briefing 317 GurbaxaniDoDPresenta tion

IT Value in the Networked Economy: Strategies, Economics and Frameworks : 

Vijay Gurbaxani Professor of Information Systems and Management Director, CRITO Consortium University of California, Irvine CA 92697-3125 Phone : 949 824 5215 E-mail: vgurbaxa@uci.edu IT Value in the Networked Economy: Strategies, Economics and Frameworks IT Value in the Netcentric Organization December 9, 2003

Agenda: 

Agenda Competing in a Networked Economy Conceptual Framework for IT Value The New Economics of I/T and Networked Business Models

The Brave New World: 

The Brave New World Charles Schwab Covisint PayPal Wal-Mart Ariba CommerceOne Singapore Cisco Microsoft Oracle Amazon eBay Google Yahoo Dell NTT DoCoMo Nokia

Or Jurassic Park?: 

Or Jurassic Park? Chemdex Prodigy Kmart Pathfinder Beyond.com HomeGrocer People’s Express Drkoop.com ZapMail CONFIRM Railroads Osborne Ashton-Tate Visicalc Ambra

The Premise: 

The Premise “More than being helped by computers, companies will live by them, shaping strategy and structure to fit new information technology.” - Fortune magazine

Competing with I/T: Strategy AND Structure: 

Competing with I/T: Strategy AND Structure Competing via strategy Product leadership (Charles Schwab) Operational excellence (Federal Express) Customer intimacy (Home Depot) Competing via structure Alliances (Star Alliance) Value added partnerships (Amazon.com) Networked organization (Cisco)

Competing via Structure: the Role of Electronic Integration: 

Competing via Structure: the Role of Electronic Integration Wal-Mart provides suppliers with access to its internal databases Dell Computer virtually-integrates its entire value chain Airline reservation systems facilitate the coordination of schedules and code-sharing arrangements GM, Ford and DaimlerChrysler are creating an electronic market in the automobile industry (Covisint) Control no longer requires ownership The Internet dramatically reduces transaction costs, facilitating the creation and utilization of electronic markets and value networks.

Emerging Organizational Alternatives: 

Emerging Organizational Alternatives Successful enterprises will increasingly structure as value-added partnerships among specialists These enterprises must retain the agility of small companies, while also accruing the benefits of scale These enterprises must be flexible to facilitate the entry of new partners that bring new value, and the exit of current partners who no longer create value

Information, Coordination and Control: 

Information, Coordination and Control Execution Organization structure Management controls Information Information technology

Companies Invest in IT to…: 

Companies Invest in IT to… Lower costs Improve employee productivity Improve process performance Supply chain management, new product development New marketing channels Competitive advantage…

IT Business Value Model: 

IT Business Value Model Complementary External Organizational Organizational Performance Industry Characteristics I. Focal Firm IT Business Value Generation Process Business Process Performance III. Macro Environment Trading Partner Resources & Business Processes Country Characteristics II. Competitive Environment Business Processes Information Technology Resources Complementary Organizational Resources

Model Constructs: 

Model Constructs

IT Business Value Research Questions: 

IT Business Value Research Questions

Propositions: 

Propositions Focal Firm 1 The IT resource – including both technology and human expertise – is valuable and confers a range of operational efficiencies that vary in extent and type depending upon the context. 2A Certain organizational resources are synergistic with IT in the generation of IT business value depending upon the organizational and technological contexts. 2B The greater the degree to which complementary organizational resources are imperfectly imitable, i.e., are difficult to replicate, the greater the degree to which a firm can obtain a sustained competitive advantage from their synergies with IT.

Propositions (continued): 

Propositions (continued) Competitive Environment 3A Industry characteristics shape the ability of firms to apply IT for improved organizational performance and to capture the resulting benefits. 3B The greater the degree of competition in an industry, the greater the extent to which firms achieve efficiency gains via IT. 3C The greater the degree of competition in an industry, the lower the extent to which firms are able to capture such benefits and achieve profitability gains via IT. 4A The resources of electronically connected trading partners shape the focal firm’s ability to generate and capture organizational performance impacts via IT. 4B The greater the degree of focal firm power relative to its trading partners connected via interorganizational information systems, the greater its share of benefits in excess of costs incurred.

Propositions (continued): 

Propositions (continued) Macro Environment 5A The macro environment shapes the degree to which firms can apply IT for organizational improvement, both in positive and negative ways.

Impacts of Information Technology: 

Impacts of Information Technology Automation effects Information effects Transformation effects

Dimensions of Productivity Payoff: 

Dimensions of Productivity Payoff Labor Productivity Output per unit of labor Multifactor Productivity Production efficiency of capital and labor

Economic Growth can Derive from:: 

Economic Growth can Derive from: Increased levels of inputs Labor, IT, other capital Capital deepening and labor productivity Improved quality of inputs Increased multifactor productivity Improved production methods

Research Findings: The Payoff from IT Investment: 

Research Findings: The Payoff from IT Investment IT investment is a major contributor to labor productivity via capital deepening IT-enabled innovation contributes to multifactor productivity through automation, structural improvements in processes, production and management techniques This effect occurs in some, but not all, industries

Research Findings: IT Pays Off for Companies (with some caveats): 

Research Findings: IT Pays Off for Companies (with some caveats) IT capital investments contribute to firm productivity and have higher marginal returns than other capital Returns vary widely among different firms Returns are higher when firms make co-investments in organizational capital Decentralization, process redesign, organization structure and employee empowerment Payoffs can occur after a lag Difficult to correlate IT investment to financial performance measures Industry structure matters a great deal Competition increases efficiency impacts of IT, but may not result in increased profits

The Impact on Organizations and Markets: 

The Impact on Organizations and Markets Process re-engineering Value networks Strategic outsourcing Centralize/decentralize decision-making Scale and scope Electronic markets

The Management Challenge: 

The Management Challenge Advances in information technologies are creating ever changing business capabilities Information technologies, and specially the Internet, enable/necessitate changes in business models The challenge is to foster an organization that is capable of competing successfully in a digital economy through the rapid adoption of innovative IT applications and new networked business models.

From BusinessWeek: Making the Move is Difficult: 

From BusinessWeek: Making the Move is Difficult “In the Information Age, the Net is accelerating the rollout of a new model: the Networked Corporation….Yet, this model is incredibly tough to execute.” - May 2002

The New Economics of IT: Understanding Networks: 

The New Economics of IT: Understanding Networks Key drivers Critical mass Technology diffusion patterns Network externalities The value of a network to any participant grows as the number of participants increases

The Evolution of Networked Commerce: From EDI to E-Hubs: 

The Evolution of Networked Commerce: From EDI to E-Hubs Source: Morgan Stanley Dean Witter Internet Research Brochure-ware publicize online, sell offline Basic E-Commerce one-to-one selling from web site B2B E-Commerce enabling commerce through aggregation many-to-many commerce EDI Networks closed, expensive, not pervasive Supplier BUYER BUYER BUYER Time 1996 1997 1998 1999 Time BUYER BUYER BUYER SUPPLIER SUPPLIER SUPPLIER B2B MARKET EFFICIENCY

Past, present and future: 

Past, present and future Phase 1: Batch EDI Trading through proprietary VANs using technically rigid, complex standards Point-to-point connections provided no transparency Expensive Price of entry kept small companies out Phase 2: Basic E-commerce Buyers and sellers trade without an intermediary Phase 3: Communities of commerce Creates market transparency Phase 4: Collaborative commerce Allows for wide range of interactions beyond an order

Success in Value Networks Demands Advanced Business and IT Processes and Capabilities: 

Success in Value Networks Demands Advanced Business and IT Processes and Capabilities 1. Discrete Exploitation - Piecemeal implementation of business capability and enabling technology 2. Intra-Process & Systems Integration - End -to-end integration of a single process and related systems (e.g, procurement to payment) 3 Inter-Process & Systems Integration - Integrated demand and supply management processes and systems 4. Dynamic Processes and Systems - Real time operations and systems 5. Re-configurable Processes and Systems -Ability to show different faces to different customers and suppliers Business Processes and Capabilities IT Processes and Capabilities Level 1 Level 2 Level 3 Level 4 Level 5 Level 1 Level 2 Level 3 Level 4 Level 5 Source: The Concours Group

Economics of Networked Business Models : 

Economics of Networked Business Models Who pays? Who captures value? How should value be allocated between players?

New Pricing Mechanisms: 

New Pricing Mechanisms Dynamic versus static Auction markets Traditional and reverse auctions Buyer specified Lower customer search costs make price-based competition difficult; how does the business differentiate itself?

Characteristics of Information Products: 

Characteristics of Information Products Transitory or Cumulative Utility Value of information may be time-dependent Creation of information is often a cumulative process Externalities Indestructibility Transmutability Content can be customized/changed easily Reproducibility Marginal cost of reproduction is close to zero

Other Key Aspects of the Networked Business Model: 

Other Key Aspects of the Networked Business Model Scalability of the model Critical mass Creating barriers to entry Network effects Each new member increases the value of the whole network Informational economies of scale Larger organizations have greater incentives to build information systems New forms of value creation Buy.com sold products at cost; profits from advertising revenue, up-selling; manufacturer sponsorships Priceline.com

Key Messages: 

Key Messages Early mover advantage Winner(s) take all economy Importance of scale Value of strategic partnerships Significant network effects Execution is critical This is just the beginning…

The Next Few Years: 

The Next Few Years The Internet and other communications technologies will provide substantial opportunities for firms to achieve gains in labor productivity, processes and production methods Future gains will increasingly come to companies engaging in networked partnerships Executives must focus relentlessly on the potential of IT and e-business, in particular, to deliver additional efficiencies, enable process innovations, and drive corporate profitability and success Continued IT investment should lead to continuing growth