managers to take a horizontal
  business process view of their companies

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Information and material flows in a process
business model
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SAP

• Systemanalyse und Programmentwicklung (SAP) was
  formed in Mannheim, Germany, in 1972 by five
  former IBM systems analysts
• SAPs goal was to develop a standard business
  software product that could be configured to meet
  the needs of a company
• SAPs founders wanted
• Data to be available in real time
• Users to work on a computer screen, not with paper

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SAP

• SAPs founders had to develop their first
  software package at night on their first
  customers computer
• Computers were not commonly available in 1972
• The first software package was referred to by
  various names, including R, RF and R/1
• Between 1978 and 1982, SAP developed a more
  integrated software package, called R/2
• R/2 was still a mainframe computer package
• By 1988, SAP had developed R/2 into an
  international software program and had sold 1,000
  systems

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SAP R/3

• SAP R/3 was developed from 1988 to 1992
• R/3 is a client/server software package that
  could operate on a number of computer systems,
  including Windows NT and Unix
• R/3 was also an open architecture system
• Allows other software companies to develop
  compatible products
• Makes integrating hardware like bar code
  scanners, PDAs, cell phones, etc., easier

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ERP Vendors

• Consolidation is currently taking place in the
  ERP software business
• PeopleSoft purchased ERP vendor J.D. Edwards in
  2003
• Oracle, after a long battle, acquired PeopleSoft
  in 2005
• SAP and Oracle are now the two largest ERP
  vendors
• Microsoft is challenging SAP and Oracle to sell
  ERP systems to small- and medium-sized businesses

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SAP R/3 Enterprise

• SAPs R/3 latest software version is called
  release 4.7 or Enterprise
• R/3 Enterprise uses a central database to share
  data between the primary functional areas of
• Marketing and Sales
• Production and Materials Management
• Human Resources
• Accounting and Finance

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Data Flow between Functional Areas
Marketing and Sales
Central Data
Accounting and Finance
Production and Materials Management
Human Resources
Data flow within an integrated information system
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SAP R/3 Modules

• SAP is organized around functional modules
• The Sales and Distribution (SD) module records
  sales orders and schedules deliveries
• Information like pricing, how and where to ship
  products, how the customer is to be billed, etc.
  is maintained in this module
• The Materials Management (MM) module manages
• The acquisition of raw materials from suppliers
  (purchasing)
• Handling of raw materials inventory
• The Production Planning (PP) module is where
  production is planned and scheduled, and actual
  production activities are recorded.

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SAP R/3 Modules

• The Quality Management (QM) module
• The Plant Maintenance (PM) module
• The Asset Management (AM) module
• The Human Resources (HR) module facilitates
  employee recruiting, hiring, training, payroll
  and benefits.
• The Financial Accounting (FI) module records
  transactions in the general ledger accounts. It
  is used to generate financial statements for
  external reporting purposes

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SAP R/3 Modules

• The Controlling (CO) module is used for internal
  management purposes.
• In CO, the companys manufacturing costs are
  assigned to products and to cost centers, so that
  the profitability of the companys activities can
  be analyzed
• The CO module supports managerial decision-
  making
• The Project System (PS) module allows for
  planning and control of special projects
• The Workflow (WF) module is a set of tools that
  can be used to automate any of the activities in
  R/3

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SAP R/3 Modules
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ERP Implementation

• For a variety of reasons, many companies choose
  to implement only certain modules of an ERP
  system
• Data transfer between different ERP systems or an
  ERP system and a legacy software system is
  frequently done with batch programs, which
  eliminates real-time data accuracy

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ERP Implementation

• Primary task in implementation is setting
  configuration options in the ERP software
• With SAP, it has been estimated that there are
  about 8,000 configuration settings possible
• Configuration settings customize the software so
  that it fits the companys needs

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Best Practices

• Before ERP, IS people designed software to
  reflect a companys business practices
• With ERP software, the software developers have
  used their experience with a number of companies
  to develop best practices
• Best Practices represent the way an ERP company
  feels a particular business transaction should be
  carried out to maximize efficiency
• While customers can customize their ERP systems
  to represent their own particular way of doing
  business, straying too far from best practices
  might mean that they will not get the benefits
  the ERP integration promises

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ERP for Midsize Companies

• By 1998, most Fortune 500 companies had installed
  ERP systems
• ERP companies began to focus on midsize companies
  (1,000 or fewer employees)
• Midsize companies in Europe have an estimated 50
  billion annual IT budget
• IT budget for US midsize companies is even larger
• To capture the midsize market, SAP developed
  Industry Solutionspreconfigured versions of its
  R/3 software for specific industries such as
• Oil and gas, automotive, banking, chemicals, etc.

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New SAP Products

• Business Warehouse (BW) simplifies the
  integration and analysis of data from multiple
  sources, both SAP and non-SAP
• Customer Relationship Management (CRM)
• Also allows for analysis of sales data to
  identify trends and opportunities
• Advanced Planner and Optimizer (APO) helps
  coordinate production planning and scheduling
  between multiple facilities and with suppliers
  and customers
• NetWeaver provides a comprehensive platform to
  connect R/3 to the Internet

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Choosing Consultants and Vendors

• ERP systems are so complex, one person cannot
  fully understand a single system, much less be
  able to compare systems effectively
• A team, including external consultants, is
  probably needed to select the best ERP system for
  a company
• A team made up of consultants and company experts
  is needed to determine how to configure ERP
  software properly

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ERP Software Benefits

• Global integration, including currency exchange
  rates
• Reduced IT maintenance single system is easier
  to maintain
• Provides information so that a company can be
  managed, not just monitored