Using IT to add value: Innovation versus Efficiency In 1985, Michael Porter developed the “value chain” framework which is now the accepted “model” for describing and analyzing the value creation logic within an organization. However, the value chain was developed to promote efficiencies within a manufacturing environment, and becomes difficult to apply outside of a sequential, recurring production environment. Two additional value creation models have been proposed in the academic literature: the value shop is focused on solving customer problems (suitable for firms that provide professional services as found in medicine, law, architecture, engineering and IT consulting), while the value network is focused on firms that provide mediating technologies to link and communicate with customers (such as banks and insurance companies). The value models, using IT as the enabler, tend to focus on increased efficiency. Another way to enhance value within an organization is through innovation. IT is the lever that enables organizations to add value through innovation. But herein lies the efficiency/innovation dilemma. If the IT infrastructure within your organization enables efficiencies via a value model, can it also be used to enable adding value through innovation? As an IT manager, how do you identify opportunities to add value? The presentation will end with a discussion of how IT managers can facilitate value creation based on both efficiency and innovation.

Value Configuration Analysis Find Solve Evaluate Execute Choose Shop Network Resolve Customer Problem Facilitate Customer Relationships M A R G I N Chain Improve Internal Efficiencies

Value created by transforming inputs into products Value Chain Inbound Logistics Operations Outbound Logistics Marketing & Sales After-sales Service Firm Infrastructure Human Resources Management Technology Development Procurement M A R G I N Value created by transforming inputs into products

Value created by providing solutions, not services Value Shop Firm Infrastructure Human Resources Management Infrastructure Support Technology Development Procurement Problem Finding & Acquisition Problem Solving Choice Simon’s Problem Solving Model Control/ Evaluation Execution Value created by providing solutions, not services

Value derived from service of linking customers Value Network Mediating technology facilitates exchange relationships Firm Infrastructure Human Resources Management Technology Development Procurement Network promotion and contract management Invite and select customers to join network Initialize, manage and terminate contracts Service provisioning Establish, maintain and terminate links Billing for value received Infrastructure operation Maintain and run physical and information network Value derived from service of linking customers

Value Configuration Examples Find Solve Evaluate Execute Choose Shop Network Resolve Customer Problem Facilitate Customer Relationships M A R G I N Chain Improve Internal Efficiencies

Do not confuse efficiency with innovation “Price compression is killing innovation” Michael Capellas, Compaq Computer CEO, Business Week (Sep 24, 2001), pg 102 “Don’t mistake reinventing the wheel for innovation” Related to Goldman Sachs $100 million investment in Webvan – current value $0 Allan Sloan, “Dumb Deals 101”, Newsweek (Sep 10, 2001) pg 41

Types of Innovation (Christensen & Overdorf) Sustaining Innovation Respond to evolutionary market changes Make a product or service perform better Disruptive Innovation Dealing with disruptive market changes Create an entirely new market

Innovation as Value Proposition Three components of value proposition Value Shop (VS) Value Chain (VC) Value Network (VN) Total Value Proposition (TVP) is the product ∆TVP = ∆VS * ∆VC * ∆VN Disruptive innovation requires a new business model Efficiency is incomplete sustaining innovation VC is the focus

Value Added Strategies Value Shop Value Chain Value Network Innovation Create truly new benefits Develop new process as support Enhance customer navigation Efficiency Standardize Products & Services Reengineer (TQM, Fast cycle time) Automate Interface

Value Configuration Strategies Where are Alibris and BBA? Find Solve Evaluate Execute Choose Shop Network Resolve Customer Problem Facilitate Customer Relationships M A R G I N Chain Improve Internal Efficiencies

Value Configuration Strategies Find Solve Evaluate Execute Choose Amazon: shared information Cisco: solves problems M A R G I N Compaq: mass production

Value Configuration Strategies Find Solve Evaluate Execute Choose Sun: Java enables internet Amazon: shared information Cisco: solves problems EBay: auction network Napster: music distribution Dell: mass customization M A R G I N Compaq: mass production

Where does IT fit into this? Use IT as a ready lever for efficiency improvement By improving products and services By improving operations By improving the customer interfaces Use IT as a lever to aid innovation By making new benefits possible By developing new processes By creating new customer networks Use IT to create new business model Extended Value Chain Value Shop Value Network

Value Added Strategies VS VN VC

References Chan K.W. and Mauborgne R. “Value Innovation: The Strategic Logic of High Growth”, Harvard Business Review, Jan-Feb 1997, pp 103-112. Christensen, C.M. and Overdorf. M. “Meeting the Challenge of Disruptive Change”, Harvard Business Review, Mar-Apr 2000, pp 67-76. Gobeli, D.H. & Rudelius, W. “Managing Innovation: Lessons from the Cardiac-Pacing Industry”, Sloan Management Review, 26:4 (Summer 1985), pp. 29 – 33 Hansen, M.T. and von Oetinger, B. “Introducing T-Shaped Managers: Knowledge Management’s Next Generation”, Harvard Business Review, Mar 2001, pp 107-116. Stabell, C.B. and Fjeldstad, O.D. “Configuring Value for Competitive Advantage: on Chains, Shops, and Networks”. Strategic Management Journal, 19 (1998), pp 413-437.

Preview for Next Week 1:00 – 2:00: Open Source 2:15 – 3:30: Ben Berry – Wireless Applications 3:45 – 5:00: Outsourcing