1. Business Transformation: Lessons from the Matrix of Change Prof. Erik Brynjolfsson Center for eBusiness, MIT Sloan School October, 2004 Generous support for this research was provided by the Center for eBusiness under grants from BT and CSK Copyright © 2004 Erik Brynjolfsson. Reproduction prohibited ebusiness.mit.edu

2. 2 What are the key assets at Dell? Michael Dell

3. 3 Computerization > Computers Image by Ralph Clevenger IT Capital (10%) Technological Complements (15%) Organizational Complements (75%) Intangible Assets are more important in the Information Economy

4. 4 Digital Business requires changes throughout the enterprise “Amazon’s on-line account maintenance system provides its customers with secure access to everything about their account at any time. …they can...customize virtually everything about the system to their own tastes... …such information flow to and from customers would paralyze most old-line companies.” --Denise Caruso, New York Times

5. 5

6. 6

7. 7 CustomerCustomer Global Internet Web server FirewallFirewall CorpI/SCorpI/S InventoryInventory ProductsProducts CustomersCustomers DatabasesDatabases Provide Access to Corporate Databases Internally and Externally End to End Integration Provides: Real-time Order Status Transaction Records Product Information

8. 8 Lessons from the Research 1.Use technology to leverage existing assets –Transformation doesn’t mean cannibalization: Large firms should build on their competitive advantages.

9. 9 The Organization as a Collection of Processes l Evolution : –Many business processes “evolve” over time l Co-Evolution: –Ecology of “memes” will tend toward stable clusters of technologies, structures and processes l Design: –“Supermodularity” can prevent piece-meal trial and error from finding optimal cluster

10. 10 Managing Change Business processes are the basic building blocks of all business models. How can managers identify the processes that leverage their new business model? How can the identify the processes that need to change?

11. 11 Web servers and email-based Interactions Physical Retail Front Office Case study: Digital Business is Not (just) New Technology Traditional Brokerages Online Brokerages

12. 12 Web servers and email-based Interactions Outsourced, Generic information Focus on frequent traders Salaried compensation Alliances with other service providers Diversified revenue stream including ads Low Fees on trading Physical Retail Front Office Assigned Broker Provides Personal Advice Focus on “high net worth” investors Specialized research staff Commission-based compensation Proprietary, Custom information High fees tied to trading Case study: Digital Business is Not (just) New Technology Traditional Brokerages Online Brokerages

13. 13 Web servers and email-based Interactions Outsourced, Generic information Focus on frequent traders Salaried compensation Alliances with other service providers Diversified revenue stream including ads Low Fees on trading Physical Retail Front Office Assigned Broker Provides Personal Advice Focus on “high net worth” investors Specialized research staff Commission-based compensation Proprietary, Custom information High fees tied to trading Both are Coherent Systems Traditional Brokerages Online Brokerages

14. 14 The Matrix of Change l Helps identify critical enforcing and conflicting interactions within an existing organizational system l Helps identify critical enforcing and conflicting interactions within a proposed organizational system l Helps identify how to transition to a proposed organizational system; l Can provide useful insights regarding –change feasibility – implementation sequence –location –implementation pace

15. The Matrix of Change predicts a rough transition Copyright © 1994-1998 Erik Brynjolfsson IT, Productivity and Organization 26 Proprietary, custom Information Retail Front High Fees Old Practices + + +- Grid Rankings + Reinforcing practices - Opposing Practice + + - - - Outsourced, generic Information Web and Email for Interaction Low Fees New Practices - +-

16. 16 The analysis of Schwab Online is much more encouraging

17. 17 Lessons from the Research 1.Use technology to leverage existing assets –Transformation doesn’t mean cannibalization: Large firms should build on their competitive advantages. 2.Understand business process complementarities using the Matrix of Change –Business processes are valuable only to the extent they support and are supported by the rest of the system

18. 18 One Stop Financial Supermarket Wrap Account with Single Annual Fee Multiple Access Points Access to Specialized research Personal Broker via multiple channels Proprietary, Custom information No fees for trading A New Model for Merrill New Online Brokerage Model “Unlimited Advantage”

19. 19 Merrill Lynch’s New Business Model

20. 20 Last Laugh? “Now, Schwab is embarking on what may well prove its riskiest move yet… Instead of trying to drive revenue through low-cost trades, Schwab says it will focus on providing investment advice to its clients. It is opening several new brokerage offices, where for the first time Schwab-employed "financial advisers" will provide investment tips and other services for a fee …. In the not-too-distant future, "Schwab will be a lot closer to Merrill Lynch than it is to the Schwab of yesterday," predicts Charles "Chip" Roame, a former Schwab executive.” –Gasparino and Brown, Wall Street Journal, page 1 feature

21. 21 Lessons from the Research 1.Use technology to leverage existing assets –UPS 2.Understand business process complementarities using the Matrix of Change –Merrill Lynch, Schwab 3.Be ready to re-invent, not just follow –A deep understanding of your real assets catalyzes creativity

22. To Learn More about the Matrix of Change – and to get your own free copy of the software – please visit: http://ebusiness.mit.edu/moc http://ebusiness.mit.edu/moc The Center for eBusiness is the largest industry-sponsored research program at the MIT Sloan School. To learn about the Center, visit http://ebusiness.mit.edu

23. The Internet and the Dynamo