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Appropriating IT-EnabledValue Over Time

Establishing when and how an IT-dependent strategic initiative can be protected

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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

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Learning Objectives

1. Analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time.

2. Identify and recognize the four barriers to erosion that protect IT-dependent competitive advantage. Learn to estimate their size.

3. Identify the response lag drivers associated with each of the four barriers to erosion, and provide examples of each.

4. 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.

5. Employ the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives

6. Articulate possible courses of action based on your analysis to be able to offer recommendations

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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

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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

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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

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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 DriversCharacteristics 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

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Four Barriers to Erosion

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IT-Resources Barrier

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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

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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

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IT-Resources Barrier

IT AssetsIT infrastructure - IT

components managed by specialists to provide standard services to the organization

Information Repositories – data stores containing extensive information

IT CapabilitiesIT 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

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Complementary-Resources Barrier

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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.

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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

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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

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Complementary ResourcesExternal Resources

• Assets that do not reside internally with the firm but accumulate with other firms and with consumers– Brand– Distribution channels

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IT-Project Barrier

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IT-Project Barrier

• Rely on an essential enabling IT core• Cannot be implemented until the necessary

technology has been successfully introduced

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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

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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

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Preemption Barrier

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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

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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

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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

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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

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The Dynamics of Sustainability

• Two main dynamics– Capability development– Asset-stock accumulation

Manager’s RolePlan to remain ahead of the competition.

Look for opportunities to reinvigorate and reinforce the existing barriers to erosion

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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”

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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

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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

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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

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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

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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

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Outcomes and Recommendations

1. 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

2. 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

3. 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

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What we Learned

1. Analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time.

2. Identify and recognize the four barriers to erosion that protect IT-dependent competitive advantage. Learn to estimate their size.

3. Identify the response lag drivers associated with each of the four barriers to erosion, and provide examples of each.

4. 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.

5. Employ the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives

6. Articulate possible courses of action based on your analysis to be able to offer recommendations