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