1. Value Creation and Strategic Information Systems
What is added value and how can it be created by way of IT-dependent strategic initiatives
© Gabriele Piccoli

2. Course Roadmap Part I: Foundations
Part II: Competing in the Internet Age
Part III: The Strategic use of Information Systems
Chapter 6: Strategic Information Systems Planning
Chapter 7: Value Creation and Strategic Information Systems
Chapter 8: Value Creation with Information Systems
Chapter 9: Appropriating IT-Enabled Value over Time
Part IV: Getting IT Done
© Gabriele Piccoli

3. Learning Objectives
Define key terminology, including the concepts of total value created, customer willingness to pay, supplier opportunity cost, and added value.
Learn to compute total value created and added value.
Learn to estimate the portion of the total value created that will be appropriated by each of the entities who contributed to its creation.
Differentiate between strategic information systems and tactical information systems.
Define and utilize the concept of IT-dependent strategic initiatives.
© Gabriele Piccoli

4. Introduction Creation and appropriation of economic value
The primary role of functional and general managers
Creation and appropriation of economic value
© Gabriele Piccoli

5. Analysis of Added Value
A formal mechanism to evaluate how much of the value created the firm can appropriate by employing the initiative
Benefits:
Deciding whether you should go ahead with the initiative or not
Evaluating how to respond to a competitor who took the leadership position
© Gabriele Piccoli

6. Value When something novel is done
When this “something novel” is deemed worthwhile by someone else
Economic value is created through a transformation process
Resource: Value $x (Input)
Transformation process
Customer Willing to Pay: $x + $v (Output)
© Gabriele Piccoli

7. Components of Value Supplier Opportunity Cost (SOC): Firm Cost (FC):
The minimum amount of money the suppliers are willing to accept to provide the firm with the needed resources.
Firm Cost (FC):
The actual amount of money the firm disbursed to acquire the resources needed to create its product or service.
Customer Willingness to Pay (CWP):
The maximum amount of money the firm’s customers are willing to spend in order to obtain the firm’s product.
Total Value Created (TVC):
The difference between customer willingness to pay and supplier opportunity cost.
TVC = CWP – SOC.
© Gabriele Piccoli

8. Supplier Opportunity Cost
A rational supplier will only provide the firm with its services if it receives at least the same sum of money they would have received from any other buyer
SOC is NOT the amount that suppliers will be paid (the firm cost)
It is the theoretical minimum they will accept
© Gabriele Piccoli

9. Customer Willingness To Pay
Value is in the eyes of the customer
Value is generated when
Customers is willing to pay to acquire whatever the firm has created
This amount is larger than the supplier opportunity cost
© Gabriele Piccoli

10. Total Value Created
Value is created when resources that in their next best used would be worth a given amount are transformed into something that a customer is willing to pay more for.
Value
continuum
Supplier opportunity cost
Coffee Shop willingness to pay
Total value created in the cake-making transformation process: $9
$20
$11
© Gabriele Piccoli

11. Appropriating the Value Created
TVC only tells us if there is an opportunity to make a profit.
Value appropriation:
The process by which the total value created in the transaction is allocated amongst the entities who contributed to creating it
Value
continuum
Supplier opportunity cost
Your Firm’s cost
Coffee Shop willingness to pay
Price
Supplier Share
Your Firm’s Share
Coffee Shop’s Share
Total value created in the cake-making transformation process: $9
$18
$20
$12
$11
© Gabriele Piccoli

12. Cake-Making Example Supplier opportunity cost = $11 Firm cost = $12
Ingredients =$4
Time = $6.5 per hour
Electricity and delivery = $0.5
Firm cost = $12
Ingredients =$5
Price = $18
Customer willingness to pay = $20
Value Appropriation
The suppliers appropriate $1.00 in excess profits
You appropriate $6.00 in excess profits
The customer, the gourmet coffee shop, appropriates $2.00 in savings
Value
continuum
Supplier opportunity cost
Your Firm’s cost
Coffee Shop willingness to pay
Price
Supplier Share
Your Firm’s Share
Coffee Shop’s Share
Total value created in the cake-making transformation process: $9
$18
$20
$12
$11
© Gabriele Piccoli

13. Added Value
The portion of the total value created that would be lost if the firm did not take part in the exchange
The unique portion of the total value created that is contributed by the firm itself
It depends on the effects of existing competition
Added value = $0 when you face competitors with
Same cost structure
Perfect substitutes of your products
© Gabriele Piccoli

14. Pricing Considerations
Price becomes important to gauge what portion of the value created each entity partaking to the transaction can appropriate.
No matter how much value your firm contributes to creating, unless you can be (at least in part) unique in your value creation, you will quickly compete this value away to customers.
© Gabriele Piccoli

15. Competitive Advantage
The maximum amount of value that a firm can appropriate equals its added value.
Added value is a measure of its competitive advantage
It measures the extent to which the firm is able to do something:
Unique
Valuable
© Gabriele Piccoli

16. Creating Added Value Creating unique characteristics of your cake
Increase in SOC = $2
Increase in CWP = $3
Added value created = $1
Your
Firm
Supplier Opportunity Cost
Coffee Shop willingness to pay
Cousin Bettie’s
$20
$11
$23
$13
Your Firm’s Added Value: $1
© Gabriele Piccoli

17. Two Ways to Create New Value
Increasing Customer Willingness to Pay:
Doing something of value for customers
Investing incremental resources to increase CWP by a larger amount
Decreasing Supplier Opportunity Cost
Creating incentives for suppliers to supply the with needed resources for less money
Supplier opportunity cost
Customer willingness to pay
© Gabriele Piccoli

18. Some Considerations Value is in the eye of the customer
Customer willingness to pay is not the same as price
Value can be tangible or intangible
Creation of value is not the same as appropriation of value
Competitive advantage and added value are closely related
© Gabriele Piccoli

19. Added Value Analysis
Clearly define the initiative and understand what it entails
Identify the comparison
Estimate Customer Willingness to Pay
Estimate Supplier Opportunity Cost
Estimate Added Value
© Gabriele Piccoli

20. Strategic Information Systems
A firm achieves competitive advantage when:
It is able to generate added value
By creating a unique and positive difference between CWP and SOC.
Strategic information systems
Information sytems used to support or shape the competitive strategy of the firm
Designed and implemented to enable the creation and appropriation of value
© Gabriele Piccoli

21. Strategic Information Systems
Defined by their purpose and the objective with which they are created
No need for proprietary IT:
Technology alone does not determine added value.
The initiative and its Information System underpin the firm’s value-creating strategy.
Tactical systems are:
Critical to business operations
But do not generate added value.
© Gabriele Piccoli

22. IT-Dependent Strategic Initiatives
IT-dependent strategic initiatives consist of identifiable competitive moves (or projects) – designed to lead to sustained improvements in the firm’s competitive position – that depend on the use of IT to be enacted.
Initiative
Strategic
IT-dependent
© Gabriele Piccoli

23. Do not focus on IT Investments
IT-dependent strategic initiative
consist of the configuration of an activity system, dependent on IT at its core that fosters the creation and appropriation of economic value.
IT investments
only pay off if they are part of a larger and cohesive information system design
© Gabriele Piccoli

24. What we Learned
Define key terminology, including the concepts of total value created, customer willingness to pay, supplier opportunity cost, and added value.
Learn to compute total value created and added value.
Learn to estimate the portion of the total value created that will be appropriated by each of the entities who contributed to its creation.
Differentiate between strategic information systems and tactical information systems.
Define and utilize the concept of IT-dependent strategic initiatives.
© Gabriele Piccoli