1. 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.

2. Overview Efficiency/Innovation dilemma Review Competitive Forces Model
Attempt to integrate numerous frameworks into something simple that makes sense
Review Competitive Forces Model
Extend Michael Porter’s Value Chain
Value Shop and Value Network
All use IT as the enabler to increase efficiency
IT also enables value add through innovation
Innovation strategies
How to implement those strategies

4. Porter’s Competitive Forces Model
How the Model is Used
The Players in each force are listed
An Analysis is made to relate
the determinants to each player listed
Devise a strategy to
defend a company against the forces,
based on specific players and the determinants
Look for supportive information technologies

5. Response Strategies Reduce Costs Product differentiation
Cost leadership?
Product differentiation
Enhance value of existing products
Improve quality (Superior product)
Focused market niche

6. Additional Response Strategies
Internal efficiency
Reduce “cycle time”
Growth strategy
Customer-oriented strategy
External Alliances
Innovation: new products, features, etc.

7. Strategy and the Internet (Porter)
We need to “…see the internet for what it is: an enabling technology…” (pg 64)
The “…greatest impact [of the internet] has been to enable the reconfiguration of existing industries that had been constrained by high costs for communicating, gathering information, or accomplishing transactions.” (pg 66)
“The great paradox of the Internet is that its [benefits] also make it more difficult for companies to capture those benefits as profits.” (pg 66)

9. Myths associated with the Internet
First mover advantage through increased switching costs and network effects
In reality, switching costs lower
For network effects to provide entry barrier, must be based on proprietary technologies
Partnering is a “win-win” strategy
Complements can have negative effect
Microsoft standardized operating systems which increased rivalry in PC industry
Outsourcing can lead to homogeneous industry with lowered entry barriers

10. Principles for Internet Strategy (Porter) Strategic Positioning
Start with the right goal: long term ROI.
Deliver a unique value proposition.
Develop a distinctive value chain configuration.
Make trade-offs for robust strategy.
Fit all elements of company to the strategy.
Maintain continuity of direction

11. 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

12. 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

13. Value Chain Structure Critical Activities Critical Linkages
M A R G I N
Critical Activities
Transform inputs into products
Also identify activities that provide infrastructure support
Critical Linkages
Internal linkage: Information shared across activities within firm
Tend to be sequential flows between activities
External linkage: Information shared across activities between different firms
Extended value chain

14. Competitive Forces Analysis
Value Chain Analysis
M A R G I N
Understand
Industry
Strategy
Activities of the organization
Identify the activities and linkages that are critical
Add value by focusing on those critical activities and linkages
Lower cost by increasing efficiency, scale or capacity
Competitive Forces Analysis

15. Value Chain Use Directly applicable to manufacturing activities
M A R G I N
Directly applicable to manufacturing activities
Mass vs customized
Less applicable when intangible products
R&D

16. 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

17. Value Shop (cont’d)
Find
Solve
Evaluate
Execute
Choose
Rely on intensive information to solve a customer problem
Value creation based on:
Information asymmetry between firm and client
Firm has information client needs
Firm has standardized information acquisition process
Cyclical, iterative solution process
Many standardized solutions
Can be resolved by non-experts
Need experts to recognize unique cases

18. Value Shop (cont’d) Key driver is value, not cost
Find
Solve
Evaluate
Execute
Choose
Key driver is value, not cost
“Value” depends on quality of professionals assigned to client projects
Learning across projects is critical linkage
Need for “knowledge base”
Examples
Medical profession
Law
Consulting

19. 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

20. Value Network (cont’d)
Value derived from scale and capacity
Each additional customer adds value
Value of new service dependent on who else adopts it
Examples:
Telephone
The first cell phone had no value
Insurance, HMO
Board base of clients share risk

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

22. 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

23. 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

24. 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
Innovation depends on new business model
VS or VN or multiple factors are foci
Efficiency is incomplete innovation
VC is the focus

25. 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

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

27. 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

28. How to innovate? Focused on strategies
Combination of value configuration strategies needed to enable innovation
How can a manager facilitate implementation of these strategies?
Hope to provide some insight by end of course

29. 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

30. Value Added StrategiesVS VN VC

31. References
Chan K.W. and Mauborgne R. “Value Innovation: The Strategic Logic of High Growth”, Harvard Business Review, Jan-Feb 1997, pp
Christensen, C.M. and Overdorf. M. “Meeting the Challenge of Disruptive Change”, Harvard Business Review, Mar-Apr 2000, pp
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
Stabell, C.B. and Fjeldstad, O.D. “Configuring Value for Competitive Advantage: on Chains, Shops, and Networks”. Strategic Management Journal, 19 (1998), pp