Transcript Value Innovation - Dakota State University

The Universal Solvent
Carr, Chapter 5
Richard T. Christoph
INFS 780
Technical advances often destroy
 Railroad eliminated locational
advantages firms had

Suddenly, it was easy to ship goods over
long distance
 Telephone halted advantages of
long-term relationships

I could talk about products anywhere
 IT is doing the same

Consider on-line investing
Carr notes (pg 88):
 IT can corrode advantages not just
in one or a few areas, but across
many aspects of a company’s
business.

Traditional advantages tend to dissipate as
the function is automated
 Is this right?
Software impact
 Automated systems in customer
service (or other areas) removes
differences in response times


All players in the industry will have about
the same response parameters
Not possible to achieve distinction when
using the same software
 This is great if this function is not
your basis for advantage
Homogenization
 Functions become the same from
firm to firm
 The Internet has dramatically
increased this impact


Advantages based in proprietary networks
are gone
Carr suggests the Internet has pushed
power away from firms and into customers
Compare catalog order vs. Internet
 The catalog places premium on


Catalog size, quality
 Allows my store to differentiate
Cost of distribution is high,
 mailing list management critically important
 Internet

Focus on speed
 Customer can “drop” my store for another
 Cheap distribution costs
 All internet sites look alike – no advantage for size
Porter’s Comments on the Internet

Internet provides easy access for buyers to
information


Traditional Sales force not as critical


Reduces barriers to entry
Proprietary systems decrease


Buyer power rises
Rivalry increases
The main benefits from the Internet
(access, information) reduce the
transaction costs and profitability to many
firms
Competitive Advantage
 Sustainable advantage

Firm can build a long-term advantage over
peers

IT likely will not do this today
 Leverageable Advantage

A fleeting advantage that will be quickly
copied by competitors

IT can certainly provide this – but not for long
Value Innovation
 Why do firms exist?

Economists state that markets are the
most efficient way to distribute goods


Think of commodities markets for oil, wheat, corn,
etc.
If this is true, why create a firm to
distribute goods in place of a market?

Firms must add expense over a plain market!
Why do firms exist?
 Remember Ronald Coase? He
suggested that transaction costs
were the reason firms are created.
 Transaction costs are all costs buyer
and seller incur as they gather
information and negotiate a sale.


These quickly add up
Consider trying to buy a car – what do you have to
do?
Transaction costs
 Costs are higher when the product is
complex and varied; conversely, costs
are lower when the product is a
commodity


Corn futures markets work well since there are low
transaction costs
Home sales have high transaction costs, so firms
(Realtors) have developed
 When firms are created, functions are
“aggregated” together
What about technology?
 How has technology changed
transaction cost over time?



More information is quickly available
This lowers transaction costs
Reduces need for the middle firm
 Some argue that firms will
disappear and all of us become
contractors

Technology allows dis-aggregation
Disaggregation Trends
 What does this mean?
 Why do it?
 Is this not the exact opposite of
vertical/horizontal integration?
Which is right?
 How do transaction costs enter in
this?
Transaction Costs could Cause larger
firms
 Carr notes that as IT lower
transaction costs, vertical
integration could increase leading
to larger and larger firms
 This is normal in maturing markets


Lower transaction costs allow easier
management
Consider WalMart
Bottom line
 Do not confuse the business with
the Information system

As information becomes easily available, it
become less costly and possibly worth
less (since all have about the same
information)
 Consider ERP systems
ERP & Strategy
From Peoplesoft: Managing ERP Applications for Strategic Advantage
􀂄 “Improved Cost-Effectiveness.
Proactive management and support
means that problems are prevented
before they decrease ROI. customers
report lower maintenance and operating
costs, often with a savings of 20 percent
or more”
Would Drucker say this focuses on
effectiveness or efficiency?
ERP & Strategy
From Peoplesoft: Managing ERP Applications for Strategic Advantage
􀂄 “Increased Efficiency. A first-call resolution
up to 50 percent for user functionality
questions increases the productivity of
customers, freeing them to focus on
managing and aligning workforce with
corporate needs and increasing employee,
partner, and customer satisfaction.”
Does Porter note this type of saving as a
strategic one?
ERP & Strategy
From Peoplesoft: Managing ERP Applications for Strategic Advantage
􀂄 “Expanded Strategic Focus. With all
of the routine and mundane tasks
covered, clients have the greater ability
to leverage new capabilities within their
ERP systems, like self-service functions
for managers and employees”
Would Carr state that these “strategic”
benefits are able to build a proprietary
competitive advantage?
What do these mean?
 I suggest that these are really efficiency
based


This means such benefits, while valuable, are NOT
strategic
Could these sorts of benefits be infrastructural in
nature?
 Consider the electricity grid or highway
system

Could we not point to similar benefits? If so, they
are certainly NOT strategic.
IT examples
 Carr notes that ERP systems allow
all firms to be equally efficient


Eliminates the efficient firm advantage
Best practices become universal practices

What does this mean?
 How do we compete now


Is strategy dead?
What does this mean for IT?
My Conclusions
 ERP systems will tend to increase
rivalry since all firms become more
efficient

No longer can an unusually effective IT
Dept. provide unique apps the yield
competitive advantage


Many ERP customization is done by 3rd parties –
available to all firms
Customer clearly wins – but firm’s profit
will probably not increase
My Conclusions
 ERP may remove IT as a source of
competitive advantage for a single
firm


ERP enforces discipline – you must do it
their way. IT groups focus on the install of
the ERP
ERP systems are so big that they tend to
use all available IT resource

After ERP install, what is the difference between
Firm 1’s and firm 2’s information capability?
My Conclusions
 Differentiation will be harder to
achieve since more firms can do it.


If ERP allows firms to customize marketing
(or any other aspect of business) it is
logical that more firms will try to do it.
Thus, differentiated marketing will become
the norm

Consider “Web-based marketing” – everyone now
does it. How can you build a sustainable
advantage on that?
My Conclusions
 ERP systems are infrastructural


Given the prior issues, I believe that ERP
systems are becoming an infrastructural
technology.
This means that all firms need it to
compete at all


Similar to electricity, telephone, cash registers,
etc
If this is true, it means a fundamental
change in the IT profession.
IT Changes
 I submit that IT will change and that
successful IT pros must:




Focus increasingly on the business side –
not the technology side
Carefully build accurate cost justification
models
Assume that basic IT issues will be
outsourced
Find the IT components that may have
strategic value and build a business case
there.