1. Making the Case for Networked Business
Chapter 4
Making the Case for Networked Business
MIS 524

2. AGENDA Comparing Industrial and Networked Economies
Economies of Scale
Economies of Scope
Economies of Style
Linking Strategy to Execution to Results
Developing the Business Case for IT
MIS 524

3. PreIndustrial Economies
There are two versions of a pre-industrial economy:
In the subsistence version, people produce what they need. Buyer=supplier and there are no intermediaries, supply chains, fulfillment, etc.
In the craft version, people buy from skilled suppliers who fabricate unique items for each customer. There might be intermediaries in the value chain, but the product itself is unique in form, substance and performance.
MIS 524

4. Pre-Industrial Economics
Note lack of necessary intermediaries
Buyer=Supplier= Distributor
Unique Product
Unique Supplies
Subsistence Economy Craft Economy
Focal Firm
Unique Supplies
Unique Product
Note possibility of intermediation
Note possibility of intermediation
MIS 524

5. Economies of SCALE
The industrial age brought about the ability to mass produce items.
These items were no longer unique in form, substance and performance.
To keep costs low, quality control and replicability were the major criteria.
In addition, the large quantities required changes to the supply chain, including necessary intermediaries at both ends.
MIS 524

6. Comparing Industrial and Pre-Industrial Economies
Industry (mechanism) provided economies of SCALE
The cost of the Nth item is effectively zero, for some N.
This differs from a craft economy, where each item is built from scratch.
Finding the right value for N may be difficult, but it is generally large
Economies of scale require mass markets, however, since N may be quite large
Products have “mass” and the major cost is no longer production but distribution (including marketing)
MIS 524

7. Note focus on reliable and manageable supply chains
Industrial Economics
Focal Firm
Replicable Product
Replicable Supplies
Note almost certain requirement of intermediaries for distribution and marketing
Note focus on reliable and manageable supply chains
Competitive advantage arises from nature of product but also from maintaining external supply chains and relationships with customers
MIS 524

8. Economies of SCOPE
As mass markets specialize and differentiate (or as individual customers become more savvy, literate, demanding), there grows a necessity to cater to individual tastes or niches.
Meeting these needs requires controllable variation in the mass produced product, a change in the SCOPE or design of the product.
MIS 524

9. Economies of SCOPE
New products, though, require new plants, given the need for economies of scale.
In order to have economy of scope, this “barrier to entry” has to be overcome
In general, industrial economies cannot exhibit economies of scope and hence competition has moved to differentiation and market segmentation.
However, entry costs for IT-enabled businesses are generally low, allowing new products and services to be launched almost at will.
MIS 524

10. Post-Industrial Economics
Customer 1
Focal Firm
Replicable Supplies
Tailorable Supplies
Tailorable Product
Customer 2
Customer 3
Customer 4
Keys to competitive advantage are customer feedback, agility, cost control, knowledge of supply chain.
i.e., data, information
and knowledge
MIS 524

11. IT-Enhanced Economies
IT can assist in moving from economies of scale to economies of scope
Lots of information is required.
However, communication might still be rather slow
…and networks of information aren’t necessarily advantageous in and of themselves.
MIS 524

12. Economies of STYLE
The network economy has introduced a third kind of economy: style
An economy of style occurs when the whole business proposition can be reengineered at will
This allows the producer and customer (or producer and supplier) to have almost any relationship desired.
MIS 524

13. Comparing Industrial and Networked Economies
IT and the Internet can create “weightless” production in which N can be very small, thus obviating the need for a mass market.
In addition, both transaction and coordination costs for sales and production can be dramatically decreased (sometimes close to zero).
MIS 524

14. Comparing Industrial and Networked Economies
The following can then be tailored:
Delivery time, place, style
Item instruction (how to use, etc.)
Item integration with other items
Item integration with (business) processes
(End-to-end) consulting
In effect, an economy of style allows the producer to reengineer customers.
MIS 524

15. Networked Economies Replicable Supplies Intelligent Supplies
Customer 1
Replicable Supplies
Intelligent Supplies
Focal Firm
Intelligent Product
Customer 2
Customer 3
Customer 4
Each of these implied relationships is now customizable rather than fixed. Now the focal firm has implicit control over all aspects of the model, including all aspects of the supply chain. In the extreme, the focal firm can “disappear”
MIS 524

16. The Three Tenors
Economy of scale: It’s inexpensive to make a large number of items
Economy of scope: It’s inexpensive to make a large variety of items
Economy of style: It’s inexpensive to have a large number of relationships with items (and suppliers and customers)
MIS 524

17. Economies of X Required Implications
Replicability of input factors
Some output factors are relatively weightless
Intelligence, knowledge
Flexibility, agility
Expenditure on process
Lots of output variation
Increased complexity
Potential role conflict and vagueness
Increased reliance on knowledge
Blurring of organizational boundaries
Ratcheting up of competition
MIS 524

18. Economies of Scale Required Implications
Replicability of supplies
Development of mass markets for products
Knowledge of marketplace and production process is more critical
Ability to tune production
Expenses on machinery and employee training
Ability to produce multiple products
Increased complexity
Supply chain integration
Increased reliance on knowledge
Supplier, buyer relationships change
Ratcheting up of competition
MIS 524

19. IT and Economies of Scale
IT has an ACCOUNTING function to keep track of materials
IT has a REPORTING function to keep track of performance of production
MIS 524

20. Economies of Scope Required Implications
Replicability of manufacturing process
Infinite variations of design
Intelligence, knowledge of process design and design process
Flexibility, agility in production
Expenditure on design, training
Odd dependence on suppliers
Lots of unique products
Increased complexity of product line and customers
Potential role conflict and vagueness
Increased reliance on knowledge of process and customers
Supply chain vagueness
Ratcheting up of competition
MIS 524

21. IT and Economies of Scope
IT has functions of industrial economy providing economy of scale PLUS
Intelligence gathering and maintenance functions to keep track of customer requirements
Monitoring and control functions to keep track of process variation
Accounting functions to determine profitability
MIS 524

22. Economies of Style Required Implications
Replicability of input factors
Business model is relatively weightless in terms of product, process
Intense Intelligence, knowledge of suppliers, buyers, employees
Flexibility, agility in design, relationships
Expenditure on intelligence, marketing
Lots of variation in relationships
Increased complexity of supply chain
Potential role conflict and vagueness
Increased reliance on knowledge
Blurring of organizational boundaries
Ratcheting up of competition
MIS 524

23. IT and Economies of Style
All functions required for economy of scope PLUS
Network required to integrate along supply chain
Intelligence gathering critical to develop and monitor new relationships
Accounting is much more complex as new businesses develop.
MIS 524

24. Linking Strategy, Execution, Results
Operating and Innovating, managing and learning, leading and engaging
Capabilities
(Re-
Sources)
Cost
Concept
Revenue
Value
Assets
MIS 524

25. Analyzing Performance Drivers
Benefits from Investment in Networked IT Infrastructure
Benefits from Doing Business on a Networked IT Infrastructure
Commerce
Content/knowledge
Community
MIS 524

26. Making the Case for IT The Benefits Case The Cost Case
The Cost-Benefit Case
Additional Arguments
MIS 524

27. The BENEFITS Case for IT
Benefits from Investing in Networked IT Infrastructure: flexibility, functionality
Benefits from Doing Business on a Networked IT Infrastructure
Commerce (Process efficiency & quality)
Content/Knowledge; learning
Community (Relationships)
MIS 524

28. Source of Benefits Market Raw Materials Factory Industrial Model
Economies of Scale
Industrial Model
Focal Firm
Suppliers
Buyers
Economies of Scope
Economies of Style
Networked Model
MIS 524

29. Benefits from IT Investment
Cumulative value over time 5
Net value per unit time
Total Profit
Breakeven Time 2
Benefit (Cost)
Max outflow 1
Time 4
Max Exposure 3
MIS 524
Neg Cashflow

30. The COST Case for IT Tangible Costs Intangible Costs
What happens to costs with IT?
MIS 524

31. Indirect Costs Training Staff Burn-in Complaints Intrusion Retraining
Wear-in, folklore
Opportunity costs
Transfer costs
Tooling up
MIS 524

32. The Cost-Benefit Case for IT
Difficult to make; costs are hard to predict
Benefits are often intangible and non persistent
Technology costs change a lot
Opportunity costs are high
Cost control is rarely the object of the exercise, profit is.
MIS 524

33. Typical Project Trajectories
Benefit per unit time
Cumulative benefit (cost) over time
Net benefit per unit time
Costs (-Revenues) per unit time
MIS 524