Appropriating IT-Enabled Value Over Time

1. Appropriating IT-EnabledValue Over Time Establishing when and how an IT-dependent strategic initiative can be protected © 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 • Analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time. • Identify and recognize the four barriers to erosion that protect IT-dependent competitive advantage. Learn to estimate their size. • Identify the response lag drivers associated with each of the four barriers to erosion, and provide examples of each. • 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. • Employ the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives • Articulate possible courses of action based on your analysis to be able to offer recommendations © Gabriele Piccoli

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

5. 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 © Gabriele Piccoli

6. 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 © Gabriele Piccoli

7. 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 © Gabriele Piccoli

8. Four Barriers to Erosion © Gabriele Piccoli

9. IT-Resources Barrier © Gabriele Piccoli

10. 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 © Gabriele Piccoli

11. 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 © Gabriele Piccoli

12. 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 IT-Resources Barrier © Gabriele Piccoli

13. Complementary-Resources Barrier © Gabriele Piccoli

14. 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. © Gabriele Piccoli

15. 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 © Gabriele Piccoli

16. 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 © Gabriele Piccoli

17. Complementary ResourcesExternal Resources • Assets that do not reside internally with the firm but accumulate with other firms and with consumers • Brand • Distribution channels © Gabriele Piccoli

18. IT-Project Barrier © Gabriele Piccoli

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

20. 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 © Gabriele Piccoli

21. IT-Project BarrierImplementation Process The strength of barriers changes depending on the implementation characteristics of the IT core • Implementation 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 © Gabriele Piccoli

22. Preemption Barrier © Gabriele Piccoli

23. 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 © Gabriele Piccoli

24. 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 © Gabriele Piccoli

25. 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 © Gabriele Piccoli

26. 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 © Gabriele Piccoli

27. 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 © Gabriele Piccoli

28. 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” © Gabriele Piccoli

29. Asset-Stock Accumulation • The Process by which: • Firms accrue resources over time • These assets are typically developed over time and cannot be accelerated Example: Gamblers’ data © Gabriele Piccoli

30. 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 © Gabriele Piccoli

31. 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 © Gabriele Piccoli

32. 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 © Gabriele Piccoli

33. 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 © Gabriele Piccoli

34. 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 © Gabriele Piccoli

35. What we Learned • Analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time. • Identify and recognize the four barriers to erosion that protect IT-dependent competitive advantage. Learn to estimate their size. • Identify the response lag drivers associated with each of the four barriers to erosion, and provide examples of each. • 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. • Employ the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives • Articulate possible courses of action based on your analysis to be able to offer recommendations © Gabriele Piccoli