Using IT to add value: Innovation versus

Efficiency

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

Porter’s Competitive Forces Model

How the Model is Used

The Players in each force are listed

An Analysis is made to relatethe determinants to each player listed

Devise a strategy todefend a company against the forces,

based on specific players and the determinants

Look for supportive information technologies

Response Strategies

Reduce Costs Cost leadership?

Product differentiation Enhance value of existing products Improve quality (Superior product)

Focused market niche

Additional Response Strategies Internal efficiency

Reduce “cycle time” Growth strategy Customer-oriented strategy External Alliances Innovation: new products, features, etc.

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)

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

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

Value Configuration Analysis

Chain

Shop Network

Find Solve

Evaluate Execute

Choose

Improve Internal Efficiencies

Resolve Customer Problem Facilitate Customer

Relationships

Value Chain

Inbound Logistics

Operations

Outbound

Logistics

Marketing & Sales

After-sales

Service

Firm Infrastructure

Human Resources Management

Technology DevelopmentProcurement

Value created by transforming inputs into products

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

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

Competitive Forces Analysis

Value Chain Use

Directly applicable to manufacturing activities Mass vs customized

Less applicable when intangible products R&D

Value Shop

Problem Finding & Acquisition

Problem Solving

Control/ Evaluation

Execution

Choice

Firm InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Value created by providing solutions, not services

Simon’s Problem Solving Model

InfrastructureSupport

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

Find Solve

Evaluate Execute

Choose

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

Find Solve

Evaluate Execute

Choose

Value Network

Network promotion and contract management Invite and select

customers tojoin network

Initialize, manage andterminate contracts

Firm InfrastructureHuman Resources ManagementTechnology DevelopmentProcurement

Value derived from service of linking customers

Service provisioning Establish,

maintain andterminate links

Billing forvalue received

Infrastructure operation Maintain and

run physical and information network

Mediating technology facilitates exchange relationships

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

Value Configuration Examples

Compaq: mass production

Cisco: solves problems

Amazon: shared information

Find Solve

Evaluate Execute

Choose

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

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

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

Value Added Strategies

Value Shop Value Chain Value Network

Innovation Create truly new benefits

Develop new process as support

Enhance customernavigation

Efficiency Standardize Products & Services

Reengineer(TQM, Fast cycle time)

Automate Interface

Value Configuration Strategies

Compaq: mass production

Cisco: solves problems

Amazon: shared

information

Find Solve

Evaluate Execute

Choose

Value Configuration Strategies

Compaq: mass production

Cisco: solves problems

Amazon: shared

information

Find Solve

Evaluate Execute

Choose

Dell: mass customization

Napster: music distribution

Sun: Javaenablesinternet

EBay: auctionnetwork

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

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

Value Added Strategies

VC

VS VN

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.