Chapter 9 Appropriating IT-Enabled Value Over Time

1. Chapter 9 Chapter 9Appropriating IT-EnabledValue Over Time Establishing when and how an IT-dependent strategic initiative can be protected

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

3. Learning Objectives • To analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time. • To recognize the flaws in the arguments of those who suggest that information technology has lost its potential to enable sustained competitive advantage. • To recognize the four barriers to erosion that protect IT-dependent competitive advantage, and to estimate their size. • To identify the response lag drivers associated with each of the four barriers to erosion, and to provide examples of each. • To recognize how each of the four barriers can be strengthened over time in order to protract the useful life of an IT-dependent strategic initiative. • To use the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives when your firm takes a leadership position. • To use the concepts and frameworks described in this chapter in situations where your firm may be evaluating whether to retaliate against a competitor who pioneered an IT-dependent strategic initiative. • To identify the possible courses of action a firm should take based on your analysis, and to be able to recommend when the firm should or should not pursue a given IT-dependent strategic initiative.

4. Introduction • The primary objective of the modern general and functional manager is to use them to create added value • The firm must be able to appropriate the value created over time to truly benefit • Failing to do so will quickly lead to a situation where competitors match the leader, and customers rather than the innovator end up appropriating the value created

5. Not all Initiatives are Equal • Can we reduce uncertainty about whether IT-dependent strategic initiatives lead to sustainable advantage? vs. High Speed Internet Access in Hotels Business Intelligence in Casinos

6. Sustainability Framework Careful! • Reproducing IT is NOT equivalent to reporoducing an IT-dependnet strategic initiative Basic Concepts: • Sustainable competitive advantage • Response lag • Response lag drivers • Barriers to erosion

7. Sustainable Competitive Advantage • Ability of a firm to protect its competitive advantage in the face of competition • Don’t focus on theoretical replicability • Sustainability as a continuum • How much time to erode the advantage? • How much money to erode the advantage? • The stronger the advantage, the higher the resiliency to imitation

8. Resource-based Views • Modeled as a bundle of resources • Competitive advantage depends upon the characteristics of the resources at its disposal • When the firm controls resources that are rare, valuable, inimitable, and non-substitutable, the advantage will be difficult for competitors to overcome • Rare • Valuable • Inimitable • Non-substitutable

9. Resource-based Views • Rare • A resource is rare when it is idiosyncratically distributed • It is scarce and not readily available for acquisition by competitors • Valuable • A resource is valuable when it is necessary to underpin a value adding strategy • Valuable resources enable the firm to offer a value proposition that is either superior to competitors’ or, while equivalent, it can be offered with a lower investment • Inimitable • A resource is inimitable when competitors find it impossible, or difficult, to duplicate it • Non-substitutable • A resource is non-substitutable when competitors are unable to replicate the firm’s overall value proposition using surrogate resources for the ones that are rare, valuable, and inimitable

10. Response Lag • Response lag: • The time it takes competitors to respond aggressively enough to erode a firm’s competitive advantage • A measure of the delay in competitive response Response Lag Drivers Characteristics of the technology, firm, its competitors, or the value system in which the firm is embedded that combine to make replication hard and costly. • Response lag drivers: • Work in combination • Combine into Barriers to Erosion

11. Four Barriers to Erosion

12. IT-Resources Barrier • Rely on access to IT assets and capabilities necessary to produce and use the technology at the core • More reliance on preexisting IT resources leads to more difficult in replication

13. IT-Resources Barrier IT Assets: • Available IT resources • What the firm has IT Capabilities: • Skills and abilities of firm’s workforce • What the firm can do

14. IT-Resources Barrier IT Assets IT infrastructure - IT components managed by specialists to provide standard services to the organization Information Repositories – data stores containing extensive information IT Capabilities IT tech skills - ability to design and develop effective computer applications IT mgmt skills - ability to provide leadership to create more response lag Relationship Asset - mutual respect and trusting rapport between the IS function and business managers

15. Complementary-Resources Barrier

16. Complementary-Resources Barrier • Successful implementation of any IT-dependent strategic initiative requires that complementary organizational resources be mobilized as well • Firm must develop or acquire the necessary complementary resources

17. Complementary Resources • As an initiative becomes more reliant on these, the complementary-resource barrier to imitation strengthens, and replication of the strategy becomes slower, costlier, and more difficult.

18. Complementary ResourcesStructural Resources Structural Resources: used to enact IT-dependent strategic initiative • Tangible: competitive scope, physical assets, scale of operations and market share, organizational structure, governance, and slack resources • Intangible: corporate culture, top management commitment, and the ability to manage risk

19. Complementary ResourcesCapabilities Capabilities: how the firm carries out its productive activities • Activity System: interlocking and mutually reinforcing economic activities that show internal consistency and are appropriately configured • Business Processes: series of steps that a firm performs in order to complete an economic activity

20. Complementary ResourcesExternal Resources • Assets that do not reside internally with the firm but accumulate with other firms and with consumers • Brand • Distribution channels • When a firm’s IT-dependent strategic initiative can make use of or contribute to the development of these external resources, response lag increases considerably and barriers to imitation are augmented

21. IT-Project Barrier • Rely on an essential enabling IT core • Cannot be implemented until the necessary technology has been successfully introduced

22. IT-Project BarrierIT Characteristics • Complexity: • A function of the bundle of skills and knowledge necessary to effectively design, develop, implement, and use it • Uniqueness: • Degree of tailoring of the core IT • Off the shelf vs. custom developed • Visibility: • Extent to which competitors can easily and directly observe the enabling technology

23. IT-Project BarrierImplementation Process Complexity: • A function of the project size and scope, number of functional units involved, complexity of user requirements, etc… Degree of Process change: • A function of the far reachingness of the IT core • Harder and riskier change becomes when • More departments involved • More organizational boundaries crossed

24. Preemption Barrier • Even if a competitor is able to replicate an IT-dependent strategic initiative, the response may be unsuccessful if: • The leader created preferential relationship with customers or other members of the value system • The leader introduced substantial switching costs • When this occurs respondents must • Eeither compensate customer for the cost of switching or • Provide enough additional value to justify customers’ absorbing the switching costs

25. Preemption Barrier Switching Costs • The total costs borne by the parties of an exchange when one of them leaves the exchange Value System Structure • Provides opportunities for preemptive strategies and for the exploitation of the response-lag drivers

26. Preemption BarrierSwitching Costs • Co-specialized tangible investments: • The total capital outlay necessary to obtain the needed physical assets • Co-specialized Intangible investments: • The need of the firm’s customers or channel partners to invest time and money to partake in the initiative

27. Preemption BarrierValue System’s Structure • Relationship Exclusivity: • Participants in the value system elect to do business with only one firm that provides a particular set of products/services • They work with either the leader or the follower but never with both • Concentrated Value-System Link: • The market numbers relatively few organizations or consumers to work with

28. Holistic Approach • When thinking about value creation appropriation, you must think holistically • The combination of information technology and organizational resources –display both emergent properties and sustainability potential think holistically

29. The Dynamics of Sustainability • Two main dynamics • Capability development • Asset-stock accumulation Manager’s Role Plan to remain ahead of the competition. Look for opportunities to reinvigorate and reinforce the existing barriers to erosion

30. Barriers to Erosion Response-Lag Drivers

31. Capability Development • The process by which: • An organization improves its performance over time by • Developing its ability to use available resources for max effectiveness • Capability development is the process of “Learning by using”

32. Asset-Stock Accumulation • The process by which firms accrue resources over time • These assets are typically developed over time and cannot be accelerated

33. Applying the Framework • We can use the sustainability framework to determine when to pursue an IT-dependent strategic initiative • We ask two types of questions: • Prerequisite questions • Sustainability questions • Applicable to both • The leader trying to maintain an advantage • A laggard looking to respond to the innovator

34. Prerequisite Questions Is the initiative aligned with our strategy? • This question helps figure out how the initiative advances the firm’s positioning and strategy Are we focused on reducing cost, increasing willingness to pay, or both? • This question helps focusing the analysis on the planned value proposition What’s the IS design needed for this Initiative? • This question ensures that we do not narrowly focus on IT investments, but rather on IS design

35. Sustainability Questions Which competitors can replicate the initiative? • The leader should focus on maximizing the impact of prerequisite assets and capabilities • The laggard can estimate the role existing assets and capabilities play in the initiative How long before competitors can offer the same value proposition? • What is the response lag of the IS core of the initiative? • This question helps in estimating the role of IT in the initiative and the role of the IT project barrier

36. Sustainability Questions Will replication do competitors any good? • This question helps in estimating the role of the prehemption barrier • Based on this analysis the leader may choose to move aggressively to build switching costs • The laggard may choose fast replication or to be more circumspect What evolutionary paths does the innovation create? • This question points to the need to evaluate the potential for capability development and asset stock accumulation

37. Outcomes and Recommendations • Develop the IT-dependent strategic initiative independently. Best suited when: • Strong barriers to erosion exist • Sustainable advantage can be attained • Potential to gain acceptable ROI before imitation • Develop the IT-dependent strategic initiative as part of a consortium. Best suited when: • The innovator is unlikely to yield sustainable competitive advantage, • But it will improve overall profitability of the industry • Shelve the IT-dependent strategic initiative when: • The initiative will not likely create strong barriers to erosion • Retaliation by competitors will degrade average industry profits

38. The Recap • When analyzing the potential to defend a competitive advantage created by an IT-dependent strategic initiative, you must estimate the magnitude of the following four barriers to erosion: • IT Resources Barrier • Complementary Resources Barrier • IT Project Barrier • Preemption Barrier • An IT-dependent strategic initiative is defendable when the magnitude, in terms of time and money, of one or more of the barriers to erosion is such to discourage imitation or to render it impossible or impractical • Information technology (IT) can be critical to the sustainability of competitive advantage, bur it is not the IT itself that ensures sustainability, but rather the characteristics of the IT-dependent strategic initiative that the technology enables

39. The Recap • The useful life of an IT-dependent strategic initiative can be extended by rejuvenating the barriers to erosion. • Capability development • Asset-stock accumulation • The outcome of the analysis results in one of three recommendations • Pursue the IT-dependent strategic initiative independently when the firm can protect it or reap an acceptable return on investment before competitors can successfully retaliate • Pursue the IT-dependent strategic initiative as part of a consortium, when the firm cannot protect it, but all the firms in the industry will be better off once replication has occurred • Do not pursue the IT-dependent strategic initiative when the firm cannot protect it and industry profitability degrades once replication has occurred

40. What we Learned • To analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time. • To recognize the flaws in the arguments of those who suggest that information technology has lost its potential to enable sustained competitive advantage. • To recognize the four barriers to erosion that protect IT-dependent competitive advantage, and to estimate their size. • To identify the response lag drivers associated with each of the four barriers to erosion, and to provide examples of each. • To recognize how each of the four barriers can be strengthened over time in order to protract the useful life of an IT-dependent strategic initiative. • To use the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives when your firm takes a leadership position. • To use the concepts and frameworks described in this chapter in situations where your firm may be evaluating whether to retaliate against a competitor who pioneered an IT-dependent strategic initiative. • To identify the possible courses of action a firm should take based on your analysis, and to be able to recommend when the firm should or should not pursue a given IT-dependent strategic initiative.