mis 5241 chapter 4 making the case for networked business
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MIS 524 1
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 ResultsDeveloping 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
Buyer=Supplier=Distributor
Unique ProductUnique Supplies
Subsistence EconomyCraft Economy
Focal Firm Unique ProductUnique
Supplies
Note lack of necessary
intermediaries
Note possibility of intermediationNote 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
Industrial Economics
Focal Firm Replicable Product
ReplicableSupplies
ReplicableSupplies
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
Focal FirmReplicableSupplies
TailorableSupplies
Customer 1
Customer 2
Customer 3
Customer 4
Tailorable Product
Keys to competitive advantage are
customer feedback, agility, cost control, knowledge of supply
chain.
i.e., data, informationand 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
Focal FirmReplicableSuppliesIntelligentSupplies
Customer 1
Customer 2
Customer 3
Customer 4
Intelligent Product
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 XRequired 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 ScaleRequired 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 ScopeRequired Implications
Replicability of manufacturing process
Infinite variations of designIntelligence, 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 StyleRequired 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
Concept
Revenue
Capabilities(Re-
Sources)
Cost
Value
Assets
Operating and Innovating, managing and learning, leading and engaging
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
Raw Materials Factory Market
Industrial Model Economies of Scale
Focal FirmSuppliers Buyers
Networked Model
Economies of Scope Economies
of Style
MIS 524 29
Benefits from IT Investment
1
2
3
Net value per unit time
Cumulative value over
time4
5
Max outflow
Breakeven Time
Neg Cashflow
Max Exposure
Total Profit
Ben
efit
(Cos
t)
Time
MIS 524 30
The COST Case for IT
Tangible Costs Intangible Costs What happens to costs with IT?
MIS 524 31
Indirect Costs
TrainingStaff Burn-inComplaintsIntrusionRetrainingWear-in, folkloreOpportunity costsTransfer costsTooling up
MIS 524 32
The Cost-Benefit Case for IT
Difficult to make; costs are hard to predictBenefits are often intangible and non
persistentTechnology costs change a lotOpportunity costs are highCost control is rarely the object of the
exercise, profit is.
MIS 524 33
Typical Project Trajectories
Costs (-Revenues) per unit time
Benefit per unit time
Net benefit per unit time
Cumulative benefit (cost) over time
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