The Universal Solvent

1
The Universal Solvent

• Carr, Chapter 5
• Richard T. Christoph
• INFS 780

2
Technical advances often destroy

• Railroad eliminated locational advantages firms
  had
• Suddenly, it was easy to ship goods over long
  distance
• Telephone halted advantages of long-term
  relationships
• I could talk about products anywhere
• IT is doing the same
• Consider on-line investing

3
Carr notes (pg 88)

• IT can corrode advantages not just in one or a
  few areas, but across many aspects of a companys
  business.
• Traditional advantages tend to dissipate as the
  function is automated
• Is this right?

4
Software impact

• Automated systems in customer service (or other
  areas) removes differences in response times
• All players in the industry will have about the
  same response parameters
• Not possible to achieve distinction when using
  the same software
• This is great if this function is not your basis
  for advantage

5
Homogenization

• Functions become the same from firm to firm
• The Internet has dramatically increased this
  impact
• Advantages based in proprietary networks are gone
• Carr suggests the Internet has pushed power away
  from firms and into customers

6
Compare catalog order vs. Internet

• The catalog places premium on
• Catalog size, quality
• Allows my store to differentiate
• Cost of distribution is high,
• mailing list management critically important
• Internet
• Focus on speed
• Customer can drop my store for another
• Cheap distribution costs
• All internet sites look alike no advantage for
  size

7
Porters Comments on the Internet

• Internet provides easy access for buyers to
  information
• Buyer power rises
• Traditional Sales force not as critical
• Reduces barriers to entry
• Proprietary systems decrease
• Rivalry increases
• The main benefits from the Internet (access,
  information) reduce the transaction costs and
  profitability to many firms

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Competitive Advantage

• Sustainable advantage
• Firm can build a long-term advantage over peers
• IT likely will not do this today
• Leverageable Advantage
• A fleeting advantage that will be quickly copied
  by competitors
• IT can certainly provide this but not for long

9
Value Innovation

• Why do firms exist?
• Economists state that markets are the most
  efficient way to distribute goods
• Think of commodities markets for oil, wheat,
  corn, etc.
• If this is true, why create a firm to distribute
  goods in place of a market?
• Firms must add expense over a plain market!

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Why do firms exist?

• Remember Ronald Coase? He suggested that
  transaction costs were the reason firms are
  created.
• Transaction costs are all costs buyer and seller
  incur as they gather information and negotiate a
  sale.
• These quickly add up
• Consider trying to buy a car what do you have
  to do?

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Transaction costs

• Costs are higher when the product is complex and
  varied conversely, costs are lower when the
  product is a commodity
• Corn futures markets work well since there are
  low transaction costs
• Home sales have high transaction costs, so firms
  (Realtors) have developed
• When firms are created, functions are
  aggregated together

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What about technology?

• How has technology changed transaction cost over
  time?
• More information is quickly available
• This lowers transaction costs
• Reduces need for the middle firm
• Some argue that firms will disappear and all of
  us become contractors
• Technology allows dis-aggregation

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Disaggregation Trends

• What does this mean?
• Why do it?
• Is this not the exact opposite of
  vertical/horizontal integration? Which is right?
• How do transaction costs enter in this?

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Transaction Costs could Cause larger firms

• Carr notes that as IT lower transaction costs,
  vertical integration could increase leading to
  larger and larger firms
• This is normal in maturing markets
• Lower transaction costs allow easier management
• Consider WalMart

15
Bottom line

• Do not confuse the business with the Information
  system
• As information becomes easily available, it
  become less costly and possibly worth less (since
  all have about the same information)
• Consider ERP systems

16
ERP Strategy From Peoplesoft Managing ERP
Applications for Strategic Advantage

• ?? Improved Cost-Effectiveness. Proactive
  management and support means that problems are
  prevented before they decrease ROI. customers
  report lower maintenance and operating costs,
  often with a savings of 20 percent or more
• Would Drucker say this focuses on effectiveness
  or efficiency?

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ERP Strategy From Peoplesoft Managing ERP
Applications for Strategic Advantage

• ?? Increased Efficiency. A first-call resolution
  up to 50 percent for user functionality questions
  increases the productivity of customers, freeing
  them to focus on managing and aligning workforce
  with corporate needs and increasing employee,
  partner, and customer satisfaction.
• Does Porter note this type of saving as a
  strategic one?

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ERP Strategy From Peoplesoft Managing ERP
Applications for Strategic Advantage

• ?? Expanded Strategic Focus. With all of the
  routine and mundane tasks covered, clients have
  the greater ability to leverage new capabilities
  within their ERP systems, like self-service
  functions for managers and employees
• Would Carr state that these strategic benefits
  are able to build a proprietary competitive
  advantage?

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What do these mean?

• I suggest that these are really efficiency based
• This means such benefits, while valuable, are NOT
  strategic
• Could these sorts of benefits be infrastructural
  in nature?
• Consider the electricity grid or highway system
• Could we not point to similar benefits? If so,
  they are certainly NOT strategic.

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IT examples

• Carr notes that ERP systems allow all firms to be
  equally efficient
• Eliminates the efficient firm advantage
• Best practices become universal practices
• What does this mean?
• How do we compete now
• Is strategy dead?
• What does this mean for IT?

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My Conclusions

• ERP systems will tend to increase rivalry since
  all firms become more efficient
• No longer can an unusually effective IT Dept.
  provide unique apps the yield competitive
  advantage
• Many ERP customization is done by 3rd parties
  available to all firms
• Customer clearly wins but firms profit will
  probably not increase

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My Conclusions

• ERP may remove IT as a source of competitive
  advantage for a single firm
• ERP enforces discipline you must do it their
  way. IT groups focus on the install of the ERP
• ERP systems are so big that they tend to use all
  available IT resource
• After ERP install, what is the difference between
  Firm 1s and firm 2s information capability?

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My Conclusions

• Differentiation will be harder to achieve since
  more firms can do it.
• If ERP allows firms to customize marketing (or
  any other aspect of business) it is logical that
  more firms will try to do it.
• Thus, differentiated marketing will become the
  norm
• Consider Web-based marketing everyone now
  does it. How can you build a sustainable
  advantage on that?

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My Conclusions

• ERP systems are infrastructural
• Given the prior issues, I believe that ERP
  systems are becoming an infrastructural
  technology.
• This means that all firms need it to compete at
  all
• Similar to electricity, telephone, cash
  registers, etc
• If this is true, it means a fundamental change in
  the IT profession.

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IT Changes

• I submit that IT will change and that successful
  IT pros must
• Focus increasingly on the business side not the
  technology side
• Carefully build accurate cost justification
  models
• Assume that basic IT issues will be outsourced
• Find the IT components that may have strategic
  value and build a business case there.