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A methodology of constructing a decision path for IT investment
Journal of Strategic Information Systems 9 (2000) 17±38
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A methodology of constructing a decision path for IT investment S.H. Kim 1, D.H. Jang*, D.H. Lee 2, S.H. Cho 3 Graduate School of Management, KAIST, 207-43 Cheongryangri, Dongdaemun, Seoul 130-012 South Korea Accepted 15 August 2000
Abstract Information Technology (IT) may be used for organizational ef®ciency, but should also be ¯exible to adapt to the rapidly changing competitive business environment. In competitive business circumstances, management continually asks: (1) How ¯exible must the ®rm be in investing in IT in order to meet unknown business needs in the future? At the same time, how ef®cient must the ®rm be in order to meet current business needs?; (2) How well must the ®rm align its business strategy with IT investment in order for it to support its strategic goals?; (3) how to construct a decision path for IT investments with respect to ¯exibility, ef®ciency and alignment between business strategy and IT investments? Although many researchers have struggled to answer these questions, they generally provide no means for incorporating these factors into the IT investment decision process. This paper suggests a method that identi®es the degree of ¯exibility required (a -value), and accounts for and incorporates the a -value in making IT investments. The proposed method is based on a product development method called Quality Function Deployment (QFD). It will be applied to a real case of the ªH-companyº in Korea to validate and evaluate the proposed methodology. q 2000 Elsevier Science B.V. All rights reserved. Keywords: IT ¯exibility; IT ef®ciency; IT alignment; IT investment priority grid; Quality function deployment
* Corresponding author. Tel.: 182-2-3273-0627/8; fax: 182-2-3273-0629. E-mail addresses: [email protected] (S.H. Kim), [email protected] (D.H. Jang), [email protected] (D.H. Lee), [email protected] (S.H. Cho). 1 Tel.: 182-2-958-3611; fax: 182-2-958-3604. 2 Tel.: 182-2-958-3671; fax: 182-2-958-3604. 3 Tel.: 182-2-3772-6101; fax: 182-2-784-6115. 0963-8687/00/$ - see front matter q 2000 Elsevier Science B.V. All rights reserved. PII: S 0963-868 7(00)00034-2
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Fig. 1. IT investment priority grid.
1. Introduction As information technology (IT) is recognized as a strategic resource in the process of ®rms' rapid transformation to Electronic Business (E-business), more than 50% of United States business ®rms' capital budgets are being spent on building and refreshing IT infrastructure and applications (Weill and Broadbent, 1998). Nonetheless, to many business ®rms, IT investment has been a failure. In some cases, such investment brought the ®rm to the edge of crisis, with a great deal of investment loss rather than a competitive advantage (Kweku, 1997). In order to sustain business competitiveness, business ®rms need to invest in IT that supports current business goals in an ef®cient manner. At the same time, they have to make their IT systems ¯exible enough to respond to unknown future business needs. In other words, both ef®ciency and ¯exibility must be achieved simultaneously (Weill and Broadbent, 1998; Chan et al., 1997; Aggarwal, 1997; Porter, 1996; Brancheau et al., 1994; Mooney, 1996). If a ®rm is solely pursuing ef®ciency through IT applications, that organization could meet its computing needs at the lowest cost. However, a focus on tightly coupled applications will result in rigidity and dif®culty with integration of applications that must be changed due to changing business needs (Duncan, 1995; Lee, 1998). A business organization that tends to invest heavily in IT to achieve ¯exibility in meeting future needs may achieve its goal without bearing any excess cost of rewriting or re-instituting new applications (Aggarwal, 1997). Nonetheless, a drawback of this approach is the creation of inef®ciency, and to some extent, this approach may bring operational chaos that diminishes organizational identity (Allen and Boynton, 1991). Although achieving both ef®ciency and ¯exibility of IT applications simultaneously is a key to the success of IT investment, it is dif®cult for business ®rms to achieve them simultaneously due to rapid changes in information technology, the business environment, and customer demand (Weill and Broadbent, 1998). Furthermore, the trade-off between ¯exibility and ef®ciency is different from one organization to another, and there can be no standard that will be ideal for everyone (Boynton and Victor, 1991). Along with achieving both ef®ciency and ¯exibility, it is vital for a ®rm to align IT
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investment with business strategy. Based on a suggestion made by Burch (1990), an IT investment grid is constructed and presented in the following Fig. 1. Fig. 1 shows IT investments made on the basis of the degree of ¯exibility and ef®ciency required by the ®rm as determined by its strategy. An IT investment in quadrant A in Fig. 1 indicates a computing application having a high degree of both ¯exibility and ef®ciency. Flexibility arises from granulated software modules, and at the same time the application is ef®cient in its execution. On the other hand, an IT investment in quadrant C indicates a low degree of both ¯exibility and ef®ciency. The IT investment grid provides conceptual direction relative to selecting IT investments, but it does not provide a speci®c decision path in making IT investment with respect to these factors. For example, even if a ®rm has enough resources to invest in IT, a decision-maker may not be able to decide which quadrant to choose. This grid does not indicate which quadrant is the most appropriate for the ®rm with respect to its current and anticipated competitiveness. Depending on the selection of quadrant as an investment domain, the depth and breadth of IT investment with respect to IT infrastructure and application portfolios will be different. In spite of the importance of achieving both ¯exibility and ef®ciency with information technology, very little research has been done in this area. Furthermore, there is no methodology for determining a decision path relative to ¯exibility and ef®ciency. The purpose of this research is to postulate a methodology which would detect the level of ¯exibility (a value) required in an IT investment, as well as using that alpha value for constructing a decision path as an IT investment guide. More speci®cally, this research intends to answer the following questions from a management perspective in relation to IT investments. 1. How ¯exible must the ®rm be in its IT investments in order to meet unknown business needs in the future? At the same time, how ef®cient must the ®rm be in order to meet current needs of business? 2. How well must the ®rm align its business strategy with IT investments in order for it to support its strategic goals? 3. How can a decision path be constructed for IT investment with respect to the answers derived from those two questions? The methodology is based on Quality Function Deployment (QFD). The proposed methodology is applied to a case study of ªH-companyº in Korea. The discussion of research ®ndings and future issues for the decision path for IT investment is based on this case study. 2. Review of related research 2.1. Information technology evaluation models For the past few decades, much research has been done in the evaluation of IT investment. Most of these evaluations are based around net present value (NPV), internal rate of
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return (IRR), and other forms of existing ®nancial investment methodology. Along with this type of research, IT investment methodology has been also explored from a technical project management view as well as from a general management view (Bacon, 1992). However, many ®rms have experienced dif®culty in sustaining their competitiveness through IT investment due to the inadequate management of IT investment and the lack of appropriate IT investment methodology acceptable to IT practitioners (Due, 1997). 2.2. Alignment between business strategy and information technology The purpose of IT investment is to create business value. Many researchers suggest that business value can be maximized, and competitive threat can be minimized, only by selecting IT investments aligned to the company's business strategy (Aggarwal, 1997; Porter, 1996). Alignment can be categorized into strategic alignment and operational alignment. Strategic alignment shows how much the long-term business strategy is supported by IT (Weill and Broadbent, 1998). Operational alignment shows how much IT is ef®ciently supporting the current business activities of a company for sustaining its competitiveness (Porter, 1996). Although alignment between business strategy and IT investment is very critical in making a business ®rm competitive, it is dif®cult for ®rms to achieve it because every company has its own business strategy and accordingly the alignment of IT investment must be uniquely different (Chan et al., 1997). 2.3. Quality function deployment (QFD) Quality Function Deployment (QFD) is a product development method that translates the needs of customers through the stages of product planning, engineering and manufacturing into a ®nal product (Akao, 1990). The company can achieve various goals using QFD such as reduction in customer's complaints, improvement in design reliability and customer satisfaction, easier design change, and reduction in product development cycle time (Moskowitz and Kim, 1997). The basic idea of QFD is to translate the desires of the customer into design or engineering characteristics of the product, and subsequently into the characteristics of parts, process plan and production requirements related to its manufacture. Phase I translates the voice of the customer into corresponding engineering characteristics. Phase II moves one step further back in the design process by translating the engineering characteristics into parts' characteristics. Phase III identi®es critical process parameters and operations. Finally, phase IV identi®es detailed production requirements. The QFD is accomplished through a series of measurements called ªHouse of Qualityº (HOQ), which provides the means for inter-functional communications (Hauser and Clausing, 1988). The customer requirements (CR) are represented on the left side of the HOQ. Identifying the relative importance of the various customer requirements plays an important role in discerning those that are critical and helps in prioritizing design effort. Engineering characteristics (EC) of design requirements are represented on the upper side of the HOQ. The relative EC importance can be calculated using the relative CR importance and the weights assigned to the relationships between CR's and EC's. The
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Fig. 2. QFD process calculating the degree of requirement for ¯exibility (a ).
relationship between the CR's and EC's, which is presented in the main body of the HOQ, can be represented in symbol or numerical form. The strength of the relationships is typically assessed by the design team in a subjective manner. Even though QFD is proposed for customer driven product development and delivery methodology, a similar approach can be extended for aligning IT investment with business strategy and making priority decisions as to where IT investments should be made. 3. Proposed methodology for constructing a decision path The methodology described here is composed of four phases: identi®cation of the IT requirement set, identi®cation of the degree of requirement for ¯exibility (a value) using the QFD process, establishment of the IT investment priority grid, and determination of a decision path using the alpha value. 3.1. Phase 1. Identi®cation of the IT requirement set All information systems that a company needs have to be identi®ed in order to determine priority of IT systems to be installed. For ease of notation, we shall refer to those needed IT systems as the ªIT requirement setº. The IT requirement set can be extracted directly or indirectly from users' groups, which will bene®t because their needs will be met (Agarwal et al., 1994). There are two types of user groups: external user groups that have various claims on the organization (e.g. stockholders); and, internal user groups that operate the organization (e.g. managers). In Phase 1, we can identify the IT requirement set that is critical to an organization through interviews with members of these internal and external user groups. 3.2. Phase 2. Identi®cation of the degree of ¯exibility requirement (a value) Many researchers have emphasized the need for ¯exibility and ef®ciency, and an alignment between business strategy and IT investment in order for an organization to sustain its competitiveness (Weill and Broadbent, 1998; Chan et al., 1997). Furthermore, they
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suggest that those factors must be incorporated into the IT investment decision scheme. Thus, Phase 2 will ®nd the degree of the ¯exibility required in achieving business goals by maintaining alignment between business strategy and IT investment. The proposed methodology is based on QFD. Fig. 2 shows QFD processes related to the proposed methodology. 3.2.1. Step 2.1. Review of vision, business strategy and critical success factor Step 2.1 must be executed carefully due to the fact that a change in the relative importance of higher level factors greatly affects the relative importance of lower level factors as shown by the sequential characteristics of the QFD method. If the relative importance of any company's vision, business strategy, and/or critical success factors changes, then the degree of ¯exibility requirement (a ) can be varied. We can review a company's vision, business strategy, and critical success factors through its reports, publicity initiatives, advertising, etc., as well as interviews with senior management, IT professionals, and other supporting department personnel. 3.2.2. Step 2.2 Evaluation of the importance of business strategy 1. Organize those data related to vision and business strategy as illustrated in the ®rst HOQ in Fig. 2. In order to build the ®rst HOQ, the reviewed vision attributes are represented in the left side of the HOQ and the reviewed business strategies are assigned to the upper side of the HOQ. 2. Derive the relative importance (weight) of vision. 3. Analyze the relationships between vision attributes and business strategies and mark the strength of the relationship in the relationship matrix of the HOQ. A degree of strength is assigned to each relationship between vision attributes and business strategies. The strength of each relationship can be represented in numerical form (1±3±5 scale) or nominal form such as symbols to denote weak, medium and strong relationships (Akao, 1990). 4. Derive the relative importance (weights) of business strategies through multiplying the relative importance of vision attributes by the degree of strength of the relationship between vision attributes and business strategies. 3.2.3. Step 2.3. Evaluation on critical success factors 1. Arrange the reviewed business strategies and critical success factors in the second HOQ chart. 2. Analyze the relationships between business strategies and critical success factors and mark the strength of relationship in the relationship matrix of the HOQ chart. 3. Derive the relative importance of critical success factors through multiplying the relative weights of business strategies obtained from Step 2.2.4 by the degree of strength of the relationship between business strategies and critical success factors. 3.2.4. Step 2.4. Identi®cation of the degree of ¯exibility requirement (a value) 1. Arrange reviewed critical success factors and factors of ef®ciency along with ¯exibility in the third HOQ chart.
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2. Analyze the relationships between critical success factors and ef®ciency/¯exibility factors, and mark the strength of relationship in the relationship matrix of the HOQ chart. 3. Derive the relative importance of ¯exibility and ef®ciency by multiplying the weights of critical success factors obtained from Step 2.3.3 with the degree of strength of the relationships between critical success factors and ef®ciency/¯exibility factors.
In the methodology proposed here, we used a numerical form for denoting weak, medium and strong relationships in determining the relative importance of vision, business strategy, critical success factors, and ¯exibility ef®ciency factors. Those who participate in this process can choose `strong' by selecting 5, `medium' by marking 3 and `weak' by choosing 1 in a subjective manner. An analyst coordinates con¯icts among evaluators and produces a result with great inter-coder reliability that is acceptable to everyone. Once the strengths of the relationships between factors on the left side of the HOQ and factors on its upper side are analyzed, we can compute the relative and absolute importance weights of factors as follows. For example, we can obtain the absolute and relative importance of business strategies by using the following Eq. (1). X vaj di ri;j : 1 where di is the degree of importance of vision attributes, i, i 1; 2; ¼; m; ri;j the quanti®ed relationship between vision attributes, i, and business strategies, j; i 1; ¼; m; vaj the absolute importance for business strategies, j, j 1; 2; ¼; n: The absolute importance weights of business strategies vaj is formed from the weighted column sum of each vision attribute by the quanti®ed relationship values of business strategies, j. The absolute importance weight can then be transformed into a relative importance measure, vrj ; by dividing each weight, vaj by the total of all the weights. This value becomes the relative importance of attributes in the row of the subsequent HOQ chart, i.e. di : We can get the relative importance of critical success factors by applying the same process. Also, we can obtain the degree of ¯exibility requirement (a ) and ef®ciency 1 2 a by using the following Eq. (2). X X a di rij = vej 1 vfj 2 where di is the degree of importance of critical success factor, i, i 1; 2; ¼; m; ri;j the quanti®ed relationship between critical success factor, i, and ¯exibility, j; i 1; 2; ¼; m; vej the absolute importance for ef®ciency, j, j 1; 2; ¼; h: vfj the absolute importance for ¯exibility, j, j 1; 2; ¼; n; a the relative importance of ¯exibility, i.e. the degree of ¯exibility requirement. The relative importance of ¯exibility (a ) is formed through dividing the weighted column sum of each ¯exibility factor by the quanti®ed relationship values of critical success factors, j, by the total of all the weights of ¯exibility and ef®ciency factors. The relative weight of ef®ciency 1 2 a can be obtained by subtracting the relative
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importance of ¯exibility (a ) from one. The relative importance of ¯exibility means the degree of ¯exibility requirement an organization requires to achieve business goals. 3.3. Phase 3. Establishment of IT investment priority grid 3.3.1. Step 3.1. Evaluation of the IT requirement set To link the IT requirement set to that of an organization's needs related to ¯exibility and ef®ciency, ®rst we must score the IT requirement set on these very two dimensions of ¯exibility and ef®ciency. The ¯exibility dimension means the degree of ¯exibility of an organization satis®ed by the IT requirement set, while the ef®ciency dimension evaluates the degree of ef®ciency of the organization satis®ed by the IT requirement set. Each proposed IT system from Phase 1 is scored on a scale of 1±3±5 to denote weak, medium and strong, respectively. Con¯icts among evaluators are coordinated by an analyst to produce results agreeable to everyone. Both sets of scores were averaged to give ef®ciency and ¯exibility scores. For convenience, we normalized the averaged numeric value of zero to ®ve, to the score of zero to one. The normalized ef®ciency score means the relative satisfaction achieved by an IT system from the ef®ciency perspective (v e). The normalized ¯exibility score means the relative satisfaction achieved by an IT system from the ¯exibility perspective (v f). This evaluation process can be implemented through interviews with members of an internal user group consisting of personnel from R&D, production, sales, procurement and the ®nancial department. The results were tabulated by an analyst. 3.3.2. Step 3.2. Plotting of the evaluation results on an IT investment grid These normalized ef®ciency and ¯exibility scores obtained from Step 3.1 can be plotted on an IT investment grid. The point on the grid indicates each IT system supported level of ef®ciency and ¯exibility. The point (1,1) is the best IT system in which to invest from a two-dimensional perspectives, while the point (0,0) indicates an extremely poor IT system in which to invest. This grid provides a logical base from which decision-makers can select IT systems. Nonetheless, it cannot provide an answer as to which IT system is the most appropriate for the ®rm with respect to its current and anticipated competitiveness. Furthermore, once the ®rm selects the highest priority quadrant, it cannot provide an answer as to which subsequent quadrant should be selected if resources are available. In Phase 4, we will look at such an example. 3.4. Phase 4. Determination of decision path using a value 3.4.1. Step 4.1. Determination of priority of IT systems In Phases 2 and 3, we obtain four values of relative importance: the degree of ¯exibility requirement (a ), the degree of ef®ciency requirement 1 2 a; the relative satisfaction by IT systems from the ef®ciency perspective (v e), and the relative satisfaction by IT systems from the ¯exibility perspective (v f). So, the ®nal importance of each IT system to be developed (v ) can be derived by the following Eq. (3).
v avf 1 1 2 ave ;
0#a#1
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Fig. 3. Example of variation of a decision path according to the variation of a value.
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Table 1 H-company's IT requirement set Information system
Claimant
A: CAD and drawing data management system B: Information (cost and tech.) sharing with supplier C: Database for supplier management D: System for managing technical data of product E: DSS development for foreign information analysis F: Database for design cost analysis G: System for joint development with supplier H: Accounting system for manufacturing management I: Technical document management system J: Expert system for guiding vehicle K: Integrated network between domestic and foreign of®ce L: Design support system and database M: Digitization of the assembly manual N: Project schedule management system O: Real time processing system for sales data P: CKD operation system Q: Construction of network for advertisement and customer's complaint management R: Support system for individual affair and education S: EDI for clearance T: System for installment management U: System for analysis of MIP planning V: Warehousing management system
R&D Procurement Procurement R&D Financial accounting R&D R&D Manufacturing R&D Sales and marketing Sales and marketing R&D Manufacturing R&D Sales and marketing Manufacturing Sales and marketing Financial Accounting Manufacturing Sales and marketing Manufacturing Manufacturing
The value of v means the degree of each IT system's importance to the achievement of a company's business goals. The higher the v value, the higher the priority that it must be invested in or developed. By way of illustration, suppose the degrees of requirement for ¯exibility (a ) and ef®ciency 1 2 a are equal, and at the same time the relative satisfaction of each IT system from those ef®ciency (v e) and ¯exibility (v f) perspectives are given. Then, an IT investment decision path is determined as a solid line represented in Fig. 3. The decision path varies along with the variation of a value. When a value varies from 0.5 to 0.7, the decision path alters from a solid line to a dotted line in Fig. 3. When a value is 0.7, the F IT system located in B quadrant, which is lower in priority than A quadrant, is higher in priority than the B IT system located in A quadrant. This implies that any modi®cation or alteration of an organization's vision, business strategy and/or critical success factors, which affect the degree of requirement of ¯exibility and ef®ciency necessitated by the organization's business goals, may alter or modify its IT investment strategy. 3.5. Step 4.2. Con®rmation and decision-making Although IT systems to be developed are prioritized as shown in Step 4.1, no company can invest in all the identi®ed IT systems due to technological and resource constraints. Thus, planned IT systems must be developed on a priority basis in the context of a ®rm's budgetary constraints and the limitation of technology.
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4. Application of the proposed methodology to the real world: a case study In this section, we describe a real-world application of the proposed methodology, which was conducted as part of information technology planning for a large automobile company with an annual sales volume of about US$ 110 billion in 1997. We will call this organization ªH-companyº. H-company owns the world's largest automobile production facility with an annual production capacity of 2 million units. It operates three plants and eight R&D centers in Korea, and twelve branches and three R&D centers in the rest of the world. Its number of employees is about 38,000. 4.1. Identi®cation of the IT requirement set Among several departments, we selected ®ve on which to focus: R&D center; Sales and Marketing; Procurement; Manufacturing; and Financial Accounting. They are in charge of core functions. Each department identi®ed IT systems that, they consider, are critical for achieving their business goals. With this, we identi®ed twenty-two IT systems to be developed or invested in as presented in Table 1. 4.2. Identi®cation of the degree of ¯exibility requirement 4.2.1. Review of vision, business strategy and critical success factors To review its vision, business strategy, and critical success factors, we gathered the company's reports such as publicity, advertising, etc., and analyzed them. Once those factors were identi®ed, we reviewed them through interviews with senior managers in order to identify missing factors, which are very important, and eliminated unimportant factors. A vision describes an aspiration for the future without specifying the means that will be used to achieve those desired ends. H-company's vision is to increase its world market share by 4% through achieving key goals such as globalization, intensifying research and development, and increasing productivity. Key goals are depicted in Table 2. There are two types of business strategies. One is the intended strategy that managers develop. The other is the realized strategy, which actually takes place over time. The intended strategy also provides guidelines for the means by which the ®rm will pursue its goals, along with information regarding what the company hopes to accomplish. We identi®ed eighteen intended strategies. The company's intended business strategies are listed in Table 3. For convenience, we decomposed its strategies into three categories: cost strategy, product strategy and marketing strategy. Cost strategy includes six intended Table 2 H-company's key goals to achieve vision Vision
Increasing world market share by 4%
Goals
Globalization Increasing productivity Organization activation Improvement of company image
Intensifying research and development Product development Improvement of ®nancial standing
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Table 3 H-company's business strategy Cost strategy
Market strategy
Product strategy
Increasing factory automation rate
Establishing foreign cooperation for marketing Ensuring foreign dealer Establishing foreign production bases Providing the customer with a process monitoring service Establishing market information monitoring systems
Development of high valueadded product Flat organization (R&D) Development of new energy sources Enlarging the product line
Training and educating employees Intensifying of out-sourcing simple and repeated operations Acquiring components from various sources Establishing direct channel for customer and supplier Building maintenance center under direct management
Establishing an overseas technology center for assuring new technology Cooperation in development components Assuring foreign manpower
strategies such as `increasing factory automation rate', and `training and educating employees'. Five intended strategies (e.g. establishing foreign cooperation for marketing) are included in market strategy. Seven intended strategies (e.g. development of high value -added product) are classi®ed under product strategy. Critical success factors are extremely important for maintaining a ®rm's competitive position. Critical success factors should be relevant to the individual company with respect to determining a variety of environmental conditions such as industry characteristics. In consideration of such environmental conditions we identi®ed twenty critical success factors, listed in Table 4. It is vital for a company to achieve both ¯exibility and ef®ciency simultaneously through suitable IT investments in order to be competitive. Many researchers suggest that ¯exibility can be measured by a variety of variables, such as sharability and connectivity of IT applications. Ef®ciency can also be measured by various variables, such as cost reduction. However, while there are many measurement variables, there is no integrated measurement. Thus, as revealed in the review of the related research, we selected four factors as measurement variables for ef®ciency and ¯exibility. Factors regarding ef®ciency and ¯exibility are listed in Table 5. 4.3. Evaluation of the importance of business strategy, CSFs and ¯exibility using QFD To evaluate the degree of importance of business strategy, we ®rst placed the seven identi®ed vision attributes on the left side of the HOQ and the eighteen identi®ed intended business strategies on the upper side of the HOQ. Secondly, it would be better to determine the relative importance of each vision attribute. In this case, we assumed, for convenience, that the importance of all vision attributes is equal. Thirdly, we determined the degree of relationship between the vision attributes and the intended business strategies through interviews and discussion with internal users. It took a lot of time to coordinate con¯icts
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Table 4 H-company's critical success factors Sales amount per salesperson Financial stability Minimization of material ¯ow cost Factory utilization Productivity of an employee Minimization of product development cost Control the manufacturing Preservation of proper inventory Partnership with foreign sales cooperation Partnership with foreign customers Customer service (delivery maintenance) Concurrent engineering for product development Product quality and safety Flexibility in manufacturing: FMS, CIM Improving the supplier's quality Forecasting ability Rapid learning of the new technology Rapid communication with components suppliers Accumulating employee's know-how Effective job assignment
among evaluators, and produce an evaluation result acceptable to everyone. The relationship and relative importance of business strategies are depicted in Appendix A.1. By applying a similar process, the importance of business strategies, the relationships between business strategies and critical success factors, and the relative importance of critical success factors were evaluated as shown in the Appendix A.2. By using Eq. (2) we Table 5 Ef®ciency and ¯exibility factors
Ef®ciency
Factors
Researchers
Productivity Improvement
Tan and Uijttenbrek (1997); Barua et al. (1995); Hamel and Prahalad (1994) and Kelly (1994) Downes and Mui (1998), Poirier and Reiter (1996) DeLone and McLean (1992)
Cost reduction Product and service quality improvement Time ef®ciency Flexibility
Rapid development of new products and services Sharability and connectivity of IT applications Ability to respond to future market Organizational coordination and communication
Hamel and Prahalad (1994) Aggarwal (1997) Keen (1991), Duncan (1995) and Weill and Broadbent (1998) Weill and Broadbent (1998) Boynton and Victor (1991)
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could obtain the relationships between critical success factors and those factors related to ¯exibility and ef®ciency, and in turn the value of the degree of ¯exibility requirement (a value) and ef®ciency requirement 1 2 a value) presented in Appendix A.3. As indicated in Appendix A.3, H-company requires more ¯exibility than ef®ciency, which is determined by its vision, intended business strategies, and critical success factors. This result is congruent with Boynton's (1991) suggestion. He claimed that mass production ®rms focus more on ef®ciency than on ¯exibility in achieving competitive advantage. This is due to the fact that product speci®cation and demand are relatively constant and predictable. 4.4. Establishment of the IT investment priority grid 4.4.1. Evaluation of the IT requirement set In this phase, an assessment is made to determine the degree to which those identi®ed IT requirements focus on ¯exibility or ef®ciency. Each identi®ed IT system is analyzed to get a score on ef®ciency and ¯exibility. These scores are determined via the IT department and an internal user group. For example, the IT system named `CAD and drawing data management system' was assigned a score of ®ve since it contributes strongly to the achievement of `productivity improvement' and `time ef®ciency'. Nonetheless, a relatively low score of three is given to that IT system with respect to cost reduction and product/service quality improvement. The total weight of ef®ciency is averaged and the resulting value is normalized. Thus, we could obtain the relative importance of the `CAD and drawing data management system' from the ef®ciency perspective. The evaluation result of each IT system is provided in Appendix B. 4.5. Plotting of the evaluation results on an IT investment grid Each IT system's score obtained from the evaluation of an IT requirement set was plotted onto the IT investment grid. Fig. 4 shows H-company's IT investment grid with respect to ef®ciency and ¯exibility. 4.6. Determination of decision path using a value To determine the priority of IT systems, four relative weights obtained from the previous phases were applied to Eq. (3). Eq. (3) is concerned with the degree of requirement for ¯exibility (a ), the degree of requirement for ef®ciency 1 2 a; the degree of satisfaction with the IT system from an ef®ciency perspective (v e), and the degree of satisfaction with the IT system from a ¯exibility perspective (v f). This process enabled us to obtain the ranking of the IT requirement set as presented in Table 6. Fig. 5 shows the IT investment decision path of H-company. H-company decided to use the IT investment decision path as a guide within resources available. However, in case that IT investment could not be realized in the context of technological limitations, it could be delayed until the technology could be utilized. 5. Discussion and conclusion Information technology is no longer a passive means to increase productivity of a
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Fig. 4. H-company's IT investment priority grid.
business ®rm. A business ®rm's IT investment for meeting current needs as well as ¯exibility for adapting itself to its business environment is not only vital, but a ®rm's survival is dependent upon making an error-free decision about IT investment. In spite of this necessity, there is no uni®ed methodology for guiding management to make the right decision for IT investment. There is a plethora of suggestions and research on the importance of ¯exibility and alignment between business strategy and IT investment. Nonetheless, there is no uni®ed approach to incorporating these factors into the decision process. The proposed methodology allows for incorporating decision factors related to ¯exibility and ef®ciency that the ®rm must adopt in order for it to be competitive. The proposed methodology is based on a framework suggested in the QFD. Application of the proposed methodology to H-company in Korea has revealed its usefulness in determining IT investment priority. First of all, the case analysis has convinced us that the proposed methodology can contribute in determining IT investment priorities with respect to ¯exibility and ef®ciency factors in the context of a ®rm's vision and strategies as a uni®ed measurement approach. Second, it can complement existing IT investment methodologies. Third, the proposed methodology can diagnose and coordinate inter-functional con¯icts in determining IT investment priorities. The proposed methodology has some advantages. Speci®cally, they are: (1) by identifying contradictory requirements between ¯exibility and ef®ciency in the context of a
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Table 6 The ranking of IT the requirement set Rank
Information systems
Score
Rank
Information systems
Score
1
A: CAD and drawing data management system L: Design support system and Database O: Real time processing system for sales data B: Information (cost and tech.) sharing with supplier G: System for joint development with supplier N: Project schedule management system K: Integrated network between domestic and foreign F: Database for design cost analysis E: DSS development for foreign information analysis V: Warehousing management system S: EDI for clearance
0.78
12
C: Database for supplier management
0.48
0.73
13
0.46
0.70
14
D: System for managing technical data of product I: Technical document management system
0.68
15
P: CKD operation system
0.42
0.63
15
Q: Construction of network for customer's complaint
0.42
0.62
17
0.34
0.57
18
H: Accounting system for manufacturing management M: Digitization of the assembly manual
0.53
19
0.29
0.51
20
J: Expert system for guiding vehicle U: System for analysis of MIP planning
0.50
21
0.24
0.50
22
T: System for installment management R: Support system for individual affairs and education
2 3 4 5 6 7 8 9 10 11
0.44
0.32
0.27
0.15
company's vision, business strategies and critical success factors, it provides insight into questions like: ªHow ¯exible must the company be in order to meet unknown, future business needs while satisfying current business needs of ef®ciency ?º (2) it provides a guide to which application-oriented IT systems are most appropriate for meeting the ®rm's current needs and anticipated needs in the context of budgetary and technological constraints; and (3) the proposed methodology can help the business ®rm to align IT investment to its business strategies in such a way that computing services are meeting the ®rm's strategic goals. Nonetheless, there are several limitations. The ¯exibility requirement of IT investment can be realized through a separation of IT infrastructure and IT application. However, the case analysis focuses on identifying those applications oriented to an IT system. We did not collect nor analyze data on experts' opinions on the type of IT infrastructure required by H-company to stay ¯exible in meeting future IT needs. A second drawback is the timeconsuming effort in collecting and evaluating all of the data required for the proposed methodology. As the number of relationship factors increases, the workload on analysis
S.H. Kim et al. / Journal of Strategic Information Systems 9 (2000) 17±38
33
Fig. 5. H-company's IT investment decision path.
and evaluation of IT system attributes increases dramatically. It is highly desirable to have software for automatic identi®cation of the degree of relationship among the various factors. Third, data collection and analysis is heavily dependent upon the subjectiveness of evaluators. In this study, we used an evaluation result agreeable to everyone through coordinating con¯icts among evaluators by consultants. One of the future directions of this research is an extension of the decision path as a dynamic modeling tool, including both the IT infrastructure and the application requirement. In spite of these limitations, we have demonstrated that a uni®ed approach to the identi®cation of IT investment priorities and construction of an investment decision path is applicable to a large organization such as H-company in Korea.
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Appendix A. HOQs for the case study A.1. HOQ representing the relationship between vision/goals and business strategy
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A.2. HOQ representing the relationship between business strategy and critical success factor
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A.3. HOQ Representing the relationship between critical success factor and factors of ef®ciency and ¯exibility
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37
Appendix B. IT requirement set evaluation sheet
References Agarwal, R., Roberge, L., Tanniru, M., 1994. MIS planning: a methodology for system prioritization. Information and Management 27 (5), 261±274. Aggarwal, S., 1997. Flexibility management: the ultimate strategy. Industrial Management 39 (1), 26±31. Akao, Y., 1990. Quality Function Deployment: Integrating Customer Requirements into Product Design. Productivity Press, Portland. Allen, B.R., Boynton, A.C., 1991. Information architecture: in search of ef®cient ¯exibility. MIS Quarterly 15 (4), 435±445. Bacon, J.C., 1992. The use of decision criteria in selecting information systems/technology investments. MIS Quarterly 16 (3), 335±350. Barua, A., Kriebel, C.H., Mukhopadhyay, T., 1995. Information technologies and business value: an analytic and empirical investigation. Information Systems Research 6 (1), 3±23. Boynton, A.C., Victor, B., 1991. Beyond ¯exibility: building and managing the dynamically stable organization. California Management Review 34 (1), 53±66.
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Brancheau, J.C., Janz, B.D., Wetherbe, J.C., 1994. Key issues in information systems management: 1994±1995 SIM delphi results. MIS Quarterly 18 (4), 371±403. Burch, J.G., 1990. Planning and building strategic information systems. Journal of Systems Management 41 (7), 21±27. Chan, Y.E., Huff, S.L., Barclay, D.W., Copeland, D.G., 1997. Business strategic orientation, information systems strategic orientation, and strategic alignment. Information Systems Research 8 (2), 125±150. DeLone, W.H., McLean, E.R., 1992. Information systems success: the quest for the dependent variable. Information Systems 3 (1), 60±95. Downes, L., Mui, C., 1998. Unleashing the Killer App: Digital strategies for Market Dominance. Harvard Business school Press. Due, R.T., 1997. A strategic approach to IT investment. Information Systems Management 14 (3), 73±76. Duncan, N.B., 1995. Capturing ¯exibility of information technology infrastructure: a study of resource characteristics and their measure. Journal of Management Information Systems 12 (2), 37±57. Hamel, G., Prahalad, C.K., 1994. Competing for the Future. Harvard Business School Press. Hauser, J.R., Clausing, D., 1988. The House of Quality. Harvard Business Review 66 (3), 63±73. Kweku, E.M., 1997. Critical issues in abandoned information systems development projects. Communications of the ACM 40 (9), 74±80. Lee, R., 1998. An enterprise decision framework for information system selection. Information Systems Management 15 (4), 7±13. Mooney, J.G., 1996. The productivity and business value impacts of information technology: economic and organizational analysis. PhD dissertation, University of California, Irvine. Moskowitz, H., Kim, K.J., 1997. QFD optimizer: a novice friendly quality function deployment decision support system for optimizing product design. Computer and Industrial Engineering 32, 641±655. Poirier, C.C., Reiter, S.E., 1996. Supply Chain Optimization: Building the Strongest Total Business Network. Berrett-Koehler Publisher. Porter, M.E., 1996. What is strategy. Harvard Business Review 74 (6), 61±78. Tan, D.S., Uijttenbroek, A.A., 1997. Information infrastructure management: a new role for IS managers. Information Systems Management 14 (4), 33±41. Weill, P., Broadbent, M., 1998. Leveraging the new Infrastructure. Harvard Business School Press.
www.elsevier.com/locate/jsis
A methodology of constructing a decision path for IT investment S.H. Kim 1, D.H. Jang*, D.H. Lee 2, S.H. Cho 3 Graduate School of Management, KAIST, 207-43 Cheongryangri, Dongdaemun, Seoul 130-012 South Korea Accepted 15 August 2000
Abstract Information Technology (IT) may be used for organizational ef®ciency, but should also be ¯exible to adapt to the rapidly changing competitive business environment. In competitive business circumstances, management continually asks: (1) How ¯exible must the ®rm be in investing in IT in order to meet unknown business needs in the future? At the same time, how ef®cient must the ®rm be in order to meet current business needs?; (2) How well must the ®rm align its business strategy with IT investment in order for it to support its strategic goals?; (3) how to construct a decision path for IT investments with respect to ¯exibility, ef®ciency and alignment between business strategy and IT investments? Although many researchers have struggled to answer these questions, they generally provide no means for incorporating these factors into the IT investment decision process. This paper suggests a method that identi®es the degree of ¯exibility required (a -value), and accounts for and incorporates the a -value in making IT investments. The proposed method is based on a product development method called Quality Function Deployment (QFD). It will be applied to a real case of the ªH-companyº in Korea to validate and evaluate the proposed methodology. q 2000 Elsevier Science B.V. All rights reserved. Keywords: IT ¯exibility; IT ef®ciency; IT alignment; IT investment priority grid; Quality function deployment
* Corresponding author. Tel.: 182-2-3273-0627/8; fax: 182-2-3273-0629. E-mail addresses: [email protected] (S.H. Kim), [email protected] (D.H. Jang), [email protected] (D.H. Lee), [email protected] (S.H. Cho). 1 Tel.: 182-2-958-3611; fax: 182-2-958-3604. 2 Tel.: 182-2-958-3671; fax: 182-2-958-3604. 3 Tel.: 182-2-3772-6101; fax: 182-2-784-6115. 0963-8687/00/$ - see front matter q 2000 Elsevier Science B.V. All rights reserved. PII: S 0963-868 7(00)00034-2
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Fig. 1. IT investment priority grid.
1. Introduction As information technology (IT) is recognized as a strategic resource in the process of ®rms' rapid transformation to Electronic Business (E-business), more than 50% of United States business ®rms' capital budgets are being spent on building and refreshing IT infrastructure and applications (Weill and Broadbent, 1998). Nonetheless, to many business ®rms, IT investment has been a failure. In some cases, such investment brought the ®rm to the edge of crisis, with a great deal of investment loss rather than a competitive advantage (Kweku, 1997). In order to sustain business competitiveness, business ®rms need to invest in IT that supports current business goals in an ef®cient manner. At the same time, they have to make their IT systems ¯exible enough to respond to unknown future business needs. In other words, both ef®ciency and ¯exibility must be achieved simultaneously (Weill and Broadbent, 1998; Chan et al., 1997; Aggarwal, 1997; Porter, 1996; Brancheau et al., 1994; Mooney, 1996). If a ®rm is solely pursuing ef®ciency through IT applications, that organization could meet its computing needs at the lowest cost. However, a focus on tightly coupled applications will result in rigidity and dif®culty with integration of applications that must be changed due to changing business needs (Duncan, 1995; Lee, 1998). A business organization that tends to invest heavily in IT to achieve ¯exibility in meeting future needs may achieve its goal without bearing any excess cost of rewriting or re-instituting new applications (Aggarwal, 1997). Nonetheless, a drawback of this approach is the creation of inef®ciency, and to some extent, this approach may bring operational chaos that diminishes organizational identity (Allen and Boynton, 1991). Although achieving both ef®ciency and ¯exibility of IT applications simultaneously is a key to the success of IT investment, it is dif®cult for business ®rms to achieve them simultaneously due to rapid changes in information technology, the business environment, and customer demand (Weill and Broadbent, 1998). Furthermore, the trade-off between ¯exibility and ef®ciency is different from one organization to another, and there can be no standard that will be ideal for everyone (Boynton and Victor, 1991). Along with achieving both ef®ciency and ¯exibility, it is vital for a ®rm to align IT
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19
investment with business strategy. Based on a suggestion made by Burch (1990), an IT investment grid is constructed and presented in the following Fig. 1. Fig. 1 shows IT investments made on the basis of the degree of ¯exibility and ef®ciency required by the ®rm as determined by its strategy. An IT investment in quadrant A in Fig. 1 indicates a computing application having a high degree of both ¯exibility and ef®ciency. Flexibility arises from granulated software modules, and at the same time the application is ef®cient in its execution. On the other hand, an IT investment in quadrant C indicates a low degree of both ¯exibility and ef®ciency. The IT investment grid provides conceptual direction relative to selecting IT investments, but it does not provide a speci®c decision path in making IT investment with respect to these factors. For example, even if a ®rm has enough resources to invest in IT, a decision-maker may not be able to decide which quadrant to choose. This grid does not indicate which quadrant is the most appropriate for the ®rm with respect to its current and anticipated competitiveness. Depending on the selection of quadrant as an investment domain, the depth and breadth of IT investment with respect to IT infrastructure and application portfolios will be different. In spite of the importance of achieving both ¯exibility and ef®ciency with information technology, very little research has been done in this area. Furthermore, there is no methodology for determining a decision path relative to ¯exibility and ef®ciency. The purpose of this research is to postulate a methodology which would detect the level of ¯exibility (a value) required in an IT investment, as well as using that alpha value for constructing a decision path as an IT investment guide. More speci®cally, this research intends to answer the following questions from a management perspective in relation to IT investments. 1. How ¯exible must the ®rm be in its IT investments in order to meet unknown business needs in the future? At the same time, how ef®cient must the ®rm be in order to meet current needs of business? 2. How well must the ®rm align its business strategy with IT investments in order for it to support its strategic goals? 3. How can a decision path be constructed for IT investment with respect to the answers derived from those two questions? The methodology is based on Quality Function Deployment (QFD). The proposed methodology is applied to a case study of ªH-companyº in Korea. The discussion of research ®ndings and future issues for the decision path for IT investment is based on this case study. 2. Review of related research 2.1. Information technology evaluation models For the past few decades, much research has been done in the evaluation of IT investment. Most of these evaluations are based around net present value (NPV), internal rate of
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return (IRR), and other forms of existing ®nancial investment methodology. Along with this type of research, IT investment methodology has been also explored from a technical project management view as well as from a general management view (Bacon, 1992). However, many ®rms have experienced dif®culty in sustaining their competitiveness through IT investment due to the inadequate management of IT investment and the lack of appropriate IT investment methodology acceptable to IT practitioners (Due, 1997). 2.2. Alignment between business strategy and information technology The purpose of IT investment is to create business value. Many researchers suggest that business value can be maximized, and competitive threat can be minimized, only by selecting IT investments aligned to the company's business strategy (Aggarwal, 1997; Porter, 1996). Alignment can be categorized into strategic alignment and operational alignment. Strategic alignment shows how much the long-term business strategy is supported by IT (Weill and Broadbent, 1998). Operational alignment shows how much IT is ef®ciently supporting the current business activities of a company for sustaining its competitiveness (Porter, 1996). Although alignment between business strategy and IT investment is very critical in making a business ®rm competitive, it is dif®cult for ®rms to achieve it because every company has its own business strategy and accordingly the alignment of IT investment must be uniquely different (Chan et al., 1997). 2.3. Quality function deployment (QFD) Quality Function Deployment (QFD) is a product development method that translates the needs of customers through the stages of product planning, engineering and manufacturing into a ®nal product (Akao, 1990). The company can achieve various goals using QFD such as reduction in customer's complaints, improvement in design reliability and customer satisfaction, easier design change, and reduction in product development cycle time (Moskowitz and Kim, 1997). The basic idea of QFD is to translate the desires of the customer into design or engineering characteristics of the product, and subsequently into the characteristics of parts, process plan and production requirements related to its manufacture. Phase I translates the voice of the customer into corresponding engineering characteristics. Phase II moves one step further back in the design process by translating the engineering characteristics into parts' characteristics. Phase III identi®es critical process parameters and operations. Finally, phase IV identi®es detailed production requirements. The QFD is accomplished through a series of measurements called ªHouse of Qualityº (HOQ), which provides the means for inter-functional communications (Hauser and Clausing, 1988). The customer requirements (CR) are represented on the left side of the HOQ. Identifying the relative importance of the various customer requirements plays an important role in discerning those that are critical and helps in prioritizing design effort. Engineering characteristics (EC) of design requirements are represented on the upper side of the HOQ. The relative EC importance can be calculated using the relative CR importance and the weights assigned to the relationships between CR's and EC's. The
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Fig. 2. QFD process calculating the degree of requirement for ¯exibility (a ).
relationship between the CR's and EC's, which is presented in the main body of the HOQ, can be represented in symbol or numerical form. The strength of the relationships is typically assessed by the design team in a subjective manner. Even though QFD is proposed for customer driven product development and delivery methodology, a similar approach can be extended for aligning IT investment with business strategy and making priority decisions as to where IT investments should be made. 3. Proposed methodology for constructing a decision path The methodology described here is composed of four phases: identi®cation of the IT requirement set, identi®cation of the degree of requirement for ¯exibility (a value) using the QFD process, establishment of the IT investment priority grid, and determination of a decision path using the alpha value. 3.1. Phase 1. Identi®cation of the IT requirement set All information systems that a company needs have to be identi®ed in order to determine priority of IT systems to be installed. For ease of notation, we shall refer to those needed IT systems as the ªIT requirement setº. The IT requirement set can be extracted directly or indirectly from users' groups, which will bene®t because their needs will be met (Agarwal et al., 1994). There are two types of user groups: external user groups that have various claims on the organization (e.g. stockholders); and, internal user groups that operate the organization (e.g. managers). In Phase 1, we can identify the IT requirement set that is critical to an organization through interviews with members of these internal and external user groups. 3.2. Phase 2. Identi®cation of the degree of ¯exibility requirement (a value) Many researchers have emphasized the need for ¯exibility and ef®ciency, and an alignment between business strategy and IT investment in order for an organization to sustain its competitiveness (Weill and Broadbent, 1998; Chan et al., 1997). Furthermore, they
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suggest that those factors must be incorporated into the IT investment decision scheme. Thus, Phase 2 will ®nd the degree of the ¯exibility required in achieving business goals by maintaining alignment between business strategy and IT investment. The proposed methodology is based on QFD. Fig. 2 shows QFD processes related to the proposed methodology. 3.2.1. Step 2.1. Review of vision, business strategy and critical success factor Step 2.1 must be executed carefully due to the fact that a change in the relative importance of higher level factors greatly affects the relative importance of lower level factors as shown by the sequential characteristics of the QFD method. If the relative importance of any company's vision, business strategy, and/or critical success factors changes, then the degree of ¯exibility requirement (a ) can be varied. We can review a company's vision, business strategy, and critical success factors through its reports, publicity initiatives, advertising, etc., as well as interviews with senior management, IT professionals, and other supporting department personnel. 3.2.2. Step 2.2 Evaluation of the importance of business strategy 1. Organize those data related to vision and business strategy as illustrated in the ®rst HOQ in Fig. 2. In order to build the ®rst HOQ, the reviewed vision attributes are represented in the left side of the HOQ and the reviewed business strategies are assigned to the upper side of the HOQ. 2. Derive the relative importance (weight) of vision. 3. Analyze the relationships between vision attributes and business strategies and mark the strength of the relationship in the relationship matrix of the HOQ. A degree of strength is assigned to each relationship between vision attributes and business strategies. The strength of each relationship can be represented in numerical form (1±3±5 scale) or nominal form such as symbols to denote weak, medium and strong relationships (Akao, 1990). 4. Derive the relative importance (weights) of business strategies through multiplying the relative importance of vision attributes by the degree of strength of the relationship between vision attributes and business strategies. 3.2.3. Step 2.3. Evaluation on critical success factors 1. Arrange the reviewed business strategies and critical success factors in the second HOQ chart. 2. Analyze the relationships between business strategies and critical success factors and mark the strength of relationship in the relationship matrix of the HOQ chart. 3. Derive the relative importance of critical success factors through multiplying the relative weights of business strategies obtained from Step 2.2.4 by the degree of strength of the relationship between business strategies and critical success factors. 3.2.4. Step 2.4. Identi®cation of the degree of ¯exibility requirement (a value) 1. Arrange reviewed critical success factors and factors of ef®ciency along with ¯exibility in the third HOQ chart.
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23
2. Analyze the relationships between critical success factors and ef®ciency/¯exibility factors, and mark the strength of relationship in the relationship matrix of the HOQ chart. 3. Derive the relative importance of ¯exibility and ef®ciency by multiplying the weights of critical success factors obtained from Step 2.3.3 with the degree of strength of the relationships between critical success factors and ef®ciency/¯exibility factors.
In the methodology proposed here, we used a numerical form for denoting weak, medium and strong relationships in determining the relative importance of vision, business strategy, critical success factors, and ¯exibility ef®ciency factors. Those who participate in this process can choose `strong' by selecting 5, `medium' by marking 3 and `weak' by choosing 1 in a subjective manner. An analyst coordinates con¯icts among evaluators and produces a result with great inter-coder reliability that is acceptable to everyone. Once the strengths of the relationships between factors on the left side of the HOQ and factors on its upper side are analyzed, we can compute the relative and absolute importance weights of factors as follows. For example, we can obtain the absolute and relative importance of business strategies by using the following Eq. (1). X vaj di ri;j : 1 where di is the degree of importance of vision attributes, i, i 1; 2; ¼; m; ri;j the quanti®ed relationship between vision attributes, i, and business strategies, j; i 1; ¼; m; vaj the absolute importance for business strategies, j, j 1; 2; ¼; n: The absolute importance weights of business strategies vaj is formed from the weighted column sum of each vision attribute by the quanti®ed relationship values of business strategies, j. The absolute importance weight can then be transformed into a relative importance measure, vrj ; by dividing each weight, vaj by the total of all the weights. This value becomes the relative importance of attributes in the row of the subsequent HOQ chart, i.e. di : We can get the relative importance of critical success factors by applying the same process. Also, we can obtain the degree of ¯exibility requirement (a ) and ef®ciency 1 2 a by using the following Eq. (2). X X a di rij = vej 1 vfj 2 where di is the degree of importance of critical success factor, i, i 1; 2; ¼; m; ri;j the quanti®ed relationship between critical success factor, i, and ¯exibility, j; i 1; 2; ¼; m; vej the absolute importance for ef®ciency, j, j 1; 2; ¼; h: vfj the absolute importance for ¯exibility, j, j 1; 2; ¼; n; a the relative importance of ¯exibility, i.e. the degree of ¯exibility requirement. The relative importance of ¯exibility (a ) is formed through dividing the weighted column sum of each ¯exibility factor by the quanti®ed relationship values of critical success factors, j, by the total of all the weights of ¯exibility and ef®ciency factors. The relative weight of ef®ciency 1 2 a can be obtained by subtracting the relative
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importance of ¯exibility (a ) from one. The relative importance of ¯exibility means the degree of ¯exibility requirement an organization requires to achieve business goals. 3.3. Phase 3. Establishment of IT investment priority grid 3.3.1. Step 3.1. Evaluation of the IT requirement set To link the IT requirement set to that of an organization's needs related to ¯exibility and ef®ciency, ®rst we must score the IT requirement set on these very two dimensions of ¯exibility and ef®ciency. The ¯exibility dimension means the degree of ¯exibility of an organization satis®ed by the IT requirement set, while the ef®ciency dimension evaluates the degree of ef®ciency of the organization satis®ed by the IT requirement set. Each proposed IT system from Phase 1 is scored on a scale of 1±3±5 to denote weak, medium and strong, respectively. Con¯icts among evaluators are coordinated by an analyst to produce results agreeable to everyone. Both sets of scores were averaged to give ef®ciency and ¯exibility scores. For convenience, we normalized the averaged numeric value of zero to ®ve, to the score of zero to one. The normalized ef®ciency score means the relative satisfaction achieved by an IT system from the ef®ciency perspective (v e). The normalized ¯exibility score means the relative satisfaction achieved by an IT system from the ¯exibility perspective (v f). This evaluation process can be implemented through interviews with members of an internal user group consisting of personnel from R&D, production, sales, procurement and the ®nancial department. The results were tabulated by an analyst. 3.3.2. Step 3.2. Plotting of the evaluation results on an IT investment grid These normalized ef®ciency and ¯exibility scores obtained from Step 3.1 can be plotted on an IT investment grid. The point on the grid indicates each IT system supported level of ef®ciency and ¯exibility. The point (1,1) is the best IT system in which to invest from a two-dimensional perspectives, while the point (0,0) indicates an extremely poor IT system in which to invest. This grid provides a logical base from which decision-makers can select IT systems. Nonetheless, it cannot provide an answer as to which IT system is the most appropriate for the ®rm with respect to its current and anticipated competitiveness. Furthermore, once the ®rm selects the highest priority quadrant, it cannot provide an answer as to which subsequent quadrant should be selected if resources are available. In Phase 4, we will look at such an example. 3.4. Phase 4. Determination of decision path using a value 3.4.1. Step 4.1. Determination of priority of IT systems In Phases 2 and 3, we obtain four values of relative importance: the degree of ¯exibility requirement (a ), the degree of ef®ciency requirement 1 2 a; the relative satisfaction by IT systems from the ef®ciency perspective (v e), and the relative satisfaction by IT systems from the ¯exibility perspective (v f). So, the ®nal importance of each IT system to be developed (v ) can be derived by the following Eq. (3).
v avf 1 1 2 ave ;
0#a#1
3
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Fig. 3. Example of variation of a decision path according to the variation of a value.
25
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Table 1 H-company's IT requirement set Information system
Claimant
A: CAD and drawing data management system B: Information (cost and tech.) sharing with supplier C: Database for supplier management D: System for managing technical data of product E: DSS development for foreign information analysis F: Database for design cost analysis G: System for joint development with supplier H: Accounting system for manufacturing management I: Technical document management system J: Expert system for guiding vehicle K: Integrated network between domestic and foreign of®ce L: Design support system and database M: Digitization of the assembly manual N: Project schedule management system O: Real time processing system for sales data P: CKD operation system Q: Construction of network for advertisement and customer's complaint management R: Support system for individual affair and education S: EDI for clearance T: System for installment management U: System for analysis of MIP planning V: Warehousing management system
R&D Procurement Procurement R&D Financial accounting R&D R&D Manufacturing R&D Sales and marketing Sales and marketing R&D Manufacturing R&D Sales and marketing Manufacturing Sales and marketing Financial Accounting Manufacturing Sales and marketing Manufacturing Manufacturing
The value of v means the degree of each IT system's importance to the achievement of a company's business goals. The higher the v value, the higher the priority that it must be invested in or developed. By way of illustration, suppose the degrees of requirement for ¯exibility (a ) and ef®ciency 1 2 a are equal, and at the same time the relative satisfaction of each IT system from those ef®ciency (v e) and ¯exibility (v f) perspectives are given. Then, an IT investment decision path is determined as a solid line represented in Fig. 3. The decision path varies along with the variation of a value. When a value varies from 0.5 to 0.7, the decision path alters from a solid line to a dotted line in Fig. 3. When a value is 0.7, the F IT system located in B quadrant, which is lower in priority than A quadrant, is higher in priority than the B IT system located in A quadrant. This implies that any modi®cation or alteration of an organization's vision, business strategy and/or critical success factors, which affect the degree of requirement of ¯exibility and ef®ciency necessitated by the organization's business goals, may alter or modify its IT investment strategy. 3.5. Step 4.2. Con®rmation and decision-making Although IT systems to be developed are prioritized as shown in Step 4.1, no company can invest in all the identi®ed IT systems due to technological and resource constraints. Thus, planned IT systems must be developed on a priority basis in the context of a ®rm's budgetary constraints and the limitation of technology.
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4. Application of the proposed methodology to the real world: a case study In this section, we describe a real-world application of the proposed methodology, which was conducted as part of information technology planning for a large automobile company with an annual sales volume of about US$ 110 billion in 1997. We will call this organization ªH-companyº. H-company owns the world's largest automobile production facility with an annual production capacity of 2 million units. It operates three plants and eight R&D centers in Korea, and twelve branches and three R&D centers in the rest of the world. Its number of employees is about 38,000. 4.1. Identi®cation of the IT requirement set Among several departments, we selected ®ve on which to focus: R&D center; Sales and Marketing; Procurement; Manufacturing; and Financial Accounting. They are in charge of core functions. Each department identi®ed IT systems that, they consider, are critical for achieving their business goals. With this, we identi®ed twenty-two IT systems to be developed or invested in as presented in Table 1. 4.2. Identi®cation of the degree of ¯exibility requirement 4.2.1. Review of vision, business strategy and critical success factors To review its vision, business strategy, and critical success factors, we gathered the company's reports such as publicity, advertising, etc., and analyzed them. Once those factors were identi®ed, we reviewed them through interviews with senior managers in order to identify missing factors, which are very important, and eliminated unimportant factors. A vision describes an aspiration for the future without specifying the means that will be used to achieve those desired ends. H-company's vision is to increase its world market share by 4% through achieving key goals such as globalization, intensifying research and development, and increasing productivity. Key goals are depicted in Table 2. There are two types of business strategies. One is the intended strategy that managers develop. The other is the realized strategy, which actually takes place over time. The intended strategy also provides guidelines for the means by which the ®rm will pursue its goals, along with information regarding what the company hopes to accomplish. We identi®ed eighteen intended strategies. The company's intended business strategies are listed in Table 3. For convenience, we decomposed its strategies into three categories: cost strategy, product strategy and marketing strategy. Cost strategy includes six intended Table 2 H-company's key goals to achieve vision Vision
Increasing world market share by 4%
Goals
Globalization Increasing productivity Organization activation Improvement of company image
Intensifying research and development Product development Improvement of ®nancial standing
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Table 3 H-company's business strategy Cost strategy
Market strategy
Product strategy
Increasing factory automation rate
Establishing foreign cooperation for marketing Ensuring foreign dealer Establishing foreign production bases Providing the customer with a process monitoring service Establishing market information monitoring systems
Development of high valueadded product Flat organization (R&D) Development of new energy sources Enlarging the product line
Training and educating employees Intensifying of out-sourcing simple and repeated operations Acquiring components from various sources Establishing direct channel for customer and supplier Building maintenance center under direct management
Establishing an overseas technology center for assuring new technology Cooperation in development components Assuring foreign manpower
strategies such as `increasing factory automation rate', and `training and educating employees'. Five intended strategies (e.g. establishing foreign cooperation for marketing) are included in market strategy. Seven intended strategies (e.g. development of high value -added product) are classi®ed under product strategy. Critical success factors are extremely important for maintaining a ®rm's competitive position. Critical success factors should be relevant to the individual company with respect to determining a variety of environmental conditions such as industry characteristics. In consideration of such environmental conditions we identi®ed twenty critical success factors, listed in Table 4. It is vital for a company to achieve both ¯exibility and ef®ciency simultaneously through suitable IT investments in order to be competitive. Many researchers suggest that ¯exibility can be measured by a variety of variables, such as sharability and connectivity of IT applications. Ef®ciency can also be measured by various variables, such as cost reduction. However, while there are many measurement variables, there is no integrated measurement. Thus, as revealed in the review of the related research, we selected four factors as measurement variables for ef®ciency and ¯exibility. Factors regarding ef®ciency and ¯exibility are listed in Table 5. 4.3. Evaluation of the importance of business strategy, CSFs and ¯exibility using QFD To evaluate the degree of importance of business strategy, we ®rst placed the seven identi®ed vision attributes on the left side of the HOQ and the eighteen identi®ed intended business strategies on the upper side of the HOQ. Secondly, it would be better to determine the relative importance of each vision attribute. In this case, we assumed, for convenience, that the importance of all vision attributes is equal. Thirdly, we determined the degree of relationship between the vision attributes and the intended business strategies through interviews and discussion with internal users. It took a lot of time to coordinate con¯icts
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Table 4 H-company's critical success factors Sales amount per salesperson Financial stability Minimization of material ¯ow cost Factory utilization Productivity of an employee Minimization of product development cost Control the manufacturing Preservation of proper inventory Partnership with foreign sales cooperation Partnership with foreign customers Customer service (delivery maintenance) Concurrent engineering for product development Product quality and safety Flexibility in manufacturing: FMS, CIM Improving the supplier's quality Forecasting ability Rapid learning of the new technology Rapid communication with components suppliers Accumulating employee's know-how Effective job assignment
among evaluators, and produce an evaluation result acceptable to everyone. The relationship and relative importance of business strategies are depicted in Appendix A.1. By applying a similar process, the importance of business strategies, the relationships between business strategies and critical success factors, and the relative importance of critical success factors were evaluated as shown in the Appendix A.2. By using Eq. (2) we Table 5 Ef®ciency and ¯exibility factors
Ef®ciency
Factors
Researchers
Productivity Improvement
Tan and Uijttenbrek (1997); Barua et al. (1995); Hamel and Prahalad (1994) and Kelly (1994) Downes and Mui (1998), Poirier and Reiter (1996) DeLone and McLean (1992)
Cost reduction Product and service quality improvement Time ef®ciency Flexibility
Rapid development of new products and services Sharability and connectivity of IT applications Ability to respond to future market Organizational coordination and communication
Hamel and Prahalad (1994) Aggarwal (1997) Keen (1991), Duncan (1995) and Weill and Broadbent (1998) Weill and Broadbent (1998) Boynton and Victor (1991)
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could obtain the relationships between critical success factors and those factors related to ¯exibility and ef®ciency, and in turn the value of the degree of ¯exibility requirement (a value) and ef®ciency requirement 1 2 a value) presented in Appendix A.3. As indicated in Appendix A.3, H-company requires more ¯exibility than ef®ciency, which is determined by its vision, intended business strategies, and critical success factors. This result is congruent with Boynton's (1991) suggestion. He claimed that mass production ®rms focus more on ef®ciency than on ¯exibility in achieving competitive advantage. This is due to the fact that product speci®cation and demand are relatively constant and predictable. 4.4. Establishment of the IT investment priority grid 4.4.1. Evaluation of the IT requirement set In this phase, an assessment is made to determine the degree to which those identi®ed IT requirements focus on ¯exibility or ef®ciency. Each identi®ed IT system is analyzed to get a score on ef®ciency and ¯exibility. These scores are determined via the IT department and an internal user group. For example, the IT system named `CAD and drawing data management system' was assigned a score of ®ve since it contributes strongly to the achievement of `productivity improvement' and `time ef®ciency'. Nonetheless, a relatively low score of three is given to that IT system with respect to cost reduction and product/service quality improvement. The total weight of ef®ciency is averaged and the resulting value is normalized. Thus, we could obtain the relative importance of the `CAD and drawing data management system' from the ef®ciency perspective. The evaluation result of each IT system is provided in Appendix B. 4.5. Plotting of the evaluation results on an IT investment grid Each IT system's score obtained from the evaluation of an IT requirement set was plotted onto the IT investment grid. Fig. 4 shows H-company's IT investment grid with respect to ef®ciency and ¯exibility. 4.6. Determination of decision path using a value To determine the priority of IT systems, four relative weights obtained from the previous phases were applied to Eq. (3). Eq. (3) is concerned with the degree of requirement for ¯exibility (a ), the degree of requirement for ef®ciency 1 2 a; the degree of satisfaction with the IT system from an ef®ciency perspective (v e), and the degree of satisfaction with the IT system from a ¯exibility perspective (v f). This process enabled us to obtain the ranking of the IT requirement set as presented in Table 6. Fig. 5 shows the IT investment decision path of H-company. H-company decided to use the IT investment decision path as a guide within resources available. However, in case that IT investment could not be realized in the context of technological limitations, it could be delayed until the technology could be utilized. 5. Discussion and conclusion Information technology is no longer a passive means to increase productivity of a
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Fig. 4. H-company's IT investment priority grid.
business ®rm. A business ®rm's IT investment for meeting current needs as well as ¯exibility for adapting itself to its business environment is not only vital, but a ®rm's survival is dependent upon making an error-free decision about IT investment. In spite of this necessity, there is no uni®ed methodology for guiding management to make the right decision for IT investment. There is a plethora of suggestions and research on the importance of ¯exibility and alignment between business strategy and IT investment. Nonetheless, there is no uni®ed approach to incorporating these factors into the decision process. The proposed methodology allows for incorporating decision factors related to ¯exibility and ef®ciency that the ®rm must adopt in order for it to be competitive. The proposed methodology is based on a framework suggested in the QFD. Application of the proposed methodology to H-company in Korea has revealed its usefulness in determining IT investment priority. First of all, the case analysis has convinced us that the proposed methodology can contribute in determining IT investment priorities with respect to ¯exibility and ef®ciency factors in the context of a ®rm's vision and strategies as a uni®ed measurement approach. Second, it can complement existing IT investment methodologies. Third, the proposed methodology can diagnose and coordinate inter-functional con¯icts in determining IT investment priorities. The proposed methodology has some advantages. Speci®cally, they are: (1) by identifying contradictory requirements between ¯exibility and ef®ciency in the context of a
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Table 6 The ranking of IT the requirement set Rank
Information systems
Score
Rank
Information systems
Score
1
A: CAD and drawing data management system L: Design support system and Database O: Real time processing system for sales data B: Information (cost and tech.) sharing with supplier G: System for joint development with supplier N: Project schedule management system K: Integrated network between domestic and foreign F: Database for design cost analysis E: DSS development for foreign information analysis V: Warehousing management system S: EDI for clearance
0.78
12
C: Database for supplier management
0.48
0.73
13
0.46
0.70
14
D: System for managing technical data of product I: Technical document management system
0.68
15
P: CKD operation system
0.42
0.63
15
Q: Construction of network for customer's complaint
0.42
0.62
17
0.34
0.57
18
H: Accounting system for manufacturing management M: Digitization of the assembly manual
0.53
19
0.29
0.51
20
J: Expert system for guiding vehicle U: System for analysis of MIP planning
0.50
21
0.24
0.50
22
T: System for installment management R: Support system for individual affairs and education
2 3 4 5 6 7 8 9 10 11
0.44
0.32
0.27
0.15
company's vision, business strategies and critical success factors, it provides insight into questions like: ªHow ¯exible must the company be in order to meet unknown, future business needs while satisfying current business needs of ef®ciency ?º (2) it provides a guide to which application-oriented IT systems are most appropriate for meeting the ®rm's current needs and anticipated needs in the context of budgetary and technological constraints; and (3) the proposed methodology can help the business ®rm to align IT investment to its business strategies in such a way that computing services are meeting the ®rm's strategic goals. Nonetheless, there are several limitations. The ¯exibility requirement of IT investment can be realized through a separation of IT infrastructure and IT application. However, the case analysis focuses on identifying those applications oriented to an IT system. We did not collect nor analyze data on experts' opinions on the type of IT infrastructure required by H-company to stay ¯exible in meeting future IT needs. A second drawback is the timeconsuming effort in collecting and evaluating all of the data required for the proposed methodology. As the number of relationship factors increases, the workload on analysis
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Fig. 5. H-company's IT investment decision path.
and evaluation of IT system attributes increases dramatically. It is highly desirable to have software for automatic identi®cation of the degree of relationship among the various factors. Third, data collection and analysis is heavily dependent upon the subjectiveness of evaluators. In this study, we used an evaluation result agreeable to everyone through coordinating con¯icts among evaluators by consultants. One of the future directions of this research is an extension of the decision path as a dynamic modeling tool, including both the IT infrastructure and the application requirement. In spite of these limitations, we have demonstrated that a uni®ed approach to the identi®cation of IT investment priorities and construction of an investment decision path is applicable to a large organization such as H-company in Korea.
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Appendix A. HOQs for the case study A.1. HOQ representing the relationship between vision/goals and business strategy
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A.2. HOQ representing the relationship between business strategy and critical success factor
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A.3. HOQ Representing the relationship between critical success factor and factors of ef®ciency and ¯exibility
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Appendix B. IT requirement set evaluation sheet
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