Changing the Firm’s Digital Backbone: How Information Technology shapes the Boundaries of a Firm Stephan Billinger & Michael Jacobides Research Fellow, Strategic and International Management Area The presentation Introducing the phenomenon Prior theory Research design The case study Summary contribution 2 Creating a vertical architecture: The case of Fashion Inc. Garment Service Unit Sourcing & Order Processing Sales Apparel collection Product Development Packaged & tagged garment Make & Trim Garment Sourcing & Cut Packaging & Processing Apparel Design Cut Fabric Refined Fabric CMT Unit Cut Fabric Dyeing Dyed Fabric Fiber Arrows: Firm selling Refinement & Processing Refined Farbic Sourcing & Knitting Raw Fabric Arrows: Firm buying Dyed Fabric Fiber Raw Fabric Fabric Unit 3 Why did Fashion Inc. not outsource but open-up its boundaries instead? Comments from managers “Why should we get rid of the ‘staple part’ of our value chain?” “Innovation is not changing a style or a color – it’s in the fabric!” Benefits Operational Efficiency and Effectiveness Strategic Capabilities and Propensity to Innovate Use of the Market Benchmark supports Corporate Resource Allocation 4 The role of IT at Fashion Inc.‘s redesign „The old IT infrastructure cannot do it…“ „We need a new IT system!“ How does Information and Communication Technology (IT) influence a firm’s boundary choices? 5 IT and firm boundaries / IT and modularity in firms Research that follows the TCE tradition suggests – IT reduces transaction costs (Ciborra, 1993) – IT reduces internal, external coordination costs (Malone et al, 1987) – IT leads to external coordination (Clemons et al, 1993; Hitt, 1999) IT in firms – “Electronic markets”, “electronic hierarchies” (Malone et al, 1987) – IT facilitates communication in MNEs (Andersen & Foss, 2005) Looking at firms: Technology, organizations and (internal) boundaries – Modular organizations (Sanchez & Mahoney 1996; Baldwin & Clark 2000; Schilling 2000; Schilling & Steensma, 2001) – Modularization: Disaggregated production chain (Schilling, 2002) 6 The theory gap and the research design Research has not looked at: – How does Information and Communication Technology (IT) influence a firm’s boundary choices? The setting was chosen on conceptual grounds, rather than because of its representativeness (Firestone, 1993) Inductive case study to identify micro-level mechanisms Verification of case-study results using an IT database 7 Comparing the old and the new IT system The problem in daily business The old IT system The new IT system “How do we get prices out of the IT system?” System allows only buying, selling can only be pursued after certain steps System supports buying and selling along the entire value chain “How can we react to several customers along the value chain?” Scenario planning is not possible Scenario planning with IT simulation tools … … … 8 New IT: An Enterprise Resource Planning (ERP) system that plays an architectural role Master Production Schedule Network Forecasting Production Requirements Planning Network Demand Planning Manufacturing Planning & Control Purchasing Controlling Network Configuration Overall Tasks Inventory Management Core Tasks Order Management ERP systems support these functionalities only recently Network Tasks Master Data Management Partly adopted from Schuh & Roesgen, 2006 9 Vertical packages determine vertical scope Fiber Warehouse Raw Fabric Warehouse Dyed Fabric Warehouse Fabric Warehouse Processes procured internally Vertical Package 3 Sourcing Fiber Processes procured by external partners Vertical Package 1 Vertical Package 2 Knitting Fabric Refinement Dyeing Fabric Order Processing Vertical Package 4 10 Summary contributions Different types of IT play different roles in organizational design – Architectural IT vs. productive IT vs. mediating IT Vertical packages determine vertical scope – Vertical packages are a particular configuration of processes that fulfil a distinct business need Architectural IT (e.g. an ERP system) – is required to rapidly configure and reconfigure vertical packages – enables modularity within an organization 11 Implications Firm boundary decisions – A firm’s overall boundaries are the sum of its individual transactional choices – combining these choices can generate benefits – Vertical scope is determined by dynamically changing configurations of vertical packages Organizational design – Permeable value chains are based on rapidly reconfigurable modularity – Modular structures are central for creating markets within and across organizations Information Systems – IT can help to simulate vertical integration while addressing intermediate markets – To understand firm boundaries, we need to study architectural technologies (e.g. ERP) rather than mediating technologies (e.g. EDI) 12 Thank you!