Business Transformation: Lessons from the Matrix of Change

Prof. Erik BrynjolfssonCenter for eBusiness

MIT Executive Education November, 2002

Copyright © 2002 Erik Brynjolfsson. Reproduction prohibited

ebusiness.mit.edu

Erik Brynjolfsson

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DATA

Firm-level Data: Two SamplesSample Coverage

» 1987-2000 Sample: 1167 large firms (10,517 observations)

» 41 industries (2-digit SICs) represented

! 54% manufacturing, 43% services, 3% mining & construction

! Not a random sample of US firms

» Four Principal Types of Data! Market Value from S&P’s Compustat II

! Computer Capital from Computer Intelligence

! Ordinary Capital, other Assets, R&D from S&P’s Compustat

! Organizational practices from surveys we conducted 1995-1996

» Currently Undertaking New Survey of 500 firms! Part of 5 year, $5 million project at MIT

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-1 .5

-1.0

-0.5

0.0

0.5

1.0

1.5

-4 -2 0 2 4

MFP

IT 3

IT and Productivity: The Data Speak

IT Stock (relative to industry average)

Productivity(relative to industry average)

IT is associated with greater productivity...

...But what explains the substantial variation across firms?

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Computers and Organizational Capital

Computer Capital

Org

Mar

ket v

alue

High IT and

High “Org.Capital”

Source: Brynjolfsson, Hitt and Yang, Intangible Assets: Computers and Organizational Capital, http://ebusiness.mit.edu/erik

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Lessons from the Research

1. There’s a lot more to digital business than (just) technology! Be ready to transform the whole business

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Digital Business requires changes throughout the enterprise

“Amazon’s on-line account maintenance system provides its customers with secure access to everything about their account at any time. …they can ...customize virtually everything about the system to their own tastes...

…such information flow to and from customers would paralyze most old-line companies.”

--Denise Caruso, New York Times

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10

CustomerCustomerCustomer Global InternetGlobal Global

InternetInternetWeb

serverWeb Web

serverserver

FirewallFirewallFirewall

CorpI/S

CorpCorpI/SI/S

InventoryInventoryInventory

ProductsProductsProducts

CustomersCustomersCustomers

DatabasesDataData

basesbases

Provide Access to Corporate Databases Internally and Externally

End to End Integration Provides:• Real-time Order Status• Transaction Records• Product Information

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Lessons from the Research1. There’s a lot more to digital business than (just)

technology– Be ready to transform the whole business

2. Use technology to leverage existing assets– Transformation doesn’t mean cannibalization: Large firms

should build on their competitive advantages.

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Managing Change

Business processes are the basic building blocks of all business models.

How can managers identify the processes that leverage their Internet business model?

How can the identify the processes that need to change?

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Web servers and email-based InteractionsOutsourced, Generic informationFocus on frequent tradersSalaried compensationAlliances with other service providersDiversified revenue stream including adsLow Fees on trading

Physical Retail Front OfficeAssigned Broker Provides Personal AdviceFocus on “high net worth” investorsSpecialized research staffCommission-based compensationProprietary, Custom informationHigh fees tied to trading

Case study:Digital Business is Not (just) New Technology

Traditional Brokerages

Online Brokerages

The Matrix of Changepredicts a rough transition

Copyright © 1994-1998 Erik Brynjolfsson IT, Productivity and Organization 26

Proprietary, custom Information

Retail Front

High Fees

Old Practices

+

+

+ -

Grid Rankings

+ Reinforcing practices

- Opposing Practice

+

+

-

-

-

Out

sour

ced,

gen

eric

Info

rmat

ion

Web

and

Em

ail f

or In

tera

ctio

n

Low

Fee

s

New

Pra

ctic

es

-

+-

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The analysis of Schwab Online is

much more encouraging

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Lessons from the Research1. There’s a lot more to digital business than (just)

technology– Be ready to transform the whole business

2. Use technology to leverage existing assets– Transformation doesn’t mean cannibalization: Large firms

should build on their competitive advantages.

3. Understand business process complementarities using the Matrix of Change– Business processes are valuable only to the extent they

support and are supported by the rest of the system

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One Stop Financial SupermarketWrap Account with Single Annual FeeMultiple Access PointsAccess to Specialized researchPersonal Broker via multiple channelsProprietary, Custom informationNo fees for trading

A New Model for Merrill

New Online Brokerage

Model

“Unlimited Advantage”

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Merrill Lynch’s New Business Model

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Last Laugh?“Now, Schwab is embarking on what may well prove its

riskiest move yet… Instead of trying to drive revenue through low-cost trades, Schwab says it will focus on providing investment advice to its clients. It is opening several new brokerage offices, where for the first time Schwab-employed "financial advisers" will provide investment tips and other services for a fee ….

In the not-too-distant future, "Schwab will be a lot closer to Merrill Lynch than it is to the Schwab of yesterday," predicts Charles "Chip" Roame, a former Schwab executive.”– Gasparino and Brown, Wall Street Journal, June 19,

2001, page 1 feature

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Lessons from the Research1. There’s a lot more to digital business than (just)

technology– Pizza Hut, MIT statistical Study

2. Use technology to leverage existing assets– UPS

3. Understand business process complementarities using the Matrix of Change– Merrill Lynch, Schwab

4. Be ready to re-invent, not just follow – A deep understanding of your real assets catalyzes creativity

Research and Practice Have Never Been Closer!

To Learn More about the Matrix of Change, please visit:

http://ebusiness.mit.edu/moc

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Center for eBusiness at MIT

To learn more about the Center for eBusiness, please visit:

http://ebusiness.mit.edu