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Chapter 9Appropriating IT-Enabled

Value Over Time

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

Chapter 9

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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. To analyze the potential of IT-dependent strategic initiatives to ensure value appropriation over time.

2. To recognize the flaws in the arguments of those who suggest that information technology has lost its potential to enable sustained competitive advantage.

3. To recognize the four barriers to erosion that protect IT-dependent competitive advantage, and to estimate their size.

4. To identify the response lag drivers associated with each of the four barriers to erosion, and to provide examples of each.

5. To 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.

6. To use the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives when your firm takes a leadership position.

7. To use the concepts and frameworks described in this chapter in situations where your firm may be evaluating whether to retaliate against a competitor who pioneered an IT-dependent strategic initiative.

8. To identify the possible courses of action a firm should take based on your analysis, and to be able to recommend when the firm should or should not pursue a given IT-dependent strategic initiative.

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Introduction

• The primary objective of the modern general and functional manager is to use them to create added value

• The firm must be able to appropriate the value created over time to truly benefit

• Failing to do so will quickly lead to a situation where competitors match the leader, and customers rather than the innovator end up appropriating the value created

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Not all Initiatives are Equal

• Can we reduce uncertainty about whether IT-dependent strategic initiatives lead to sustainable advantage?

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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Resource-based Views

• Modeled as a bundle of resources

• Competitive advantage depends upon the characteristics of the resources at its disposal

• When the firm controls resources that are rare, valuable, inimitable, and non-substitutable, the advantage will be difficult for competitors to overcome

• Rare

• Valuable

• Inimitable

• Non-substitutable

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Resource-based Views• Rare

– A resource is rare when it is idiosyncratically distributed– It is scarce and not readily available for acquisition by competitors

• Valuable– A resource is valuable when it is necessary to underpin a value adding strategy– Valuable resources enable the firm to offer a value proposition that is either

superior to competitors’ or, while equivalent, it can be offered with a lower investment

• Inimitable– A resource is inimitable when competitors find it impossible, or difficult, to

duplicate it• Non-substitutable

– A resource is non-substitutable when competitors are unable to replicate the firm’s overall value proposition using surrogate resources for the ones that are rare, valuable, and inimitable

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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

• 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 BarrierIT Assets

IT 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 Barrier

• Successful implementation of any IT-dependent strategic initiative requires that complementary organizational resources be mobilized as well

• Firm must develop or acquire the necessary complementary resources

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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

• When a firm’s IT-dependent strategic initiative can make use of or contribute to the development of these external resources, response lag increases considerably and barriers to imitation are augmented

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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

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• 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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Holistic Approach

• When thinking about value creation appropriation, you must think holistically

• The combination of information technology and organizational resources –display both emergent properties and sustainability potential think holistically

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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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Barriers to Erosion Response-Lag Drivers

Barriers to Erosion Response-Lag Drivers

IT Resources Barrier IT Assets • IT infrastructure* • Information repositories* IT Capabilities • Technical skills† • IT management skills† • Relationship assets*

Complementary Resources Barrier Complementary Resources*†

IT Project Barrier Technology Characteristics • Visibility • Uniqueness • Complexity Implementation Process • Complexity • Process change

Preemption Barrier Switching Costs

• Tangible co-specialized investments* • Intangible co-specialized investments* • Collective switching costs* Value-System Structural Characteristics • Relationship exclusivity • Concentrated links

*Response-lag drivers subject to asset-stock accumulation processes. †Response-lag drivers subject to capability development processes.

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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

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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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The Recap• When analyzing the potential to defend a competitive advantage

created by an IT-dependent strategic initiative, you must estimate the magnitude of the following four barriers to erosion: – IT Resources Barrier– Complementary Resources Barrier– IT Project Barrier– Preemption Barrier

• An IT-dependent strategic initiative is defendable when the magnitude, in terms of time and money, of one or more of the barriers to erosion is such to discourage imitation or to render it impossible or impractical

• Information technology (IT) can be critical to the sustainability of competitive advantage, bur it is not the IT itself that ensures sustainability, but rather the characteristics of the IT-dependent strategic initiative that the technology enables

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The Recap• The useful life of an IT-dependent strategic initiative can be extended

by rejuvenating the barriers to erosion. – Capability development – Asset-stock accumulation

• The outcome of the analysis results in one of three recommendations– Pursue the IT-dependent strategic initiative independently when the firm

can protect it or reap an acceptable return on investment before competitors can successfully retaliate

– Pursue the IT-dependent strategic initiative as part of a consortium, when the firm cannot protect it, but all the firms in the industry will be better off once replication has occurred

– Do not pursue the IT-dependent strategic initiative when the firm cannot protect it and industry profitability degrades once replication has occurred

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What we Learned

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

2. To recognize the flaws in the arguments of those who suggest that information technology has lost its potential to enable sustained competitive advantage.

3. To recognize the four barriers to erosion that protect IT-dependent competitive advantage, and to estimate their size.

4. To identify the response lag drivers associated with each of the four barriers to erosion, and to provide examples of each.

5. To 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.

6. To use the concepts and frameworks described in this chapter in the context of future IT-dependent strategic initiatives when your firm takes a leadership position.

7. To use the concepts and frameworks described in this chapter in situations where your firm may be evaluating whether to retaliate against a competitor who pioneered an IT-dependent strategic initiative.

8. To identify the possible courses of action a firm should take based on your analysis, and to be able to recommend when the firm should or should not pursue a given IT-dependent strategic initiative.