Business Process ReengineeringInnovation and Industry Disruptions

Management Information Systems

MBA Program

The Innovator’s Dilemma

• The management practices that allow firms to become industry leaders also make it difficult for them to identify and appropriate the disruptive technologies that ultimately overtake their markets

Why do firms miss new opportunities?

• Let’s look at some famous statements about new technologies– “This telephone has too many shortcomings to be seriously

considered as a means of communication.  The device is inherently of no value to us.”  Western Union Internal Memo, 1876

– The wireless music box has no imaginable commercial value.  Who would pay for a message sent to nobody in particular?” Response of Associates of David Sarnoff, when invited to invest in radio

– “There is no reason anyone would want a computer in their home.” Ken Olsen, President and Founder of Digital Equipment Corp., 1977

– “640k ought to be enough for anybody” Bill Gates in 1981

– “Everything that can be invented has been invented.” Charles H. Duell, Commissioner, U.S. Office of Patents, 1899.

The depressing message…

• Everything you are learning in your MBA will not help your firm avoid the dilemma– Managing better– Working harder– Avoiding dumb mistakes…

…are not the solution

5 reasons why firms miss Disruptive Innovation

1. Firms rely on information from customers & investors for resources.

2. Firms perceive small markets as incompatible with the growth needs of large companies.

3. Disruptive technologies start with no substantive markets and markets that don’t exist can’t be analyzed.

4. A firm’s capabilities are wrapped up in its processes and values.

5. The supply of a technology may not equal market dominance.

Sustaining Technologies

• Sustaining innovative technologies...– Actually help the firm by fostering improved

product performance or cost effectiveness– Align with the desired value proposition of

established customers.

• Disruptive Technologies– Does not have the performance or quality

characteristics based on the value system used by the existing customer.

– Are often less expensive, simpler, smaller, and easier to use.

– Are first used in insignificant or narrow markets.– The customers of the existing firm often don’t

value or can’t use a disruptive technology.

Disruptive Technologies

Market Trajectories and Technology Change

• Existing firms generally want to earn higher margins. To do so, they …– Improve existing products– Focus on existing competitors– Don’t want to make a product none of its current

customers want or need and that has a low margin– Often keep building on the product with the result that it

“overshoots” market needs

• As a result, technological capacity outpaces what the market needs

• Disruptive technologies fill in the over performance gap and become performance-competitive.

Entry of Disruptive Technology

Performance requirement for users

Time

Disruption

Market 2

Market 1Produce Performance

Susta

inin

g

Sus

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ing

Characteristics of Disruptive Technologies

• At first, disruptive technologies do not satisfy the demands of the high end of the market. 

• Established firms overlook disruptive technologies because they don’t appear attractive.

• With time and over-engineering of sustained technologies a disruptive technology begins to satisfy market demand at a lower costs. 

• Large firms that forsook early investment in the disruptive technology have trouble catching up or are left behind. 

In a nutshell…

• … disruptive technologies are "simple, convenient-to-use innovations that initially are used by only unsophisticated customers at the low end of markets." Christiansen, 1997

Value Networks

• Customers rank-order product attributes• Firms operate with specific cost structures needed

to provide valued products and services• The success of an innovation depends upon the

perceived needs of known network actors• A new entrant’s advantage is that their agility

(e.g., smaller size, openness to different perspectives, etc.) makes it easier for them to identify & make strategic commitments to develop emerging market opportunities

So, Everything in B-School is Wrong?

• The resource allocation process effects a company’s ability to identify and manage a disruptive technology

• The Resources-Processes-Values (RPV) model highlights capabilities & disabilities of an organization– Firms have resources such as people, things, places– They engage in processes that are routinized for

efficiency– They develop values that are used to define what we do

and don’t do

Firm’s do what they do well

• The resource allocation process suggests that a rational manager aligns resources so that the firm does what it needs to in order to satisfy existing customers’ needs.

• We develop a lean, mean, fighting machine….

How to Respond?• Firms need to “learn” how to deal with

disruptive technologies (e.g., develop internally or spin-out a separate organization)– Create an environment supportive of the

“different” value network and this network’s customers

– Match the size of the spin-off organization to the size of the market.

Capabilities for Coping with Disruptive Technologies

• 3 options exist for creating new capabilities:– Acquire an existing organization that has

processes & values closely matched with the new opportunities.

– Change the existing firm’s processes & values.– Spin-off a separate and independent

organization that will develop the new processes & values that are needed to address the new market

Discovery-driven planning

• Realize that the basis of competition changes when the rate of technological improvement exceeds that demanded by the market.– When disruptions occur, actions must

be taken before plans can be made.– So, plans need to be made for learning

rather than implementation

Discovery-driven planning

• Identify the assumptions upon which business plans are based– Test market assumptions before

expensive commitments are made– Agnostic marketing where no one

knows exactly why, how, or to what degree a disruptive technology will be used

• Don’t talk to the same people• Explore the boundaries of the market

• Performance oversupply results in a change in the basis of competition in a product’s market along four dimensions:– Functionality– Reliability– Convenience– Price

Crossing the Chasm

IT Often Enables or Instigates Change

• Business Process Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed.

Process

• Collection of activities that takes one or more kinds of input and creates an output that is of value to the customer

Of course, this is really a decision making process not a process map

BUSINESS PROCESSESBusiness Process Redesign

Six principles for redesigning business processes:

1. Organize business processes around outcomes, not tasks

2. Assign those who use the output to perform the process

3. Integrate information processing into the work that produces the information

BUSINESS PROCESSESBusiness Process Redesign

Six principles for redesigning business processes:

4. Create a virtual enterprise by treating geographically distributed resources as though they were centralized

5. Link parallel activities instead of integrating their results

6. Have the people who do the work make all the decisions, and let controls built into the system monitor the process

Procedural-Oriented Techniques

• Provides a baseline for the new system

• Includes both logical and physical models

PROCESSES AND TECHNIQUES TO DELIVER INFORMATION SYSTEMS

Procedural-Oriented Techniques

Critical appraisal of existing work processes to:• Identify major subprocesses, entities, and

interactions• Separate processing from data flow• Capture relationships between data elements• Determine entities and processes within scope

PROCESSES AND TECHNIQUES TO DELIVER INFORMATION SYSTEMS

Procedural-Oriented Techniques

• Conducted by IS specialists• Maps logical requirements to available technology

PROCESSES AND TECHNIQUES TO DELIVER INFORMATION SYSTEMS

Schein Model of Change

• Assumptions– Not only learning, but unlearning– Motivation to change must exist– Organizational change is mediated

through individual changes– Change involves attitudes and emotions

and can be painful and threatening

Schein Model of Change

• Change is multi-staged– Unfreeze– Change– Refreeze

Characteristics That Typify Reengineered Process

• Several jobs are combined into one.

• Workers are involved in making decisions.

• The steps in the process are performed in a natural order.

• Processes have multiple versions.

• Work is performed where it makes the most sense.

Characteristics That Typify Reengineered Process

• Checks and controls are reduced.

• Reconciliation is minimized.

• A case manager provides a single point of contact.

• Hybrid centralized/decentralized operations are prevalent.

Overcoming Resistance to Change

• Resistance to change is inevitable:– Expect it (70% of change initiatives fail)

• Resistance doesn’t always show its face:– Find it

• Resistance has many motivations:– Understand it

• Deal with people’s concerns not their arguments: – Confront it

• Only one way to deal with resistance: – Manage it

Sometimes change needs to be “pushed”

• Sirkin, Keenan, and Jackson’s DICE Model– Duration: Minimize time between

milestones– Integrity: Project teams need to be good– Commitment: Top management support– Effort: Less work to get it done is better

than more…

Plus, change is a process

• Kotter’s process model for change success– Establish a sense of urgency

– Form a powerful guiding coalition

– Create a vision

– Communicate a vision

– Empower others to act on the vision

– Plan for and create short term wins

– Consolidate improvements and move on to more change

– Institutional successful change

Change requires balance

• Duck’s model of change

• Change requires a balance between trust and empowerment– Employee Trust: Built through

predictability (clarify goals) and capability (clarify roles of players)

– Empowerment: invite everyone to participate in change

Change requires balance

• Make sure you do the following:– Establish context for change– Stimulate conversations– Provide resources– Coordinate projects– Ensure congruence of messages and

behaviors– Provide opportunities for joint creation– Anticipate and address problems– Prepare the critical mass

“The Fad That Forgot People”Thomas H. Davenport

• “. . no one wants to ‘be reengineered.’ No one wants to hear dictums like, ‘Carry the wounded but shoot the stragglers’”

• “No one wants to see 25-year-old MBAs in their first year of consulting making $80,000 per year with $30,000 signing bonuses, being billed out at six times their salaries, putting the company’s veteran’s through their paces like they’re just another group of idiots who ‘can’t think out of the box’.”

• “The most profound lesson of business process reengineering was never reengineering, but business processes. Processes are how we work.”

• “For technologists, the lesson from reengineering is a reminder of an old truth: information technology is only useful if it helps people do their work better and differently. Companies are still throwing money at technology -- instead of working with the people in the organization to infuse technology.”

“The Fad That Forgot People”Thomas H. Davenport

IT PROJECT MANAGEMENT

• IT Project management requires knowledge of system development methodologies:

– SDLC– Prototyping– RAD– Purchasing life cycle

IT PROJECT MANAGEMENT

Most projects share common characteristics:

1. Risk and uncertainty highest at project start

2. Ability of stakeholders to influence project greatest at project start

3. Cost and staffing levels lower at project start and higher toward end

(PMI, 1996)

IT PORTFOLIO MANAGEMENT

• Project categories to help with prioritization:

– Absolute must A mandate due to security, legal, regulatory, or end-of-life-cycle IT issues

– Highly Desired/Business-Critical Includes short-term projects with good financial returns

– Wanted Valuable, but with longer time periods for ROI (more than 12 months)

– Nice to Have Projects with good returns, but with lower potential business value

PROJECT INITIATION

• Project charter• Scope statement• Feasibility analyses

– Economic– Operational– Technical

PROJECT PLANNING

• Three major components:– Schedule– Budget– Staff (project team)

PROJECT PLANNINGScheduling

• Work breakdown analysis:– Identifies phases and task sequence to

meet project goals– Estimates time of completion for each task– Results in a project master schedule that

identifies date and deliverable milestones

PROJECT PLANNINGStaffing

Project staffing involves:

1. Identifying IT specialist skill mix needed

2. Selecting personnel who collectively have necessary skills and assigning them to work

3. Preparing personnel for specific team member work

4. Providing incentives to achieve project goals

PROJECT PLANNINGPlanning Documents

Two typical planning documents:• Statement of Work (SOW)

– For the customer– High-level document that describes what project

delivers and when– Contract between project manager and executive

sponsor

• Project Plan– Used by project manager to guide, monitor, and

control execution of project– Reviewed by managers or committees that oversee

project

PROJECT PLANNING

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Planning Documents

Two typical planning charts:• PERT (or CPM)• Gantt

PROJECT PLANNINGPlanning Documents

(Reprinted from Valacich, George, and Hoffer, Essentials of Systems Analysis & Design, Prentice Hall, 2001)

(Reprinted from Valacich, George, and Hoffer, Essentials of Systems Analysis & Design, 1st Edition, Copyright © 2001. Reprinted by permission of Pearson Education, Inc. Upper Saddle River, NJ)

PROJECT EXECUTION AND CONTROLManaging Project Risks

(Bashein, Markus, and Finley, 1997)

PROJECT EXECUTION AND CONTROLManaging Business Change

Lewin/Schein Change Model

PROJECT CLOSING

• IT project deliverables completed• Formal user acceptance obtained or

failed project terminated• Common questions for team members:

– What went right on this project?– What went wrong on this project?– What would you do differently on the next

project, based on your experience with this project?

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Chapter 6Understanding Network Effects

Information Systems: A Manager’s Guide to Harnessing Technology

Introduction• Network effects: When the value of a product

or service increases as its number of users expands– Also known as network externalities or Metcalfe’s Law

• When network effects are present:– The value of a product or service increases as the

number of users grows– They’re among the most important reasons you’ll

pick one product or service over another

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Where’s All That Value Come From?

• The value derived from network effects comes from three sources:– Exchange

• Exchange creates value and every product or service subject to network effects fosters some kind of exchange

– Staying power: The long-term viability of a product or service

• Networks with greater numbers of users suggest a stronger staying power

– Complementary benefits: Products or services that add additional value to the network

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Where’s All That Value Come From?

• The three value-adding sources often work together to reinforce one another in a way that makes the network effect even stronger – When users exchanging information attract more

users, they can also attract firms offering complementary products

– When developers of complementary products invest time writing software, switching costs are created that enhance the staying power of a given network

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One-Sided or Two-Sided Markets?

One-sided markets• A market that derives

most of its value from a single class of users

• Have same-side exchange benefits

– Benefits derived by interaction among members of a single class of participant

Two-sided markets• Network markets comprised

of two distinct categories of participant, both of which that are needed to deliver value for the network to work

• Have cross-side exchange benefits

– When an increase in the number of users on one side of the market creates a rise in the other side

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How Are These Markets Different?

• Network markets experience early, fierce competition• Firms are very aggressive in the early stages of these

industries because:– Once a leader becomes clear, bandwagons form– New adopters begin to overwhelmingly favor the leading

product over rivals, tipping the market in favor of one dominant firm or standard

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How Are These Markets Different?

• These markets are often winner-take-all or winner-take-most, exhibiting monopolistic tendencies where one firm dominates all rivals

• If a few strong players emerge they could even become an oligopoly

• The best product or service doesn’t always win

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How Are These Markets Different?

• Winning customers away from a dominant player in a network industry isn’t as easy as offering a product or service that is better – Any product that is incompatible with the dominant

network has to exceed the value of the technical features of the leading player, plus the value of the incumbent’s exchange, switching cost, and complementary product benefit

– The incumbent must not be able to easily copy any of the newcomer’s valuable new innovations

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How Are These Markets Different?

– Technological leap-frogging can be really tough • Technological leap-frogging: Competing by offering a new

technology that is so superior to existing offerings that the value overcomes the total resistance that older technologies might enjoy via exchange, switching cost, and complementary benefits

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Figure 6.1- Battling a Leader with Network Effects is

Tough

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Strategies for Competing in Markets with Network

Effects • Move early • Subsidize product adoption • Leverage viral promotion • Expand by redefining the market to

bring in new categories of users or through convergence

• Form alliances and partnerships • Establish distribution channels

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Strategies for Competing in Markets with Network

Effects • Seed the market with complements • Encourage the development of complementary

goods• Maintain backward compatibility • For rivals, be compatible with larger networks • For incumbents, constantly innovate to create a

moving target and block rival efforts to access your network

• For large firms with well-known followers, make pre-announcements

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