Using IT to add value: Innovation versus Efficiency

1. Using IT to add value: Innovation versus Efficiency

2. Overview • Efficiency/Innovation dilemma • Attempt to integrate numerous frameworks into something simple that makes sense • Review Competitive Forces Model • Extend Michael Porter’s Value Chain • Value Shop and Value Network • All use IT as the enabler to increase efficiency • IT also enables value add through innovation • Innovation strategies • How to implement those strategies

4. An Analysis is made to relate the determinants to each player listed Devise a strategy to defend a company against the forces, based on specific players and the determinants Look for supportive information technologies Porter’s Competitive Forces Model • How the Model is Used The Players in each force are listed

5. Response Strategies • Reduce Costs • Cost leadership? • Product differentiation • Enhance value of existing products • Improve quality (Superior product) • Focused market niche

6. Additional Response Strategies • Internal efficiency • Reduce “cycle time” • Growth strategy • Customer-oriented strategy • External Alliances • Innovation: new products, features, etc.

7. Strategy and the Internet (Porter) • We need to “…see the internet for what it is: an enabling technology…” (pg 64) • The “…greatest impact [of the internet] has been to enable the reconfiguration of existing industries that had been constrained by high costs for communicating, gathering information, or accomplishing transactions.” (pg 66) • “The great paradox of the Internet is that its [benefits] also make it more difficult for companies to capture those benefits as profits.” (pg 66)

9. Myths associated with the Internet • First mover advantage through increased switching costs and network effects • In reality, switching costs lower • For network effects to provide entry barrier, must be based on proprietary technologies • Partnering is a “win-win” strategy • Complements can have negative effect • Microsoft standardized operating systems which increased rivalry in PC industry • Outsourcing can lead to homogeneous industry with lowered entry barriers

10. Principles for Internet Strategy (Porter)Strategic Positioning • Start with the right goal: long term ROI. • Deliver a unique value proposition. • Develop a distinctive value chain configuration. • Make trade-offs for robust strategy. • Fit all elements of company to the strategy. • Maintain continuity of direction

11. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value Configuration Analysis Shop Network Resolve Customer Problem Facilitate Customer Relationships Chain Improve Internal Efficiencies

12. Firm Infrastructure Human Resources Management M A R G I N Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales After-sales Service M A R G I N Value Chain Value created by transforming inputs into products

13. M A R G I N M A R G I N Value Chain Structure • Critical Activities • Transform inputs into products • Also identify activities that provide infrastructure support • 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

14. Competitive Forces Analysis M A R G I N M A R G I N Value Chain Analysis • Understand • Industry • Strategy • Activities of the organization • Identify the activities and linkages that are critical • Add value by focusing on those critical activities and linkages • Lower cost by increasing efficiency, scale or capacity

15. M A R G I N M A R G I N Value Chain Use • Directly applicable to manufacturing activities • Mass vs customized • Less applicable when intangible products • R&D

16. Value Shop Firm Infrastructure Human Resources Management InfrastructureSupport Technology Development Procurement Problem Finding & Acquisition Problem Solving Choice Simon’s Problem Solving Model Control/ Evaluation Execution Value created by providing solutions, not services

17. Find Solve Choose Evaluate Execute Value Shop (cont’d) • Rely on intensive information to solve a customer problem • Value creation based on: • Information asymmetry between firm and client • Firm has information client needs • Firm has standardized information acquisition process • Cyclical, iterative solution process • Many standardized solutions • Can be resolved by non-experts • Need experts to recognize unique cases

18. Find Solve Choose Evaluate Execute 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 linkage • Need for “knowledge base” • Examples • Medical profession • Law • Consulting

19. Value Network • Mediating technology facilitates exchange relationships Network promotion and contract management • Invite and select customers tojoin network • Initialize, manage andterminate contracts Firm Infrastructure Human Resources Management Technology Development Procurement Service provisioning • Establish, maintain andterminate links • Billing forvalue received Infrastructure operation • Maintain andrun physical and information network Value derived from service of linking customers

20. Value Network (cont’d) • Value derived from scale and capacity • Each additional customer adds value • Value of new service dependent on who else adopts it • Examples: • Telephone • The first cell phone had no value • Insurance, HMO • Board base of clients share risk

21. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value Configuration Examples Cisco: solves problems Amazon: shared information Compaq: mass production

22. Do not confuse efficiency with innovation • “Price compression is killing innovation” • Michael Capellas, Compaq Computer CEO, Business Week (Sep 24, 2001), pg 102 • “Don’t mistake reinventing the wheel for innovation” • Related to Goldman Sachs $100 million investment in Webvan – current value $0 • Allan Sloan, “Dumb Deals 101”, Newsweek (Sep 10, 2001) pg 41

23. Types of Innovation(Christensen & Overdorf) • Sustaining Innovation • Respond to evolutionary market changes • Make a product or service perform better • Disruptive Innovation • Dealing with disruptive market changes • Create an entirely new market

24. Innovation as Value Proposition • Three components of value proposition • Value Shop (VS) • Value Chain (VC) • Value Network (VN) • Total Value Proposition (TVP) is the product • ∆TVP = ∆VS * ∆VC * ∆VN • Innovation depends on new business model • VS or VN or multiple factors are foci • Efficiency is incomplete innovation • VC is the focus

25. Value Added Strategies

26. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value Configuration Strategies Amazon: shared information Cisco: solves problems Compaq: mass production

27. M A R G I N Find Solve Choose Evaluate Execute M A R G I N Value Configuration Strategies Sun: Javaenablesinternet Amazon: shared information Cisco: solves problems EBay: auctionnetwork Napster: music distribution Dell: mass customization Compaq: mass production

28. How to innovate? • Focused on strategies • Combination of value configuration strategies needed to enable innovation • How can a manager facilitate implementation of these strategies? • Hope to provide some insight by end of course

29. Where does IT fit into this? • Use IT as a ready lever for efficiency improvement • By improving products and services • By improving operations • By improving the customer interfaces • Use IT as a lever to aid innovation • By making new benefits possible • By developing new processes • By creating new customer networks • Use IT to create new business model • Extended Value Chain • Value Shop • Value Network

30. Value Added Strategies VS VN VC

31. References • Chan K.W. and Mauborgne R. “Value Innovation: The Strategic Logic of High Growth”, Harvard Business Review, Jan-Feb 1997, pp 103-112. • Christensen, C.M. and Overdorf. M. “Meeting the Challenge of Disruptive Change”, Harvard Business Review, Mar-Apr 2000, pp 67-76. • Gobeli, D.H. & Rudelius, W. “Managing Innovation: Lessons from the Cardiac-Pacing Industry”, Sloan Management Review, 26:4 (Summer 1985), pp. 29 – 33 • Hansen, M.T. and von Oetinger, B. “Introducing T-Shaped Managers: Knowledge Management’s Next Generation”, Harvard Business Review, Mar 2001, pp 107-116. • Stabell, C.B. and Fjeldstad, O.D. “Configuring Value for Competitive Advantage: on Chains, Shops, and Networks”. Strategic Management Journal, 19 (1998), pp 413-437.