SCHOOL OF ECONOMICS Department of Informatics
IT investments at European airlines
Is IT viewed as a strategic resource?
Master thesis presented January 2005
Authors: Klara Eriksson Selma Mulagic
Supervisor: Odd Steen, Ph. D. Senior Lecturer and Director of Studies
i IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
IT investments at European Airlines
Is IT viewed as a strategic resource?
© Klara Eriksson & Selma Mulagic
Master thesis presented January 2005 Size: app.100 pages Supervisor: Odd Steen, Ph. D. Senior Lecturer and Director of Studies
Abstract
IT investments are essential parts of a company’s strategy. Deciding whether to invest or not to invest in a certain IT project requires multiple considerations. Our aim has been to find out which are the most important ones.
Our study has been conducted as a quantitative one based on a survey inquiry; our 17 respondents operate in the airline industry, a sector which is information intensive but at the same time, for various economical and other factors is forced to be careful about high capital IT investments.
Starting from a theoretical model of IT investment justification we have constructed two new model versions ranking the appraisal techniques and the expected benefits; we have found that the major points of consideration are the existing IT- and operations system together with the software applications, system integration and long-term costs and benefits. Concerning the expected benefits, the financial ones take the first place, budgets inclusive return on investment calculations. Intangible considerations like securing future business, gaining competitive advantage and improve customer relationship are also ranked as the utmost priorities.
In general we can conclude that approximately the two thirds of our respondents consider IT as a strategic resource of the company. It is mostly IT professionals who see IT also as an opportunity for their company. Curiously, those three respondents who determine IT’s roll merely as a support function, have all IT background. Furthermore, three quarts of all respondents confirm that IT is a useful weapon first of all in rivalry with competitors, one of the main battlefields defined by Porter.
Key words: Strategy, IT investment justification, IT benefits, strategic resource
ii IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Acknowledgements
First and foremost, we would like to thank our supervisor, Odd Steen, Ph. D. Senior Lecturer and Director of Studies at the Department of Informatics of Lund University, for his engagement during these months and his precious views which have contributed to our thesis’ finally outcome.
Furthermore, we wish to thank Lars Wahlgren, Director of Studies at the Department of Statistics of Lund University for having helped us with his own views about this quantitative research we have conducted and the difficulties we have faced.
Special thanks are extended to 17 leaders of European airlines which have taken their times and have contributed to our research and we are really thankful for their will to participate in this research and their share in this inquiry.
iii IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Table of Contents
LIST OF GRAPHS, FIGURES AND TABLES ...... VI 1. INTRODUCTION...... 1 1.1 BACKGROUND AND PROBLEM DISCUSSION ...... 1 1.2 AIM ...... 2 1.3 CORE ISSUES...... 3 1.4 DELIMITATIONS...... 3 1.5 INTENDED AUDIENCE...... 3 1.6 STRUCTURE...... 4 2. THEORETICAL FRAMEWORK ...... 5 2.1 ABOUT STRATEGY ...... 5 2.2 A MAIN PART OF COMPANY STRATEGY: INVESTMENTS ...... 7 2.3 MICHAEL PORTER ABOUT COMPETITIVE STRATEGY ...... 12 2.4 BENEFITS MANAGEMENT...... 16 2.5 THE IT INVESTMENT JUSTIFICATION MODEL...... 18 2.6 CONCLUSION...... 22 3. INDUSTRY- AND COMPANY PRESENTATION...... 24 3.1 ABOUT THE AIRLINE INDUSTRY IN GENERAL ...... 24 3.2 COMPANIES PARTICIPATING IN THIS STUDY...... 25 3.3 IT STRATEGY IN THE AIRLINE INDUSTRY ...... 31 4. METHODOLOGY...... 33 4.1 RESEARCH DESIGN ...... 33 4.2 RESEARCH PROCESS ...... 40 4.2.1 Literature study ...... 40 4.2.2 Choice of the branch...... 41 4.2.3 Collecting data by constructing a survey ...... 41 4.2.4 Collecting data by searching material on the Internet ...... 43 4.2.5 Processing and analyzing data...... 43 4.3 VALIDITY ...... 44 4.4 RELIABILITY...... 45 5. SURVEY ANALYSIS ...... 48 5.1 INTRODUCTION...... 48 5.2 IT IN THE STRATEGIC BATTLEFIELD...... 52 5.3 QUESTIONS RELATED TO THE IT INVESTMENT JUSTIFICATION MODEL...... 58 5.4 GENERAL OVERVIEW AND FUTURE VISION ...... 66 6. DISCUSSION AND CONCLUSIONS ...... 68 POST SCRIPTUM ...... 72 7. REFERENCES...... 73 7.1 LITERATURE...... 73 7.2 METHODS BOOKS ...... 74 7.3 COMPENDIUM...... 75 7.4 ARTICLES ...... 75 7.5 ELECTRONIC REFERENCES ...... 77 7.5.1 Home pages:...... 77 7.5.2. Home Pages for the 83 airlines which did not sent back our survey...... 79 7.5.3 Annual rapports to download:...... 81 APPENDICES ...... 82 APPENDIX 1: INTRODUCTION LETTER...... 82
iv IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
APPENDIX 2: SURVEY QUESTIONS ...... 84 APPENDIX 3: COMPANY PERFORMANCE MATRIX...... 88 APPENDIX 4: COMPANY RESOURCE MATRIX...... 89 APPENDIX 5: LIST OF RESPONDENTS ...... 90 APPENDIX 6: STATISTICAL TABLES ...... 91 APPENDIX 7: TRADITIONAL CALCULATION TECHNIQUES...... 93 APPENDIX 8: VARIABLE MEASUREMENT SCALES ...... 96 APPENDIX 9: AN EXAMPLE FOR AN IT INVESTMENT APPRAISAL CALCULATED BY NPV...... 97 APPENDIX 10: QUESTIONS AND ANSWERS BASED ON LIKERT SCALE...... 98 APPENDIX 11: LIST OF THE 100 AIRLINES OF OUR STUDY ...... 100
v IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic List of Graphs, Figures and Tables
Figure 1 Four IT domains...... 11 Figure 2 The five forces of Porter, 1980 ...... 13 Figure 3 The generic strategies of Porter, 1980 ...... 14 Figure 4 A process model of benefits management...... 17 Figure 5 The IT investment justification model ...... 19 Figure 6 The geographic position of our respondents ...... 26 Figure 7 Our version 1 of the IT investment justification model...... 69 Figure 8 Our version 2 of the IT investment justification model...... 70 Figure 9 Likert scale ...... 98
Graph 1 Confidence Interval depending on sample size...... 47 Graph 2 IT investments specified by business process ...... 49 Graph 3 IT investment specification ...... 50 Graph 4 Chart of general view about IT...... 51 Graph 5 Chart of general view about IT divided by respondent profile...... 51 Graph 6 Chart of respondents´ IT approach...... 52 Graph 7 IT as a useful weapon regarding Porter’s five forces – version 1 ...... 53 Graph 8 IT as a useful weapon regarding Porter’s five forces – version 2 ...... 54 Graph 9 Porter’s five forces recognized as a strategic weapon...... 55 Graph 10 IT investments specified by business process ...... 56 Graph 11 Mean scores for intangible benefits divided by company profile ...... 58 Graph 12 Chart of mean scores for strategic impacts...... 59 Graph 13 Chart of mean scores for tactical considerations...... 59 Graph 14 Chart of mean scores for operational considerations...... 60 Graph 15 Chart of intangible benefits...... 61 Graph 16 Chart of financial benefits ...... 62 Graph 17 Chart of non-financial tangible benefits...... 63 Graph 18 Importance of ROI by IT investments ...... 64 Graph 19 Use of investment calculations divided by company profile...... 65 Graph 20 Great IT challenges in the next five years ...... 66
Table 1 List of airlines divided by company size ...... 91 Table 2 List of airlines divided by company- and respondent profile ...... 91 Table 3 Statistics about company size, company profile and respondent profile...... 92
vi IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
1. Introduction ______This chapter introduces the subject of this thesis; it starts by presenting the background and continues by formulating problematic issues, outlining the aim for the thesis and the rationale behind it. The reader will also get a clear picture about the delimitations we applied. This chapter concludes by giving an overview about the contents of the different parts of this thesis. ______
1.1 Background and problem discussion
During the last decades IT/IS i.e. information technology and information system has invaded nearly all the sectors and has become a natural part of our life. Companies, to remain viable in an époque of strenuous competition, must take into consideration the different solutions information technology offers; in certain branches of trade, it is an imperative to embrace the latest technology. With organizations becoming increasingly dependent on IT management of IT has become more crucial through the years.1 The technological development is very fast, new hardware and software solutions are coming into the market all the time; implementing them is often very expensive while companies are compelled to economize and operate with limited resources and budgets. Their goal to maximize overall competitive advantage must be matched with the imperative of minimizing costs.2 All this is forcing a company to a delicate balancing; to be able to manage it successfully, a well planned strategy is needed which includes IT and business executives as well. A prominent part of this strategy is investments in IT/IS and decisions about these investments can greatly impact the future success of a company. With growing IT costs, the notorious reputation of costly IT failures, together with the notion that IT has become a critical component of business, companies seek evidence verifying the contribution of IT to the success of the business.3 How to appraise and evaluate in advance eventual future benefits of IT/IS – this question has been the subject of much academic debate and literature in recent years and studies from business life often point out that the current methods are far from being satisfactory.4 Several models are presented in the academic world to cope with this problem but the question remains: are these models or their principles known and acknowledged by business and IT executives? Are these models applied in real life?
So as to be able to plunge into this issue it is reasonable to examine the situation in a certain industry where companies with the same profile can be compared, how they are facing the problem of appraising future IT/IS investments.
1 Earl, M. J. (1989). Management Strategies for Information Technology, Prentice Hall, Essex 2 Apostolopoulos, T. & Pramataris, K. (1997). Information Technology Investment Evalution:Investment in Telecommunication Infrastructure, International Journal of Information Management, 17,4. 287-296 3 Thorp, J. (1998). The information paradox : realizing the business benefits of information technology, McGraw-Hill Ryerson, Toronto 4 Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, 214-225
1 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Why have we chosen airlines? Our first thought has been that flying is an ancient dream of mankind and we think that the possibility which the newest technique – including much of IT – offers, reaching different parts of the world in a few hours at a reasonable price, is formidable and interesting to study. It is mostly thanks to IT that this possibility is now available for so many people.
Furthermore, the choice of the airline industry seems to be quite reasonable from several points of view: this industry, pro primo, is applying information technology on a high level – neither the operation of aircrafts, nor selling millions of tickets worldwide would be possible without sophisticated information systems. Pro secundo, international air transport is one of the most dynamic and fastest-changing industries of the world, even if not all the actors have the same chances of growing because of the old national barriers; the universal trade association of airlines, IATA is planning the fundamental restructuring of services; their new resolution called “Simplifying the Business”5, including inter alia the elimination of all paper tickets by 31 December 2007, is consisted of four projects based on new IT/IS solutions requiring considerable resources and efforts. Pro tertio, being a industry of high sensitivity for international politics and events, it has suffered remarkable losses during the last years, starting with the unfortunate date of September 11th 20016, a situation when companies are getting cautious and they think twice about the pros and contras of new projects. All these circumstances are rendering the issue of economizing and rationalizing with high capital IT/IS investments greatly acute and this was therefore why we have chosen this sector to study.
On the other side, IT/IS investments are central for us who are interested and involved in IT issues as a future job – investments are engines of the economy and this is true even for IT7 - and we are curious to see how engaged companies are in a branch which is essentially IT- dependent and which kind of investments have they done during the last years and which are the challenges they face in the future.
1.2 Aim
The aim of this thesis is to investigate which are the major factors airlines are considering when they are facing a decision about an IT investment and which are the benefits they expect as a result, starting from a theoretical model constructed by a team of University professors from the Anglo-Saxon world, which contains possible factors and benefits justifying the motives to invest in IT.
The background for appraising the above mentioned factors and benefits is a philosophy about what IT can accomplish generally for a company, according to the executives; so as to discover this background we wish to investigate if IT is viewed as a strategic resource or just as a technical tool; furthermore, if IT is considered as a strategic weapon on the “battlefield” where every company is fighting on a daily basis, against forces described by Porter.
5 IATA, URL: http://www.iata.org/Whip/Public/frmMain_Public.aspx?WgId=67&FileSortField=Posted&FileSortOrder=Asc 6 IATA, annual report, URL: http://www.iata.org/NR/ContentConnector/CS2000/SiteInterface/sites/about/file/annual_report_2004.pdf 7 Earl, M. J. (1989). Management Strategies for Information Technology, Prentice Hall, Essex
2 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 1.3 Core issues
So as to be able to achieve the above mentioned aim, we have to give response to the following questions:
• Which methods are used mostly among those listed in the above mentioned IT investment justification model? • Are there any methods in this model which are not mentioned? • Which are the main benefits, among those listed in this model that airlines claim an IT investment must yield? • Which are the benefits airlines expect from a future IT investment? • Are intangible benefits playing also a crucial role or are they neglected to some extent compared to tangible benefits? • Can IT/IS help airlines in their “battle” against the five market forces determined by Professor Porter? • Generally, is IT seen as a strategic resource?
1.4 Delimitations
Our thesis is delimited to the pre-investment appraisal process, the so called ex ante calculations and considerations, and does not handle the other parts of the investment lifecycle.
Furthermore, this study sees IT investment justification from a general, theoretical perspective and omit to specify differences between different types of IT investments.
Regarding the financial-economical calculations at IT investments, our intention is to give a general overview together with some few examples, but we do not investigate this issue in details.
The IT investment appraisal process is in at the same time also the first step of identifying and structuring benefits; in this study we do not deal with the other four steps of the benefit management process (see Figure 4 in Chapter 2.4).
1.5 Intended audience
According to our opinion the question of IT investments, views about them and problematic issues around justifying them are of primary interest for all who is involved in the area of information technology, both outside and inside the academic world.
We are convinced that by getting acquainted with the contents of this study, the reader gets a deeper insight in the complexity of the issues around IT investment dilemmas and by the end of the lecture he would feel that the time spent was not wasted; he has become richer with some new IT knowledge, which perhaps sometimes, somewhere can be proved to be valuable.
3 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 1.6 Structure
After this introduction follows Chapter 2 which presents our theoretical framework; starting from the subject of strategy we go on examining an essential part of a company’s strategy, investment in general and IT investments in special. We discuss Porter’s two strategic models, followed by a short outline of benefit management. The key point in this chapter is the IT investment justification model, which serves as a basis for our empirical study.
Chapter 3 gives an insight into that branch we have chosen for our empirical study, viz. the European airline industry. A general and historical presentation is followed by the description of those airlines who are participating in this study. This chapter is concluded by choosing some excerpts illustrating some interesting features of airline IT strategy.
Chapter 4 guides the reader through our research process and presents our research design as well as important points of consideration like the methodology of collecting data and a discussion about validity and reliability, two core issues for a researcher. This chapter of methodology is placed here, after the theoretical framework and the branch presentation, because it refers iteratively to the contents of the previous chapters; should our chapter of methodology follow directly after the introduction, it would be rather difficult for the reader to follow the argumentation without constantly turning pages.
Chapter 5 is a summary of all the results of the empirical study we have conducted. These are presented following the structure of our theoretical framework from Chapter 2.
Chapter 6 tries to give answers to our core issues defined in the introduction; here we comment both the theoretical and the empirical parts of this study, trying to come to a kind of synthesis among them. In this chapter is our model presented and discussed which is defined as the aim of this thesis.
We provide a list of Graphs, Figures and Tables on page VI.
The list of references is divided in several different categories so as to make the search easier. Finally, we attached eleven appendices which contain supplementary material connected to the previous chapters’ contents.
4 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 2. Theoretical framework ______This chapter serves as a theoretical background for our empirical study. Outgoing from the concept of strategy, we study the fields of investments and especially IT investments, benefits management and the question if IT is regarded as a strategic resource. This chapter concludes by the presentation of an IT investment justification model which will be the base of our further studies. ______
Choosing a motto for this chapter, we have decided to quote Napoleon, one of the greatest strategists of history:
“Strategy is the art of making use of time and space. I am less concerned about the latter than the former. Space we can recover lost time never."8
But what is strategy in a more concrete meaning? We try to give an outline here below of this enormously rich subject.
2.1 About strategy
We begin by an overall definition from today’s business world, from Yeates & Candle’s book:
“Strategy is the pattern or plan that integrates an organisation’s major goals, policies and actions into a cohesive whole. In other words, it pulls together and gives meaning to everything an organisation does. A well formulated strategy helps to organise resources into a unique and viable force based on the competences and shortcomings of the organisation, on anticipated changes in the environment and activities by competitors.”9
Why is strategy so important for a company? An organization that does not plan its future is not likely to have one, according to Ronald A. Gunn, director of Strategic Futures Consulting Group, USA.10 Both business and academic literature emphasize the importance of strategic planning for an organization, i.e. defining long-range goals and objectives together with the way which leads to achieve them. One can argue that the ever-changing and dynamic nature of technology, new challenges or sudden developments can quickly render any plan obsolete. We can answer to this argument with General Eisenhower’s words: "Plans are nothing, planning is everything. 11"
It is not a coincidence that we have quoted a general; the concept of strategy has its roots in the military and takes us back to abt.500 BC, to Athens where ten “strategists” were elected
8 Bourrienne, L. A. F. de (1829). Mémoires sur Napoléon, le Directoire, le Consulat, L’Empire et la Restauration, Auguste Wahlen et H. Tarlier, Bruxelles 9 Yeates, D. & Cadle, J. (1996). Project Management for Information Systems, Pitman Publishing, London, pp. 16 10 Strategic Futures, URL: http://www.strategicfutures.com/articles/stratpln/stratpln.htm 11 Eisenhower, D. D. (1948). Crusade in Europe, Doubleday & Company, New York
5 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic every year having the task of teaching the art of conquering in war or keeping peace12… The word strategy entered the English language in 1810, as English military circles studied the battles of Napoleon Bonaparte. During the last two centuries has the concept of strategy gradually spread to other fields, especially business13.
The nine basic maxims of strategy14, applied from the 19th century in Europe are valid also for businesses and on further consideration, even for managing information technology:
1) Uniform leadership –this means that somebody must take over the leadership and have an overview about all the integrated systems and networks used by the company.
2) Clear aim, i.e. the leader must identify the goal of the task and even specify how to achieve it by the system which is implemented.
3) Simplicity, i.e. one must achieve the above goals by so little effort as possible, simple coding and solutions are to be preferred; complicated systems can lead to difficulties in daily operations
4) Security, i.e. to protect the system and the data from those who are not supposed to get access to the system
5) The offensive principle which implies taking initiatives and continuously updating and ameliorating the functions
6) Manoeuvre, i.e. to be mobile in time and space namely to be available all the time
7) Concentration, i.e. not to spread out too much so that one can achieve the biggest possible strength, focusing to the main function of the information system. It is also important to have a reserve or plan B if something unexpected happens, viz. doing constantly backup functions.
8) The principle of sparing energy which implies to involve as little strength as possible and at the same time having a maximal amount of strength as a reserve; namely not to implement more software and hardware than those which are absolutely necessary from the point of view of the business process.
9) The principle of surprise, i.e. to have own applications and solutions, launching it when it is less expected; this can assure a significant competitive advantage for the company.
Which are the strategic questions and issues at a company? How can we decide if a question is of strategic character or simply operational at a daily basis? Karlöf et al. in their book give some guidelines to get oriented in this subject. The strategic questions can be recognized by the following features: 15
12 Karlöf, B., Nilsson, S. & Froment, M. Edenfeldt. (2002). Strategi i ett styrelseperspektiv – en vägledning, Ekerlids Förlag, Stockholm 13 Columbia University, New York, URL: http://www3.gsb.columbia.edu/courses/selection/describe.cfm?WHATCOURSE=B8799- 013&GSB=YES&Term=20051 14 Roos, G., von Krogh, G. & Roos, J. (2004). Strategi – en introduktion, Studentlitteratur, Lund 15Karlöf, B., Nilsson, S. & Froment, M. Edenfeldt. (2002). Strategi i ett styrelseperspektiv – en vägledning, Ekerlids Förlag, Stockholm
6 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic • The issues are extensive and large-scale, relatively to the company’s size • Undertaking of the matter is long-term and it binds the company’s future resources • Unknown factors make appraisal of possible consequences difficult • It is difficult to preview to which extent the issue will effect the company • It is difficult to recall the decision once made which implies a reduction of future ability to move further
A significant difference between the strategic and the operational issues is that while the second one is always acute but not always important, the first one is never acute but always important. This implies that if a company doesn’t strictly plan his activities, the urgency of daily, operational tasks take all the available time and strategic, utmost important issues will be postponed all the time.16 A company which does not take time to think over his strategy and has only an operative focus might end at a point which is called by Michael Robert by “Christopher Columbus Management”:
• When he sailed off he did not know where he was going to arrive. • When he arrived, he did not know where he was. • When he came back, he did not know where he had been.17
The strategic work at a company is not limited only to a kind of planning the future, but it consists of several stages. The initial phase implies inspecting and mapping the present stage of affairs and generating possible alternatives for acting plus creating basis of facts for the acting plan in question. The second phase includes decisions about strategic alternatives of acting and priorities plus realizing the actions which has been decided. The third, last phase implies pursuing the taken measures and updating the strategy after getting new information.18
2.2 A main part of company strategy: investments
An important part of strategic work is about taking care of the available resources of a company, and placing them in a way which makes sure that their value will be higher in the future; with other words, this part of strategy is about investments.19
By investments it is generally meant to purchase assets as for example real estates or machines.20
Estimating investments is an important step when a company is planning an investment. A calculation for the investment is prepared showing the expected payments which the investment includes. On the basis of this calculation the investment is judged to be profitable or not profitable. Which are the traditional ways a company makes these calculations? The literature suggests that the most popular methods for assessing and evaluating investments come from the field of finance and focus on cost-benefit analysis and discounted cash flow analysis. Generally, these approaches are:
16 Karlöf, B., Nilsson, S. & Froment, M. Edenfeldt. (2002). Strategi i ett styrelseperspektiv – en vägledning, Ekerlids Förlag, Stockholm 17 Robert, M. (2001). Strategic supremacy – Pure and simple, PPS Inc., USA 18 Karlöf, B., Nilsson, S. & Froment, M. Edenfeldt. (2002). Strategi i ett styrelseperspektiv – en vägledning, Ekerlids Förlag, Stockholm 19 Ax, C., Johansson, C. & Kullvén, H. (2004). Den nya Ekonomistyrningen, Liber Ekonomi, Malmö 20 Ibid.
7 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic • easy to apply, • seen as objective, and • considered as theoretically well grounded.
The commonly used and accepted techniques include, among others, the following ones: • PP, payback period, • ROI, return on investment • IRR, internal rate of return • NPV, net present value • ROCE, return on capital employed and • EVA, economic value added.21
All of these have strengths and weaknesses; generally we can say that those which can be easily calculated and provide a means to rank multiple projects, often fail concerning other factors like the time value of money or cash flows, while those which can easily compare rates, are difficult to calculate. The calculation which is considered as theoretically superior method, as it accounts for time value of money as well as it allows comparison of mutually exclusive projects and projects of unequal duration is NPV, net present value.22 A more detailed description of the above calculation methods is attached as Appendix 7.
According to Ballantine and Stray these traditional investment appraisal techniques, such as the above mentioned ROI, IRR, NPV and PP are often used to appraise capital investments in IT.23
Here at this point it seems to be important to precise what the studied literature means by IT investments; they are defined as a purchasing of bigger volume of IT products and systems. The aim of an investment, according to Dos Santos is to improve a company’s long- term profitability by increasing income or decreasing costs, but some of IT investments can be compulsory due to several circumstances as for example a new legislation.24 IT investments can be categorized in different ways; according to Falk & Olve’s classification there are four main types of IT investments: the indispensable ones, the rationalizing ones, the ones which support decisions and those which have the ability of changing competitive position of the company.25
According to Currie, however, the above depicted traditional financial evaluation techniques are necessary but not sufficient tools for justifying information technology investments and assessing the business value of complex information systems and applications. 26 Strassmann and Hitt & Brynjolfsson also claim that this measurement is not sufficiently satisfying to judge the real value of IT.27 28 Alter also mentions that most management executives are not
21 Laudon, K. C. & Laudon, J. P. (1999). Essentials of management information systems: Transforming business and management, Prentice Hall, New York 22 Ibid. 23 Ballantine, J. & Stray, S. (1998). Financial appraisal and the IS/IT investment decision making process, Journal of Information Technologi, 13, pp. 3-14 24 Dos Santos, B. (2000). Improving the return on IT-investment: the productivity paradox, International Journal of information Management, 20. 429-440 25 Falk, T. & Olve, N-G. (2000). IT som strategisk resurs – Företagsekonomiska perspektiv och ledningens ansvar, Liber Ekonomi, Malmö 26 Currie, W. (1995). The IT strategy audit: Formulation and performance measurement at a UK bank, Managerial Auditing Journal, 10 (1), 7-16 27 Strassman, P. A. (1990). The business value of computers, Information Economics Press, New Canaan
8 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic comfortable with the available set of tools and techniques which are used to justify their investments in IT. 29 It is, however, evident, that these “objective” financial measurements are the easiest ones from a leadership perspective, i.e. just considering revenues, profit level, increase of sales on assets, etc. 30
Financial measurements are specifically designed to assess the “bottom line” financial impacts of investments, by often setting direct IT related costs against quantifiable benefits achievable. The so called cash flow methods have a basic characteristic that investments are represented as a set of negative and positive cash flows. By NPV and IRR, for example, which are considered as popular ones in IT context, the finding of the right time value of money is a problematic issue, according Ballantine and Stray31. By NPV, for example, when we count out the value of it, we must start by estimating factors like productivity improvement by year, obsolescence in years, and the discount rate for cash flows; these estimations by IT projects are rather uncertain, because in IT context we can never be sure about the duration of the acquired IT assets or which productivity improvement they will involve during this period. IT investment projects are generally considered as high risk project, just because of the difficulty of these estimations and therefore they are unique among investments, as Reményi points out. 32 The NPV formula (see Appendix 7) gives a good calculation result essentially for the risk-less market rate. The NPV method also omits to take account of management flexibility.33
Despite the above critique of using the NPV method by IT investments, some authors claim that it can still be considered as a theoretically superior one, especially compared to the widely used PP and IRR methods. Bacon claims that if these techniques are used alone when assessing IT investments, the results could be misleading when comparing projects of different size or timing in cash flows. Nevertheless, these techniques are generally accepted in practice.34
The above approaches fail to capture all of the contributions provided by IT since they are interested mostly in cost savings and labour reduction, namely efficiency improvements. When calculating the cost side of an IT investment, there are here different costs to think about; we have to include in such analysis direct costs as hardware, software or labour, but also indirect costs which are incurred at the implementation of an IT system such as training, support, and productivity losses due to downtime and other qualitative costs. These later ones are more difficult to quantify, and, therefore, are not well-reflected in the financial models. These calculations, on the other hand, are made before the investments are realized and seldom after the implementation. Clemons and Weber emphasizes the importance of circumstances around the IT investment and warns against judging an IT investment only by
28 Hitt, L. M. & Brynjolfsson, E. (1996). Produktivity, business profitability, and consumer surplus: three different measures of information technology value, MIS Quartely, 20 (3), 121-142 29 Alter, S. (1999). Information System: A Management Perspective, Addison-Wesley, USA 30 Dos Santos, B. (2000). Improving the return on IT-investment: the productivity paradox, International Journal of information Management, 20.429-440 31Ballantine, J. & Stray, S. (1998). Financial appraisal and the IS/IT investment decision making process, Journal of Information Technologi, 13, pp. 3-14 32 Remenyi, D., Money, A. & Twite, A. (1995). The effective measurement & managment of IT cost & benefits, Butterworth-Heinemann, Loughborough 33 Dos Santos, B. (2000). Improving the return on IT-investment: the productivity paradox, International Journal of information Management, 20, pp. 429-440 34 Bacon, C. J. (1992). The use of decision criteria in selecting information system, MIS Quarterly, 16 (3), 335- 354
9 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic the initial results or benefits; the investment be proved to be important for the company on a long-term basis. Clemens and Weber remarks that factors like gaining competitive advantage or strategic necessity can make a company to break with the rules of traditional financial analysis. It is also suggested that one must think over the implications of not making a certain investment and the consequences of a missed opportunity. 35
We attach as Appendix 9 an example for an IT investment appraisal calculation, counted by the NPV method, thus illustrating how this process looks like starting from a concrete IT investment case, viz. implementing a web information management extranet system.36
Another difficulty regarding measurement of IT investments is the fact that an IT investment often gets integrated in the whole company over the borders of departments. Costs and benefits should therefore be spread over the whole company or some parts of it. 37 IT has an arising part in budgets and this makes the problems around evaluation, justification and control of IT investments actual. Ballantine & Stray emphasize that the resources which are involved in IT investments are huge and are of a high risk character.38 Information technology, as Willcocks et al claims, provides executives with a great challenge. We can define four IT domains, as Figure 1 suggests:39
35 Clemons, E. K. and Weber, B. W. (1994). Segmentation, differentiation, and flexible pricing: Experiences with information technology and segment-tailored strategies, Journal of Management Information Systems, 11 (2), 9-36 36 Griffith University, Australia, Lifecycle Management of IT projects in Construction (Chapter 4: Critical Review of Investment Appraisal Techniques), URL: www4.gu.edu.au:8080/adt-root/uploads/ approved/adt- QGU20030423.122317/public/03Chapter4.pdf 37 Falk, T. & Olve, N-G. (2000). IT som strategisk resurs – Företagsekonomiska perspektiv och ledningens ansvar, Liber Ekonomi, Malmö 38 Ballantine, J. & Stray, S. (1998). Financial appraisal and the IS/IT investment decision making process, Journal of Information Technologi, 13, 3-14 39 Willcocks, L., Feeny, D. & Gerd, I. (1997). Managing IT as a Strategic Resource, McGraw-Hill, Berkshire, UK
10 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Useful IT IT capability Strategic IT hype IT
Figure 1 Four IT domains
These parts exist separately from each other but at the same time their contents can vary over time. The IT hype includes all the over optimistic visions about how IT is able to bring about shortly and effectively, this is about the rhetoric which goes beyond the actuality. These super optimistic visions about transforming our life by acquiring IT assets are not limited to some unserious sources, but even well respected newspapers, journals and politicians issued such statements. Within the IT hype there is the domain of IT capability which is consisted of all available products and services; Internet is a part of this second domain which, in contrast to the IT hype does really exists. This domain is a very large one, offering IT technology to firms. The third one is the useful IT domain which includes those investment possibilities which provide an acceptable rate of return for organization. We must observe that although this domain is smaller than the previous one, it is still large enough to overwhelm the level of IT budget for any firm. The innermost and smallest domain is defined by Willcocks et al as strategic IT. By this it is meant a subset of potential IT investments which have the ability to bring about significant and not only marginal benefits. It is interesting to observe here that Willcocks et al comes with an example which is relevant just for our present study, viz. that the use of airline reservation systems as a competitive weapon. At the same time, it is accentuated that most executives are aware of IT’s capability of being a competitive weapon or resource.40 We intend to investigate how executives see this issue within that branch we have chosen. The academic discussion has been lately intensive, how to look at the role of IT generally. IT is traditionally known as a tool used for distribution, storage and managing of information. IT can also be applied to render production more effective.41 According to Falk & Olve, IT has functioned as a support function to the main activity at the company. The overwhelming
40 Willcocks, L., Feeny, D. & Gerd, I. (1997). Managing IT as a Strategic Resource, McGraw-Hill, Berkshire, UK 41 Li, M. & Ye, R. (1999). Information technology and firm performance: Linking with environmental, strategic and managerial contexts, Information & Management, 35, 43-51
11 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic interest has been to rationalize for making more profit. IT nowadays is also about creating income and improving the quality of decisions and services.42 As Applegate remarks, IT is “no longer simply a tool to support “back-office” transactions, IT has become a strategic part of most business “.43 According to Earl, IT as a strategic resource offers both opportunities and threats. Therefore strategic planning for IT is essential.44 Henderson and Venkatramen claims that there is still a lack of understanding the potential of IT for tomorrow’s organizations.45 This was uttered for about eleven years ago, we intend to test with the help of our survey if leaders in the chosen sector do lack understanding of IT’s potential or they acknowledge that IT is a strategic weapon and opportunity.
The issue of IT as a strategic resource leads us to one of the business world’s most well- known authority in strategy, Michael Porter from Harvard University.
2.3 Michael Porter about Competitive Strategy
Michael Porter has created a framework for business strategy in the 80s, based on industrial organizations. Porter’s model about the five forces effecting a company has been the subject of much critique lately; while during the 80s one could count with a relatively stable and predictable environment, today’s world economy is mostly characterized by sudden changes and dynamics. The model presupposes a relatively free market and therefore it is less suitable for regulated industries. The model is focusing unilaterally on the competition aspect and tends to neglect the possibilities of alliances, or regarding IT, the advantage of linking together the different information systems along a value chain, or not mentioning the latest possibilities of the brand new techniques like virtual enterprise-networks. 46
Despite of all these critique for having concentrated on the exterior environment’s forces, his ideas are greatly appreciated until today even if other strategy experts tend to emphasize the importance of other factors.47 We intend to investigate, within the limits of our possibilities if the companies in the branch we have chosen share Porter’s vision of overwhelming priority for competitive and exterior forces or it is the value chain48, the inner business process which is their main concern.
Porter has created two main models for a company’s business strategy; the model of the five forces and the generic strategies model.49 Here below we present shortly the model of five forces:
42 Falk, T. & Olve, N-G. (2000). IT som strategisk resurs – Företagsekonomiska perspektiv och ledningens ansvar, Liber Ekonomi, Malmö 43 Applegate, L. M. et al (2003). Corporate Information Strategy and Management, McGraw-Hill/Irwin, New York 44 Earl, M. J. (1989). Management Strategies for Information Technology, Prentice Hall, Essex 45 Henderson, J. C. & Venkatraman, H. (1993). Strategic alignment: Leveraging information technology for transforming organizations, Journal, IBM Systems Journal 46 The Manager, Internet Portal about management topics, URL: http://www.themanager.org/Disclaimer/aboutus.htm 47 Ibid. 48 Grant, R. M. (1996). Contemporary Strategy Analysis – Concepts, Techniques, Applications, Blackwell, Cambridge, Massachusetts, USA 49 Hedman, J. & Kalling, T. (2002). IT and Business Models. Concepts and Theories, Liber, Malmö
12 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Figure 2 The five forces of Porter, 1980 50
The five forces are as follows: 51
1) The Bargaining Power of Suppliers 2) The Bargaining Power of Customers 3) Threat of New Entrants 4) Threat of Substitutes 5) Competitive Rivalry between Existing Players
The Bargaining Power of Suppliers includes all the sources which are needed in order to provide goods and services. The suppliers’ power is high when there are only a few of them acting on the market and it is difficult to substitute the product a company needs. Suppliers can exert pressure on participants in an industry by reducing the supply of the product and by increasing prices.
The Bargaining Power of Customers determines how much customers can impose pressure on prices. Buyers are powerful when they purchase large volumes and if the product is easily replaceable or less important for the clients.
Threat of New Entrants refers to new companies emerging with the same profile and offering the same products. There is always a latent resistance within an industry against new actors. There can exist different barriers hindering the entrance of new companies, such as economical ones like profitability factors, requirement for high initial investments etc, psychic factors like customers’ loyalty and trust or merely political as legislation or government action in a country in order to limit entrance from foreign actors.
Threat of Substitutes exists when there are alternate products available which can satisfy the same needs by customers; for example, an alternate product for an airline ticket can be not only an other airline ticket, but also a railway ticket in some cases or, mostly for business passengers, even the market of video conferencing can function as a threat.
50 Hedman, J. & Kalling, T. (2002). IT and Business Model, Concepts and Theories, Liber, Malmö 51 Yeates, D. & Cadle, J. (1996). Project Management for Information Systems, Pitman Publishing, London
13 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Competitive Rivalry between Existing Players includes competition between companies who are present on the market and offer more or less the same kind of products. If the competition is high, the prices, margins and hence the profitability gets lower. A reasonable response to this would be a contract between existing companies and an agreement about minimum prices; this, however, is prohibited by law in most countries; companies are not allowed to create a monopoly position and misuse it against customers. We all remember the case of Microsoft in this issue.52
Porter’s second strategic model, i.e. that of the tree generic strategies which we illustrate here below inspired of Hedman’s & Kalling`s book:
COMPETITIVE ADVANTAGE
Lower Cost Differentiation
Broad Target Cost Leadership Differentiation COMPETITIVE SCOPE
Narrow Cost Focus Differentiation Target Focus
Figure 3 The generic strategies of Porter, 1980 53
The three generic strategies are as follows:
• Low Cost - having a lower cost position than competitors on an industry-wide basis. • Differentiation - differentiating a product or service from the competitors' by creating something that is perceived as unique. • Focus - concentrating on a particular market segment or product niche.
As we see on the model, there exist two main categories:
• Cost leadership, viz. companies who go in for offering the most favourable prices • Differentiation, viz. those who offer something special or of high quality.
The first one, cost leadership is related to the concept of experience curve. This includes shortly that the logarithm of the cumulative output is a declining linear; with other words, the cost of the nth unit of a product is gradually decreasing parallel with the increasing of n.54
52Carnegie Mellon, School of Computer Science, (1998). Remedies of the Microsoft Monopoly,” Writer: [email protected]” URL: http://www-2.cs.cmu.edu/~jcl/essays/monopoly.html, Pittsburgh, USA 53 Hedman, J. & Kalling, T. (2002). IT and Business Models. Concepts and Theories, Liber, Malmö 54 Grant, R. M. (1996). Contemporary Strategy Analysis – Concepts, Techniques, Applications, Blackwell, Cambridge, Massachusetts, USA
14 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Translating this to that branch we have chosen to study, this means that the more tickets they sell, the more they can decrease the cost of one passenger. The low-cost strategy is directed to all the five forces. An example for a well-known company which has an explicit low-cost strategy is IKEA, the Swedish furniture supplier. However, there are risks of choosing this business approach; among these risks we can mention the possible deterioration of quality in general, thus providing less satisfactory services or simply merely little value for the customer.55
An interesting addition to the above passage about the low cost strategy is an article, published at the daily newspaper Metro, on basis of an interview with the Nordic sales manager, Lotta Lindquist-Brosjö of an explicit low-cost airline, Ryanair; she explains in the article that the company’s vision is that within six years they hope to sell flight tickets free of charge. The business concept behind this is not to create value by the traditional way, viz. the core business, but through provisions coming from mediating other, somehow related secondary products or services like rent a car or booking of hotel rooms.56
The other main strategy, differentiation, can be considered as the opposite of the above low- cost strategy; it focuses to the product itself which means that the customer gets a unique article, different from other products. This approach means shortly that there are customers available who are prepared to pay more for better products.57
Porter, focusing on competitive positioning, has remarked in his book Competitive advantage: Creating and sustaining superior Performance that technological change was among the most prominent force driving competition.58 Hensdill claims that within IT spending strategic applications play an increasing part; managers do not simply invest in technology so as to continue business process in the same way as before but to create new strategic opportunities.59
Our main concern, having all the above subjects in mind, is how IT can help companies in this difficult battle. Focusing on competition, one of the main goals is to gain competitive advantage against other actors on the market, by accomplishing something more or better than others do. According to Earl, IT is capable of achieving this competitive advantage by using IT to enhance or limit the competitive forces at work in that sector in which the company is operating.60 The kernel of using IT for competitive advantage is, according to Earl, the use of IT in information processing, concerning products, services and channels of distribution – this has the potential of changing the basis of competition against rivals.
Sethi and King have constructed a concept about assessing competitive advantage derived from a certain IT application which is called for CAPITA, abbreviation for competitive advantage provided by an information technology application. This concept includes five dimensions;
55 Hedman, J. & Kalling, T. (2002). IT and Business Models. Concepts and Theories, Liber, Malmö 56 Jansson, M. (2004). “Flyget kan bli gratis”, an interview with Ryanair’s Nordic Chief Officer Lotta Linquist- Brosjö, daily newspaper Metro Sweden, Sept 6, 2004 57 Hedman, J. & Kalling, T. (2002). IT and Business Models. Concepts and Theories, Liber, Malmö 58 Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior Performance, The Free Press New York 59 Hensdill, Ch. (1998). Hotels technology survey, Hotels Journal, 51-76 60 Earl, M. J. (1989). Management Strategies for Information Technology, Prentice Hall, Essex
15 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic • Efficiency, i.e. the extent to which an application helps a company to produce products/services at lower prices than the rivals • Functionality, i.e. the extent to which an application provides those functions and capabilities which are needed by the customers • Threat, i.e. the impact of an application on the balance between suppliers and buyers • Preemptiveness, i.e an early adoption to usurp the market • Synergy, i.e. the degree of integration between an IT application and the company’s goals, strategies and environment.61
In the earlier times of IT the focus was often on improving productivity and performance; during the last decade it became obvious that IT has the potential for changing the ways of managing, breaking space and time constraints of the past. Even creating new businesses become possible by inter alia mass storage of data or software engineering.
According to Parsons IT can be used to limit or enhance the power of rivals, competitors, suppliers, new entrants or new products in the company’s wider competitive arena. Furthermore, Parsons argues that IT can be a powerful support at each of the three generic strategies, defined by Porter.62
In our thesis we presuppose that companies having different concepts cost leadership versus differentiation might have different views about using IT. In our empiric research we have grouped our respondents by these two categories and intend to examine if some kind of difference is detectable.
Having decided to invest in IT, keeping in mind all the above advantages which are supposedly coming from the investment, it is essential not to have the illusion that these benefits will come automatically during the following years, but they need a careful management to lead to those results one has expected. This is a longer process which is identified in the literature as benefits management.
2.4 Benefits management
Benefits management is the identification of potential benefits at a company. It includes their planning, modelling and tracking. Benefit management can be regarded as a complement to investment appraisal or being a part of it. While the investment appraisal process is in fact a justification for a certain investment, benefit management means that organizations plan achieving the benefits. According to the homepage of the Office of Government Commerce, UK costs and benefits cannot be viewed in isolation and a planning of an overall investment is essential, inclusively appraisal of costs and benefits.63
Why is it important? According to the above mentioned English governmental home page, many projects fail to deliver those benefits which are expected after the appraisal process. Moreover, 30 – 40 % of business support systems are considered not to deliver any benefits at all. While costs and risks are often monitored, benefits are more difficult to define.64
61 Sethi, V. & King, W. R. (1994). Development of measures to assess the extent to which an information technology application provides competitive advantage, Management Science, 40 (12), 1601-1626 62 Parsons, G. L. (1983). Information technology: a new competitive weapon, Sloan Management Review 63 Office of Government Commerce, UK, URL: http://www.ogc.gov.uk/ 64 Ibid.
16 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Ward presents an empirical study about realization of IS/IT benefits in his article published in the European Journal of Information Systems. He claims that from the results of his survey research it became clear that the current methods for identifying and realizing benefits are far from satisfactory.65 The main issue in Ward’s article is a lifecycle evaluation of an individual investment in IS/IT. It is important to underline the concept of lifecycle, because here the benefits are not limited to the preliminary appraisal of benefits which is done before the investment but it is about all the period when benefits are expected, realized, discovered or simply failed to show up. Ward has collected many critical observations about the practice of dealing with benefits, especially appraising them; Currie, for example, defines the appraisal process as a ritual of legitimacy rather than a process of really accessing benefits. As he points out, the most important thing is not to make good forecasts but to make them come true.66 Ward reminds his readers about the fact that IS/IT on its own does not deliver benefits, what IS/IT can do is to create benefit opportunity to those who perform their business activities in a changed way; benefits will be the consequences of these changes.67 Earl is also sharing this view that benefits have their root in business change and not directly in the technology itself.68
Ward mentions the Cranfield research programme which has developed the following model including the parts of benefits management. We present the model here below:
1 Identifiying & structuring benefits 52 Potential for Planning further benefits benefits realisation
4 3
Evaluating & Executing reviewing thebenefits results realisation plan
Figure 4 A process model of benefits management69
65 Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, 214-225 66 Currie, W. (1989). The art of justifying new technology to top management, Omega, 17, pp. 409-418 67 Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, 214-225 68 Earl, M. J. (1992). Putting IT in its place: a polemic for the nineties, Journal of Information Management, 7, pp. 100-108 69 Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, 214-225
17 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic The first step of benefits management is identifying and structuring benefits which a company expects from a certain IT investment. The second step includes planning of benefits realisation. According to Ward, in this phase one must allocate responsibility for each of the benefits. The business changes which are needed to achieve it are also prepared. The third step involves already the implementation of the IT/IS application and the benefits realisation plan is in action. The fourth step is about evaluating the delivered benefits with the help of “before” and “after” measures. The last step is to identify if further benefits are achievable which were not expected before. A key point is that the experience of the total evaluation process will enable the company to start a new project with a deeper understanding and knowledge.70
Although all these steps are of great importance, it is clear that without the first step we cannot talk about any kind of benefits management. Ward claims that there is a general recognition that the evaluation techniques which are needed in this crucial first step are frequently inadequate, even in appraising the value of IT/IS investments.71 A. Gunasekaran and R. Miele of the University of Massachussetts, USA and his colleagues Peter E. D. Love of Deakin University, Victoria, Australia and F. Rahimi of the University of Surrey, UK has developed a model which tries to embrace the whole spectrum of possible considerations concerning the justification of IT investments. Next we present this model.
2.5 The IT investment justification model
As pointed out in the article publishing the above mentioned model, IT investments are a necessity for businesses, they have to invest in IT but at the same time there are increasing economic pressures forcing them to think twice before deciding for a high capital investment and go on evaluating and reevaluating their resources. 72
This model includes a large range of considerations, beyond the classical – traditional – economic ones. Here below we present the model:
70 Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, 214-225 71 Ibid. 72 Gunasekaran, A. et al. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, 349-364
18 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Figure 5 The IT investment justification model73
According to the article, managers face basically three kinds of problem handling their IT resources and deciding about purchasing new ones:
• Identifying competitors’ actions regarding the use of IT • Determining if it is possible to maintain the same positions without IT • Evaluating how IT can improve businesses
So as to justify an IT investment, it seems evident that several various appraisal techniques are necessary to have a better picture about the prospects the company is facing once accepted the project. The problem is starting by the big amount of non-financial benefits which can be tangibles or intangibles; these are difficult to quantify or measure in an appropriate way. There is no such thing as the best method as different projects claim different appraisal methods and can result in different benefits, so it is always a set of evaluation methods and expected benefits which are included in the considerations. 74
73 Gunasekaran, A. et al. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, 349-364 74 Ibid.
19 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic It is mentioned that CEOs are often not comfortable with the current tools and techniques being unsatisfied with the dominance of the financial evaluation.
The model the article proposes is divided into a company’s three levels (see the left side of the model) and on the other side, benefits are categorized into intangible-, financial- and non- financial tangible ones.
Traditionally, the rationalization of an IT investment is dual purpose: to improve efficiency and reducing costs, all this resulting in higher profit level. Having these mostly short-term goals companies are more reluctant to count with eventual long-term benefits or taking in consideration some qualitative aspects. A main issue is how to compare the advantages of an IT investment, with a lot of intangible factors, with another type of investment within the company. The key message here is that companies should not make IT investment decisions on the sole basis of financial return only.75
According to the article, in many industry sectors the primary evaluation criteria are the cost- benefit approach and focusing on competitive advantage. Furthermore the relevance of financial techniques like ROI is discussed. (see more about ROI in Chapter 2.2 respectively in Appendix 7) ROI is basically useful to evaluate internal effectiveness, such as capacity utilization, employee productivity, scrap level, etc and therefore using this to IT investments can restrict or bias the evaluation process, according to the article. Concerning the use of ROI, the article makes a distinction between so called less experienced sectors, including services, agriculture etc and more experienced organizations, such as financial and manufacturing ones, pointing out that while the former is starting to use more adventurous techniques accelerating its learning curve of IT, the latter often retain their established ways of working which are not easy to change. According to the article, management and financial controller see IT more as a support function rather than a strategic tool. Furthermore, executives are not sure how to implement efficiently IT and most view IT from a technical, rather than a business approach.
Summarizing the above views, the article comes up with some general conclusions which we mention here below:76
• Managers find it difficult to justify the costs of IT investments • The difficulties around measurement of IT benefits is thought to be a major constraint to IT investment • Non-financial methods should be involved in the justification process • The financial methods in use are inadequate • Intangible benefits are valuable although not quantifiable
Beyond these items mentioned above the present justification process of IT investments are also falling short of being satisfactory because of the lack of strategic integration within an organization, according to the article.
The conceptual model, which is the main basis of our study, places emphasis on evaluating the benefits of strategic, tactic, operational, financial and intangible appraisal techniques. The
75 Gunasekaran, A. et al. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, 349-364 76 Ibid.
20 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic model is supposed to be feasible and effective to determine if an IT investment for any given company is beneficial or not.
The model, consisting of five major parts is commented by the article; we try to abstract here the most vital ones:77
1) Strategic impact
At this level the focus is on giving a clear strategic direction for the whole business of a company. Awareness and willingness are the two key concepts here. The objectives can vary according to the company’s profile but the important thing is that the main concept should be logically held together providing the necessary direction for the business. Typical strategic measures are about profit in relation to sales and investment, targets in absolute and relative terms.
2) Tactical considerations
Here the focus in on medium or short-term business processes on departmental level. A main point is to identify critical success factors which are project specific. The lack of this could hinder the corporate progress and result in a loss of business. This level has a combination of both tangible and intangible measures.
3) Operational performance
Here the main focus is on the daily operation, and that IT and systems should be integrated and well functioning. This part of the model includes key issues like upgrades, host servers, databases, internal expertise’s, licenses, etc.
4) Intangible benefits
Some of the investments do not fit in a traditional appraisal technique as for example ROI, therefore here, the article emphasizes that evaluation is not a single act but a process which must be repeated; this, due to the dynamics of an IT investment which can produce eventually even some unexpected additional benefits or just miss other ones which were expected. The authors of the article emphasize that the lack of relevance and regular evaluation procedures may lead to the loss of control over IT investments.
5) Tangible benefits
a) Financial benefits
The article mentions one of the most well-known financial ratios, ROI which indicates which investment should result in the largest return. Generally, there is a hurdle rate which separates an acceptable investment from a non acceptable one.
b) Non-financial benefits
77 Gunasekaran, A. et al. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, 349-364
21 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic The article has not commented this part of the conceptual model which concerns issues like inventory and set-up time which are concrete problems but are difficult to quantify.
So as to test the model, the authors have made a case study at ICL, a leading European IT company and interviewed the knowledge manager. One of the conclusions of this study was that the knowledge manager acknowledges that in none of the projects he had been involved before could quantify the benefits in monetary terms and consequently, their method to evaluate an IT investment is trying to estimate what it would cost to the company not doing it. Another interesting aspect of this study is, as we see the thing that the manager has recognized that for 20 years ago the fear of losing jobs because of IT was a misconception; by reducing the staff by two employees, the company had also lost the experience these people had. Today, the company has about 19 thousand employees (it had only 400, 20 years ago) and the company views them as a main asset for the company.78
2.6 Conclusion
During the theoretical study we have accomplished and tried to summarize in this chapter we have come to the insight of the importance of strategic thinking about IT generally and about IT investments specifically.
It came to us as a surprise how deeply the academic world is interested in this issue and how much is written about the difficulties arising concerning this. We have “witnessed” a lively debate, not only regarding the possible answers, but also even the core issues and main questions. There seems to be, however, a consensus about the changing nature of IT and its use by organizations, from the traditional view of being a technical tool to the insight of IT’s potential of becoming a strategic resource, which is especially relevant considering all the challenges companies face, described by the great strategist Michael E. Porter.
We understand now that predicting benefits and costs of IT is a complex issue, given the special, high-risk character of IT projects; the model we have found as a possible solution to a right justification of IT investments seems to us much reasonable and sufficiently complete to embrace most thinkable aspects of this issue.
Having this theoretical background or framework, we go on now to study how all these phenomena are interpreted and faced in that IT intensive branch we have chosen. The next chapter is presenting this branch, the European airlines industry.
Starting from this theoretical background which our survey is based on, we have formulated the following hypotheses which we prove in the above mentioned branch:
1. Companies use the traditional financial calculations for IT-investments. (see Appendix 2. Question 12) 2. IT is viewed as a strategic resource. (see Appendix 2. Question 2) 3. IT is viewed rather from a technical than a business approach. (see Appendix 2. Question 3)
78 Gunasekaran, A. et al. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, 349-364
22 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 4. IT can help companies against all the five forces defined by Michael Porter. (see Appendix 2. Question 13)
Hypotheses in connection with the IT investment justification model:
5. All the evaluation techniques listed on the left side of the model are used by companies. (see Appendix 2. Question 5) 6. Some of these techniques are used more frequently than others. (see Appendix 2. Question 5) 7. There might exist additional evaluation techniques not listed in the model. (see Appendix 2. Question 5 >>> “Other, such as…”) 8. All benefits listed in the model can be relevant for companies. (see Appendix 2. Question 6) 9. Some of these benefits might be considered as more important than others. (see Appendix 2. Question 6) 10. There might exist additional benefits not listed in the model. (see Appendix 2. Question 6 >>> “Other, such as…..”)
The answers we get from our respondents which will support or reject the above hypotheses about IT investment justification process, are certainly depending from that experience companies have with their past investment projects. We think it is essential to discover this background, at least in great lines; our Question 4 is investigating this issue.
Furthermore, the literature suggests that IT provides executives with great challenges. We decided to find out which are these challenges; the alternative answers are based on branch information from Internet. (see Appendix 2. Question 14)
23 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 3. Industry- and company presentation ______This chapter tries to paint a picture about the industry we have chosen for our empirical research. After a general introduction of the main actors and a short historic background of the European airline industry, we present briefly the companies which participate in our study as respondents. Finally, we create a kind of collage collecting some interesting features of airlines’ IT strategy. ______
3.1 About the airline industry in general
The airline industry is described by Sir Colin Marshall, chairman of British Airways like this: “The flywheel for the engine of the world’s industry”79. Behind this poetic metaphor there are considerable facts: the industry is worth over one billion US dollars and employs ca 22 million people worldwide80.
Among the world’s top twenty airlines, a ranking based on the annual number of carried passengers, there are seven European ones. The following list presents them ranked81:
1. Lufthansa, Germany 2. Air France, France 3. British Airways, UK 4. Alitalia, Italy 5. Iberia, Spain 6. SAS, Scandinavia82 7. KLM, Holland
Studying the background of the airlines industry we discover that this global industry is showing some unique tendencies; while other major world industries, such as financial markets/services, telecommunications, information technology, car manufacturing, shipping etc. have been acting during the last decade like global mergers across borders, airlines still retain a certain conservative and nationalistic character. Historically, aviation has played an important and strategic role and the fleet of a state, which was overwhelmingly of military character, has been a symbol for power and prestige. Even today, flag carriers are often viewed like symbols of prestige and national pride. A first glimpse inside the annual rapport of SN Brussels Airlines convinces even the most skeptical that this industry’s first concern is not merely economic, but also politics and struggle for power have an important role: “ 2003 was an important year for SN Brussels Airlines, a year in which it faced the challenge of proving that it could live up to its potential as the No1 carrier to and from the Capital of Europe“.83 SN Brussels Airlines has only a short history of a few years behind and the company is fighting to achieve the same reputation as the legendary Sabena had once upon a
79 Chan, D. (2000). The development of the airline industry from 1978 to 1998: A strategic global overview, Journal of Management Development, Vol. 19 No.6, pp. 489-514 80 Ibid. 81 Industryweeek, URL: http://www.industryweek.com/iwinprint/data/chart4-8.html 82 May we observe here that the SAS Scandinavia is a member of SAS Group Scandinavia which is Europe´s fourth-largest airline group – our respondent is from SAS Group, as we have learned from SAS Groups home page URL: http://www.scandinavian.net/12208/2003eng_finalfinal.pdf 83 Kuijpers, R. Executive chairman, URL: http://www.flysn.com/manualuploads/annualreport2003.pdf
24 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic time. But Belgium, although being the symbolical center of Europe, is not on the above list among the most prominent European airline-powers. The above list seems to reflect historical legacies, much older ones than the present European Union. Germany has traditionally strived after to develop his air force; after the country’s unification in 1871, Germany was among the pioneers at the beginning of the 20th century building airplanes and thus competing with the main rivals France and England. The explanation for the prestigious position of Spain, Italy and Holland requires going back till even more remote époques: Spain and Holland were mighty colonial powers once upon a time; Madrid is still the European portal for Latin America and Amsterdam is the one for old Dutch colonies around the world. Although the époque of colonies is definitively past, a network of contacts based on cultural and political legacy is still existing and acting. Concerning Italy, Rome is historically the center of the whole Mediterranean area and there, also, exists a network of contacts, even if it is not comparable with the one of the old emperors. The prominent position of SAS, Scandinavian Airlines, on the other hand, ─ as SAS is known first of all as a Swedish airline by the public and not by chance as Sweden is the biggest shareholder in SAS Group84 ─ apart from the international prestige of Swedish industry and skills generally, can also be seen as a result of that politics of neutrality which Sweden has been constantly engaged to, through the tempests of European history, a fact which has great importance in the 21st century when issues like security and reliability have become concern number one.
These historical and political considerations may seem to excess the boundaries of this thesis, but without them it would be very difficult to understand the challenge today’s European airlines are facing and the goals they have when they are planning new investment. For, we can say without exaggeration, IT is the new weapon in this great struggle; to illustrate this, we can mention that the leading airline, Lufthansa has started gigantic plans together with Boeing to implement Internet connection on its aircrafts with help of satellites and by this Lufthansa has the best chances to keep his exclusive position on the market.85
Above reflections gives us a picture about the historical background of this industry and illustrates how difficult might it be for new companies – as the majority of our respondents are relatively newly established airlines – to take a share of the market and we presuppose that IT is or can become a useful weapon in this big fight.
3.2 Companies participating in this study
This study is dealing with those airlines which have responded to our survey, by e-mail or post. The following map illustrate where our respondents are located:
84 SAS, URL: http://www.scandinavian.net/EC/Appl/Home/FrontDoor/0,3479,LNG%253Dsv%2526SO%253DCC72C5993E8 741D1_97092C8DA005C503%2526MKT%253DSE,00.html 85 Eutelsat, France (one of the world’s leading satellite operators) homepage URL: http://www.eutelsat.com/news/pdf/2003/cbb.pdf O’Connor, Vanessa, (2003). Boeing selects Eutelsat satellites for in-flight Internet, Paris
25 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Figure 6 The geographic position of our respondents
To have an orientation about the type of organization a certain airline is, we have made some grouping as follows:
• Appendix 3 is a performance matrix, grouping the airlines in 9 different categories, based on their annual revenue and the annual number of passengers they carry. • Appendix 4 is a resource matrix, grouping the airlines in 9 different categories, based on the number of aircrafts they own and the number of employees the have. • Appendix 5 contains a list of respondents who answered in the name of their company.
These classifications are made on basis of the answers we got from these companies by our questionnaire. The rationale behind creating matrixes and grouping airlines in different categories is that strategy and investment policy may eventually vary depending on the size of the organization. If there exists any difference between these groups, they won’t be revealed until we have analyzed all the collected data. On the basis of these matrixes we determined four different groups by company size which becomes important in the context of the analysis of representativeness (see pp. 30).
The classification above follows a classical logic of economic character, based on tangible considerations like facts which are well definable in numbers like annual revenue or number of owned aircrafts. Some other type of classification or grouping could also be reasonable, in particular with consideration to the historical and political background we tried to descript
26 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic earlier. Such intangible classifications, however, are rather subjective and therefore would require further and deeper investigation, which is beyond the boundaries of this thesis. Nevertheless, it is clear, for example, that flag carriers which sometimes enjoy strong governmental support have quite different conditions and chances than those who do not have mighty sponsors. Airlines from Europe’s new states which emerged in the 90s have also a difficulty to find their place among others who have a well established position, often strengthened by historical prestige. It is hardly questionable that these factors have an impact on airlines’ investment policy.
Here below we give a short description of airlines participating in this study:
1.) Adria Airways. Adria Airways is Slovenia’s national airline with a history going back to 1961 when it was set up as a charter company. Today Adria Airways’ network links the country’s capital Ljubljana with 40 destinations, mainly in Europe. The company’s fleet comprises eight modern aircraft which have carried 864 thousand passengers in 2003, yielding an income of 124 million euros. The partnerships with Lufthansa, Air France and Austrian Airlines have enhanced the company’s access to global networks.86
2.) Air Berlin Air Berlin is Germany’s second largest airline, founded 1978 in Oregon USA, since after the Second World War only aircraft from the Allied powers were allowed to land in Berlin. Today, Air Berlin flies to holiday destinations on the Mediterranean coast, in the Canary Islands and North Africa as well as major European cities. The company carried 9.6 million passengers in 2003. For 2004 Air Berlin expects a turnover of more than 1 billion euros.87
3.) Air Lithuania Air Lithuania is the biggest private airline in the Baltic area. The company has domestic flights and direct international flights to Hamburg, Malmö, Billund and Oslo plus several connecting flights to first of all Scandinavia. The company aims to limit the number of low price tickets and concentrate to better services instead.88
4.) Austrian Airlines The world’s first regular international air connection was opened in Austria, in 1918, by a route between Vienna and Kiev. Austrian airline’s predecessor, Österreichische Luftverkehrs AG, was the fourth largest airline in 1920’s Europe. Austrian Airlines was founded in 1957, after that Austria regained sovereignty. Today the company has about 7200 employees and an annual operating annual revenue of around 2, 2 billion Euros. Austrian Airlines has connections to around 680 cities in 130 countries. The airline aims to achieve a leading position in Central and Eastern Europe.89
5.) Blue1 Airlines Blue1 is a Finnish airline owned 100 % by SAS, Scandinavian Airlines. Since March 2000 Blue1 has a joint organization with SAS and Sveneric Persson, president and CEO of Blue1 Airlines, is as well Vice President at SAS Region North East Europe. Blue1 Airlines has also
86 Adria Airways, URL: http://www.adria-airways.com/index.asp?l=en&p=qb&m=0 87 Air Berlin, URL: http://www.airberlin.com/site/index.php?LANG=eng 88 Air Lithuania, URL: http://www.airlithuania.lt/?action=view&id=1 89 Austrian Airlines, URL: http://www.aua.com/at/eng/default.htm
27 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic flights outside of Scandinavia, to Hamburg, Amsterdam, Brussels and Berlin. Blue1 Airlines has had more then one million passengers onboard in 2004.90
6.) Croatia Airlines Croatia Airlines, Croatia’s national carrier was founded 1989. The company has reached a record number of annual passengers, 1,5 million in 2003, an increase of 11 percent over previous year. The code-share agreement with Lufthansa has brought several privileges and advantages to the company, having been connected to Lufthansa’s hubs. Furthermore, from 15th December 2004 Croatia Airlines becomes a member of the Star Alliance team and by this getting access to the world-wide Star Alliance network.91
7.) Easyjet Airlines Easyjet from West Sussex, England is one of Europe’s leading low cost airlines, with 190 routes across 58 European destinations. The company started 1997 and by 2004 the annual number of passengers has exceeded 2.5 million. Easyjet’s main concept is to keep costs low by eliminating expenses which characterize traditional airlines, first of all by using the Internet reducing distribution costs. By now, approximately 95% of all tickets are sold over the Internet.92
8.) Finnair Finnair is one of the world’s oldest airlines, established in 1923. The company is Finland’s national carrier, with the Finnish government as major shareholder. Finnair’s route network includes about fifty destinations, among them also some long-haul routes to USA and Asia. The company’s domestic network is one of the densest in the world. In 2003 about 6.8 million passengers have chosen Finnair flights. The annual turnover of Finnair in 2003 was about 1.5 billion Euros.93
9.) FlyBosnia Fly Bosnia is a brand new airline, just started fall 2004. The company aims to offer, from summer 2005, twice a week regular flights between USA and Sarajevo, via England. Fly Bosnia at the present is building out its network in cooperation with Lufthansa, Malev, Croatia Airlines and Austrian Airlines.94
10.) LTU International Airlines LTU International Airlines, founded in 1955 in Frankfurt, is today one of the largest German holiday airlines; the company carries about 5,7 million passengers yearly on its 24 red and white coloured jet aircrafts. LTU has flights to approx. 80 destinations and the company’s turnover was 800 million euros in 2003.95
11.) Meridiana Airlines Meridiana is Italy’s largest private airline; its predecessor, Alisarda, was founded in 1963 with the aim of promoting tourism to the Italian Island of Sardinia. In 2002 the company has carried approx. 3, 5 million passengers. The airline’s flights connect first of all the island of
90 Blue1 Arlines, URL: www.blue1.com 91 Croatia Airlines, URL: http://www.croatiaairlines.hr/index.php?setlang=en 92 Easyjet, URL: http://www.easyjet.com/en/book/index.asp 93 Finnair, URL: http://www.finnairgroup.com/group/konserni_1.html 94 Fly Bosnia, URL: http://www.flybosnia.com/ 95 LTU International Airlines, URL: http://www.ltu.de/index.html?SiteID=0&LangID=2
28 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Sardinia with the rest of Italy, but the company has also a direct flight to Barcelona, Madrid, Paris, London and Amsterdam.96
12.) Montenegro Airlines The first Montenegrin airline in the country’s history has celebrated its 10th anniversary in October 2004. A quotation from their home page illustrates well the profile of this company: “The team, now having more than 300 mostly young people, by building this company, also built a new Montenegro and battered the illusions of Montenegro as a province.” The airline has regular flights to Zurich, Frankfurt, Rome, Paris, Ljubjana, Skopje, Budapest and Vienna and several other charter destinations. In the forthcoming season the company intends to introduce new destinations, among which England and the Scandinavian countries are specified as the most important ones.97
13.) Niki Luftfahrt Niki Luftfahrt was founded in 1979 by Niki Lauda, who was fascinated not only by racing but also by aviation. The company started with two Fokker 27 aircraft specializing to charter business. Later on, catching the opportunity of the forthcoming aviation liberalization in Austria, they extend their activity even to scheduled flights. In year 2000 Austrian Airlines becomes a main shareholder in the company. Today Niki Luftfahrt has a very large network of destinations, together with his new ally Air Berlin; both of them have a low fare profile.98
14.) SAS Scandinavia The SAS Group is North Europe’s largest airline group and the fourth largest airline group in Europe, in terms of number of passengers and operating revenue. The predecessors of SAS Group are: DDL of Denmark (est. 1918), ABA and SILA of Sweden (est. 1924 & 1943), and DNL of Norway (est. 1927). After the Second World War, in 1946 SAS was formed by DDL, DNL and SILA for intercontinental operations. These three states, viz. Sweden, Denmark and Norway own all together 50 percent of the SAS Groups shares.99
The SAS Group offers air transport and related services from its base in Northern Europe. SAS provides services within Scandinavia, Europe, North America and Asia. Scandinavian Airlines is a founding member of the world’s largest global airline alliance, Star Alliance. The Group also includes other airlines: Spanair, Braathens, Widerøe’s Flyveselskap and Blue1 and the partly-owned airlines airBaltic and Estonian Air. The SAS Group is the largest airline participating in our research.100
15.) SAS Braathens SAS Braathens is a new airline, founded in spring 2004. The company has routes inside Norway and even to other destinations in Europe outside Scandinavia, i.e. to the United Kingdom, Ireland, France, Holland, Belgium, Italy, Germany, Switzerland, Czech Republic, Spain and Portugal. SAS Braathens is the largest airline in Norway with 440 daily flights. The company’s main goal in this first season is high quality, i.e. punctuality, regularity and good service.101
96 Meridiana Airlines, URL: http://www.meridiana.it 97 Montenegro Airlines, URL: http://www.montenegro-airlines.cg.yu/eng/ 98 Niki Luftfahrt, URL: http://www.flyniki.com/ 99 SAS, annual report URL: http://www.scandinavian.net/12208/2003eng_finalfinal.pdf 100 SAS, URL: http://www.scandinavian.net/EC/Appl/Home/FrontDoor/0,3479,LNG%253Dsv%2526SO%253DCC72C5993E8 741D1_97092C8DA005C503%2526MKT%253DSE,00.html 101 SAS Braathens, URL: http://www2.sasbraathens.no/Pages/NO/OmSASBraathens/omSelskapet.html
29 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 16.) Smart Wings Smart Wings is the first Czech low fare airline. The company has flights from Prague to Copenhagen, Amsterdam, Dublin, London, Paris, Madrid, Zurich, Rome, Palma de Mallorca, Thessaloniki, Athens and Larnaca. Their philosophy is to offer the lowest possible fares to passengers.102
17.) SN Brussels Airlines SN Brussels, founded in 2002 taking over the existing Belgian airline DAT, is now Belgium’s most prominent airline. The company provides a daily direct link to 53 European, 28 American and 15 African destinations. SN Brussels Airlines carried more than 3 million passengers in 2003 and this resulted in an income of 584 million euros. 103
Four of the above airlines – Niki Luftfahrt, Easyjet, Smart Wings and Air Berlin – have the profile of low-cost airline, representing about 23 percent of all our respondents. We wish to observe that in an interview in the Swedish daily newspaper Metro104 the Swedish representative of Ryan Air tells that the market share of low cost airlines in Europe is 18 percent and in the US 30 percent; since our study is about Europe, this proportion of respondents seems to be quite appropriate. This does not mean that exclusively these four airlines sell low-fare airline tickets; nearly all of the airlines have some times campaigns decreasing significantly the prices for a special destination or time period; but these four companies have low-fare as a main, dominating profile.
As we mention in Chapter 4.1, further consideration requires so as to analyzing the spectrum of those 17 airlines presenting in this study. We have pondered upon the several points:
• Company size - these airlines are ranging from the smallest ones like Niki Luftfahrt to the biggest one, SAS Group including 10 Scandinavian airlines.
• Market position - on one side we have historically well established companies like Finnair and on the other side new entrants, both historically and economically like Fly Bosnia or Montenegro.
• Privatization – we have fully privatized companies like Air Lithuania and on the other side airlines which have governments as main shareholders, like Austrian Airlines.
• Business specialization – we have included holiday’s airlines like LTU, Germany, others with charter orientation like Niki Luftfahrt and company which has a wide spectrum of business activities, like SAS Group.
• Extension of the sphere – there are some who has its own regional territory the airline service is limited to, like Meridiana acting mostly around the Island of Sardinia or for example Air Berlin which has also long-haul flights to other continents.
Please find the detailed statistical tables about above airlines and their grouping as Appendix 6.
102 Smart Wings, URL: http://www.smartwings.net/en/ 103 SN Brussels Airlines, URL: http://www.flysn.be/en_be/home/default.aspx? 104 Jansson, M. (2004). Flyget kan bli gratis, an interview with Ryanair’s Nordic Chief Officer Lotta Linquist- Brosjö, daily newspaper Metro Sweden, Sept 6
30 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 3.3 IT strategy in the airline industry
We try here to give a picture about general strategy guidelines which are dominating in the industry we are studying. Some bigger airlines among our respondents have published articles about their strategy, policy, mission etc. or have links to their annual report which is a very useful document if we wish to understand the philosophy and the goals behind an organization. We are obliged, of course, to limit this part of the study to the uttered and published part of a company’s strategy; as we have seen in Chapter 2, to be strategic includes also a hidden, secret part of a company’s plans which cannot be revealed by the articles or interviews with the leaders of the companies.
One of Europe’s largest low fare airlines is Easyjet in England. John Thorp, Easyjet’s head of IT is one of our respondents in this study. The following remarks about the company’s IT strategy come from an article published by the international MIS (Management Information Strategies) magazine.105 John Thorp states in the interview published in the magazine that IT plays a critical role in the company’s growth. Easyjet’s website is handling about 98 percent of the total sales which is a great challenge for the IT department. The company has 16 web servers in two different locations which have to handle enormous top when Easyjet sends out email price messages to registered customers and this can result in as much as up to twenty thousand reservations in a single hour. Mr. Thorp mentions that the “crown jewel” of the company is the new revenue management system which makes new calculations in real time, based on demand and supply. The capacity planning IT tools are very important for the company, helping to forecast the growing business. They are just building even more sophisticated capacity planning tools. Easyjet, having acquired a low-cost rival company, had also to tackle integration problems. The two companies have different IT systems and moreover, they had also different philosophies about business processes. But all the problems cannot be solved by IT; Easyjet, having intentions of significant expansion, has dispute for example with the French authorities because they allow Air France to dominate the majority of take-off and landing slots in France; here we can be sure that the barriers are well functioning concerning Porter’s force the threat of new entrants…These barriers are obviously working in different ways in different countries; while in the UK 42 percent of domestic air travel is realized by low-cost airlines, by Internet bookings, this percentage is only 18 in Germany, 14 in Italy and merely 4 in France.
Another relatively new airline in England is Virgin Atlantic; we can read of their IT strategy in the same article mentioned above; they are developing analytics software for cargo operations which is important for cargo executives to get a consolidated view about the whole business. By this the executives are expected to be more effective at optimizing cargo loads. All this leads to increasing revenues. Virgin Atlantic has a programme called e-enablement which includes giving email, intranet and extranet access to non-office-based staff. The company has a policy of standardizing on common IT technology, inclusively Unix, Java and Oracle. This strategy aims to deepen the level of integration between the different firms belonging to the same Virgin Group. The interview with Virgin Atlantic’s representative, Mr.
105 Thompson, J. MIS (Managing Information Strategies), monthly magazine, Preparing for take off, URL: http://www.misweb.com/magarticle.asp?doc_id=23437&rgid=7&listed_months=-2
31 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Selway ends with an interesting remark: “We do not go for leading technologies, such as Linux – we need to go with things that work.”106
SN Brussels, one of our respondent companies is Belgium’s largest airline. The company has a rather unique operating principle: an almost complete outsourcing model. Thus, SN Brussels can concentrate to the core business; the CIO Core team consists of just 11 people including 3 internal account managers, 2 contract managers, 2 IT architects, 2 service managers and 1 programmer manager. In this way, the company’s IT budget contains only 6% payments to fixed personnel. The remaining 94 percent are spent for outsourced services. It is not easy, however, to find suppliers who can guarantee the continuity of the IT office and network systems.107
Ingvar Söderlund, Chief Information Officer of the SAS (Scandinavian Airlines) Group is one of our respondents. Here we have chosen some interesting parts of an interview with him, by the American IT company CSC (Computer Science Corporation)’s director of communications, Frank Schabel. The background of the interview is that in December 2003 CSC entered into an IT outsourcing agreement with the SAS Group. Ingvar Söderlund was asked about the reason why the SAS Group decided to outsource its IT. We quote here below his answer: “There were three main reasons. First, we wanted to benefit from the economies of scale offered by an external service provider and realize corresponding cost reductions. Second, we wanted to lift our existing technologies to new platforms and replace our old, legacy systems with standard applications in order to establish a more cost- effective platform. Third, we wanted to offer the employees in our IT function better development opportunities for their professional careers.” 108 This new cooperation is on a quite wide basis; to the question, which activities are taken over, the answer has been: “In all areas. CSC takes care of application development, maintenance and operation. Here, CSC is responsible for the majority of our applications, not for all of them. In addition, CSC is our IT consultant—and this also involves the implementation of new architectures and systems integration. Naturally, CSC also looks after our server environment and our desktops.”109 The expectation of SAS Group towards the new American provider is very high: “Here, we expect CSC to provide cost-effective, innovative and high-quality services ensuring operational readiness. For this reason, the services offered by CSC play a very important role for us in our efforts to position ourselves as a professional airline in the marketplace.”110
106 Thompson, J. MIS (Managing Information Strategies), monthly magazine, Preparing for take off, URL: http://www.misweb.com/magarticle.asp?doc_id=23437&rgid=7&listed_months=-2 107 SN Brussels Airlines, annual report, URL: http://www.flysn.com/manualuploads/annualreport2003.pdf 108 Schabel, F. (CSC) Computer Sciences Corporation, Interview with Ingvar Soderlund, Chief Information Officer of the SAS Group, URL: http://www.csc.com/features/2004/40.shtml 109 Ibid. 110 Ibid.
32 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 4. Methodology ______This chapter gives an outline about how we have planned to accomplish our research and which choices we have made in connection with this task. Since the choice of methods is a subject of vivid academic discussion, far from being obvious considering the research goals, we get the reader involved into our reflections about methodology generally and about our case particularly. ______
4.1 Research design
The decision about research methodology is an important one which has an impact on the whole process and outcome of the research.
In addition to qualitative and quantitative research there is also a possibility to apply a technique that combines both. The common goal is, irrespective of which technique we choose, to achieve a better understanding of a certain problem, but collecting, processing and interpreting data is arranged in different ways.111
Qualitative research is a type of formative research that offers techniques for obtaining in- depth responses about what people think and feel resulting in a depth of understanding. Its nature is exploratory and interactive. Furthermore, it provides a rich texture and context through which one can learn about the subject a researcher is interested in. The purpose of qualitative research is to access variations and enlarge our horizons about a certain issue.112
Qualitative research involves relatively small numbers of people and respondents are purposively selected on criteria important to issues at hand. An advantage of qualitative research is flexibility, allowing new questions to be raised depending on what one has learned from the answers of a personal interview, which is the most typical form of qualitative research. Qualitative research is often striving after exhaustive explanations rather than short and concise answers.113
Quantitative methods are used mainly to provide estimates of populations at large and indicate the extensiveness of a phenomenon; they measure level of occurrence, actions, trends, etc. Based on this approach a researcher can answer such question as “How many?” and “How often?”. A quantitative research can find out how the whole population feels about a certain issue and it enables the researcher to make comparisons between groups. Academic researchers use this form of studies so as to try the different aspects of social or political science theories.114
We have decided to conduct a quantitative study based on survey questions because according to our opinion it is appropriate so as to be able to find answer to our core issues; we wished to reach as many respondents as possible and thus achieving a more general picture. Our opinion
111 Kvale, S. (1996). Den kvalitativa forskningsintervjun, Studentlitteratur, Lund 112 Svensson, P. G. & Starrin, B. (1996). Kvalitativa studier i teori och praktik, Studentlitteratur, Lund 113 Silverman, D. (2001). Interpreting Qualitative Data. Methods for Analyzing Talk, Text and Interaction, SAGE, London 114 May, T. (1997). Social Research – Issues, methods and process, Open University Press, Buchingham, UK
33 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic is that qualitative studies based on just one company can be very valuable but it is interesting to see what several companies think and have as a practice. In our opinion, a quantitative study cannot be considered as inferior compared to qualitative study; an opinion, view or practice shared by many people has always certain relevance. Surveys were appreciated already by Roman Emperors who polled their citizens. The modern survey developed in the Anglo-Saxon world under the last two hundred years115, however, is an important tool as well in a society’s democratic process as for scientific research.
A prominent concept in connection with quantitative studies is statistic significance116. This includes, in essence, that if a study claims to be statistically significant, so the hypothesis which was tried is not only confirmed or rejected, but also scientifically proved. To achieve this level, there are strict regulations which prescribe the procedure from choosing a representative set of respondents to calculating the results on the basis of mathematical formulas. A study with limited resources in time and assets like ours, we think can hardly claim to fulfill these requirements but a well designed quantitative study can nevertheless provide useful information about the studied population and provide a discussion about the possible consequences of not having strictly followed the statistical rules. It is, however, important to be aware of all these pitfalls and avoid them so far it is possible.
A general principle is that the studied population must be representative for the whole population. A researcher is facing two main issues here: pro primo, it is about defining the whole population and get the required knowledge about it to be able to take a proportional or random sample of it, pro secundo, we have to reason about the missing answers, if we have some kind of bias and, for example, just a certain segment of the population omitted to answer.117 We must be aware of the importance of response rate when conducting a survey inquiry, and discuss it, even if we can not achieve the statistic significance. These are not simple issues and they require a lot of thinking and reasoning even if someone is an expert and professional on this field. For example; a low rate of responses means that we must be cautious concerning the generalization of the results; perhaps the missing responses could significantly impact the outcome if we got them.
In our case we have got 17 responses of our hundred airlines which the population is consisted of, within our deadline from 1st to 31st December. We have sent reminders maximally three times, we felt this was the limit and we could not disturb them any more.
The great question is if these 17 airlines which have responded are typical of the whole population or they represent a special group. Our aim was to have all kinds of companies represented in our study; in most sectors there are companies of different size and different market concepts, so we think that if we have a so wide selection of different companies as possible, our study could be easier generalized; which are these groups of different companies, this issue we have analyzed in the previous Chapter 3.2 and tried to give a detailed view about why we think that our 17 respondents are offering us a quite good prospect for a kind of generalization for our population. An interesting issue is also if this could lead to a generalization to other branches or sectors; this would require further study but we assume that branches with similar character as airlines – viz. mainly the sectors which have large numbers of customers buying services, even by Internet and there the market has
115 Prairie Research Associates Inc., USA, URL: http://www.pra.ca/resources/history.pdf 116 Körner, S. & Wahlgren, L. (2000). Statistisk dataanalys, Studentlitteratur, Lund 117 Byrne, D. (2002). Interpreting quantitative data, Sage, London
34 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic mighty and historically established actors where new entrants has some difficulty – have similar views. A thinkable example can be international ferries or hotels.
Concerning the inner response rate, viz. eventual missing values for some single answers, we can observe that all the survey which we got back were fully completed – with the exception of eventual free comments - so we did not have any difficulty with missing answers. We can see that these 17 leaders who finally decided to take their time and answer, did it carefully and precisely.
Concerning the 83 respondents who did not send back the questionnaire, it is important to discuss if there was any special reason for just these companies not to answer or they represent a special subset of the population which might have different opinion about the issues; according to Lars Wahlgren, Director of Studies of the Statistic Department at Lund University, this level of dropping off is just that one which one can expect given the circumstances of our study; company leaders do not often engage themselves in filling out surveys for students.
Nevertheless, analyzing which are those airlines who have not responded is essential from the point of view of representativeness. We attach as Appendix 11 the list of the 100 airlines of our study marking which they are who have not responded. We have classified these airlines in ten different categories so as to be able to analyze if our respondents can be considered as representative to these groups. We are conscious about the fact that this categorization, like every model, is a somewhat simplified version of reality and there might exist other type of categorizations than just that one we have done. Furthermore, it is inevitable that some categories overlap each other in a certain way, as for example group 3 and 10 or 4 and 9. On the other hand, it is difficult to draw a clear borderline between group 5 and 6 as low-cost airlines publish less details about themselves than traditional airlines do.
We try to summarize our analysis as follows:
Group 1 includes the seven leading national airlines in Europe. Although the competition is strong between them, they have collaborated with each other during the past half century; their published IT strategies have similar guidelines, their common aim being to keep the status quo. It would have been reassuring to get responses from one or two more giants, to confirm if SAS’ views are representing the whole group.
Group 2 is the list of predominantly smaller European countries’ airlines; these companies have been acting for several decades as the number one carriers of their own countries, until the deregulation of the airline industry in the early 80s.118 They have been collaborating for more decades, being members of the same international organisations like IATA119 and AEA,120 forming a common platform. Austrian Airlines and Finnair can be considered as typical representatives for this group.
It is clear, however, that Aeroflot from Russia or Turkish Airlines do not really belong here. In fact, the former Soviet giant Aeroflot does not belong to any of these categories … This
118 Chan, D. (2000). The development of the airline industry from 1978 to 1998: A strategic global overview, Journal of Management Development, Vol. 19 No.6, pp. 489-514 119 IATA, International Air Transport Association, URL: http://www.iata.org/Whip/Public/frmMain_Public.aspx?WgId=67&FileSortField=Posted&FileSortOrder=Asc 120 Association of European Airlines, URL: http://www.aea.be/AEAWebsite/Presentation_Tier/Pr_Home.aspx
35 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic leads us to the controversial question Where is the Eastern border of Europe? While the old continent’s borders are well delimited from the north, west and south and nobody is questioning e.g. Iceland’s or Malta’s belonging to Europe, the Eastern border has been subject to vivid academic and politic discussion lately in connection to the great changes in Europe after the fall of the Berlin Wall. We tried, at the beginning of this study, to avoid this controversial question by defining Europe geographically, viz. the territory lying western of the Ural. Now, analyzing the representativeness of the results, we realize that this question can hardly be avoided. According to some historians like for example Samuel P. Huntington, from Harvard University, Europe’s Eastern border is the one between Rome and Constantinople, namely the historical line between Western and Eastern Christianity; practically, this line follows the Eastern border of Finland and continues by that of Poland and crosses Romania and the former Yugoslavia in the middle.121 This means, concerning Russia or the former Soviet Union that only the Baltic States belong to Europe from this territory. This is rather problematic, also because it excludes even the Orthodox Greece; it seems hardly questionable that the European civilization can not be imagined without the Greek heritage; some historians, however, like Delanty from the University of Liverpool claim that the idea of Greece as the cradle of European culture is relatively new122. Nevertheless, having accomplished this study and collected the answers from our respondents, we can state that our results reflect the Europe defined by Huntington; in fact, we have not got any material from the other side, with the exception of Montenegro and Bosnia Herzegovina; these two countries, however, can be considered as borderline cases, having for decades being part of the former Yugoslavia where Western and Eastern Christians met. Montenegro, on the other hand – as also its Italian name suggests – has old historical connections with the West; the same is valid for the multicultural Bosnia Herzegovina which had been part of the Austrian- Hungarian Monarchy once upon a time.123 The whole former Yugoslavia and its following independent states can be considered, according to our opinion, as borderline cases.
As we mentioned before, the results of this study reflect the Europe which is defined by Huntington; we have marked, in Appendix 11, with asterisk those airlines which get outside this border. By this we do not intend to question the European identity of these countries, nor do we intend to state that a distinction on religious basis could be relevant in today’s highly secularized Europe; Huntington means either to draw a line on religious basis, but he underlines that there are differences, not in strictly religious meaning but first of all concerning attitudes, goals, preferences and values. While the character of Western Christianity is basically dynamic, having got through much changes during the last centuries including renaissance and humanism, Orthodox Christianity’s focus has always been to maintain the original, sacred version of the Bible and not to change anything.124 These basically different views of the role of the necessity of changes and development might also have an impact on the use of IT generally and IT investments specifically since IT and IT investments are just about development and constant change.
We presuppose, on the basis of Huntington’s philosophy, that there might be differences regarding attitudes to IT and IT investments by these companies; as we mentioned before, we have not got any material from the other side of this line so we have no possibility to decide if there are de facto significant differences in attitudes. As we mention it later in this chapter, we have had much correspondence with airlines, which at the end did not respond, e.g. from
121 Huntington, S. P. (1996). The clash of civilizations and the remaking of world order, Touchstone, New York 122 Delanty, G. (1995). Inventing Europe: Idea, Identity, Reality, Macmillan, London 123 Kunskapens bok (1938). Natur och Kultur, Stockholm 124 Huntington, S. P. (1996). The clash of civilizations and the remaking of world order, Touchstone, New York
36 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Spain, Portugal, Ireland, Switzerland, etc. and many of them have signalled that they got our messages and reacted somehow; from the above mentioned group Eastern of Huntington’s line we have not got one single word, no feedback at all.
Group 3 includes new national carriers or large airlines of differentiation profile. SN Brussels is a new national airline in Belgium, taking over after the former Sabena; the same is valid for Swiss International, which is now the new Swiss national airline following in the footsteps of the former Swissair. SAS Braathens is a large carrier in its own country, like British Midland Airways in the UK or Transavia in Holland.
Group 4 includes regional airlines, represented in our study by Meridiana in Southern Europe and Blue1 in Northern Europe. All of these airlines have the common feature of focusing to a certain region and providing flights between smaller cities which are not connected to the great international network, such as e.g. Air Aurigny which flies from the Channel Islands to London. If any of these airlines show special characteristics, different from others, it can be eventually Air Corse; this small family airline from the Island of Napoleon Bonaparte has a grandiose business concept, namely it has flights connecting Corse with the Francophone World, including inter alia “French” Africa and Canada; it is much likely that the French government subventions these operations; in this case this airline has a little bit more chances to invest in IT and the others in the same group.
Group 5 includes the large low-fare airlines, like Easyjet in the UK and Air Berlin in Germany. These airlines have a rather standardized profile, concentrating to selling on the Internet and finding alternative airports; they all have the same philosophy about low prices and campaigns.
Group 6 includes also low-fare airlines, the ones which are small or medium-sized. Their resources are slightly less than the previously mentioned group. We think that Smart Wings from the Czech Republic is a typical representative for this group.
Group 7 includes those airlines which are new at the market; their countries have become independent in the 90s and now they are the new national carriers. The common feature here is that they are fighting for acceptance as new national carriers in Europe. We have four representatives for this group.
Group 8 includes new privately owned large airlines which practically compete first of all with their own national carriers. This group is represented by Air Lithuania from the Baltic States. Here we have also some airlines from the other side of Huntington’s borderline, we have no information about these companies marked with asterisk.
Group 9 is consisted of small private airlines, like Niki Luftfahrt from Austria; typically, they have their own small niche and have not too much of market share.
Group 10 includes large airlines which have their main business concept in providing charter flights for travel agencies or have regular flights to holiday destinations. LTU Germany can be considered as a typical representative of them.
We can say after this short analysis that our 17 respondents are in basic lines representative for the airlines within the Europe defined by Huntington; stating this we exclude 17 airlines from our population which we have marked with asterisk in Appendix 11. Thus we have
37 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic reduced our population to 83 European airlines, having a response rate of 20 percent, viz. 17/83 airlines.
So as to give the reader an insight into our Golgotha chasing respondents, we mention here some episodes which have happened during the collection of respondents. We have got some rejective but very polite answers of different kind; KLM, Royal Dutch Airlines, for example has commented that their CFO has no time for requests from students and they have suggested that we should study their home page or their annual reports instead which maybe contain some answers. British Airways, for example, has commented that they would eventually answer by traditional post but not by e-mail. Some others did promise to answer very kindly, but they never did it. Our impression is that our survey is actually taking more time and consideration than they had expected when promising the answers. Some companies from England and Germany have let us know that it was against their policy to answer to surveys. Alitalia, for example has suggested that we should contact a local representative of the airline in Scandinavia, but we never found one who could answer in the name of the whole company. On the other hand, we have experienced much kindness and helpfulness from many leaders of airlines in all Europe, and especially SAS, Scandinavian Airlines, perhaps because this is a study from a Swedish University. Another, fully technical problem about just airlines is that even the smallest ones has thousands of passengers and thus they have a huge correspondence with clients; they have no capacity to handle all these postal messages and in fact, as we have experienced, they do everything to protect their post- and e-mail addresses. Many of these companies have installed different kinds of sophisticated half- or fully automated CRM systems which are quite impossible to handle this type of matter as our survey. Therefore, we have tried other methods to get contact names and addresses to these airlines and their leaders, such as for example reading annual reports which are signed by a CFO or CIO, etc or searched after published conference lists and articles. Our experience has been that when we succeeded in getting an address to some leader, they were willing to answer, but when we have got in the labyrinths of some organizations, our request did not reach the right person.
We would have wished to conduct a study which could include both qualitative and quantitative research; we think that combining these two main methods can be very prosperous, providing a more complex picture of the studied issue125. A possible combination we would have been quite tempted to try if we had more time and resources to our disposal is starting with a qualitative study as a preliminary step to aid in developing a relevant quantitative study design, going on with our quantitative study and concluding with a qualitative study which would address experts of the subject and would help understanding and interpreting the quantitative study. It cannot be excluded that in this last phase of the whole process we discover some new features which we unconsciously neglected so far; this could inspire to redesigning the whole research thus our research process becoming iterative and concluding when we feel that the results are quite satisfactory. We are afraid, however, that this is beyond our possibilities. What is thinkable for us instead is, to find some complementing qualitative material about our respondents or about other companies in the branch.
This classification of research methods in two main groups, qualitative and quantitative is a huge generalization. Actually, we can illustrate methods on a horizontal respectively vertical axis which represent a continuum which goes from low structured methods to highly structured methods horizontally and from direct methods to indirect methods vertically.126
125 Bryman, A. (2001). Social Research Methods, Oxford University Press, UK 126 Ekholm, M. & Fransson, A. (1984). Praktisk intervjuteknik, Almqvist & Wiksell AB, Stockholm
38 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic The main research methods, both qualitative and quantitative ones are based on an indirect way of collecting data, i.e. we collect what other people experience. While qualitative studies tend to be unstructured or semi structured, quantitative methods include mostly highly structured questionnaires with closed answers.127
We have used highly structured questions with some few alternatives; partly because this made it possible for us to have a good structure and an overview of the kind of answer we get from several respondents and partly because it is not realistic that a respondent on this level, leader of big international companies would spend hours meditating about answers. Anyhow, we have given the possibility to answer in their way, if they feel so.
As we mentioned above, we have chosen a highly structured version of methods and we think that this is the best choice in our case where many factors will be examined and a lot of respondents will answer exactly the same questions. One can argue that highly structured questionnaires with close answers do not leave too much for the nuances, but our opinion is that although nuances and subjective circumstances can be very important in a way, but even in the most abstract and subjective context there comes a moment where life requires resolute answers: to invest or not to invest, to give or not to give priority to a certain method…
Since quantitative studies are often mentioned in connection with the philosophy of positivism, which accepts exclusively measurable things of material character as scientific and require empirical collection of data128, we think that a further explanation is needed to make our intentions clear. We are not positivists. We made our choice guided by the pure conviction that numbers, quantities and proportions have relevance even in the most abstract context. Occasional sinners, for example, are judged on a quite different level than constant sinners and with further consideration we can see that the difference is merely quantitative.
Furthermore, we should not forget that quantity and quality are not two concepts existing independently from each other; it is a well known law from quantum physics that quantitative changes consequently lead to qualitative ones… But abandoning this philosophical line and turning to concrete actions, our study is posing just those sorts of questions, which are relevant for quantitative research, for example “How often is a certain method or technique used” (see question 5 at Appendix 2) or “How many respondents see IT is a strategic resource”, and so on. So as to fulfil the aim of this thesis we intend to collect data from as many European airlines as possible and finally analyze and summarize them with the help of a statistical program. Anyhow, the choice of quantitative approach does not mean that our study lacks qualitative aspects; on the contrary, within reasonable limits we have included open questions in our survey, thus offering our respondents the possibility to formulate their own answers if the existing variants are not satisfactory.
Conducting such a study one can choose several methods, i.e. the deductive respectively the inductive approaches. The deductive one includes going from existing theory and starting from this come to conclusion about single phenomena by studying them empirically. This is the theoretical point which decides which information should be collected, how it should interpreted and how the results should related the theory. The inductive type of approach
127 Bryman, A. (2001). Social Research Methods, Oxford University Press, UK 128 Ibid.
39 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic includes starting by collecting material; having accomplished this first phase, one goes on to try creating theories.129
We have chosen first of all a deductive approach for our thesis, from the point of view that preliminary theoretical studies has decided how our empirical material should be collected and which one of them, i. e. we have created our theoretical framework and formulated our hypotheses; on the basis of these hypotheses, we have created a survey containing the most relevant issues we wish to study, the core issue being the pre-investment appraisal model by Professor Gunasekan and the items or questions related to it. With the help of questionnaire we have studied specifically how a certain branch – in our case European airlines – is thinking about these theories, if they accept or apply them as practitioners. This phase can be considered as an inductive one even if the theoretical framework was somehow more dominant than it normally uses to be by an inductive research.130 A study is seldom entirely deductive or inductive; typically, even a thoroughly deductive research contains features of induction.131
An essential part of a master thesis is the referencing style; we have chosen the Oxford one which is particularly suitable for texts which make references frequently. The Harvard system, as we have perceived studying papers and rapports, tends to be annoying and disturbing the understanding of the text, if used too often. In case of having footnotes the reader has the liberty to decide whether to check the reference in question or not.
4.2 Research process
4.2.1 Literature study
We have collected dozens of academic literature about our main issue, strategy, IT investments, IT benefits, etc. We have also searched after scientific articles from university databases, first of all those which are concerning information systems, information technology and economic planning.
Our secondary collection of data has Internet as a main source. We are well aware of the fact that Internet, although an enormous opportunity for finding huge amounts of data, is also a pitfall as for the reliability. Each time we have used Internet as a source of information, we have checked if it is a reliable author i.e. of academic source or of a well known establishment who published them.
129 Bryman, A. (2001). Social Research Methods, Oxford University Press, UK 130 Glaser, B. G. & Strauss, A. L. (1967). The discovery of grounded theory: Strategies for qualitative research, Aldine 131 Magnani, L. (2000). Abduction, Reason and Science - Processes of Discovery and Explanation, Kluwer Academic/Plenum Publishers, USA
40 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 4.2.2 Choice of the branch
While choosing a certain branch to study, we have studied theses which are published at our department. We have realized, going through these theses, that certain sectors and branches of trade are fully represented, like IT and telecom, as also most parts of public sector such as education, health and communal activities; furthermore, a large amount of papers concentrate on local industries, financial- and commercial institutions, stores and shops, studying them from various aspects. Concerning the tourism-, hotel- and transport sector, which is a huge consumer of information technology with its global networks, there are no more than a few papers available, sporadically dealing with some local hotel, ferry or railway. About airlines, however, we have not found one single study; we have decided to choose this branch, thus completing the repertoire with a new aspect. Studying the airline industry and its several actors allows a broad perspective and takes us into an international context; we think that it is interesting and challenging to view an industry from a European perspective; Sweden is traditionally focused to the Anglo-Saxon world, embracing a great deal of its views and practices, but now as Sweden is a member of the European Union, there is a growing interest for other European countries as well. Having said yes to the membership in the European Union Swedes have also confirmed their identity as Europeans in this new 21st century Europe where barriers between nations tend to disappear and distances have been shrunk, thanks, among other things, also to information technology. It is now possible to conduct studies with distant respondents in a quick and easy way; this is a challenging opportunity for us to exploit and experiment with…
Our population consists of European airlines; as we have mentioned above, we have the intention of having a European perspective writing our thesis.
Since the whole population of European airlines is relatively small, including ca 100-150 airlines all together, we have decided to contact 100 airlines which are most well known in Europe. Starting from partner relations of SAS, Scandinavian Airlines, with the help of snowball method132 we have come to other airlines and their partner contacts; achieving the addresses of 100 airlines, further research did not result in any new data, so here we have stopped searching.
4.2.3 Collecting data by constructing a survey
Constructing a survey the first important thing is to have a clear picture about the contents, not only regarding questions, but also the possible alternate answers. If a respondent does not feel the answers relevant, it may question the whole survey. A respondent, who is dedicating his time to filling in a questionnaire, must be convinced about the competence of that person who has created the survey.
Determining the contents of our survey, we have used the following sources:
• Theoretical background which is presented in the theoretical part of this study, inclusively the IT investment justification model (Chapter 2)
132 Dahmström, K. (2000). Från datainsamling till rapport – att göra en statistisk undersökning, Studentlitteratur, Lund
41 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic • For IT/business function areas’ classification from a survey created by the American IT Company SCS Consulting133, formulating Question 4 • For IT specification’ classification, we have chosen the relevant alternatives from the Norwegian IT company ObjectPlanet’s homepage; the company is specialized to online survey systems134, formulating Question 4 • CIO (Chief Information Officer) Magazine publishes declarations of CIO:s round the world; in the New Zealand edition we have found interesting statements which are connected closely with the literature from our theoretical study; three questions of the survey are based on these declarations, Question 9, 10 and 11.135 • About the list of all possible challenges executives in the chosen branch are likely to face, we have read the homepages, inclusively annual reports and press releases (see the list of them at Electronic references), this regarding Question 14
Technically, a survey requires a lot of reflections which can be summarized as follows136:
• Target group of respondents and their ability to answer the questions • Scales and degree of precision • Closed answers covering the whole range of possible answers • Giving possibility to the respondents to specify their own version of answer if they find ours unsatisfactory • Language, style, size, clear definitions • Explaining the goals of the survey • Motivating our respondents • Pleasant but professional design
All this is quite demanding if someone is not dealing with surveys on a day-to-day basis. Therefore, we have contacted Lars Wahlgren, director of studies at the Department of Statistics of Lund University and he helped us about the formal issues and the design and planning of the whole research technically. It was him who drew our attention to the fact that if we have a relatively small population (for example one hundred companies) we cannot reduce this by making any choice among them but addressing our surveys to all of them; especially, if we are planning a longer questionnaire directed to leaders who are generally short of time. When we have been ready with our final version of survey, Lars Wahlgren has been so kind to control it from a design point of view, especially regarding scales and answers which must be clearly constructed and mutually excluding each other. There was one question which he pointed out as less satisfactory and we have realized that we had to modify it to be more comprehensible.
We have sent an accompanying letter to all of our respondents; this is attached as Appendix 1, followed by the questionnaire as Appendix 2. Finally, we have posted 80 of them by e-mail and 20 ones by letter. During the period 1st of December – 31 December we have received 17 surveys back which of them 15 arrived by e-mail and 2 by letter.
133 GMA, USA homepage containing “The 2003 Information Technology (IT) Spending Survey” by CSC Consulting, USA, URL: http://www.gmabrands.com/industryaffairs/docs/ITsurveylong.pdf 134 ObjectPlanet Inc., Norway homepage, URL: http://objectplanet.com/company.html 135 CIO (Chief Information Officer) Magazine; article from Malcolm, A. (2003). Air NZ CIO thinks twice about IT, Auckland, New Zealand, URL: http://cio.co.nz/cio.nsf/0/AFDFA13DB9E3EA29CC256D43007E3F50?OpenDocument 136 May, T. (1997). Social Research – Issues, methods and process, Open University Press, Buchingham, UK
42 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 4.2.4 Collecting data by searching material on the Internet
As it is pointed out several times in this study, the survey as a method has its limitations; it is the researcher who decides about the contents. So as to counterbalance this, we have searched on the Internet after information of qualitative type regarding our main issues and concerning the use of IT in that branch we have chosen, as a completing material to the quantitative one. This is a very modest supplement to this study, because, as we mentioned it before, we have not had resources or time to combine both methods. Anyhow, we wished to hear something more comments from our respondents, so we started this qualitative part by searching after press releases which contains views of first of all our respondents; we have found interesting material about three of them which detects new aspects of IT investments for us and in the same article we could find interesting material of a fourth company which we have decided to relate because we think that it is of interest for the reader. This small qualitative contribution can be found at Chapter 3.3.
4.2.5 Processing and analyzing data
Processing of data has been done by the statistical program Minitab. Nowadays there are several statistical program packages available, like SAS, SPSS or Minitab; though SPSS or SAS are much appreciated in statistical circles, we think that Minitab has a much higher standard as to the graphical and esthetical presentation. Since we do not aim to do advanced calculations and our main concern is to present our data in an easy and well understandable way, we have chosen the Minitab package for elaboration of our data. Minitab was developed by Pennsylvania State University, USA and by now it is a leading statistical tool mostly at universities as well in the US as in Europe.137
We have registered the answers from our survey questionnaire to Minitab worksheet which can be regarded as a kind of database. We have constructed several scales, not really to “measure”, but rather to be able to summarize and compare the values of answers in an illustrating way; we present these scales in Chapter 5.
An evergreen issue of dispute in statistical circles is the choice of measurements which can describe a set of values in the best possible way. Shall we apply mean, median or mode values? Each of the three numbers are telling the truth, although using different calculation methods and thus showing various aspects of the same reality.138
Since our main objective is ranking, the only reasonable choice is the mean. An exception is our Likert scale, where we have applied the median value, according to advice of statistic professionals.139
Besides the variables from the survey questionnaire, we have created several other variables so as to be able to present summaries and differences between certain groups. We have also made different groups of our respondents according to the following principles:
137 Wahlgren, L. & Isberg, P. E. (2002). Introduktion till Minitab for Windows, Lund University, Department for Statistics, Lund, Sweden 138 Körner, S. & Wahlgren, L. (2000). Statistisk dataanalys, Studentlitteratur, Lund 139 Heriot-Watt University, Edinburgh, Scotland, URL: http://www.icbl.hw.ac.uk/ltdi/cookbook/info_likert_scale/
43 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 1.) Company size, on the basis of our four introducing questions on the questionnaire and with the help of the two matrices we created (see Appendix 3 & 4)
2.) Respondent profile, starting from the background of that person who answered in the name of his company. Although we are sure that this person tried to give us an objective picture of the company he is representing, we presuppose that the professional background might eventually affect some of the answers which are of a more subjective character.
3) Company profile; according to Porter, there are two main ways to get better chances on the market, i.e. by cost leadership or differentiation. We presuppose that these two, basically different approaches result in different policies regarding IT investments.
The above 3 categories of airlines are summarized in Table 1, 2 and 3 and attached to Appendix 6.
Following the recommendations of the Minitab introduction compendium140, which emphasizes that a picture tells us more than thousand numbers, we tried to summarize our results in form of charts, tables, graphs, etc. Studying analytic methods of Miles and Huberman141 we are convinced that the extra place tables, matrixes and graphs take are not a waste of capacity but a powerful tool to help the reader to get a quick understanding of a complex issue. With the help of these charts, tables, etc we could analyze the answers we got, discuss the results and the points of correspondence or difference with the literature we had earlier studied. We reduced the presented number of charts and tables to the most important ones from the point of view of our aim and core issues.
Finally, we created the models which were the main aim of this study and took our conclusion regarding the rest of the material. We give the reader an abstract at the beginning of this study, summarizing the whole research in a short way.
4.3 Validity
Each method has its own limitations and drawbacks, and surveys are no exceptions.
Validity is defined by Widersheim - Paul & Eriksson as a capacity to measure exactly what we intend to measure. In fact, we can distinguish two types of validity: internal and external validity. Concerning the internal validity, it is about our survey questions, if it measures exactly that what we shall measure. The external validity, on the other hand, implies how well this measured value is in conformity with reality.142
It is of great importance to have a good validity in our research. Wallén, for example points out the weight of validity in a research and he defines it as “measuring instrument which should not have any theoretical error.”143 It is therefore important to take in consideration that the answers we get from the research should correspond with the question we intend to investigate. One can argue that with a field study there is a possibility to get a higher validity
140 Wahlgren, L. & Isberg, P. E. (2002). Introduktion till Minitab for Windows, Lund University, Department for Statistics, Lund, Sweden 141 Miles, M. B. & Huberman, A. M. (1984). Qualitative Data Analysis, Sage Publication, Beverly Hills, USA 142 Wiedersheim-Paul, F. & Eriksson, L. T. (1991). ”Att utreda, forska och rapportera”, Liber, Malmö 143 Wallén G. (1996). Vetenskapsteori och forskningsmetodik, Studentlitteratur, Lund
44 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic by deeper observation and checking answers personally, but we can say that this kind of personal involvement has also the potency of decreasing the validity, just by having a closer contact with the respondent; as Gilovich points it out, people have a reluctance to show their negative views if they are not really compelled to it; it is easier to say no when they do not have any personal contact with the researcher.144
We should not forget that our issues as for example IT’s roll as a strategic resource or appraising IT benefits, is a rather complex one and the number of questions we can pose is absolutely limited; thus we measure only a part of reality and not the complex one. Claiming the opposite would be unreasonable, according to our opinion.
The validity is also influenced by investigating the right issues. It is important, therefore, to get as much knowledge of the related theoretical background, to see the context and connection behind, which we tried to do.
We are convinced that the survey method is a powerful tool, able to measure views and issues concerning a larger population; though we have always inspected critically the answers and results, we can conclude that we are satisfied with them; actually, they seem to be much reasonable. We wish only we got back all the questionnaires we have sent, this would have raised the value of the results.
4.4 Reliability
By reliability we mean that the measurements tool gives reliable and stable response; with other words, if the inquiry should be repeated, it would lead to the same results. All this means that the research process is free from random faults and not effected by circumstances which could cause a deformation of the final results.145
So as to achieve a good reliability with surveys, it is recommendable to test the questions with some people, possibly those of the original population. At the same time, it is a good idea also to test them with an outsider who is not influenced by the discussed issues and see if they understand the questions by the same way as we intented to pose them.146 As we have mentioned it before, Lars Wahlgren, Director of Studies of the Statistic Department at Lund University has inspected the survey from the point of view if the questions can eventually be ambiguous or equivocal. The first time we have sent the survey we waited for reactions if there is anything they wondered about or found unclear. As the first reaction was very positive and within a really short time we understood that our concept worked and got accepted and understood. We tried to make questions as simple as possible to avoid any misunderstanding.
As for the literature we studied from the Internet, viz. the home pages of our respondent companies, it is wise, we think, to be critical; they have of course the interest to present the company from the best side and this means that they can use a special rhetoric to highlight the positive aspects. Therefore, we have tried to avoid relying on text from the main side of their homepages directed to the great public and check the facts instead, with the help of the
144 Gilovich, T (1991). How we know what isn’t so – The fallibility of human reason in everyday life, The Free Press 145 Wiedersheim-Paul, F. & Eriksson, L. T. (1991). ”Att utreda, forska och rapportera”, Liber, Malmö 146 Wallén G. (1996). Vetenskapsteori och forskningsmetodik, Studentlitteratur, Lund
45 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic published annual rapports, which present the statements of accounts about a company. In parenthesis might we add that annual reports are also “manipulated” in a way, supposedly within the limits of the actual legislation, by for example under- or overestimating non- financial assets.147 An outsider researcher is not too likely to have a chance to detect this sort of errors; however, since this thesis has no pretension to give a clear picture of these airlines’ financial position, this question is not relevant in our case.
An important rule which we must remember and which is worth to mention discussing the issue how to read a publication in a critical way is that text which is somehow hidden or in small print can eventually have the same importance than the highlighted ones.
Survey inquiries guarantee generally anonymity, also because it is not of primary interest who is the respondent, for example when the survey is about thousands of citizens in a region. In our case, however, it can be interesting to see who has answered in the name of the company. We have asked permission of our respondents to print their names on our list, Appendix 5. Those respondents, who have not answered to this specific question, are marked with asterisk.
The other consideration is that there is some possibility that respondents’ answers generally reflect much more the way things should be according to the respondent, rather than they are in reality. We assume that this point is a main concern for researchers because it is based on the human character to see things slightly better than they are.148
An issue to discuss in our study is how 17 respondents can be considered generally to be representative for a population of hundred. With help of the American Creative Research Systems Company’s programme149, we have tried to examine the preciseness of results, depending on the size of sample from a population. As we can see from the following Graph 1, the results can be considered entirely precise solely in the case when our sample size is 100. In all other cases, we have to count with the fact that the results are to be interpreted within a certain confidence interval.150 Considering 17 respondents this confidence interval is around 20 percent; all this under the circumstances that the sample choice has been made in an appropriate way, randomly or applying stratifying, viz. choosing representatives proportionally from all identified subgroups. This graph shows also the tendency that the margin of errors is significantly decreasing by augmenting the sample size.
147 J Thomasson, J., Arvidson, P., Lindquist, H., Larsson, O. & L Rohlin, L.(2004). Den nya affärsredovisningen, Liber, Malmö 148 Gilovich, T (1991). How we know what isn’t so – The fallibility of human reason in everyday life, The Free Press 149 Creative Research Systems, CA, USA, URL: http://www.surveysystem.com/sscalc.htm 150 Körner, S. & Wahlgren, L. (2000). Statistisk dataanalys, Studentlitteratur, Lund
46 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Confidence Interval
30 10; 27% 25 15; 21,5% 20 17; 19,9% 19; 18,6% 20; 18,% 15 25; 15,6% 30; 13,8% Confidence Interval
Percent 35; 12% 40; 11% 10 50; 9% 60; 7,3% 70; 5,9% 5 80; 4,5% 90; 3% 95; 2% 100; 0% 0 0 102030405060708090100110
Sample Size
Graph 1 Confidence Interval depending on sample size
47 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 5. Survey analysis ______This chapter presents the results of the survey inquiry, often in forms of tables, figures and graphs. We have divided the analysis in four different parts, the first one dealing with the last years IT investments, the last one predicting future challenges and the two middle ones about the details of pre-investment appraisal methodology respectively IT’s roll in a highly competitive environment. ______
5.1 Introduction
Before we start our analysis in this chapter, we would like to call the attention of the kind reader to information attached in the appendices; first of all, the survey questionnaire is to be find as Appendix 2. In graphs and figures we have often numbers with decimals; this is coming from our measurement scales, we use the mean value. Scales can vary depending on the questions of the survey; Appendix 8 contains the measurement scales, with the exception of the Likert scale which is shown on the separate Appendix 10. About the participating companies’ groupings, please see Appendix 6.
Since our respondents had to answer overwhelmingly to questions about IT investments, it is of great interest for us to see to which extent these companies have accomplished IT investments during the last years; regarding investments we must consider the fact that decisions about investments do not follow a regular annual scheme but we must think in longer terms; a company, having implemented a large investment project one year, may not plan a new one in a one, two or three years period after it; consequently, investment habits can not be investigated on an annual basis. So as to have a reasonable time-perspective, we have chosen a medium-term period, 5 years, which is long enough to have an overview but not too long; five years can be considered as an adequate time, easily remembered by our memory without needing to search in archives or asking people who has been working at the company for a long time. In economic literature, also in the context of IT, it is recommended to calculate for a 5 years planning horizon which is regarded mostly as medium-term planning151.
The further result of this study, specially the questions around the IT investment justification model, without doubt have these IT investments as a background experience.
Our Question 4 related to this is as follows:
“Please rate the level of IT investment you have accomplished during the past five years period”.
The answers are summarized at a range from minimum 0 to maximum 3.
Our questions addressed the 6 parts of business processes on one side, which are marketing, sales & demand fulfillment, supply chain, procurement, R&D and internal services, and IT
151 Hill, L. T. (1989). Profit Strategies for Catalogers, The Hanson Publishing Group, Inc., Stamford, CT
48 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic specification on the other side, such as hardware, new software application, developing e- business software, purchasing e-business software, upgrading present applications, system integration, networking, implementing new systems, marketing on Internet, IT-related security application and human IT skills.
The next Graph 2 shows that these companies have accomplished IT investments on average in all these business processes, though there are visible differences in the priorities; internal services and procurement have the lowest level and marketing and sales and demand have the highest scores, viz. investments have been accomplished on a level which is higher than the medium.
IT investments specified by business process 2,4 2,35
2,2
2,06 2,0
1,8 1,82 1,76
1,64 Scores 1,6
1,4
1,2 1,17
1,0 Internal Services Marketing Procurement R&D Sales & Demand Supply Chain
Graph 2 IT investments specified by business process
According to the specification by IT products, which is shown on the next Graph 3, we can observe that there are four domains which have especially high scores and three of them, i.e. developing e-business software, marketing on Internet and purchasing e-business software is Internet related investment, while the fourth one is new software application in general.
49 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
IT investment specification 3,0
2,5 2,17 2,05 2,11 2,0 2 1,94 1,76 1,7 1,58 1,58 1,5 1,47
Mean 1,17 1,0
0,5
0,0 e e s s s t g n e n s r r ill n e n o r o n a a k m io rn ki ti a ti io w w s te t e r a w a t ft d - s a t o ic ft r a o r IT sy lic In w l o g lic s a p t p s te p s H n w p n e p s n p s a e a o N a s i a e m n g e e n u ty n r n m t i H g i ti a i te n s in r e w s s se u t cu k ft u y e -b n e r o -b S r e e s a s e p g m d M w g g in le te e in in p p a N s d lo m l a a e I re h r v - rc g e T u p D I P U
Graph 3 IT investment specification
On the other side, the lowest scores are for human IT skills and IT-related security applications. This is quite astonishing, but it can be interpreted also in that way that the traditional view of investments is related first of all to tangibles assets like machines and not intangible intellectual assets. Although one can often read declarations in newspapers from business executives that their main resources are the experience of their stuff.
On the basis of above results, we can see that this branch has a wide experience in IT investments of all kind. This we have to keep in mind when we examine the answers about evaluation methods and benefits.
Having accomplished all these investments, how do these companies see the roll of IT at their firm? Please see Question 2:
“Do you consider IT at your company as a strategic resource, support function, cost of doing business, strength, weakness, opportunity, threat or other, such as ….”
As we can see on the next chart, 11 of 17, i.e. 65 percent of all respondents consider IT as a strategic resource.
50 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
General view about IT
Strategic resource 11
Support function 8
Opportunity 7 Count
Strength 7
Cost of doing business 1
0 2 4 6 8 10 12
Graph 4 Chart of general view about IT
On the following chart, we try to investigate if there are some differences between our respondents, depending of their professional background.
General view about IT 6 5 4 3 Count 2 1 0 General view about IT n y e h n n y e h n n y e h n i it c t o i it c t o i it c t o s n r g ti s n r g ti s n r g ti u u n c u u n c u u n c b tu o e n b tu o e n b tu o e n g r s r u g r s r u g r s r u n o e t f n o e t f n o e t f i p r S t i p r S t i p r S t o p ic r o p ic r o p ic r d o d o d o f O g p f O g p f O g p o te p o te p o te p t a u t a u t a u s r S s r S s r S o t o t o t C S C S C S
e e p Respondent Profile c i n u h a iq rs n n e i h d F c a e e T l l & l ra IT e v O
Graph 5 Chart of general view about IT divided by respondent profile
We see here that we have got different answers depending on respondent profile; the highest scores are for strategic resource in the finance profile group and the overall leadership profile group, whereas leaders with IT background marked support function as the highest. Only one respondent has told us that IT is a cost of doing business. It is also interesting that it is first of all people with IT skills who see IT as an opportunity or strength at the company.
51 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic By this we can state that Hypothesis 2 is supported: yes, IT is considered as a strategic resource by a majority of respondents.
As in the literature some authors question if business executives see IT from a technical or from a business approach, our next question tested this issue, please see Question 3:
“You view IT rather from a technical, business or both technical and business approach.”
On the next chart having remembered what we have read in the academic literature, we expected the most answers for the technical approach but the fact is that most of them have marked the alternative of both technical & business approach.
Respondents' IT approach
Both technical & business approach 11
Business approach 6 Count
Technical approach 0
0 2 4 6 8 10 12
Graph 6 Chart of respondents´ IT approach
We can see that no one that marked the alternative that they view IT merely from the technical side. This means that Hypothesis 3 is rejected; the majority of respondents see IT from both technical and business approach.
By this we can conclude this introduction by observing that our respondents in general, having different backgrounds as IT, finance or overall leadership, have quite an extensive experience in IT investments, certainly because their branch is using IT in so many several ways, and in the same time we see that their attitude is positive and accept the idea in general that IT has a potential of being a strategic resource, but doubtlessly IT is also a support function.
5.2 IT in the strategic battlefield
As we have seen in the previous, theoretical chapter, a company has to fight for its existence in several ways; which are these main struggles, that is summarized in Porter’s model of the five forces, presented as Figure 2 in Chapter 2.3. Please see question number 13 in the survey which is the following:
52 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic “According to Porter (Harvard) there are five forces determining a company’s strategy; in which “battle” can IT be a useful weapon? “
We have given the five alternatives and the respondents have marked those which they felt or believed that can be of help in their situation. On the next two charts we can follow which check boxes were marked.
On the first bar chart, Graph 7 the answers are grouped by respondent profile: the first group of bars shows the answers from those respondents who have a finance background, the second one those who are IT professionals and finally, those who are overall leaders.
We see that each of the three groups have preferred the “rivalry” alternative and there are only a few of them who has thought that IT could help even against the other four forces.
IT as a useful weapon regarding Porter's five forces 7 7 6 5 4 4 3 3
Count 3 2 2 2 1 1 1 1 1 1 1 0 0 0 0 Five forces r s r s r s r s r s r s e lry t e : e lry t e : e lry t e : w a c w c w a c w c w a c w c o iv u o w o iv u o w o iv u o w p R d p e p R d p e p R d p e ' ro s ' n ' ro s' n ' ro s' n rs p r f rs p r f rs p r f e e lie o e e lie o e e lie o y t p y t p y t p u u p at u u p a t u u p at B it u e B it u e B it u e st S r s t S r s t S r b h b h b h u T u T u T S S S
Respondent profile e e ip c u h n iq s a n r in h e F c a d e le T ll & ra e IT v O
Graph 7 IT as a useful weapon regarding Porter’s five forces – version 1
We can observe that IT professionals have a more optimistic view about IT potential, as in their group there are all the five forces represented. We can, however, not forget that we have the most respondents as IT professionals, viz. the three groups are not equally represented.
On the next chart, viz. Graph 8 we can see that it is the rivalry which has got most scores (13) and secondly the threatening force of substitute products (5).
53 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
IT as a useful weapon regarding Porter's five forces 7 7 6 5 4 4 3 3
Count 3 2 2 2 1 1 1 1 1 1 1 0 0 0 0 e e p e e p e e p e e p e e p Respondent profile c i c i c i c i c i n u h n u h n u h n u h n u h a iq rs a iq rs a iq rs a iq rs a iq rs n n e n n e n n e n n e n n e i h d i h d i h d i h d i h d F c a F c a F c a F c a F c a e e e e e e e e e e T l l T l l T l l T l l T l l & l & l & l & l & l ra ra ra ra ra IT e IT e IT e IT e IT e v v v v v O O O O O
Five forces r y t s r :s e lr c e c w a u w o iv d o w p R o 'p e s ' r s n r p r f e e lie o y t p t u t u p a B t i u e s S r b h u T S
Graph 8 IT as a useful weapon regarding Porter’s five forces – version 2
One of the forces of Porter is the buyers’ bargaining power. Relation with customers is essential for today’s companies; IT investments must also reflect the importance of improving customer relationships. Question 9 in our survey addresses this: is a company willing to invest in IT if it is not seen by the customer?
“What’s the point of spending money on IT if your customers don’t see the value?”
The summarized answer of the respondents is that there is no point in investing in IT if the customer does not see the value (see Appendix 10).
Question 10 is as follows:
“We spent enormous amount of money adding features to our IT products to create competitive advantage, but we did not determine whether customers attributed enough value to those features to order to justify the investment.”
The results confirm the same line as above with the previous question; respondents do not agree with the point that they would not have paid attention to the value for the customers. (see Appendix 10)
The other main concept of Porter is known as the model of generic strategies, which we have presented in Chapter 2.3 as Figure 3. The model is from 1980 but this seems to be much actual now, just speaking about the business line of an airline; the traditional national carriers are challenged by new, emerging ones with low cost profile, which is mostly due to the use of Internet at sales. The next bar chart, Graph 9 shows the results divided by company profile. We have all together 4 companies with cost leadership company profile and 13 companies with differentiation company profile.
54 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Porter's five forces recognized as a strategic weapon 10 10
8
6 4 Count 4 3 2 2 2 2 1 1 1 1 0 Company profile p n p n p n p n p n i o i o i o i o i o sh ti sh ti sh ti sh ti sh ti r ia r i a r ia r ia r ia de nt de nt de nt de nt de nt a e a e a e a e a e e r e r e r e r e r l fe l fe l fe l fe l fe st if st i f st if s t if s t if o D o D o D o D o D C C C C C
Five forces r y s r s e lr c t e : w a u w c o iv d o w p R o 'p e ' r s n s p r f r e ie o ye t l u u p t B it p a s t u re b S h u T S
Graph 9 Porter’s five forces recognized as a strategic weapon
We see that rivalry is a main concern, 3 of 4, 75 percent of the low cost airlines marked this alternative, and 10 of 13, 77 percent of the traditional airlines marked it. This means that there is no significant difference between the two groups.
We can conclude that Hypothesis 4 is not supported by the majority of respondents regarding all the five forces; there is a majority which recognizes IT as a useful weapon in the rivalry fight, but there are few who are convinced that IT can help with all of these. We do not interpret this as a negative opinion, rather it is a lack of insight; perhaps they have never reflected about these five forces like this before and simply it is the rivalry which is the most obvious part of this issue. Perhaps, after a longer consideration they would agree that IT can help generally, as one of our respondents has stated.
55 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
IT investments devided by company profile
e s r s re n a n a o w tio w ti ft s a ft a o m c n o ic s e li o s l s st p t ti s p s y p e a s p e s a n ic e a in w y r l in n t s e it te p s o en u s n r n p u ti s -b ll cu I a b a e e ki g e e - r r s tin s on r e g p g - n d g a g te g in re IT e e g in tw in n n p a t in k f s i i o n m l a t r o a d el dw a l e e ke o s h em ra v r m p r r tw w rc t g e a u - a e e u ys p D H H Im IT M N N P S U C ost Leadership Differentiation 3,0 3,0 2,53 2,5 2,5 2,3 2,15 2,07 2,0 2,0 1,84 2 2,23 1,75 2 1,75 1,84 1,5 1,5 1,5 1,69 1,38
1,0 1 0,75 1 1 1,0 0,75 0,5 0,75 0,75 0,5 0,5 0,0 0,0
e e ls s s t g n e n s r r i l m n ne i n i o r i o n a a k e i o r k t a t i o tw w -s st t e r a tw a t f d T y ca t o ic f r ca s o ar I s l i In tw pl s o eg li n w p e p t p ss H a e p n a ss in p e n a o N e a n m y g r e n m t si u g i t in a si e n u H i n r t u st e b t u e tw b y s - en ec rk of - S re e s a s e p g m d M g g in le e ew i n n p p t s i o m la N a d l I e h ra ve - r r c g e T u p D I P U
Graph 10 IT investments specified by business process
56 Although regarding Porter’s five forces we could not find some essential difference between the attitude of these two company groups, the previous chart, Graph 10 tells us much more about this difference. Generally, the investment level is much higher by those companies who go for differentiation. If the low cost companies will invest, they do it is attached to their commitment to Internet services and e-business. Curiously, marketing on Internet is of high priority by both groups and the differentiation companies have even more marketing investments. As we see, the main concern for the differentiation companies is new software applications, other than e-business. However, developing or purchasing e-business software is also important for the traditional airlines. Concerning upgrading present applications, we see a big difference: low cost companies are not interested in this at all. Another aspect of this issue is whether a company is willing to replace a quite old system and spending millions. Our Question 11 is investigating this:
“The system we run is quite old and we’re looking at replacing it, but we have to determine whether we need a system that will cost a few million dollars or tens of millions.”
The summarized result became neutral but as it includes sorts of average, we must look behind it and see how the single respondents have reacted; we have observed that the dispersion among respondents is very large: we have got all the possible different answers; obviously, there is no consensus in this matter among the different companies. (see Appendix 10). This kind of uncertainty can also depend on the complexity of the question: we could eventually separate it to two simple questions to see which part the answers are referring to.
In the theoretical part of this thesis we have focused much attention to those benefits which an IT investment can yield. Chapter 2.4 and 2.5 is dealing with justifying different kind of benefits. The next chart, Graph 11, shows the attention companies from these two different profile pay to those benefits, which are not measurable or quantifiable, having a more abstract or symbolic character:
57 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Appraising intangible benefits divided by company profile
ip sh n io IT s e at es g l in a e re t in t c n g s n n r e in u a e e m st b ty v d m t e e e e d fi o n v v r c i a n st e o n t u o e o e u m r i s v c g c h p t fu k it i a c im o to r t e m e r i n g o e c i v n y f in e w p an d r o e lit o r ic m h o p a k c u rv am o n o b u is e e e C E G Im Jo Q R S S T Mean Score Int/Cost Mean Score Int/Diff 3,0 3,0 3 2,75 2,5 2,5 2,07 2 2 2 1,84 2,0 2 2,0 1,92 2 1,92 1,5 1,75 1,5 1,5 1,53 1,15 1,0 1,25 1 1,0 1 0,76 0,5 0,5 0,92 0,0 0,0 e e e t t s c ip n n IT s t y r k ag n ag h e e e ie o t e s m m in in c n d im n e s o w a fi io c h v g u s m v n d t r i o in b a d o o la r t t o e a c o e en p es re T e G r v u c e v e r b im t i ti c e o in fu v ti an m J ity t er e h to a l o g S p n s n in m E u u f r o c Q o u C e k ec v is S ro R p Im
Graph 11 Mean scores for intangible benefits divided by company profile
We can see here an interesting point: the big diversity, regarding service to society. Obviously, the companies of low price profile keep their prices on a low level not only as a business policy, but they consider also that by this they offer a special service to people, making the flights available to larger groups of people. Concerning the competitive advantage, it is clear that this is very important for the low cost companies, which are de rigueur the ones who are fighting for their position on the market; the differentiation airlines are mostly prestigious and well established ones.
5.3 Questions related to the IT investment justification model
The conceptual model for justifying IT investment benefits which we have described in Chapter 2 can be divided in two major groups: the left side and the right side. The left side contains lists of evaluation or appraisal methods or considerations. We have asked our respondents, how often are these methods or considerations relevant when appraising an IT investment. The alternative answers are attributed numerical values according to a scale from 0 to 4 where 0 denotes the answer never and 4 the always; averages presented in graphs or charts can of course have decimal values so as to detect the differences. (see Appendix 8).
The right side, however, is a list of expected benefits and our questions are directed to the importance of these factors; the alternative answers are attributed numerical values according to a scale from 0 to 3 where 0 denotes not important at all and 3 crucial.
Here next we present the results of the model’s left side, divided by the three main company levels; strategic, tactical and operational. Our Question 5 has been the following:
58 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
“Below, you find a list of appraisal techniques for justification of an IT- investment; as each investment displays its own characteristics, you may probably use a different set of techniques/methods each time you appraise the effectiveness of a specific IT project/investment. Please specify how often you apply these techniques: “
Chart of mean scores for strategic impacts
Long-term costs&benefits 2,8
Strategic objectives 2,6
Com petitive perform ance objectives 2,4
Strategic Impacts Strategic Support for corporate strategy 2,3
Top management support 2,1
0,0 0,5 1,0 1,5 2,0 2,5 3,0
Graph 12 Chart of mean scores for strategic impacts
Chart of mean scores for tactical considerations
Security 2,2
Generating data 2
Evaluation methods 1,7
Involvement of senior managers 1,7 Tactical considerations
Critical success factors 1,6
0,0 0,5 1,0 1,5 2,0 2,5
Graph 13 Chart of mean scores for tactical considerations
59 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Chart of mean scores for operational considerations
Existing IT systems 3
Software 2,882
System integration 2,824
Existing operations system 2,824
Data m igration 2,588
Operational consideration Servers 2,471
Users' perception 2,412
0,0 0,5 1,0 1,5 2,0 2,5 3,0
Graph 14 Chart of mean scores for operational considerations
We have seen here above on Graph 12, 13 respective 14 that the different levels have their own priorities to justify the IT investment; for the highest leadership, the most important thing is to think of long-term costs and benefits, on the tactical level one concentrates on security issues while on the operational level the main concern is how this new IT investment would effect the existing system; although it is clear that all these considerations are very important.
We see here that all the evaluation techniques listed on the original model’s left side have got positive answers; we can state that all of them are used. By this we can confirm Hypothesis 5. Yes, we see that these techniques/methods are not equally used, some of them more often than others; this means that Hypothesis 6 is supported. On the other side, we have not got any suggestions about other evaluation techniques/methods which would be used in the branch and not listed in the original model. This means that Hypothesis 7 is rejected.
Now we start to analyze the right side of the IT investment justification model. This part is introduced for the respondents by Question 6 which is the following:
“Please specify how important the following intangible and tangible considerations are when appraising the benefits you expect from IT-investments:”
The main point in the whole model is that benefits must be seen also from another than just financial or quantifiable view; benefits here, are grouped first as intangibles and tangibles, and the later is further divided into financial and non-financial ones. Here can we control if the complaining of many authors about neglecting of the intangible ones get confirmed by our empirical study or not.
60 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Chart of Intangible benefits
Securing future business 2,17
Competitive advantage 2,11
Improve customer relationship 2,05
Quality improvement 1,94
Enhance confidence 1,64
Risk of not investing in IT 1,29 Int angibles Service to society 1,17
Good image 1,05
Teamwork 1
Job enrichment 0,88
0,0 0,5 1,0 1,5 2,0 2,5 3,0 Mean Score
Graph 15 Chart of intangible benefits
Overall average of intangible benefits: 1,535
Here can we see on Graph 15 that intangible benefits do get some high attention, at least concerning securing future business, gaining competitive advantage. Unfortunately, we see that job enrichment and teamwork is not too focused here.
On the next Graph 16 can we read off the results of the financial benefits’ importance; this confirms that budgets and return on investment ratio (ROI) are key issues here. Alternate technology itself does not seem to interest our respondents.
61 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Chart of financial benefits
Budgets 2,35
ROI 2,17
Priority of investment 2
Product costs 2
Revenue 1,82 Financials
Profit level 1,76
Market research 1,35
Alternate technology 1,23
0,0 0,5 1,0 1,5 2,0 2,5 3,0 Mean Score
Graph 16 Chart of financial benefits
Overall average of financial benefits: 1,840
The next Graph 17 shows that the non-financial tangible benefits are not too interesting when appraising a future IT investment. Non-financial tangible benefits got the lowest scores, as we see. If any of these benefits are of interest, it is the lead-time.
62 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Chart of non-financial tangible benefits
Lead-time 1,29
Labour absence 1,11
Set-up time 1,11
Inventory 1,05 Non-financial Tangibles Non-financial
Defective rate of products 0,94
0,0 0,5 1,0 1,5 2,0 2,5 3,0 Mean Score
Graph 17 Chart of non-financial tangible benefits
Overall average of non-financial tangible benefits: 1,225
If we compare the overall averages of these three categories of benefits, we see that the financial ones get the first place with 1,84, the intangible ones are second with 1,535 and the non-financial tangibles get the last place with 1,225. This confirms that the main concern is financial before an IT investment, but intangible considerations have also their relevance, and the difference is not too large between them.
Hereby we can conclude that all the benefits listed in the original model are considered as relevant by our respondents. This means that Hypothesis 8 is supported. Yes, this is true that these benefits are appreciated on different levels, as we have seen above. By this we confirm Hypothesis 9. We have not got any suggestion about existing other benefits which companies would expect; this means that Hypothesis 10 is rejected.
Since the financial considerations seem to be the most important ones, we are going to inspect how the different respondents have judged the return of investment ratio (ROI). On the next chart Graph 18 we can read that for about the half of the respondents ROI is a crucial factor.
The three airlines which are not caring too much about the return on investment have the common feature that they are new companies and presumably their main concern now is to get established on the market, rather then achieving a high profit level.
63 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Importance of ROI by IT investments
3,0 3 3 3 3 3 3 3 3
2,5
2,0 2 2 2 2 2 2
1,5 Q6_14 1,0 1
0,5
0,0 0 0
a n a n 1 a t ir a U a o rt S s s ls ri li i a e ti je a i T n r h A n g e d r n ri u a y n sn L a g a e in s A e a t l o s n o i e f S h s B u s B r a i B id n ft t W u ir ith u C E F r te u aa t r A L A ly e n L r r B r F M o ki B a N i M i S m S A N A S S Airline
Graph 18 Importance of ROI by IT investments
On the basis of above listed results we have created a version of this IT investment justification model, adjusted to the practice in the branch we have studied. We present the model in Chapter 6.
As we see, the IT investment justification model is mentioning only one financial calculation method, namely the ROI; based on the vivid discussion in the academic literature about the inadequateness of financial calculation regarding IT investments, we decided to investigate further if it is true that companies do use all these hardly criticized methods and labeled as inadequate or insufficient for IT investments. Next chart Graph 19 shows the answers for our Question 12:
“If you are doing calculation for judging an IT-investment, you use: NPV, Net Present Value, IRR, Internal Rate of Return, PP, Payback Period, ROI, Return on Investment, ROCE, Return on Capital Employed, EVA, Economic Value Added, or other, such as ….”
64 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Use of investment calculations divided by company profile
10 10
8
6 6 5 Count 4
2 2 2 2 2 2 2
0 0 Ty pe of calculation EVA NPV PP ROCE ROI EVA NPV PP ROCE ROI Company Profile Cost leadership Differentiation
Graph 19 Use of investment calculations divided by company profile
We can note that none of the 17 companies has confirmed that they do not use financial calculation; each one of them has marked minimum one alternative. We have, however, one calculation method which is not used and this is the IRR, i.e. the internal rate of return. We can see that ROI and NPV are leading the list. It is interesting to see that the companies with low cost profile do not use at all the PP (Payback Period) method. This can be well explained by the fact that probably low cost airlines do not plan huge investments which have a long-term effect. The NPV method, which we have discussed at the theoretical part of this thesis and we said that it is considered as superior compared to the others, is not the most frequently used one, but ROI is. Anyhow, about the half of all respondents, 8 of 17 use it.
By this we can confirm that our Hypothesis 1 is supported.
Finally, we have tested some remarks from authors regarding justifying IT investment benefits. Question 7 of the survey intended to check whether firm managers find it difficult to justify the cost associated with purchase, development and use of IT in finances terms:
“At our company managers find it difficult to justify the cost, associated with purchase, development and use of IT in financial terms.”
The summarized answer shows (see Appendix 10) that this is not so according to our respondents, they disagree in general with the idea that this would be difficult. If we control the single answers, we see that only 3 of 17, viz. 18 percent agreed with this statement.
65 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Question 8 of our survey is inspired by the finding we have mentioned in the theoretical part of this study, i.e. that the difficulties in measuring benefits and cost are thought to be a major constraint to IT investment:
“The difficulties in measuring benefits and costs are thought to be a major constraint to IT investment.”
The summarized answer is no. The details behind this show that 5 of 17 have agreed, 2 of 17 were neutral and the rest of the respondents disagreed.
5.4 General overview and future vision
As we have seen in the theoretical part of this study, executives do feel uncertain about IT investments, especially predicting a more distant future. It is difficult to see if the investment will end up in IT hype or will prove to be useful, moreover strategic. We were curious to know, which the great challenges are for the next five years for these companies; challenge is a definitively positive world in our western civilization, but anyhow, it contains a touch of uncertainty and fear. We have ranked the results which can be seen on the next chart Graph 20. Reinforcing the often criticized principles of Porter, we see that competition is an issue of first priority. Another idea remembering Porter again that the possibility that new entrants might show up from outside Europe is not a likely one. Why? While in other industries with global network, like IT and telecom or the car industry, new entrants from outside Europe are considered as a great threat. These answers suggest that this is not the case in the airline industry; the barriers, mentioned by Porter obviously work effectively.
Great IT challanges in the next five years
competing with low-cost airlines 9
e-ticketing 9
reducing cost 9
e-business 7
implementing new systems 6
new distribution channels 4
outsourcing 4 Challanges
security 3
network integration 2
building own software 1
new actors from outside Europe 1
0 1 2 3 4 5 6 7 8 9
Graph 20 Great IT challenges in the next five years
66 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Another thought is regarding these results is that important though it may appear to focus on benefits; cost reducing is a key issue for the next five years.
67 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 6. Discussion and conclusions ______This chapter summarizes the answers to the main questions of the thesis and discusses some of the interesting features and results of it. ______
As the aim of this thesis has been to investigate which are the major factors airlines are considering when they are facing a decision about an IT investment and which are the benefits they expect, we start here this summary of the thesis by presenting our two versions of that IT investment justification model, based on the results we have accounted for in the previous chapter. The first version of the model is keeping the frames of the original model, grouping and ranking methods and benefits by the three organizational levels respectively intangible, financial and non-financial tangible benefits. The second version of the model was motivated by the thought that a real ranking without taking in consideration the level borders and categories seems to be reasonable.
We have marked the most important ones by bold style; the left side of the model is marked as important over the value 2,5 having values moving on a scale from 0 to 4 and the right side of the model is marked as important over the value 2 having values moving on a scale from 0 to 3. We think it is important to mark the important ones and ranking these considerations because the original model is too complex so as to be able to give a realistic orientation of how to justify. However, while the original model can be considered as of normative character, viz. so should it be, all these considerations are important, our models, on the contrary, are of descriptive character, viz. showing how it is in a certain branch.
We note that no other method came up under our survey inquiry and no one has commented that other evaluation methods would be in use. So the model contains no other appraisal techniques or important benefits than those which were specified in the original model.
The two sides of the model depict two different aspects of the IT investigation justification process; the left side tells us about how often these considerations come up by a decision situation. It can be surprising that although our respondents are from the strategic decision level, they have marked the operational levels considerations as the most vital ones, if we look at the level averages, which are 2,714 for the operational, 2,44 for the strategic and 1,84 for the tactical level. It suggests us that although decisions are made on strategic level undoubtedly, especially with large IT projects, the operational points of view are not forgotten. This is perhaps natural in a branch which has a high operational risk. We mean not only the maintenance of airplanes, but also having booking systems with large databases is the operational point of view very vital. This reminds us of the statement of Mr. Selway, representative of a British airline (see Chapter 3.3) who said: “We do not go for leading technologies, such as Linux – we need to go with things that work.”
68 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Strategic considerations Intangibles
* Securing future business * Long-term costs & benefits * Competitive advantage * Strategic objectives * Improve customer relationship
* Competitive performance objectives * Quality improvement * Support for Corporate strategy * Enhance confidence * Top-management support * Risk of not investing in IT * Service to society * Good image * Teamwork * Job enrichment
Justification of Investment in IT Projects
Tactical considerations Tangibles
Financial * Security * Generating data * Budgets * ROI * Evaluation methods * Priority of investment * Involvement of senior managers * Product costs * Critical success factors * Revenue * Profit level
* Market research * Alternate technology
Operational
considerations Non-Financial
* Lead-time * Existing IT systems * Labour absence * Software * Set-up time * System integration * Inventory * Existing operations system * Defective rate of * Data migration products * Servers
Figure 7 Our version 1 of the IT investment justification model
69 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Justification of Investment in IT Projects
* Existing IT Systems * Budgets * Software * Securing future business * System integration * ROI * Existing Operations System * Competitive advantage * Long-term Costs and Benefits * Improve customer relationship * Strategic Objectives of Investment * Priority of investment in IT * Product costs * Data migration
* Servers * Quality improvement * Users' perception * Revenue * Competitive Performance Objectives * Profit level * Support for Corporate Strategy * Enhance confidence * Security * Top Management Support * Market research * Generating data * Risk of not investing in IT * Lead-time * Evaluation Methods * Alternate technology * Involvement of Senior Managers * Service to society * Performance Indicators/Critical * Labour absence Success Factors * Set-up time * Good image * Inventory * Teamwork
* Defective rate of products * Job enrichment
Figure 8 Our version 2 of the IT investment justification model
70 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic On the right side of the model we have identified seven key expectations for future benefits; four of them is financial and three is intangible. We would observe in parenthesis that these three intangible benefits, viz, securing future business, competitive advantage and improve customer relationship does no seem to be really intangible; is a firm securing its future business, so one can be sure that it has several tangible-financial consequences very soon.
Returning to the main point of argument around the model, i.e. the dominance of financial considerations at the decision process, we see that firms in the airline branch also rely mostly on financial calculations. If we have a look at a living example of IT investment calculation with the help of for example the NPV method, it is easy to understand that this kind of appraisal technique is rather limited. We have presented one such example in Appendix 9. Following the steps of calculation, we can see that it lacks a lots of aspects of IT which we have mentioned in the theoretical chapter, such as unexpected costs at implementation of new IT systems, IT’s effects on the company’s business process other than just 5% of increase in productivity, etc. So we agree with these university professors who created the model; applying just NPV method is quite unsatisfactory.
About intangible benefits of IT, the last thing companies think about in this branch is the employees’ job enrichment and teamwork. We can wonder why. A possible answer, which is our subjective or personal one, is that airlines have their root in the military; it is interesting to point it out that while democracy has gained domain nearly everywhere in the western society during the last half century, the military is an exception. Aviation, like military, has its strict rules and the habit that one person is in charge and is commanding while others obey.
In this thesis we have got acquainted with the basic concept of strategy; more specifically, we have focused to the models of the great strategist, Michael E. Porter. We intended to investigate if the branch we have chosen share Porter’s vision of the dominance of external forces, viz. competition and relation with outside partners. An other view is, as we have seen it in our theoretical chapter, that the value chain, viz. the company’s inner business process is the most important one. As from our results we could see, the past 5 years investment tendencies show, (see Graph 2 in Chapter 5.1) that those investments which would concern primarily internal processes, are not the ones which got priority; the main line is that sales & demand and marketing is the main concern, which makes us think that the exterior forces are much considered. Graph 8 from Chapter 5.2 suggests the same thought, i.e. that the majority of the companies is focusing to the problem of rivalry and sees IT as an effective weapon in this issue. As we have seen in the theoretical part of this thesis, Willcocks has accentuated that most executives are aware of IT’s capability of being a competitive weapon, and our empiric study has confirmed it. Nevertheless, we can conclude by saying that we have only one respondent who stated that IT is a useful weapon regarding all the five forces. The majority sees IT as a help only in the rivalry between existing competitors. Finally we can conclude by the statement that IT is recognized as a strategic resource; 11 of 17, i.e. 65 percent or two thirds of our respondents consider IT as a strategic resource.
71 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Post Scriptum
During this study we have discussed thoroughly the question of representativeness, i. e. how these 17 respondents reflect the whole population of one hundred European airlines. As we mentioned in Chapter 4.1, after analyzing the results we came to the conclusion that the collected data cannot be considered to be representative for the whole, geographically defined Europe including the originally considered one hundred airlines, but only for 83 of them which lie within the borders of a Europe defined by Professor Huntington. At Appendix 11 we have marked with asterisk those 17 airlines which get outside of this line and from which we have not got any response or feedback.
Concerning this remaining part of the population, viz. 83 airlines, in fact after deeper consideration about all thinkable aspects, we have found no evidence of any kind of considerable bias which would make this representativeness questionable; this subset of 17 companies which are our respondents seems to be reasonably proportional, in every investigated aspect, to the whole population, viz. the European airlines lying within the borders of a Europe defined by Professor Huntington. Nevertheless, strictly viewed we have no scientific-statistic proof of this representativeness.
We can, however, state with conviction that our respondent airlines all together ─ given their total annual revenue surpassing 12 billion Euros ─ represent a significant potential of using IT; consequently, their views, attitudes and habits do make a difference…
72 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic 7. References
7.1 Literature
Alter, S. (1999). Information System: A Management Perspective, Addison-Wesley, USA
Applegate, L. M., Austin, R. D. & McFarlan, F. W. (2003). Corporate Information Strategy and Management, McGraw-Hill/Irwin, New York
Ax, C., Johansson, C. & Kullvén, H. (2004). Den nya Ekonomistyrningen, Liber Ekonomi, Malmö
Bourrienne, L.A.F. de (1829). Mémoires sur Napoléon, le Directoire, le Consulat, L’Empire et la Restauration, Auguste Wahlen et H. Tarlier, Bruxelles
Bragg, S. M. (2002). Business Ratios and Formulas: A comprehensive Guide, Wiley, New York
Delanty, G. (1995). Inventing Europe: Idea, Identity, Reality, Macmillan, London
Earl, M. J. (1989). Management Strategies for Information Technology, Prentice Hall, Essex
Eisenhower, D. D. (1948). Crusade in Europe, Doubleday & Company, New York
Falk, T. & Olve, N-G. (2000). IT som strategisk resurs – Företagsekonomiska perspektiv och ledningens ansvar, Liber Ekonomi, Malmö
Grant, R. M. (1996). Contemporary Strategy Analysis – Concepts, Techniques, Applications, Blackwell, Cambridge, Massachusetts, USA
Hedman, J. & Kalling, T. (2002). IT and Business Models, Concepts and Theories, Liber, Malmö
Hill, L. T. (1989). Profit Strategies for Catalogers, The Hanson Publishing Group, Inc., Stamford, CT
Huntington, S. P. (1996). The clash of civilizations and the remaking of world order, Touchstone, New York
Karlöf, B., Nilsson, S. & Froment, M. Edenfeldt (2002). Strategi i ett styrelseperspektiv – en vägledning, Ekerlids Förlag, Stockholm
Kunskapens bok (1938). Natur och Kultur, Stockholm
73 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Laudon, K. C. & Laudon, J. P. (1999). Essentials of management information systems: Transforming business and management, Prentice Hall, New York
Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior Performance, The Free Press, New York
Remenyi, D., Money, A. & Twite, A. (1995). The effective measurement & managment of IT cost & benefits, Butterworth-Heinemann, Loughborough
Robert, M. (2001). Strategic supremacy – Pure and simple, PPS Inc., USA
Roos, G., von Krogh, G. & Roos, J. (2004). Strategi – en introduktion, Studentlitteratur, Lund
Strassman, P. A. (1990). The business value of computers, Information Economics Press, New Canaan
J Thomasson, J., Arvidson, P., Lindquist, H., Larsson, O. & L Rohlin, L.(2004). Den nya affärsredovisningen, Liber, Malmö
Thorp, J. (1998). The information paradox : realizing the business benefits of information technology, McGraw-Hill Ryerson, Toronto, Canada
Yeates, D. & Cadle, J. (1996). Project Management for Information Systems, Pitman Publishing, London
Walsh, C. (1997). Key Management Ratios, Addison-Wesley, Los Angeles
Willcocks, L., Feeny, D. & Gerd, I. (1997). Managing IT as a Strategic Resource, McGraw-Hill, Berkshire, UK
7.2 Methods books
Bryman, A. (2001). Social Research Methods, Oxford University Press, UK
Byrne, D. (2002). Interpreting quantitative data, Sage, London
Dahmström, K. (2000). Från datainsamling till rapport – att göra en statistisk undersökning, Studentlitteratur, Lund
Ekholm, M. & Fransson, A. (1984). Praktisk intervjuteknik, Almqvist & Wiksell AB, Stockholm
74 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Gilovich, T (1991). How we know what isn’t so – The fallibility of human reason in everyday life, The Free Press
Glaser, B. G. & Strauss, A. L. (1967). The discovery of grounded theory: Strategies for qualitative research, Aldine
Kvale, S. (1996). Den kvalitativa forskningsintervjun, Studentlitteratur, Lund
Körner, S. & Wahlgren, L. (2000). Statistisk dataanalys, Studentlitteratur, Lund
Magnani, L. (2000). Abduction, Reason and Science - Processes of Discovery and Explanation, Kluwer Academic/Plenum Publishers, USA
May, T. (1997). Social Research – Issues, methods and process, Open University Press, Buchingham, UK
Miles, M. B. & Huberman, A. M. (1984). Qualitative Data Analysis, Sage Publication, Beverly Hills, USA
Silverman, D. (2001). Interpreting Qualitative Data. Methods for Analyzing Talk, Text and Interaction, SAGE, London
Svensson, P. G. & Starrin, B. (1996). Kvalitativa studier i teori och praktik, Studentlitteratur, Lund
Wallén G. (1996). Vetenskapsteori och forskningsmetodik, Studentlitteratur, Lund
Wiedersheim-Paul, F. & Eriksson, L. T. (1991). ”Att utreda, forska och rapportera”, Liber, Malmö
7.3 Compendium
Wahlgren, L. & Isberg, P.E. (2002). ”Introduktion till Minitab for Windows”, Lund University, Department for Statistics, Lund, Sweden
7.4 Articles
Apostolopoulos, T. & Pramataris, K. (1997). Information Technology Investment Evalution: Investment in Telecommunication Infrastructure, International Journal of Information Management, 17,4. pp. 287-296
Bacon, C. J. (1992). The use of decision criteria in selecting information system, MIS Quarterly, 16 (3), pp. 335-354
75 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Ballantine, J. & Stray, S. (1998). Financial appraisal and the IS/IT investment decision making process, Journal of Information Technology, 13, pp. 3-14
Chan, D. (2000). The development of the airline industry from 1978 to 1998: A strategic global overview, Journal of Management Development, Vol. 19 No.6, pp. 489-514
Clemons, E. K. and Weber, B. W. (1994). Segmentation, differentiation, and flexible pricing: Experiences with information technology and segment-tailored strategies, Journal of Management Information Systems, 11 (2), pp. 9-36
Currie, W. (1995). The IT strategy audit: Formulation and performance measurement at a UK bank, Managerial Auditing Journal, 10 (1), pp. 7-16
Currie, W. (1989). The art of justifying new technology to top management, Omega, 17, pp. 409-418
Dos Santos, B. (2000). Improving the return on IT-investment: the productivity paradox, International Journal of Information Management, 20, pp. 429-440
Earl, M. J. (1992). Putting IT in its place: a polemic for the nineties, Journal of Information Management, 7, pp. 100-108
Gunasekaran, A., Love, P., Rahimi, F. & Miele, R. (2001). A model for investment justification in information technology projects, International Journal of Information Management, 21, pp. 349-364
Henderson, J. C. & Venkatraman, H. (1993). Strategic alignment: Leveraging information technology for transforming organizations, Journal, IBM Systems Journal
Hensdill, Ch. (1998). Hotels technology survey, Hotels Journal, pp. 51-76
Hitt, L. M. & Brynjolfsson, E. (1996). Productivity, business profitability, and consumer surplus: three different measures of information technology value, MIS Quarterly, 20 (3), pp. 121-142
Irani, Z. (1999). IT/IS investment decision making, Logistic and Information Management, 12(1), pp. 8-11
Jansson, M. (2004). “Flyget kan bli gratis”, an interview with Ryanair’s Nordic Chief Officer Lotta Linquist-Brosjö, daily newspaper Metro Sweden, Sept 6, 2004
Li, M. & Ye, R. (1999). Information technology and firm performance: Linking with environmental, strategic and managerial contexts, Information & Management, 35, pp. 43-51
76 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Parsons G. L. (1983). Information technology: a new competitive weapon, Sloan Management Review
Schabel, F. (CSC) Computer Sciences Corporation, Interview with Ingvar Soderlund, Chief Information Officer of the SAS Group, URL: http://www.csc.com/features/2004/40.shtml
Sethi, V. & King, W. R. (1994). Development of measures to assess the extent to which an information technology application provides competitive advantage, Management Science, 40 (12), pp. 1601-1626
Shao, B. (2002). Technical efficiency analysis of information technology investments: a two-stage empirical investigation, Information & Management, 39, pp. 391-401 Thompson, J. MIS (Managing Information Strategies), monthly magazine, Preparing for take off, URL: http://www.misweb.com/magarticle.asp?doc_id=23437&rgid=7&listed_months=-2
Ward, J., Taylor, P. & Bond, P. (1996). Evaluation and realization of IS/IT benefits; an empirical study of current practice, European Journal of Information Systems, 4, pp. 214- 225
Willcocks, L. & Lester, S. (1991). Information systems investments: Evaluation at the feasibility stage of projects, The International Journal of Technological Innovation and Entrepreneurship, 11(5), pp. 283-301
7.5 Electronic references
7.5.1 Home pages:
Adria Airways, URL: http://www.adria-airways.com/index.asp?l=en&p=qb&m=0
Air Lithuania, URL: http://www.airlithuania.lt/?action=view&id=1
Air Berlin, URL: http://www.airberlin.com/site/index.php?LANG=eng
Austrian Airlines, URL: http://www.aua.com/at/eng/default.htm
Blue1 Arlines, URL: www.blue1.com
Carnegie Mellon, School of Computer Science, (1998). Remedies of the Microsoft Monopoly,” Writer: [email protected]” URL: http://www2.cs.cmu.edu/~jcl/essays/monopoly.html, Pittsburgh, USA
77 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic CIO (Chief Information Officer) Magazine; article from Malcolm, A. (2003). Air NZ CIO thinks twice about IT, Auckland, New Zealand, URL: http://cio.co.nz/cio.nsf/0/AFDFA13DB9E3EA29CC256D43007E3F50?OpenDocument
Columbia University, New York, URL: http://www3.gsb.columbia.edu/courses/selection/describe.cfm?WHATCOURSE=B8799- 013&GSB=YES&Term=20051
Creative Research Systems, CA, USA, URL: http://www.surveysystem.com/sscalc.htm
Croatia Airlines, URL: http://www.croatiaairlines.hr/index.php?setlang=en
Easyjet, URL: http://www.easyjet.com/en/book/index.asp
Eutelsat, France (one of the world’s leading satellite operators) homepage URL: http://www.eutelsat.com/news/pdf/2003/cbb.pdf O’Connor, Vanessa, (2003). Boeing selects Eutelsat satellites for in-flight Internet, Paris
Finnair, URL: http://www.finnairgroup.com/group/konserni_1.html
Fly Bosnia, URL: http://www.flybosnia.com/
Griffith University, Australia, Lifecycle Management of IT projects in Construction (Chapter 4: Critical Review of Investment Appraisal Techniques), URL: www4.gu.edu.au:8080/adt-root/uploads/ approved/adt- QGU20030423.122317/public/03Chapter4.pdf
GMA, USA homepage containing “The 2003 Information Technology (IT) Spending Survey” by CSC Consulting, USA, URL: http://www.gmabrands.com/industryaffairs/docs/ITsurveylong.pdf
Heriot-Watt University, Edinburgh, Scotland, URL: http://www.icbl.hw.ac.uk/ltdi/cookbook/info_likert_scale/
IATA, International Air Transport Association, URL: http://www.iata.org/Whip/Public/frmMain_Public.aspx?WgId=67&FileSortField=Posted &FileSortOrder=Asc
Industry Week, Leadership in Manufacturing, weekly business magazine, Cleveland, OH USA, URL: http://www.industryweek.com/iwinprint/data/chart4-8.html
Kuijpers, R. Executive chairman, URL: http://www.flysn.com/manualuploads/annualreport2003.pdf
LTU International Airlines, URL: http://www.ltu.de/index.html?SiteID=0&LangID=2 The Manager, Internet Portal about management topics, URL:
78 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic http://www.themanager.org/Disclaimer/aboutus.htm
Meridiana Airlines, URL: http://www.meridiana.it
Montenegro Airlines, URL: http://www.montenegro-airlines.cg.yu/eng/
Niki Luftfahrt, URL: http://www.flyniki.com/
ObjectPlanet Inc., Norway homepage, URL: http://objectplanet.com/company.html
Office of Government Commerce, UK, URL: http://www.ogc.gov.uk/
Prairie Research Associates Inc., USA, URL: http://www.pra.ca/resources/history.pdf
SAS, URL: http://www.scandinavian.net/EC/Appl/Home/FrontDoor/0,3479,LNG%253Dsv%2526SO %253DCC72C5993E8741D1_97092C8DA005C503%2526MKT%253DSE,00.html
SAS Braathens, URL: http://www2.sasbraathens.no/Pages/NO/OmSASBraathens/omSelskapet.html
Smart Wings, URL: http://www.smartwings.net/en/
SN Brussels Airlines, URL: http://www.flysn.be/en_be/home/default.aspx
Strategic Futures, URL: http://www.strategicfutures.com/articles/stratpln/stratpln.htm
7.5.2. Home Pages for the 83 airlines which did not sent back our survey
Ada Air, Albania, URL: http://www.adaair.com/ Aegean Air, Greece URL: http://www.aegeanair.gr/aegeanen/home/index.asp Aer Arann, Ireland URL: http://www.aerarann.ie/ Aer Lingus, Ireland URL: http://www.aerlingus.com Aeroflot, Russia URL: http://www.aeroflot.org/ Aerosvit, Ukraine URL: http://www.aerosvit.ua/ Air Armenia, Armenia URL: http://www.armenianairlines.com/ Air Aurigny, UK URL: http://www.aurigny.com/ Air Baltic, Latvia URL: http://www.airbaltic.com/ Air Corse, France URL: http://www.corsair.fr/corsair Air Dolomiti, Italy URL: http://www.airdolomiti.it/en/email-send.asp Air Europa, Spain URL: http://www.air-europa.com/dadeco/home_page?p_codlang=EN Air France, France URL: http://airfranceconsulting.airfrance.com Air Jet, France URL: http://www.air-jet.fr/ Air Luxor, Portugal URL: http://www.airluxor.com/ Air Malta, Malta URL: http://www.airmalta.com/
79 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Air One, Italy URL: www.flyairone.it Air Polonia, Poland URL: http://www.airpolonia.com/ Air Slovakia, Slovakia URL: http://www.airslovakia.sk/ Air Ukraine, Ukraine URL: www.airukraine.com.uaAir Airlines Siberia, Russia URL: http://www.s7.ru/en/index.html Alitalia, Italy URL: http://www.alitalia.it/ AlpiEagles, Italy URL: http://www.alpieagles.com/en/contatti.htm
Antonov Airlines, Ukraine Astraeus, UK URL: http://www.flyastraeus.com/ Azzurra Air, Italy URL: http://www.azzurraair.it/eng/Comp_profilo.asp Basiq Air, Holland URL: http://www.basiqair.com/ Bellview Airline, Holland URL: http://www.bellviewairlines.nl/ Blue Panorama, Italy URL: http://www.blue-panorama.com/ Britannia Airways, UK URL: http://www.britanniaairways.com/ British Airways, UK URL: http://www.britishairways.com/ British Midland Airways, UK URL: http://www.flybmi.com/bmi/en- gb/aboutbmi/aboutbmi.aspx Bulgaria Air, Bulgaria URL: http://www.air.bg/en/ Carpatair, Romania URL: http://www.carpatair.com/contact_us/ Condor/Thomas Cook, Germany URL: http://www1.condor.com/tcf/de/index.jsp CSA, Czech Republic URL: http://www.czechairlines.com/ Cyprus Airways, Cyprus URL: http://www.cyprusairways.com/ Estonian Air, Estonia URL: http://www.estonian-air.ee/ Eurofly, Italy URL: http://www.eurofly.it/eurofly/portal/cn/B2C_IT/Uffici Eurowings, Germany URL: http://www.eurowings.com/en/ Excel Airways, UK URL: http://www.xl.com/ FlyBaboo, Switzerland URL: http://www.flybaboo.com/ Flybe, UK URL: http://www1.flybe.com/ Germanwings, Germany URL: http://www4.germanwings.com/ Grossmann Air, Austria URL: http://www.grossmannair.com/ Hahn Air, Germany URL: http://www.hahnair.de Hemus Air, Bulgaria URL: http://www.hemusair-varna.com/ Iberia, Spain URL: http://www.iberia.com Icelandair, Iceland URL: http://www.icelandair.com/ Jat, Jugoslavia URL: http://www.jat.com/ Jet2.com, UK URL: http://www.jet2.com/cgi- bin/airkiosk/I7/181002i?LS=2&LANG=EN KLM, Holland URL: http://www.klm.com/travel_en/splash.jsp Kras Air, Russia URL: http://www.krasair.ru:8080/doc.jsp?id=1603 LOT, Poland URL: http://www.lot.com/app/index.jsp?area=gateway&type=default®ion=INT&lang=pl Lufthansa, Germany URL: http://konzern.lufthansa.com Lux Air, Luxembourg URL: http://www.luxair.lu/ Macedonian Airlines, Macedonia URL: http://www.mat.com.mk/news.htm Maersk Air, Denmark URL: http://www.maerskair.dk/en Malév, Hungary URL: http://www.malev.hu
80 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Martinair, Holland URL: http://www.martinair.nl/ Moldavian Airlines, Moldavia URL: http://www.mdv.md/ MyTravelLite, UK URL: http://www.mytravellite.com Norvegian, Norway URL: http://www.norwegian.no/ Olympic Airways, Greece URL: http://195.167.49.234/ PGA, Portugal URL: http://www.flypga.com/ Ryanair, Ireland URL: http://ryanair.com/ SkyEurope, Slovakia URL: http://www.skyeurope.com Skyways, Sweden URL: http://www.mat.com.mk/news.htm Slovak Airlines, Slovakia URL: http://www.slovakairlines.sk Spanair, Sweden URL: http://www.spanair.com/ Sterling, Denmark URL: http://www.sterlingticket.com/ Swiss International, Switzerland URL: http://www.swiss.com/ TAP Air Portugal URL: http://www.tap.pt/eportal/v10/PT/jsp/index.jsp TAROM, Romania URL: http://www.tarom.ro/romana/index.php Transaero, Russia Transavia, Holland URL: http://www.transavia.nl/ Turkish Airlines, Istambul URL: http://www.turkishairlines.com/en/index.php Ukraine International Airlines, Ukraine URL: http://www.ukraine- international.com/eng/ Waltair, Sweden URL: http://www.waltair.se/ Virgin Atlantic, UK URL: http://www.virgin-atlantic.com Virgin Express, Belgium URL: http://www.virginexpress.com/ Wizz air/Hungary, Poland URL: http://www.wizzair.com Volare, Italy URL: http://buy.volareweb.com/jsp/web/index.jsp
7.5.3 Annual rapports to download:
IATA, URL: http://www.iata.org/NR/ContentConnector/CS2000/SiteInterface/sites/about/file/annual_r eport_2004.pdf
SAS Group, URL: http://www.scandinavian.net/12208/2003eng_finalfinal.pdf
SN Brussels Airlines, URL: http://www.flysn.com/manualuploads/annualreport2003.pdf
81 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendices
Appendix 1: Introduction letter
Lund, 30th of November, 2004
Dept. of Informatics Klara Eriksson c/o Gertrud Dahlman Secretary
Ole Römers väg 6 223 63 LUND – SWEDEN
Attn: Mr. Robert van der Burg, managing director, KLM financial services
Dear Sir,
We are two informatics students and are writing our master thesis about European airlines’ IT-strategy and investments; this is the central focus of the survey we send here attached.
Your opinion and views are very important to us; this survey should not take longer than 15 minutes and requires no other data than those you keep in mind as a leader at your company; furthermore, the few alternatives we have indicated as possible answers make this survey easy and quick to complete. On the other hand, we are convinced that you as a professional may find some interesting points in it, profitable somehow- somewhere along your daily activities; so at the end you won’t consider these few moments as a waste of time.
This study, conducted at Lunds University with the assistance of a team of professors, has the goal to get a good picture about how the main actors in airline industry are thinking about the rôle of information technology. We have sent this survey to ca 100 airlines in Europe and the value of this study depends upon each respondent completing the questions. Nevertheless, you may jump over any question you feel uncomfortable about. Your comments are always welcome. These are complex issues and additional information in any form, like comments or attached documents will add value to the survey.
82 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic The result of this study will be published at Lunds University and read by IT and business students and professionals. If you are interested to get a copy, please say so. Thank you for helping this study showing the right picture about IT in your industry. We ask you to send back the survey questionnaire within ten days, if it is possible.
Best regards,
Klara Eriksson Selma Mulagic
PS Comments and documents are also welcome in the following languages: French, German, Italian, Spanish, Swedish, Danish, Norwegian, Hungarian, Croatian and Bosnian.
83 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 2: Survey questions
Kindly mark check boxes by double-clicking on it and choosing default value: checked/not checked and OK. IT-Investment is a central concept in this survey; by investment we mean an IT-related initiative aiming to introduce something new or better than the existing resource and not usual operational costs or maintenance.
Your task/title at the company is: ......
Q1. Company characteristics:
A. Number of employees:
< 200 200 – 5 000 > 5 000
B. Number of passengers annually
< 100 000 100 000 – 2 millions > 2 millions
C. Number of aircrafts your Company owns:
< 10 10 – 100 > 100
D. Annual revenue
< 500 million € 500 – 5 000 million € > 5 000 million €
Q2. Do you consider IT at your company as a
strategic resource support function cost of doing business strength weakness opportunity threat other, such as ……………………………………………………………….
Q3. You view IT rather from a
technical approach business approach both technical and business approach
84 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Q4. Please rate the level of IT investment you have accomplished during the past five years period: High Medium Low Business process
Marketing Sales and Demand Fulfilment Supply chain (including distribution operations and management) Procurement (purchasing goods) R&D/ New Products Internal Services
IT specification
hardware new software application developing e-business software purchasing e-business software upgrading present applications system integration networking implementing new systems (like ERPs ) marketing on Internet IT-related security applications human IT skills other, such as……………………………………………………
Q5. Below, you find a list of appraisal techniques for justification of an IT-investment; as each investment displays its own characteristics, you may probably use a different set of techniques/methods each time you appraise the effectiveness of a specific IT project/investment. Please specify how often you apply these techniques:
Always Often Sometimes Seldom Never Strategic Impacts Strategic Objectives of Investment in IT Support for Corporate Strategy Top Management Support Competitive Performance Objectives Long-term Cost and Benefits
Tactical Considerations Performance Indicators/Critical Success Factors Generating Data Evaluation Methods Security Involvement of Senior Managers
Operational Considerations Existing IT Systems Data Migration Software Users Perception Servers System Integration Existing Operations System Other, such as …………………………………………..
85 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Q6. Please specify how important the following intangible and tangible considerations are when appraising the benefits you expect from IT-investments:
Crucial Important Occasionally Not Important Important at all Intangible Considerations: Competitive Advantage Service to Society Job Enrichment Quality Improvement Improve Customer Relationship Enhance Confidence Securing Future Business Risk of not Investing in IT Teamwork Good Image Other, such as……………
Tangible Considerations: Budgets Priority of Investment ROI (Return on Investment) Product Costs Market Research Alternate Technology Profit Level Revenue Lead-time Inventory Labour Absence Defective rate of Products Set-up time Other, such as……………………………
Do you agree with the following statements? Strongly Agree Neutral Disagree Stron agree disagree
Q7. At our company managers find it difficult to justify the cost associated with purchase, develop- ment and use of IT in financial terms. Q8. The difficulties in measuring benefits and Costs are thought to be a major constraint to IT investment. Q9. What's the point of spending money on IT if your customers don’t see the value? Q10. We spent enormous amounts of money adding features to our IT products to create competitive advantage, but we didn’t determine whether customers attributed enough value to those features to order to justify the investment. Q11. The system we run is quite old and we’re looking at replacing it, but we have to determine whether we need a system that will cost a few million dollars or tens of millions.
86 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Comments: …………………………………………………………………………………………………………
Q12. If you are doing calculations for judging an IT-investment, you use:
NPV, Net Present Value IRR, Internal Rate of Return PP, Payback Period ROI, Return on Investment ROCE. Return on Capital Employed EVA, Economic Value Added Other, such as ……………………………………………………………………….
Q13. According Porter (Harvard) there are five forces determining a company’s strategy; in which “battle” can IT be a useful weapon?
the threat of new companies entering rivalry with existing competitors the pressure from substitute products the bargaining power of buyers the bargaining power of suppliers
Comments: ……………………………………………………………………………………..
Q14. The greatest challenges for your Company in the nest five years are:
changes concerning e-ticketing and other new IT-measures integrating parts of network competing with low cost airlines security issues deciding about outsourcing reducing costs drastically implementing new systems e-business finding new distribution channels new actors entering from outside Europe building our own software applications and reducing our dependence from IT suppliers other, such as………………………………………………
Q15. The question you would like to ask…………………….?
Q16. …and the answer to this question would be……………………….?
Thanks for your patience and engagement! ☺
87 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 3: Company performance matrix
Company Characteristics
Performance Matrix
Annual Revenue Annual < 500 million € 500 – 5 000 million € > 5 000 million Number € Of < 100 000 Fly Bosnia Passengers Air Lithuania 100 000 – 2 Croatia Airlines millions Montenegro Airlines Adria Airways Blue1 Smart Wings Niki Luftfahrt > 2 millions Meridiana LTU Germany SAS Group SAS Braathens SN Brussels Easyjet England Air Berlin Finnair Austrian Airlines
88 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 4: Company resource matrix
Company Characteristics
Resource Matrix
Number of aircrafts the company owns Number < 10 10 – 100 > 100 Of < 200 Montenegro Employees Airlines Fly Bosnia Air Lithuania Niki Luftfahrt 200 – 5 000 SN Brussels Croatia Airlines Airlines LTU Germany Adria Airways Easyjet England Blue1 Air Berlin SAS Braathens Smart Wings > 5 000 Meridiana SAS Group Finnair Austrian Airlines
89 Appendix 5: List of respondents
List of respondents
Name Task/Title Company Country/City
1. * IT Sales & E>Business LTU International Germany / Düsseldorf Airways 2. Natasa Djukanovic Industry Development Manager Montenegro Airlines Montenegro / Podgorica 3. Damir Sprem Executive Vice President Finance Croatia Airlines Croatia / Zagreb 4. John Thorp IT Director Easyjet Airlines England / Worthing (Sussex) 5. * Vice President Corporate Finance SN Bruxelles Airlines Belgium / Zaventem 6. * Chief Executive – General Manager Meridiana Italy / Costa Smeralda 7. * Chief Information Officer (CIO) Adria Airways Slovenia / Ljubljana 8. Stefan Wentjärvi Vice President Finance & Administration Blue1 Finland / Helsinki-Vantaa 9. * UK representative Air Berlin Germany / Berlin 10. * Chief Information Officer (CIO) SAS Braathens Norge / Avaldnes 11. * Project Manager Smart Wings Czech Republic / Praha 12. Pirjo Myyry Director Development Process Finnair Finland / Helsinki 13. Henry Goldwood Managing Director Fly Bosnia Bosnia and Herzegovina / Sarajevo
14. * Chief Information Officer (CIO) Air Lithuania Lithuania / Kaunas 15. * Director Financial Controlling Niki Luftfahrt Austria / Vienna 16. * VP Corporate Process-, Project- & IT Services Austrian Airlines Austria / Vienna 17. Ingvar Söderlund VP & CIO SAS Group Scandinavia / Stockholm
* Anonymous
90 Appendix 6: Statistical tables
Data Display
Company Row Size Airline 1 Small Adria 2 Small Air Lithuania 3 Small Fly Bosnia 4 Small Montenegro 5 Small Niki Luftfahrt
6 Medium Blue1 7 Medium Croatia 8 Medium Meridiana 9 Medium SAS Braathens 10 Medium Smart Wings 11 Medium SN Brussels
12 Large Air Berlin 13 Large Austrian 14 Large Easyjet 15 Large Finnair 16 Large LTU
17 Giant SAS Group
Table 1 List of airlines divided by company size
Data Display
Row Company Profile Respondent Profile Airline 1 Cost Leadership Finance Niki Luftfahrt 2 Cost Leadership IT & Technique Easyjet 3 Cost Leadership IT & Technique Smart Wings 4 Cost Leadership Overall leadership Air Berlin
5 Differentiation Finance Blue1 6 Differentiation Finance Croatia 7 Differentiation Finance SN Brussels 8 Differentiation IT & Technique Adria 9 Differentiation IT & Technique Air Lithuania 10 Differentiation IT & Technique Austrian 11 Differentiation IT & Technique Finnair 12 Differentiation IT & Technique LTU 13 Differentiation IT & Technique Montenegro 14 Differentiation IT & Technique SAS Group 15 Differentiation IT & Technique SAS Braathens 16 Differentiation Overall leadership Fly Bosnia 17 Differentiation Overall leadership Meridiana Table 2 List of airlines divided by company- and respondent profile
91 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Tally for Discrete Variables: Company Size; Company Profile; Respondent Profile
Company Size Count Percent
Giant 1 5,88 Large 5 29,41 Medium 6 35,29 Small 5 29,41 N= 17 100,00
Company Profile Count Percent Respondent Profile Count Percent
Cost Leadership 4 23,53 Finance 4 23,53 Differentiation 13 76,47 IT & Technique 10 58,82 N= 17 100,00 Overall leadership 3 17,65 N= 17 100,00
Table 3 Statistics about company size, company profile and respondent profile
92 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 7: Traditional calculation techniques
The formulas mentioned below are taken from Bragg and Walsh. 152 153
Payback Period: Time needed to recover initial investment expenditure; projects are accepted if their payback periods are deemed appropriate by guidelines established within the company.
Formula:
Where C0 denotes the initial investment, Ct cash flow for time period t and n the duration in years.
Strengths: It can easily calculate and interpret and reflect a real world in which technology costs less over time and becomes quickly obsolete; it can also be regarded as a complement to other techniques.
Weaknesses: It ignores the time value of money and encourages a short-term, rapid-return focus at the expense of long-term benefits. It fails also to account for qualitative factors and risks.
ROI (Return on Investment): A measure of a corporation's profitability, it shows how effectively the company uses its capital to generate profit; the higher the ROI, the better.
Formula: Net Income/Book value of Assets = ROI
Alternatively:
Net Income + Interest (1 – Tax Rate)/Book values of Assets = ROI
Strengths: It can easily calculate and interpret.
Weaknesses: It ignores the time value of money and focuses on accounting income, not cash flows, which are affected by how a company treats depreciation and which cash flows are defined as capital.
IRR (Internal Rate of Return): A rate of discount at which a project’s net present value equals zero; projects are accepted when IRR is in excess of the opportunity.
152 Bragg, S. M. (2002). Business Ratios and Formulas: A comprehensive Guide, Wiley, New York 153 Walsh, C. (1997). Key Management Ratios, Addison-Wesley, Los Angeles
93 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Formula: Payoff / Investment - 1
Strengths: It is widely used and recognized and it can easily compare rates.
Weaknesses: It is difficult to calculate for long-term projects with multiple payoffs.
NPV (Net Present Value): Present value of the investment’s money flows using a certain rate of discount.When the net present value is positive, the investment projects is accepted.
Formula:
Where Co denotes the initial investment, Ct the cash flow for time period t, t the time period in years, n the duration in years and rt the interest rate for time period t.
Strengths: It is considered as a theoretically superior method as it accounts for time value of money as well as it allows comparison of mutually exclusive projects and projects of unequal duration.
Weaknesses: the calculation is not easy and it can be difficult to determine a rate which is appropriate; furthermore, it ignores the qualitative factors.
ROCE (Return on Capital Employed): A measure of the returns that a company is realizing from its capital.
Formula: Net profit/capital employed
Calculated as profit before interest and tax divided by the difference between total assets and current liabilities, this ratio represents the efficiency with which capital is being utilized to generate revenue.
Strengths: It gives clear information to the investors about the annual return of the invested capital.
Weaknesses: It is only a ration and does not take in consideration other factors.
EVA (Economic Value Added): EVA - style measurement systems are widely used today because they provide guidance to company managers. It is a measurement of operating results by which shareholder can judge management.
Formula: Profit after tax – total annual cost of capital
94 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Strengths: EVA is considered as a better measure than profits because it includes the calculation of the total cost of financing the operations.
Weaknesses: EVA is focused on profits but it ignores the total market value relative to the amount of investment capital.
95 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 8: Variable Measurement Scales
No investment Low Medium High
Q4. Please rate the level of IT investment you have accomplished during the past five years period: 0 1 2 3
Never Seldom Sometimes Often Always Q5. You may probably use a different set of techniques/methods each time you appraise the effectiveness of a specific IT 0 1 2 3 4 project/investment. Please specify how often you apply these techniques:
Not Occasinally important important Important Crucial at all Q6. Please specify how important the following intangible and tangible 0 1 2 3 considerations are when appraising the benefits you expect from IT-investments:
96 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 9: An example for an IT investment appraisal calculated by NPV
Name of the project: PWIME, Project Web Information Management Extranet
Initial investment (I0) cost: $ 50 000; Expected duration of benefits: 4 year; Discount rate for devaluation of money: 9 % Production cost per year (labour): 48 weeks x 40 hrs x $20/hr x 25 workers = $ 960 000; Expected productivity improvement: 5 % starting from the second year after the implementation; Expected benefits per year counted by: production cost x productivity improvement: $ 960 000 x 0,05 = $ 48 000;
*** The formula used for the calculation:
NPV = -I0 + ∑ CF; where -I0 denotes the initial investment cost and ∑ CF the sum of all cash flow expected as income as the investment is implemented.
NPV is supposed to be higher than null so as the investment could be judged as profitable.
∑ CF includes cash flows counted by year; CF1 denotes the first year and CFn the last year, while r denotes the estimated devaluation of money, so called discount rate:
1 2 n ∑ CF = CF1/(1+r) + CF2/(1+r) + …+ CFn/(1+r) ; in this case:
YEAR 1: CF1: $ 0; 2 YEAR 2: CF2: $ 48 000 / 1,09 = $ 40 400; 3 YEAR 3: CF3: $ 48 000 / 1,09 = $ 37 065; 4 YEAR 4: CF4: $ 48 000 / 1,09 = $ 34 004;
∑ CF = $ 0 + $ 40 400 + $ 37 065 + $ 34 004 = $ 111 469;
NPV = - $ 50 000 + $ 111 469 = $ 61 469;
As we see, the IT investment should yield in a profit of $ 61 469 as a result, according to the NPV calculation method. 154
154 Griffith University, Australia, Lifecycle Management of IT projects in Construction (Chapter 4: Critical Review of Investment Appraisal Techniques), URL: www4.gu.edu.au:8080/adt-root/uploads/ approved/adt- QGU20030423.122317/public/03Chapter4.pdf
97 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 10: Questions and answers based on Likert scale
Likert scale
2 1 0 -1 -2
Strongly Agree Neutral Disagree Strongly agree Disagree
Figure 9 Likert scale
Question 7:
“At our company managers find it difficult to justify the cost associated with purchase, development and use of IT in financial terms.”
Response from the survey is:
Median of Q7
Median of Q7 = -1
Question 8:
“The difficulties in measuring benefits and cost are thought to be a major constraint to IT investment.”
Median of Q8
Median of Q8 = -1
Question 9:
“What’s the point of spending money on IT if your customers don’t see the value?”
98 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Median of Q9
Median of Q9 = 1
Question 10:
“We spent enormous amounts of money adding features to our IT products to create competitive advantage, but we didn’t determine whether customers attribute enough value to those features to order to justify the investment.”
Median of Q10
Median of Q10 = -1
Question 11:
“The system we run is quite old and we’re looking at replacing it, but we have to determine whether we need a system that will cost a few million dollars or tens of millions.”
Median of Q11
Median of Q11 = 0
99 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic Appendix 11: List of the 100 airlines of our study155
Group 1: Giants Group 2: Well-established old national carriers Group 3: New national carriers/ "second largest" quality airlines Represented by: Represented by: Represented by: SAS Group, Austrian Airlines, Austria SN Brussels, Belgium Scandinavia Finnair, Finland SAS Braathens, Norway Others: Others: Others: Lufthansa, Germany Malév, Hungary Ada Air, Albania* Air France, France CSA, Czech Republic Bulgaria Air, Bulgaria* British Airways, UK Aeroflot, Russia* Swiss International, Switzerland Alitalia, Italy Aer Lingus, Ireland British Midland Airways, UK Iberia, Spain Cyprus Airways, Cyprus* Air Slovakia, Slovakia KLM, Holland Icelandair, Iceland Virgin Atlantic, UK Jat, Jugoslavia Transavia, Holland LOT, Poland Olympic Airways, Greece* TAP Air Portugal TAROM, Romania Turkish Airlines,Turkey* Air Malta, Malta Lux Air, Luxembourg
Group 4: Regional airlines Group 5: Large low-fare carriers Group 6: Medium-sized or small low-fare carriers Represented by: Represented by: Represented by: Meridiana, Italy Easyjet, UK Smart Wings, Czech Republic Blue1, Finland Air Berlin, Germany Others: Others: Others: Air Corse, France Ryanair, Ireland Wizz air/Hungary, Poland Aegean Air, Greece* Germanwings, Germany SkyEurope, Slovakia Air One, Italy Virgin Express, Belgium Jet2.com, UK Carpatair, Romania Volare, Italy Basiq Air, Holland Eurowings, Germany Sterling, Denmark MyTravelLite, UK Azzurra Air, Italy Flybe, UK Norvegian, Norway Skyways, Sweden Air Polonia, Poland Air Dolomiti, Italy Air Aurigny, UK AlpiEagles, Italy Blue Panorama, Italy FlyBaboo, Switzerland Aer Arann, Ireland
155 see the list of home pages of these airlines in Chapter 7.5.1 & 7.5.2 * Airlines and countries outside Huntington’s Europe
100 IT Investments at European airlines Is IT viewed as a strategic resource? Eriksson & Mulagic
Group 7: New national airlines of new independent Group 8: New private countries airlines
Represented by: Represented by: Adria Airways, Slovenia Croatia Airlines, Croatia FlyBosnia, Bosnia and Herzegovina Montenegro Airlines Air Lithuania, Lithuania Others: Others: Air Armenia, Armenia* Maersk Air, Denmark Estonian Air, Estonia PGA, Portugal Ukraine International Airlines, Ukraine* Air Ukraine, Ukraine* Moldavian Airlines, Moldavia* Antonov Airlines, Ukraine Macedonian Airlines, Macedonia Air Europa, Spain Air Baltic, Latvia Air Luxor, Portugal Slovak Airlines, Slovakia Hahn Air, Germany Hemus Air, Bulgaria* Kras Air, Russia* Transaero, Russia* Aerosvit, Ukraine* Airlines Siberia, Russia*
Group 9:Small private airlines Group 10: Holiday/charter airlines
Represented by: Represented by: Niki Luftfahrt LTU Germany Others: Others: Grossmann Air, Austria Condor/Thomas Cook, Germany Air Jet, France Martinair, Holland Waltair, Sweden Spanair, Sweden Bellview Airline, Holland Eurofly, Italy Astraeus, UK Excel Airways, UK Britannia Airways, UK
* Airlines and countries outside Huntington’s Europe
101