Introduction: Value Chain Basics
The basic tool for understanding the influence of Information Technology on companies is the value chainthe set of activities through which a product or service is created and delivered to customers. When a company competes in any industry, it performs a number of discrete but interconnected valuescreating activities, such as operating a sales force, fabricating a component, or delivering productsand these activities have points of connection with the activities of suppliers, channels, and customers. The value chain is a framework for identifying all these activities and analyzing how they affect both the company's costs and the value delivered to buyers...
Strategy and the Internet by Michael E. Porter (Harvard Business Review, March 2001, used by permission).
The evolution of information technology in business can be thought of in terms of five overlapping stages, each of which evolved out of constraints presented by the previous generation:
IT systems automated transactions such as order entry and accounting.
Fuller automation and functional enhancement of individual activities such as human resource management, sales force automation, and product design.
Acceleration of the Internet involving cross-activity integration links sales activities with order processing and multiple activities together through such tools as customer relationship management (CRM), supply chain management (SCM), and enterprise resource planning (ERP) systems.
Integration of the value chain and its entire value system. SCM and CRM start to merge as end-to-end applications involving customers, channels, and suppliers link orders to (for example) manufacturing, procurement, and service delivery. Eventually product developmentwhich had been largely separateis integrated, with complex product models exchanged among parties, and Internet procurement moving from standard commodities to engineered items.
Information technology is used not only to connect the various activities and players in the value system but also to optimize working in real time. Choices are made based on information from multiple activities and corporate entities. Production decisions, for example, automatically factor in the capacity available at multiple facilities and the inventory available at multiple suppliers. While early fifth-stage applications involve relatively simple optimization of sourcing, production, logistical, and servicing transactions, the deeper levels of optimization involve product design. For example, product design is optimized and customized based on input from factories and suppliers but also from customers.
The Message: Manage IT as a Strategic Asset
The complexity of each stage of the value chain increases along with the continuing evolution of technology. This is a result of a fundamental integration of technology within and across every stage of the value chain. IT has become mission-critical and it should be managed as a strategic asset. It must be seen as an inseparable part of the business. Complete alignment with the business goals is inevitable. All IT executives need to unify with the business; remaining separate will lead to failure.