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Digital TransformationsA Research Programme at London Business School

Funded by the Leverhulme Trust

Session on the Industry Level Impact of ICT

Michael G. Jacobides, Principal Investigator

Reminder: Digital Transformation of Firm and Industry Boundaries

Where we started from: Motivating questions on enduring puzzles

Were the prophecies of the world being “blown to bits”, mediated by ICT, correct?

How exactly does ICT affect firm and industry boundaries?

Why are some sectors or countries impacted from ICT, leading to new structures and / or higher performance, and others not?

What are the competitive ramifications of breaking up the value chain? How does ICT affect the strategic landscape?


What we did, I: Study sectors as they evolve, keeping a cool head

Analysis of sectors dis-integrating, refining the role of ICT:

– Mortgage Banking in the US as a tell-tale

Analysis of sectors that failed to disintegrate, despite early hype

– Re-insurance: A failed transformation and millions wasted

Analysis of sectors that re-integrated and the role of ICT

– Construction’s technologically enabled face

Comparative analysis of sectors in different countries

– International contrasts on “how things work” and global convergence


What we did, II: From the sector, to the firm, to the practice

How do firms change and set their boundaries? What’s ICT’s role?

– Textile manufacturing and the process of “opening to the market”

How do firms choose how to use ICT to affect their boundaries?

– Ongoing field work from manufacturing

What makes coordination across geographic and firm boundaries?

– How ICT is used in outsourcing or off-shoring: Going micro

Integrating findings from the practice to the firm to the industry…

– …and some modelling (and evidence) to track competitive implications


What was our evidence, what were our methods…

Emphasis on qualitative analysis

– With some econometrics and formal analysis or simulation

– Multiple sectors, multiple countries; focused on most interesting cases

Ensuring we capture the phenomenon, not glorify ICT

– Re-phrasing the question in terms of industry and firm evolution

– Keeping an open mind as for “what we’re studying anyway”

Substantial interest in developing new theory

– …as well as debunking received wisdom not fit for purpose

Preview of our session: What’s on the menu

Topics Presenter

IT and industry architecture: How IT affects the division of labor between firms, and

how can firms change their architecture

Michael G.Jacobides

IT and vertical integration:Disintegration in mortgage banking in the US; Re-integration in the construction sector

Michael G.Jacobides

Unfulfilled promises: Why IT failed to change industry structureStudy of reinsurance sector

NikolaosPisanias

The tenuous relation between IT and modularity, and how that maps onto firm and industry boundaries*

Stefano Brusoni

Preview of our session: What’s on the menu, cont’d

Topics Presenter

How IT affects the firm’s structure, boundaries, and operations

ChristopherTucci

How IT shapes a firm’s boundaries: The case of Fashion Inc.

StephanBillinger

IT and the geographic dispersion of a firm’s activities KannanSrikanth

Implications for globalization: IT-enabled convergence of industry architecture and competitive advantage

Michael G.Jacobides

IT’s impact on firms and industries: Some thoughts on policy implications

AlfonsoGambardella

Changes of Industry Architectures

The big big picture: From integration to dis-integration

– Value chains evolve, and often dis-integrate- thanks to IT & standards

– Financial Services; Automotive; Pharmaceuticals; Government…

What we notice: Outsourcing and giving things to others

– Save costs (which means someone else is better)

– While at the same time maintain key parts of the industry (IBM)

Beyond this: New players, new sectors, new capabilities

– New ecosystems emerge, new ways to add value are possible

– Which also means new entrants and new ways to fight!

An Illustration of a Changing Eco-system:

The early value chain structure in Computing…

Teradyne, Millpore, AM,…

Assembly

Operating System

Applications Software

Sales & Distribution

Field Service

Product Design

Components

Equipment, Material

Mosanto, Shipley,…

Source: Adapted from Andy Grove, 1994

…and the Brave New Dis-integrated World

Assembly

Operating System

Applications Software

Sales & Distribution

Field Service

Product Design

Components

Equipment, Material Teradyne, Millpore, AM,…

Intel, AMD, Quantum

IBM, Compaq, Dell

Solectron, Celestica

Microsoft

Microsoft, Lotus, Borland

CompUSA, Dell,…

Independent Contractors

Source: Adapted from Andy Grove, 1994

So why do sectors un-bundle?

And how does this work?

Industries, as they mature, shift towards dis-integration

– Over time, we understand the differences between “the parts”…

– …which leads to a push to create separate entities

In an effort to benefit from gains from trade and specialization,

– …firms try to find ways to make “trade” possible and specialize

– …coordination is simplified, information standardized…

…so the production process is “chopped up”

– …with the help of those who will benefit – “arms dealers”

– ICT helps the process, but does not drive it- still, it shapes a sector!

4 years, 186 interviews, 1000’s of pages later:

Mortgage Banking, from 1960 to today

Competitors: Savings & Loans; Banks; etc…

First Breakup: Securitization

Second Breakup: Secondary Market for Loan Risks

Origination Securitizing Hold loan & Insurance ServicingBrokerage Warehousing Payment processing Prepayment risk Credit Risk

Specialized Competitors: Mortgage Banks Co-specialized Competitors: GSE’s / Securitizers

Holders of loans: Financial Institutions / Investors

Insurance for default: Private Mortgage Insurers

1 2Market for Loan Bundles Secondary Loan Market

Un-bundled Competitors: Mortgage Banks

Mortgage Brokers (or Retail of Banks)

Specialized Servicers (or Subservicers)

Co-specialized Competitors: GSE’s / Securitizers

Holders of loans: Financial Institutions / Investors

Insurance for default: Private Mortgage Insurers

Third Breakup: Mortgage Brokerage &

Market for Closed Loans

Fourth Breakup: Secondary Market for Servicing Rights

Market for Loan Bundles Secondary Loan Market

Market for Brokered Loans

Market for Servicing Rights

1 2

3 4

Securitizing Hold loan & Insurance ServicingBrokerage Warehousing Payment processing Prepayment risk Credit Risk

ENABLING PROCESSES

MOTIVATING FACTORS

Coordination SimplificationReduction of interdependencies in the value chain

allow two adjoining stages of the production process to become separated

Information StandardizationInformation standards allow potential transactors to

understand and describe and then monitor and assess what they exchange

Intra-firm PartitioningAs firms grow, increasing administrative partitioning

simplifies coordination and creates separate, autonomous divisions, which are tempted to source

not only internally but also externally

Inter-firm Co-specializationAs the benefits from relying on other firms’

capabilities to complement one's own becomes evident, a learning process of trying to devise

effective trade and institutional arrangements begins

Gains from SpecializationManagerial benefits from separating parts of the production process, due to reliance on different

knowledge bases or requisite managerial styles and incentive structures in each part of the value chain,

make organizational specialization attractive

Gains from TradeDifferences in capabilities between firms and along the value

chain, also due to gains from specialization, make transacting attractive. or Desire to grow in the presence of

non-scalable segments in the value chain fuels the desire to trade with vertically co-specialized firms

NECESSARY CONDITIONS

When and why intermediate markets appear:Lessons from Mortgage Banking

Standardizing Information: The dynamics of

“the market displacing the integrated firm”

Certain means predictable with small standard deviations NOT risk free

In general the earliest assets to be securitised involved long duration, certain cash flows

As securitisation of assets became accepted, types of assets shifted towards less certain, shorter term cash flows.

PNC Insurance

Car parkingreceivables

LongevityLong Medium

5-20 years <5 years>20 yearsShort

Cert

ain

(Con

tract

ed

)U

nce

rtain

(Fu

ture

flow

/con

tract

)H

igh

ly U

nce

rtain

(Fu

ture

flow

/con

tract

)

Duration of implicit contract/Average

lifetime of the customer

Cert

ain

ty/E

mb

ed

ded

Ris

k

Length of existing contract

ResidentialMortgages

Power take-off

agreement

Aircraft Leases

Business Equipment

LeasesAuto-Loans

Credit cardReceivables

EntertainmentRoyalties:

Performing Artists Rights

Pubs

Regulated

Utilitiesreceiva

bles

Commercial

Mortgages

Wine Industry

Eurotunnel

Ferry Revenues

Non-secured

Consumer loans

Telecom:Fixed Line

(Assets/Leases)

Movie theatre

revenues

Nursing homes

Motorway Tolls

revenue

Parking and

speeding fines

Large-scale construction

contracts

Real estate business

leases

Hotels

Football Tickets

MobileOperators

FutureReceivables

Short Equipment

Leases (copiers)

Revenuefrom spare parts manufacturing

Refinancingof BOT contracts/

concessions:Defence, Rail etc

Short-termReceivables(fixed date)

Bio-technology

On-lineGaming

Subs

IT Outsourcing

Liquid Markets

Business Services(FM Contracts)

EsotericTransactions

Our Suggestions

Distressed Consumer

Loans

What this led to: A new world

Increasing role of vertical specialization

– Which also allowed some firms to focus on parts of the value chain

– Efforts to coopt other players- a “free-for-all” for a while

As the vertical structure fragments, consolidation happens

– Focus on capabilities and superior execution

– …as well as good old monopolistic control.

So is there life beyond dis-integration?

– Yes indeed. Dis-integration is part of a cycle…

– …and we may be starting to see efforts to re-integrate again

From dis-integration to re-integration:

The Bits Bite Back

In construction, a nice, and very strict specialized system arose

– With architects, engineers, quality surveyors, contractors etc

– In each European country, a different way to divide labour

But after a while, the system started rattling and shaking

– Architects increasingly artsy; quantity surveyors accountant-y; etc

– So the opportunities (including ICT) were not fully taken advantage of

Plus, when there’s no room for growth, expect war!

– ICT led to the need to re-organize, and led to a new “topography”

– Re-integrated services now the rule. Try to “be the bottleneck”…

So the world shifts between integration and disintegration.

Who gives a damn?

Well, those who do end up being more profitable…

– Either because they are the new entrants or those who adapt…

– …and change their business model accordingly

Changes in scope change the nature of your competitors…

– From tactical warfare to guerrilla fighting: think Iraq

– Redefining your enemies and friends, revisiting your strategies

When sectors change, capabilities, assets, strategies do to…

– Figuring out what you need to have and what is valuable

– Reconfiguring your strategies, playing a new game

Revisiting the role of ICT

in changing industry architectures

ICT is an important factor facilitating the process of dis-integration

– Esp. when ICT is bundled with information / coordination standards

– But ICT is also important by introducing new capability bases

But it can also lead to re-integration / architectural change

– Changes in the rules of “how the game is played”

– Which also affects who has an “architectural advantage”

ICT thus shapes competitive dynamics, redefining sectors

– But ICT alone will not change a sector- it’s an enabler!

Measuring success:What this line of research led to…

Publications in the top Journals of the field

– AMJ and SMJ on how and why mortgage banking disintegrated (07/05, 11/05)

– Org studies (12/05) on textile re-integration

– SMJ on coevolution of technology, capabilities and scope (05/05)

– Org Sci on textiles and “opening up” the value chain (03/06)

– MDE/JIBS on global differences / similarities in sectors (09/06)

– ICC on theoretical a-ha’s on “sector architecture” and design (02/06)

And there’s more in the works – revisions, and working papers

– Org Sci on the way ICT catalyzes capabilities to drive scope; RP on benefiting from innovation and industry architectures… WP’s on ICT and “vertical architectures”; Why ICT failed to fill its promises; How ICT is used in offshoring; ICT & coordination across geographies / firms

Measuring success:And how this was disseminated / shared

Interactions and presentations to academics

– 6 symposia in the Academy of Management, 2001-6; Professional Development Workshops (AoM), 2005 & 2006

– Presentations to the Strategic Management Society (2003, 2005), Schumpeter Society (2004, 2006), DRUID (2005, 2006), a.o.

– Presentations at invited seminars at Wharton, Stanford, Harvard, MIT, CMU, LSE, Bocconi, IESE, etc.

– Conference and mini-conferences at LBS, 2003-2006

Managerial Impact: Sharing and co-producing knowledge

– Presentations or addresses to Winterthur, Zurich Financial Services, Barclays, IBM, EDS, BT, Pirelli, EADS, etc.

– Presentations / keynotes in events organized by PwC, BBA, MBAA, EDS, in the US, the UK, Italy, Greece…

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