BA572 Slides - Week # 3 Dr. V.T. Raja and Dr. James Coakley Oregon State University

ERP – Review What is ERP? Who are the major ERP vendors? Major messages –ERP may erase sources of differentiation and competitive advantage –Force firms to do business in ways that may conflict with their best interest –Main reason for “failures” is that companies fail to reconcile the technological needs of the ERP with the business needs of the enterprise. –“The logic of the system may conflict with the logic of the business.”

ERP - Major Messages (Continued) The most successful ERP deployments involved companies that viewed them in strategic terms. –“ They stressed the enterprise, not the system.” Clarify strategic and organizational needs and business implications of integration. Change organizational structures to address information-flow problems

ERP - Major Messages (Continued) “If the development of an enterprise system is not carefully controlled by management, management may soon find itself under control of the system.” Require significant money, time and expertise –Careful selection of ERP vendor –Customization is very expensive - may need to customize only to sustain competitive advantage –Put right people in place –Phased or big-bang implementation (but not rash implementation)

Are these lessons restricted to ERP systems?

“Implementation” failures System: –Lack of user involvement!!!!! –Insufficient training of end-users –Inadequate infrastructure in place –Run over time and budget –Inadequate systems integration testing –Conversion problems -- data People: natural resistance to change Politics: IT can change basis of power

IT Project Success Key factors for successful project? –End-user involvement Involvement does not guarantee success, but lack of involvement guarantees failure –User-designer communication gap –Top management support Ensures funding and management support –Appropriate level of complexity and risk –Management of the implementation process Alignment of IT with business strategy

Goal for Today Framework that focus on aligning IT with Business Strategy –How to develop a “business model” that adds value? Define what we mean by a business model –How to use IT to enable the business model?

Start with Conceptual Framework from Afuah-Tucci Business Model Environment Internet Performance What Profit Site? What Customer Value? Which Customers? How to Price Value? Who to Charge for Value? How to Provide Value? How to Sustain Value? Key Drivers of Value? Who are Customers? What Activities are Needed to Deliver Value? Distinctiveness?

Environment Competitive and Macro Environment Porter’s Competitive Forces Model –“Strategy and the Internet” & Chapter 10 Threat of New Entrants Threat of Substitute Products Bargaining Power –Customers –Suppliers Rivalry among Existing Competitors

Provide examples of Entry Barriers Economies of Scale Proprietary product differences Brand identity Switching costs Capital requirements Access to channels Expected retaliation Absolute cost advantages (proprietary learning curve) Regulation

What Influences the Threat of Substitute Products? Relative price/performance of substitutes Switching costs Buyer propensity to substitute

Key Drivers of Value? Who are Customers? What Activities Needed to Deliver Value? Distinctiveness? Conceptual Framework from Afuah-Tucci Business Model Environment Internet Performance What Profit Site? What Customers Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value?

Which Customers? Broad scope Narrow scope Target market defined based on: –Geographic Scope Operations # of competitors –Range of products/services

What are the determinants of customer value? Cost Differentiation

Cost Low cost producers sell standard, no frills Emphasis on using scale & cost advantages from all sources Must achieve parity or proximity in differentiation –parity in features –proximity in price More than one firm pursuing cost leadership raises rivalry

Differentiation Unique along some dimension that is widely valued by buyers –Based on: Product, Timing, Location, Service, Linkages, Reputation –Should choose attributes different from rivals’ –Aim for parity or proximity in cost

Strategy Choices CostDifferentiation Broad Scope Narrow Scope cost leadership differentiation cost focus differentiation focus

Environment Analyze competitive forces acting on industry Identify competitive force(s) that are critical to the firm Use IT effectively to combat critical competitive force(s)

Rivalry among existing competitors How to use IT to combat force? Change/Alter : Scope of competition Strategy Interrelationship among industries

How can we use IS/IT to combat these forces? Use IT to change scope of competition Example: Wall Street Journal Use IT to enhance strategy Examples: Caesar’s Palace Nexis/Lexis Use IT to change strategy Examples: ‘ICE’ age

Conceptual Framework from Afuah-Tucci Business Model Environment Internet Performance What Profit Site? What Customer Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value? Key Drivers of Value? Who are Customers? What Activities Needed to Deliver Value? Distinctiveness?

Value Configuration Analysis Chapter 7 Chain Shop Network FindSolve EvaluateExecute Choose

Value Chain What is basic premise of value chain? –Value created by transforming inputs into products Inbound Logistics OperationsOutbound Logistics Marketing & Sales After- sales Service Firm Infrastructure Human Resources Management Technology Development Procurement

Value Chain Structure IT can facilitate each value chain activity and also linkages within/across chain Critical Linkages –Internal linkage: Information shared across activities within firm Tend to be sequential flows between activities –External linkage: Information shared across activities between different firms Extended value chain

Value Chain Analysis Understand –Industry –Strategy –Activities of the organization Identify the activities and linkages along value chain that are critical Add value by focusing on those critical activities and linkages –Lower cost by increasing efficiency, scale or capacity Competitive Forces Analysis

Value Chain Use Directly applicable to manufacturing activities Less applicable in some situations –Hospitals (sick patients – healthy patients) –Education (Freshman – Graduates)

Value Shop Problem Finding & Acquisition Problem Solving Control/ Evaluation Execution Choice Firm Infrastructure Human Resources Management Technology Development Procurement Simon’s Problem Solving Model Infrastructure Support What is basic premise of value shop? –Value created by providing solutions to customer problems

Value Shop (cont’d) Value creation based on: –Information asymmetry between firm and client Firm has information to satisfy client needs –Rely on intensive information to solve a customer problem Firm has standardized information acquisition process –Cyclical, iterative solution process Can be resolved by non-experts Need experts to recognize unique cases FindSolve EvaluateExecute Choose

Value Shop (cont’d) Key driver is value, not cost –“Value” depends on quality of professionals assigned to client projects Learning across projects is critical –Need for “knowledge base” FindSolve EvaluateExecute Choose

Value Network Network promotion and contract management Invite and select customers to join network Initialize, manage and terminate contracts Firm Infrastructure Human Resources Management Technology Development Procurement Service provisioning  Establish, maintain and terminate links  Billing for value received Infrastructure operation  Maintain and run physical and information network What is basic premise of value Network? –Value created by providing intermediary services

Value Network (cont’d) Value derived from scale and capacity –Each additional participant adds value –Value of new service dependent on who else adopts it

Discussion Question Provide an example of a firm that uses a value chain. Provide an example of a firm that uses a value shop. Provide an example of a firm that uses a value network.

Combinations of Value Configuration Strategies Automobile manufacturers: mass production Cisco: solves problems EBay: auction network FindSolve EvaluateExecute Choose Dell: mass customization Napster: music distribution HMO Amazon?

Conceptual Framework from Afuah-Tucci Business Model Environment Internet Performance What Profit Site? What Customer Value? Which Customers? How Price Value? Who to Charge for Value? How Provide Value? How Sustain Value? Key Drivers of Value? Who are Customers? What Activities Needed to Deliver Value? Distinctiveness?

What is needed to perform activities that underpin customer value? Resources: things and assets that can be acquired. –Flexible: asset acquired for one task may be used on another Processes: procedures developed to accomplish a task. –Designed to be inflexible to ensure consistency and promote efficiency Process developed to accomplish one task may not be used to accomplish another Values: criteria by which employees make decisions about priorities –Organizational structure & culture? Leading for Innovation by Clayton M. Christensen

Discussion Question What is a “core competency”? –Makes high contribution to value –Unique or higher level than competitors –Extendable to multiple lines Is there a distinction between core competencies and competitive advantage? 1

How do you make a competitive advantage sustainable? Three strategies in text –Block Limit access (intellectual property) Undercut price –Run Continual innovation of products/services –Team-up Joint ventures Strategic Alliances/Acquisitions

Run Strategy: Two types of innovation Sustaining innovation: Make product or service better based on metrics in mainstream market Disruptive innovation: New product or service that is actually worse based on mainstream metrics –Examples?

Discussion Question Given an example of how internet technologies have created disruptive technological change. 2

Christensen study of disk manufacturers 116 new technologies introduced –111 were sustaining: improve performance of disk drives 100 percent of these were from established firms –5 were disruptive innovation: smaller drives that were slower and had less capacity No new technologies were involved Diskette None of the established firms remained atop the market after the disruptive innovations entered the market!

Innovation Christensen cites numerous instances where companies failed to react to disruptive changes –Seeing the disruption coming was not the problem –Organizations did not have capability to react in a way that enabled them to keep pace with the required changes

What limits a firms ability to react? Established companies develop RPV (resource/ process/value) models focused on sustaining innovations –Processes and values focused on introducing improved products to gain competitive edge. Disruptive innovations: –Could not be handled by routine processes –Had lower profit margins (did not fit the values of the organization) –Were not suited for existing “best” customers –Evolved in emerging markets that were surrendered by established companies PC market initially ignored by IBM

Three options to create new capabilities Acquisition Create new capabilities internally Spin-out ventures

Acquisitions If acquired companies processes and values are basis for success, cannot easily integrate into parent organization. –HP and Compaq merger? If acquired companies resources are basis for success, then can integrate –Cisco?

Create new capabilities If organization acquires new resources, cannot use same processes and values Processes and values define how resources are combined to create value Processes are hard to change

Spin-out ventures “A separate organization is required when the mainstream organization's values would render it incapable of focusing resources on the innovation project” –A threatening disruptive technology requires a different cost structure to be profitable and competitive –The current size of the opportunity is insignificant relative to the growth needs of the mainstream organization

Start with Conceptual Framework from Afuah-Tucci Business Model Environment Internet Performance What Profit Site? What Customer Value? Which Customers? How to Price Value? Who to Charge for Value? How to Provide Value? How to Sustain Value? Key Drivers of Value? Who are Customers? What Activities are Needed to Deliver Value? Distinctiveness?

Components of a Business Model Profit Site –Location in a value configuration vis-à-vis customers, suppliers, rivals, potential new entrants, complementors and substitutes –Look at value configuration, competitive forces, complementary assets model (brand name, relationship with clients or suppliers)

Components of a Business Model – cont’d Pricing Strategy –Menu/Fixed –Bargaining –Auction –Reverse Auction –Barter – exchange good and services

Components of a Business Model – cont’d Source of Revenue –Commission –Advertising –Markup –Production (direct to consumer) Software –Referral –Subscription –Fee-for-Service

Components of a Business Model – cont’d Value & Scope –Cost vs Differentiation –Broad vs Focus Commerce Strategy –B2C –B2B –C2B –C2C or P2P –B2E

Strategic Alignment Model Four Domains of Strategic Choice Scope Competencies Governance Structure Processes Skills Scope Competencies Governance Infrastructure Processes Skills Strategy Infrastructure BusinessInformation Technology Need to recognize how decisions in one domain affects the other domains Functional Integration Strategic Fit

Strategy Domains Business –Scope: What business are you in? –Distinctive Competencies: What do you do well to distinguish yourself from your competitors? –Governance: What external business relationships do you depend on? IT –Scope: What information technologies support or create strategic business opportunities? –IT Competencies: What characteristics of IT create business advantage? –IT Governance: What external relationships does IT depend on (outsourcing, vendors, etc.)

Infrastructure Domains Business –Structure: Organizational structure –Processes: What are key business processes? –Skills: What HR needed to accomplish specific competencies? IT –Infrastructure: Hardware, Software, Database, Networks –Processes: Development, Maintenance, Operations –Skills: What skills required to maintain architecture and execute the processes?

Strategic Alignment Model Alignment is a dynamic and evolving process Business Strategy Scope Competencies Governance Organizational Infrastructure Structure Processes Skills IT Strategy Scope Competencies Governance IT Infrastructure Infrastructure Processes Skills

How to use the Strategic Alignment Model Identify your strongest and weakest domain –Need to develop communication with and increase understanding of weaker domains Understand relationship between domains when change in strategy occurs

IT is an Expense Infrastructure defined by business processes –Priority is to improve business processes, which places focus on changing business infrastructure. IT focus is on application development, driven by need to support business infrastructure Business Strategy Scope Competencies Governance Business Infrastructure Structure Processes Skills IT Strategy Scope Competencies Governance IT Infrastructure Infrastructure Processes Skills Risk: IT reacts to support business processes – not viewed as strategic resource

Discussion Question Provide an example of a firm that uses a value chain. –How do they price the value? –Who do they charge for the value? –What is the revenue model? –What is the commerce strategy? 5

Discussion Question Provide an example of a firm that uses a value shop. –How do they price the value? –Who do they charge for the value? –What is the revenue model? –What is the commerce strategy? 5

Discussion Question Provide an example of a firm that uses a value network. –How do they price the value? –Who do they charge for the value? –What is the revenue model? –What is the commerce strategy? 5