Chapter 9
Chapter 9
Appropriating IT-Enabled
Value Over Time
Establishing when and how an IT-dependent strategic initiative can
be protected
1
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 ITdependent 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 ITdependent strategic initiative.
3
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
4
Not all Initiatives are Equal
• Can we reduce uncertainty about whether ITdependent strategic initiatives lead to
sustainable advantage?
vs.
High Speed
Internet Access
in Hotels
Business Intelligence in Casinos
5
Sustainability Framework
Careful!
– Reproducing IT is NOT equivalent to reporoducing an ITdependnet 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 Drivers
Characteristics 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
13
IT-Resources Barrier
IT Assets
IT infrastructure - IT
components managed by
specialists to provide
standard services to the
organization
Information Repositories –
data stores containing
extensive information
IT Capabilities
IT 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
15
Complementary-Resources Barrier
• Successful
implementation of any ITdependent strategic
initiative requires that
complementary
organizational resources
be mobilized as well
• Firm must develop or
acquire the necessary
complementary resources
16
Complementary Resources
• As an initiative becomes
more reliant on these,
the complementaryresource barrier to
imitation strengthens,
and replication of the
strategy becomes
slower, costlier, and
more difficult.
17
Complementary Resources
Structural Resources
Structural Resources: used to enact ITdependent 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 Resources
Capabilities
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 Resources
External 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 Barrier
IT 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 Barrier
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
• 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
25
Preemption Barrier
Switching 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 Barrier
Value 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 Role
Plan 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
35
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
37
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 ITdependent 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 ITdependent strategic initiative.
40