Was it worth it? Dynamic Capabilities as a means of evaluating ERP implementation Business Information Systems Simon Woodworth 5 April 2007 Business Information Systems Simon Woodworth 5 April 2007

Questions to ask Does implementing an Enterprise System influence an organisation’s Competitive Advantage? For better or worse? Is competitive advantage influenced directly by the ES technology or other associated factors? Does implementing an Enterprise System influence an organisation’s Competitive Advantage? For better or worse? Is competitive advantage influenced directly by the ES technology or other associated factors?

What is an Enterprise System? A working definition: A suite of applications, embodying best practices, that integrates data, processes, resources and functions across an organisation and provides central planning and control of those data, processes, resources and functions Sources: Scott2002, Grant2005, King2006, Davenport1998, Huang2004, Shang2003, Huang2004, Rikhardsson2006, Rashid2002, Somers2003, Davenport2000, Ward2005, Hendricks2006 as well as others A working definition: A suite of applications, embodying best practices, that integrates data, processes, resources and functions across an organisation and provides central planning and control of those data, processes, resources and functions Sources: Scott2002, Grant2005, King2006, Davenport1998, Huang2004, Shang2003, Huang2004, Rikhardsson2006, Rashid2002, Somers2003, Davenport2000, Ward2005, Hendricks2006 as well as others

Enterprise System Characteristics Organisation - spanning Integrative Central control May reduce flexibility in heterogeneous / diverse organisations Packaged processes May eliminate distinctiveness Late adopters benefit from lessons learned in earlier implementations Configurable Customisable Costly Adapt processes to ES or ES to processes? Expensive! Organisation - spanning Integrative Central control May reduce flexibility in heterogeneous / diverse organisations Packaged processes May eliminate distinctiveness Late adopters benefit from lessons learned in earlier implementations Configurable Customisable Costly Adapt processes to ES or ES to processes? Expensive!

Enterprise Systems and Competitive Strategy Davenport2000 asks: What are my current sources of competitive advantage? How will implementing an ES affect these? Will an ES enable new strategic capabilities? What happens if everyone gets an ES? Will it damage my business to commoditise my processes? Will an ES implementation distract my business from what it’s good at? And Kalling2003 states: Still an open question whether ERP systems produce a competitive advantage Davenport2000 asks: What are my current sources of competitive advantage? How will implementing an ES affect these? Will an ES enable new strategic capabilities? What happens if everyone gets an ES? Will it damage my business to commoditise my processes? Will an ES implementation distract my business from what it’s good at? And Kalling2003 states: Still an open question whether ERP systems produce a competitive advantage

Enterprise Systems and Competitive Strategy How to answer these questions? The Resource Based View and Dynamic Capabilities suggests an approach The Resource Based View focuses on the internal characteristics of the firm, as distinct from external factors like Porter’s Five Forces How to answer these questions? The Resource Based View and Dynamic Capabilities suggests an approach The Resource Based View focuses on the internal characteristics of the firm, as distinct from external factors like Porter’s Five Forces

The Resource Based View Beard2004

A Resource-Based model of Capabilities and Competitive Advantage Mata1995, Leonard Barton1995 Barney1999, Beard2004

Sources of Sustained Competitive Advantage What are the sources of Competitive Advantage? Above-average performance (superior profitability) due to cost leadership or differentiation (Porter1985, Seddon2005) What is Sustained Competitive Advantage? Sustained above-average performance … Provided by Core Capabilities … … which emerge from exploiting rare, inimitable and imperfectly mobile Resources … whose origins may be unclear or deeply embedded in the history and culture of the organisation What are the sources of Competitive Advantage? Above-average performance (superior profitability) due to cost leadership or differentiation (Porter1985, Seddon2005) What is Sustained Competitive Advantage? Sustained above-average performance … Provided by Core Capabilities … … which emerge from exploiting rare, inimitable and imperfectly mobile Resources … whose origins may be unclear or deeply embedded in the history and culture of the organisation

Enterprise Systems and Sustained Competitive Advantage Ideally … Implementing an ES will yield Sustained Competitive Advantage Which maximises ROI (Beard2004) Therefore … Implementing an ES will enhance or add to an organisation’s Core Capabilities However … The influencing mechanism is unclear Any influence may well be negative! Ideally … Implementing an ES will yield Sustained Competitive Advantage Which maximises ROI (Beard2004) Therefore … Implementing an ES will enhance or add to an organisation’s Core Capabilities However … The influencing mechanism is unclear Any influence may well be negative!

Influencing Mechanisms Seddon2005 Model A

Influencing Mechanisms Seddon2005 Model B

Influencing Mechanisms Seddon2005 suggests that Model B is more likely than Model A i.e. ES implementation does not directly affect Competitive Advantage However Wheeler2002 proposes that firms which are good at strategically choosing and implementing enabling technologies will consistently create customer value i.e. Sustained Competitive Advantage Seddon2005 suggests that Model B is more likely than Model A i.e. ES implementation does not directly affect Competitive Advantage However Wheeler2002 proposes that firms which are good at strategically choosing and implementing enabling technologies will consistently create customer value i.e. Sustained Competitive Advantage

How can implementing an ES affect Sustained Competitive Advantage? Potential negative effects Loss of differentiation due to levelling effect of common / packaged processes (Carr2003) Likely to influence Enabling Capabilities, leading to Competitive Parity at best Should be mitigated by intelligent use of configuration and customisation (Davenport2000, Holland1999, Beard2004) Loss or impairment of capabilities due to mismatch with canonical / non–canonical processes Could lead to Competitive Disadvantage Avoiding this requires thorough understanding of existing capabilities and processes Potential negative effects Loss of differentiation due to levelling effect of common / packaged processes (Carr2003) Likely to influence Enabling Capabilities, leading to Competitive Parity at best Should be mitigated by intelligent use of configuration and customisation (Davenport2000, Holland1999, Beard2004) Loss or impairment of capabilities due to mismatch with canonical / non–canonical processes Could lead to Competitive Disadvantage Avoiding this requires thorough understanding of existing capabilities and processes

How can implementing an ES affect Sustained Competitive Advantage? Potential negative effects Loss of flexibility in diverse or heterogeneous organisations Offset by ES selection process / best-of-breed approach (suggested by Beard2004) Short-term gain but others catch up Supplemental Capabilities affected, leading to Temporary Competitive Advantage only But could still lead to Sustained Competitive Advantage, as suggested by (Piccoli2005) Potential negative effects Loss of flexibility in diverse or heterogeneous organisations Offset by ES selection process / best-of-breed approach (suggested by Beard2004) Short-term gain but others catch up Supplemental Capabilities affected, leading to Temporary Competitive Advantage only But could still lead to Sustained Competitive Advantage, as suggested by (Piccoli2005)

How can implementing an ES affect Sustained Competitive Advantage? Potential positive effects Long term gain Enhancement or addition of Core Capabilities Leading to Sustained Competitive Advantage For this to happen, ES implementation must: Enhance differentiation of firm’s product Or … Produce long term cost-reducing effects Potential positive effects Long term gain Enhancement or addition of Core Capabilities Leading to Sustained Competitive Advantage For this to happen, ES implementation must: Enhance differentiation of firm’s product Or … Produce long term cost-reducing effects

Caveat Assumption is that the goal of implementing an ES is to gain Sustained Competitive Advantage Assumes overt strategic thinking on the part of managers! Not necessarily the case! Goal might be: Keeping up with competitors – Competitive Parity Trojan horse for reorganisation Compliance requirement Cost reducing exercise – Temporary Competitive Advantage Assumption is that the goal of implementing an ES is to gain Sustained Competitive Advantage Assumes overt strategic thinking on the part of managers! Not necessarily the case! Goal might be: Keeping up with competitors – Competitive Parity Trojan horse for reorganisation Compliance requirement Cost reducing exercise – Temporary Competitive Advantage

A Research Agenda The Resource Based View and Dynamic Capabilities provides a useful theoretical framework for examining effects of ES implementation The influence of ES implementation on Sustained Competitive Advantage needs to be understood Whether the influence is direct (as a result of the technology) or indirect (related process and organisational changes) also needs to be investigated The Resource Based View and Dynamic Capabilities provides a useful theoretical framework for examining effects of ES implementation The influence of ES implementation on Sustained Competitive Advantage needs to be understood Whether the influence is direct (as a result of the technology) or indirect (related process and organisational changes) also needs to be investigated

Was it worth it? ES implementation goals versus outcomes

Was it worth it? Capability Transformation Cycle