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 Frameworkfrom Afuah-Tucci

BusinessModel

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 theThreat 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 Frameworkfrom Afuah-Tucci

BusinessModel

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

Cost Differentiation

BroadScope

NarrowScope

costleadership differentiation

costfocus

differentiationfocus

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 Frameworkfrom Afuah-Tucci

BusinessModel

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 AnalysisChapter 7

Chain

Shop Network

Find Solve

Evaluate Execute

Choose

Value Chain

• What is basic premise of value chain?– Value created by transforming inputs into products

Inbound Logistics

Operations

Outbound

Logistics

Marketing & Sales

After-sales

Service

Firm Infrastructure

Human Resources Management

Technology DevelopmentProcurement

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 InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Simon’s Problem Solving Model

InfrastructureSupport

• 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

Find Solve

Evaluate Execute

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”

Find Solve

Evaluate Execute

Choose

Value Network

Network promotion and contract management

• Invite and select customers tojoin network

• Initialize, manage andterminate contracts

Firm InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Service provisioning Establish,

maintain andterminate links

Billing forvalue received

Infrastructure operation

Maintain andrun 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: auctionnetwork

Find Solve

Evaluate Execute

Choose

Dell: mass customization

Napster: music distribution

HMO

Amazon?

Conceptual Frameworkfrom Afuah-Tucci

BusinessModel

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?

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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.

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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 Frameworkfrom Afuah-Tucci

BusinessModel

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 ModelFour Domains of Strategic Choice

ScopeCompetenciesGovernance

StructureProcesses

Skills

ScopeCompetenciesGovernance

InfrastructureProcesses

Skills

Strategy

Infrastructure

Business Information Technology

Need to recognize how decisions in one domain affects the other domains

Functional Integration

StrategicFit

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 StrategyScope

CompetenciesGovernance

Organizational InfrastructureStructure

ProcessesSkills

IT StrategyScope

CompetenciesGovernance

IT InfrastructureInfrastructure

ProcessesSkills

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 StrategyScope

CompetenciesGovernance

Business InfrastructureStructure

ProcessesSkills

IT StrategyScope

CompetenciesGovernance

IT InfrastructureInfrastructure

ProcessesSkills

Risk:

IT reacts to supportbusiness processes – not viewed asstrategic 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?

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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?

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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?

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