The Vanishing Advantage

Carr, Chapter 4INFS 780

Richard T. Christoph

IT’s Role in Business

Firms have spent literally billions in IT development Sought a competitive advantage

Pioneers built new systems at great expense The PGAITA factor Most systems focused on the TPS &

BICARSA Paybacks could be huge –

IT and Competitive Advantage

For many years, firms believed IT provided an avenue to a sustainable competitive advantage Porter describes this as something that

you can do that competitors cannot easily duplicate

Carr refers to this as a proprietary advantage

Proprietary vs. Infrastructural Advantage

Proprietary: One firm can “own” or control the technology SABRE is a great example

Infrastructural: Becomes a “cost of doing business” Electricity and phone network quickly

became part of the infrastructure. Most technologies start as proprietary

and move toward infrastructural

Technologies in Transition

TIVO – started as proprietary, now CATV firms are deploying their own copies

SABRE – owned by AA, now, however is a basic, available system for airline reservations.

ATM – Provided a short advantage to owning banks – other banks quickly caught up

IT & Productivity

IT has vastly enhanced productivity Carr notes that most productivity has

enhanced customers This means customers see lower prices Business do not see higher profits

If Carr is right, IT does not appear to yield a sustainable competitive advantage

Compare with Porter’s 5 Forces

RivalryLevels

Buyers

Entrants

Suppliers

Substitutes

What has IT changed?

Let’s look at RIVALRY

Usual issues for competition Warranties and guarantees Advertising & special promotions Dealer networks Product innovation

How does IT impact these? Doesn’t IT provide better customer

responsiveness for all of these??

Rivalry after IT

Think about it – consumers benefit from fast ordering, dealer networks, lower cost information sharing Firms, however, must match these

abilities simply to stay in business! Firms gain no advantage from using IT

in these ways – but can lose all if they do not have IT!

This is a classic infrastructural situation

Recall that RIVALRY Is Stronger when: Many, equal-sized firms Slow demand growth

Sales volume built by stealing share Switching costs are low Exit costs high

IT lowers switching costs, allows easy share stealing, makes small firms compete evenly with large firms

IT Increases Rivalry??

Can IT be shown to INCREASE rivalry? It appears the answer is YES Rivalry increases – profits do not Customers benefit No strategic benefit to the firm

Again, a classic infrastructural technology

Technology as an Infrastructure

Hardware and software moving rapidly to common standards Too expensive to develop one of a kind

– and no reward for doing so

Computational power cheaply and widely available No benefit from having the latest

system

When IT was new

Ah, these were the days. I arrived at the very end of this period (1977) Technology itself was a barrier due to

cost (needed special room, power, operators)

Software did not exist – you wrote it Simple applications cost many

thousands Networks were slow (4800bps) and

needed special lines, gear, people

Locking in Advantage

Firms sought first mover advantage One large bank system I installed

included some of the first ATM machines in SC

Very complex – we had some 10 leased lines (20 modems!) and a separate Series 1 computer moving between async & bisynch communications

The brief advantage

My bank moved all operations in-house (DDA, loan, savings) Needed a single database, custom software –

all custom written Built an operations center, hired staff Total cost was over $2,000,000

Allowed immediate, rapid growth Competitors could match capability in

three years with commercial packages

Bank software now

All banks must offer ATM access, single database accounts

Bank IT has become an infrastructure No longer provides competitive

advantage IT now offers more RISK than REWARD If IT fails, customers upset – if IT works,

customers not impressed

Technology Replication Cycle

First movers spend huge amounts Imitators can usually copy cheaply

Errors are eliminated as we learn what works

Costs drop dramatically Followers my benefit more than first

movers

Cost Declines of Computing Power

Cost Declines of Networking Power

http://www.neweconomyindex.org/section1_page13.html

So Costs Decline – so what?

Costs drop dramatically as technology moves from proprietary to infrastructural Best practices established Volume production Wide market adoption Consider electricity, telephone, VCR,

DVDRW, color TV

Homogenization of Process

Competitors begin to use the same tools in the same way to do the same job

Used to built code to match our business process Now, we match our process to the

software Example: ERP systems

Require firms to adjust to the ERP package This reduces opportunity for unique,

system-based competitive advantage

Homogenization of Process

Carr notes: When a company buys a Seibel

software package for CRM, it aslo is buying the Seibel way of managing customers.

An example of this is the Datatel WebAdvisor system All public SD schools use it – no one

has an advantage over any other school

What’s a Mother To Do?

Peter Drucker notes that firms can tend to be efficient (doing things well) or effective (doing the right thing) (firms can rarely do both) Common software packages promote

efficiency but one firm will not be more effective than another using the same package

Competitive advantage is based on effective items