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Chapter 1. The Migration from Traditional to Net-Enhanced Organizations and Systems

Foundations of Net-Enhanced Organizations

Detmar Straub, 1st EditionCopyright © 2003 John Wiley & Sons, Inc.

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Copyright ©John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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Chapter 1. Learning Objectives

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Chapter 1. Learning Objectives• How is Net-Enhancement different from other management fads?• What are the main drivers of Net-Enhancement?

• Digitization, • Falling price of telecom services, • Easy access to computers, • Globalization & commoditization, • Changes in the way we organize ourselves. • Shrinking production cycles, • Intelligent products & services, • Consumer demand for customized products & services

• How do these change the way we operate in business?• What does Net-Enhancement really mean?• Understand how to a business can reduce costs and transform its

business model as new technology is implemented• Explain currently emerging trends and the 2nd wave of E-commerce

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Chapter 1. Outline• 1. Introduction• 2. Organizational/Environment Drivers of

Net-Enhancement• 3. What is Net-Enhancement?• 4. Definitions of Net-Enhancement• 5. Scenario: Electronically wringing out the

costs in an airport vehicle rental business• 6. Key Trends• 7. Second of Consolidating Wave of Net-

Enhancement

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1. Introduction

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1.1 Fads and Fashions

• There have been many ‘fads’ and ‘fashions’ in business organization: MBO, TQM, BPR & ERP

• These have often been imitated, at great expense, without achieving the benefits claimed

• Is Net-Enhancement just another fad?• Here we argue that, the growing use of the Internet

will make Net-Enhancement one of the central transforming innovations of the 21st Century

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NE: Fad or Fashion?

• Is Net-Enhancement just another fad?

• One key is to look at the growth in the use of the Internet:– Rapid and continuing increases in Internet access– 1/3 of US econ. growth from 1995-1999 due to IT– Continuing decline in computer prices (26%

average from 95-99)– Continued rapid growth in use of IP addresses

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1.2 Net-Enhancement, E-Business and Other e-Terms

There are many terms currently that start with ‘e’• e-Commerce: limited to the transactions and

external exchanges between businesses• e-Business: has a similar meaning, but is limited

because of its proprietary origins• e-Organization or e-Everything are too general to

be practical• Net-Enhancement, meanwhile, is a broad term that

conveys the idea of exchanges over open electronic networks, and can cover any size or type of organization

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2. Organizational/Environmental Drivers of Net-Enhancement

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Organizational/Environmental Drivers of ‘Net’-Enhancement (Table 1)

• Certain changes (“drivers”) in both the way we organize ourselves and in the general environment in which we operate are responsible for the inevitability of Net-Enhancement

• These represent a permanent change in the way we do business…

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Source # Driver

Environmental 1 Digitalization of media

“ 2 Inexpensive telecommunications

“ 3 Widespread diffusion of computers

Organizational 4 Increasing pressure on costs and margins, including globalization and commoditization

“ 5 Changing organizational models, including empowerment of workers, informating of key business activities, outsourcing and downsizing of many firms, partnering, cross-functional business processes, virtual teams

“ 6 Rapidly shrinking cycle times

“ 7 Intelligent products and services

“ 8 Demand for customized products and services

Table 1. Drivers of Net-Enhanced Organizations

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Driver #1: Digitization

• Digitization is the process of capturing ‘content’ in bits rather than some physical form

• With digitization, the storage medium not important – only the accurate storing of the bits

• This means that content can be easily replicated and becomes independent of its physical medium

• The growing use of digital cameras with increasingly high resolution making digital storage of photographs and film possible is a related factor.

• Falling prices for storage media making ever larger data stores affordable is another factor.

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Digital Convergence (Figure 1.1)

• Increasingly all forms of information, from voice to video, data to documents, is being stored in digital form and can also be transmitted anywhere, at anytime. This phenomenon is called Digital Convergence.

15Figure 1.1 Digital Convergence of Media into Bits (cf. Welke, 2002)

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Driver #2: Inexpensive Telecommunications

• Deregulation and privatization of telecom networks has combined with new technologies to increase competition

• This is driving down the price of telecom services

• Low telecom costs make Net-Enhancement feasible by making networking affordable to a much larger population

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Driver #3:Widespread Diffusion of Computers

• Computers have become ubiquitous

• Ready access by people to computers is what facilitates Net-Enhancement

• A critical mass of users is essential for such a new technology to succeed

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Real & Projected Growth of Home Computing in the US (Figure 1.2)

• Growth in the use of P.Cs in the U.S has been exponential:– 1995: 25% of homes– 1998: 33% of homes– 2000: 50% 0f homes

• Growth may yet reach the same as for TV (90% +)• What is the saturation point for home computing?

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Fig. 1.2 Real and Projected Growth of Home Computing in the USA

[Where is the saturation point?]

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Global Diffusion of Computers (Figure 1.3)

• Most countries still trail the US in their use of computers per capita, but growth is exponential.

• Developed countries have a much higher use than developing countries.

21Fig. 1.3 Typical Ratios in International Diffusion of Computing

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Driver #4a: Inc. Pressures on Costs and Margins: Globalization

Globalization:

• Lower barriers to transnational commerce supported by Net-Enhancement

• Effect is to increased competition by enlarging markets

• Puts downward pressure on costs and margins

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Driver #4b: Increased Pressures on Costs and Margins: Commoditization

Commoditization:• Defined as the standardization of

products and services• Increasing the substitutability of products

by alternative producers, forcing down prices and rewarding economies of scale

• Reconfigures business environments allowing offshore firms to enter domestic markets

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Driver #5: Changing Organizational Models

The effects of Net-Enhancement on organizations includes:

Empowerment – power devolves to workers in the ‘front

lines’; increased exchange of info within/across work groups

means media choices assume greater importance(?)

Informating – digital flow of information enables new

decision-making tools; data mining of electronic business

exchanges also opens new business possibilities

Delayering – hierarchical organizations are ‘flattened’;

managers must communicate more efficiently with larger

numbers of employees. This also encourages outsourcing.

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Driver #5: Changing Organizational Models (cont.)

Partnering –firms now focus on their core competencies and

make strategic alliances with companies that complement

these strengths; all facilitated and enhanced by networking

Tele-work – knowledge workers are increasingly liberated

from specific locations through the use of broadband links

Virtual Teams – rapid cycle design and problem-solving

encourages greater flexibility of temporary teams for

specific jobs working in looser types of relationships.

Implementing the communications infrastructure to

support this is a new key to competitive advantage.

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Driver #6: Rapidly Shrinking Cycle Times

• Competition forces + technological improvements have led to dramatic reductions in production cycles

• This both increases customer satisfaction and brings down costs

• Net-Enhancement supports tighter task coordination, leading to increased process ‘seamlessness’

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Driver #7: Intelligent Products and Services

• Integrated circuit chips are increasingly imbedded in every manufactured item

• As a consequence, intelligent products and services are becoming increasingly common in all aspects of life and work such as: – GPS systems providing information to drivers

– Emergence of e-Books and the evolution of cell phones

– PDAs providing wireless connectivity to the Internet

– Plans are to add radio frequency based chips to all products, completely automating the sales process, eliminating shoplifting

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Driver #8: Demand for Customized Products and Services

• Increasingly customers expect to be able to:– exercise choice in products and services– receive the benefits of mass production

• Net-Enhancement permits a personalized response– creating a ‘market-of-one’ aka ‘mass customization’

• Current examples include:– Dell’s ability to individually configure computers for

customers online– Ernst & Young’s online consulting service which uses an

expert system to give small businesses advice on improving business practices

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Figure 1.4 Dell Computer Manufacturing for Individual Customers through its configurator engine (creates feedback via web).

Net-Enhancement makes it possible to combine massproduction efficiencies with customization of products tailored to individual customer’s preferences.

Mass Customization

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3. What is Net-Enhancement?

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What is Net-Enhancement?

• A preliminary definition of Net-Enhancement is: “commercial activity via electronic (computerized) networked connections”

• Origins of Net-Enhancement;– 1940s: networks began as simple exchanges of

information between computers– Information theory (1948): added the concept of

minimum bit exchange to complete a transaction– This, combined with multiple, remote senders and

receivers communicating over multiple networks, produced the modern telecommunications network

(see Figure 1.4)

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Figure 1.5 Generic International Telecommunications NetworkModern networks of telecommunications linking the world is at the heart of the Net-Enhanced revolution

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The Emergence of Net-Enhancement• 1964 – The 1st IBM computer dedicated to business

processes – esp. accounting & bookkeeping - were never the same again. Lg. firms then created networks to linking their mainframes to remote locations

• 1980s - PC advances contributed to the development of smart networks, which demonstrated their usefulness to businesses in creating new strategic capabilities

• 1990s - robust networks with distributed computing intelligence became widespread, supporting the developing of electronic commerce.

• Organizations began to use their networks to increase accounting and production efficiencies, assist decision- making and even support new strategic directions

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The Three Stages of Net-Enhancement (Table 1.1)

Cash’s 3 Stages in the Evolution of Computers for Organizational Needs :

• 1st Era(50s-60s): Systems used to run transactional processing systems (TRS) and ‘management information’ systems (MIS)

• 2nd Era(70s-early 80s): Development of decision support systems (DSS) and rule-based expert systems (ES)

• 3rd Era(early 80s-90s): Evolution of proprietary Customer Ordering Systems (CRS) as competitive weapons by airlines

35Table 1.1 The three eras of computer

 

 

  

Era IT Focus GenericSystems

Purpose Primary IT Technology

I: 50sto

60s

Organization TPS, MIS Efficiency Mainframes

II: 70sto

80s

Individual DSS, ES Effectiveness Mini-computers

III: 80sto

90s

Intra-industry CRS Strategic/Competitiveness

Networking

 

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The New Era of Net-Enhanced Applications (Table 1.2)

• The “Net-Enhancement Era” (NEE) differs from these 3 eras of computing by breaking out of the straitjacket of the individual firm

• Organizations change focus from intra-industry systems to inter-industry and consumer-oriented systems based on the TCP/IP protocol used on the Internet and WWW

• Perhaps most importantly, firms are stretching far beyond their traditional partners to include new suppliers and intermediaries as well as establishing new relationships with their consumers

37Table 1.2 The N.E.E.Table 1.2 The N.E.E.

Era IT Focus GenericSystems

Purpose Primary IT Technology

I: 50s-60s

Organization TPS, MIS Efficiency Mainframes

II: 70s-80s

Individual DSS, ES Effectiveness Mini-computers

III: 80s-90s

Intra-industry CRS Strategic/Competitiveness

Networking

IV: IV: 90s-90s-00s00s

Inter-industry;Inter-industry;consumersconsumers

WWW and WWW and BrowsersBrowsers

Economies of Economies of scale, market scale, market penetration, new penetration, new bus. directionsbus. directions

TCP/IP-based TCP/IP-based Client/Server Client/Server networkingnetworking

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4. Definitions of Net-Enhancement

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Definitions of Net-Enhancement

• Net-Enhancement can be defined and understood from several perspectives

• The technical perspective emphasizes the evolution of the supporting technologies

• The information-based perspective looks at what kinds of network-based systems are doing in terms of the movement, storage and processing of information

• Organizational perspectives look at how organizations have changed and the new capabilities network-based systems have given them

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4.1 Technology-Based Net-Enhancement

Advances in technology have defined Net-Enhancement, which is currently governed by the rules of the TCP/IP protocol

This has the advantages that:– TCP/IP is universal– TCP/IP is not owned by any firm or country

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4.2 Information-Based Net-Enhancement

• Information-based Net-Enhancement means replacing information processes with physical ones– Dell’s Net-Enhancement system, for example,

allows for direct, Web-based interaction with customers

– Eliminates the need for a storefront– Supports tightly coordinated production lines– Ships outsourced monitors produced by Sony

whose arrival is coordinated for just-in-time production

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Ives’ Customer Resources Life Cycle

• Advanced use of IS has introduced a more connected customer/client relationship

• The sale of a product may only be the first stage of a long-term relationship

• In which information allows the firm to track the use of the product through its life cycle.

• Ives has organized the evolution of this type of long-term relationship over the life-cycle of a product in to five stages shown in Table 1.3

43Table 1.3 Ives’ Customer Resources Cycle (Ives and

Learmonth 1983)

 

 

 

Stage Name Description

1 Search Helping customers find your product

2 Selection Assisting customers to choose your product

3 Acquisition Making it easy and convenient for customers to acquire your product

4 Stewardship Aiding customers to track the state of your product

5 Salvage Helping customers dispose of your product

 

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4.2 Information-Based Net-Enhancement (cont.)

“Smart” products/services can respond as substitutes for physical actions of customers– Simple online product registration (HP) or online product

tracking (Otis) extend the vendor-customer relationship

– Smart products go even further because the products are able to ‘report’ back to the vendor on their status

– When a customers is online, for example, AOL is automatically contacted by its software and, if enhancements are needed, the client is informed, eliminating the need for the client to physically monitor and then contact AOL

– UPS’s package delivery packaging service is another example – and where customers didn’t realize they wanted the service until it was offered!

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4.3 Net-Enhancement Based on Organizational Structure

Net-Enhancement, through the substitution of information for physical processes is driving firms to become more and more virtual in their organizational structures.

• They focus on informational core competences and usually outsource non-core assets and capabilities.

• This transformation is just as critical for firms, such as automotive manufacturers that are more labor and equipment intensive as it is for firms such as Yahoo!

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4.4 Other Distinguishing Characteristics of Net-Enhancement

The ‘ideal’ Net-Enhanced firm might be described as having the following characteristics:1. Adopts a global focus2. Ties its IT to its strategic positioning3. Avoids proprietary solutions and technologies4. Adopts and selectively deploys information

visibility5. Creates strong links to its customers through

proprietary data, its main source of competitive advantage

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5. Scenario: Electronically Wringing Out the Costs In An

Airport Vehicle Rental Business

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Electronically Wringing Out the Costs In An Airport Vehicle Rental Business

If management understands Net-Enhancement, they will look for ways to

replace physical processes with information that can be made available

system-wide through the Web

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Wringing Out the Costs In An Airport Vehicle Rental Business:

• Check-in counters and staff can be replaced with kiosks located in the airport terminal or via the Web

• Once the customer has confirmed their choices, the order is confirmed by digital signature

• Finger- or voice-prints may soon replace keys or key-cards

• Automated inventory control will track cars entering and leaving, allowing maximum fleet utilization for the company

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Wringing Out the Costs In An Airport Vehicle Rental Business:

The key concept is a direct-to-consumer business model. Competitive advantage comes from:

• Customer perceptions of faster service• Lower overheads• Builds customer loyalty by offering services 24/7• Greater flexibility in services offered• Eventually even kiosks could become redundant

as Web-based and computer-orchestrated systems automate the process seamlessly for the customer

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6. Key Trends

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6.1 Key Trends:• Consumer resistance to change may slow the

uptake of NE changes, especially if top management and knowledge workers do not champion them

• An effect of this resistance is that the transition to use a new innovation takes longer

• Not all changes will prove valuable, as some will prove to be ‘fads’

• The real downside to resistance to change is that it makes organizations “late adopters”, lowering their competitiveness.

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6.2 Moore’s Law (Figure 1.6)In 1965, Gordon Moore, then Intel CEO observed

that the number of transistors per unit of area was doubling about every two years.

A rough description of the effect of this ever increasing transistor production density is that, in a ten year period:– Computer capabilities increases tenfold– The pricing of these improvements decreases tenfold– This increases the leverage of firms to substitute

information for physical processes and to become more ‘virtual’

• This relationship is expected continue for some time into the future

54Figure 1.6 Cost Performance Relationships in Computing Power

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6.3 Growth in Net-Enhancement Sectors

• While growth rates have slowed to ‘only’ double digits, healthy growth still lies ahead

• Will spread throughout the world as developing countries catch up with the more networked nations

• However, the competitive advantage conferred by cheap, robust and widely available technology may not last

• For now, we note that there is a critical mass of equipment and software to sustain the growth of Net-Enhancement and that continued high growth rates will ensure its long term global diffusion.

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7. Second or Consolidating Wave of ‘Net’-Enhancement (2000-?)

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Second Wave of Net-Enhancement

• The crash in dot.coms and telecoms is unlikely to have long-term effects

• Initial exponential growth (“contagion”) may then be followed by a period of consolidation and rationalization

• A further spurt of growth is likely at some point once the new innovations are ‘digested’ (see Figure 1.6)

58Figure 1.7 Nolan’s Stages of Growth Model

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End of Chapter 1