This lesson is from Digital Transformation by Indian School of Business.

Competitive Advantage with Information Capabilities

The Strategic Import of Information Capabilities

• How IT enabled business models disrupt established industries.
• How IT can transform your firm’s cost of operations and what it takes to implement this transformation.
• Two ways in which IT alters your cost structure.
• First, simple automation or substitution of labor with technology.
  • So let’s say I have ten people that perform my payroll function for me. They manually go through employee contracts and estimate wages of employees, including tax withholdings, annual holidays, deductions for employee benefits, etcetera, etcetera.
  • Now I decide to automate this payroll management of my company. By substituting these ten people with a payroll management system.
  • Automating the entire function using software.
  • The software automates inputs, transfers them across relevant modules, and estimates wages while eliminating redundancies and improving accuracy.
  • This simple substitution of label with technology will clearly save you costs. But is it a source of competitive advantage?
  • In other words, can this simple automation create for you sustainable performance differences relative to your competition?
    • No, not really.
    • If you don’t engage in this kind of automation, it’s a source of competitive disadvantage.
    • But if you engage in it, it’s not really competitively valuable.
  • Why? Because everyone can imitate this investment with relative ease.
  • So much so that nobody really owns their payroll functions anymore.
  • It’s management is outsourced to third parties who builds scale and skill in this function and offer it to your firm as a mere service.
• The second way in which IT alters your co structure is through the design of information capabilities.
  • If you keep automating various functions within your organization you might end up with silos of automation.
  • So it’s important that these different functions in your organizational value chain talk with each other.
  • This integration is critical to providing the right information to the right stakeholder at the right time in your firm.
  • And your ability to do so speaks for the information capabilities of your firm, and while automation is not a source of competitive advantage the design of information capabilities sure is.
• Amazon, the world’s largest book retailer and so far an online retailer. Barnes & Nobles, a company that dominated book sales in the world before Amazon.
• Barnes and Noble
  • used to have these large stalls where you would walk in, browse the shelves, drink coffee, eat a criossant and just maybe but a book.
• Now look at Amazon’s information capabilities
  • they have in place something called a touchless business process.
    • a touchless business process is one where data items are captured automatically in the value chain with no manual re-entry of the same data items ever again in the value chain.
    • In other words, when you enter information on Amazon to order a book, there is no more human touch to that data.
  • It flows automatically through their systems and business processes to reach suppliers and third party logistics providers like Fed-Ex, who can drop-ship your product based on this information.
  • So when a publisher logs into the Amazon value chain,
    • The publisher has real-time visibility into demand for their products.
  • In contrast, when a Barnes and Noble publisher logs into the Barnes and Noble value chain
    • they see how much Barnes and Noble has ordered from them.
    • A significant lag in
      • communicating demand information at the retail front to the upstream players in the value chain.
  • When there is no delay in relaying inventory information and this information is seamlessly available across the value chain. The result is far superior inventory management.
  • Therefore, at Amazon there is little error in inventory planning and there is little delay in scheduling delivery of inventory.
  • This online retailer using it’s superior information capabilities has done something wonderful.
    • They have substituted inventory with information.
    • And then therefore able to deliver quality customer service, maintain a large variety of products.
    • And maintain adequate inventory and inventory turns of those products.
    • Variety, inventory management, and service, a triad of objectives almost unheard of being fulfilled in the retail business.
  • What you find is that Amazon holds nearly 10% of its revenue as inventory, while Barnes & Noble holds over 20% of sales in inventory. In turn, it takes Amazon 46 days to sell a book. It takes Barnes & Noble nearly 115 days to do so. Amazon has 90 days credit terms with its suppliers. The company operates with negative working capital.
    • saving that would accrue to Barnes & Noble if it were able to match Amazon’s information capabilities.
  • Amazon’s business model was so disruptive to Barnes & Noble that it never adapted. Even when it began to, Barnes & Nobles saw Amazon as a technology problem. Not a problem of a fundamentally different business model.
  • The company has developed such skill and skill in designing information capabilities that it offers it as a service to the sellers on its marketplace.
  • 90% of the sellers on Amazon’s marketplace use Amazon’s logistics and warehousing services.
• Walmart. Revenue of 560 Billion dollars the company is like a mini country.
  • And it’s retail business is an unarguably complex one spanning diverse product categories.
  • Yet this company maintains 9-10% of its sales as inventory.
  • So it’s not that this cannot be done for this business versus another or this business model versus another. But it is incredibly difficult to do.
  • Many companies in the 90s tried to imitate Walmart. Notable amongst them was the discount retailer Kmart, who began to lose out significantly.
  • In terms of operational efficiency to Walmart. Kmart suffered from poor inventory availability in its stores due to inadequate forecasting and fulfillment processes.
  • It was widely recognized that Walmart’s operational excellence was due significantly to an integrity IT infrastructure that provided end to end visibility in its value chains.
  • The transmitted store sales and inventory data not just to head quarters but also to upstream manufacturers.
  • In January 2002, Kmart declared bankruptcy, the firm had four chief information officers in the previous five years.
  • These examples illustrate to you an important shift from focusing on IT to focusing on information capabilities.
  • Superior information capabilities drive the competitor value or competitor advantage of firms like Walmart and Amazon because they are very, very difficult to replicate.
  • They require a shift in business strategy, a redesign of business processes.
  • And the change in organizational culture, and most firms are bad at it.