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TRANSCRIPT
Business Transformation: Lessons from the Matrix of Change
Prof. Erik BrynjolfssonCenter for eBusiness
MIT Executive Education November, 2002
Copyright © 2002 Erik Brynjolfsson. Reproduction prohibited
ebusiness.mit.edu
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DATA
Firm-level Data: Two SamplesSample Coverage
» 1987-2000 Sample: 1167 large firms (10,517 observations)
» 41 industries (2-digit SICs) represented
! 54% manufacturing, 43% services, 3% mining & construction
! Not a random sample of US firms
» Four Principal Types of Data! Market Value from S&P’s Compustat II
! Computer Capital from Computer Intelligence
! Ordinary Capital, other Assets, R&D from S&P’s Compustat
! Organizational practices from surveys we conducted 1995-1996
» Currently Undertaking New Survey of 500 firms! Part of 5 year, $5 million project at MIT
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-1 .5
-1.0
-0.5
0.0
0.5
1.0
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-4 -2 0 2 4
MFP
IT 3
IT and Productivity: The Data Speak
IT Stock (relative to industry average)
Productivity(relative to industry average)
IT is associated with greater productivity...
...But what explains the substantial variation across firms?
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Computers and Organizational Capital
Computer Capital
Org
Mar
ket v
alue
High IT and
High “Org.Capital”
Source: Brynjolfsson, Hitt and Yang, Intangible Assets: Computers and Organizational Capital, http://ebusiness.mit.edu/erik
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Lessons from the Research
1. There’s a lot more to digital business than (just) technology! Be ready to transform the whole business
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Digital Business requires changes throughout the enterprise
“Amazon’s on-line account maintenance system provides its customers with secure access to everything about their account at any time. …they can ...customize virtually everything about the system to their own tastes...
…such information flow to and from customers would paralyze most old-line companies.”
--Denise Caruso, New York Times
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CustomerCustomerCustomer Global InternetGlobal Global
InternetInternetWeb
serverWeb Web
serverserver
FirewallFirewallFirewall
CorpI/S
CorpCorpI/SI/S
InventoryInventoryInventory
ProductsProductsProducts
CustomersCustomersCustomers
DatabasesDataData
basesbases
Provide Access to Corporate Databases Internally and Externally
End to End Integration Provides:• Real-time Order Status• Transaction Records• Product Information
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Lessons from the Research1. There’s a lot more to digital business than (just)
technology– Be ready to transform the whole business
2. Use technology to leverage existing assets– Transformation doesn’t mean cannibalization: Large firms
should build on their competitive advantages.
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Managing Change
Business processes are the basic building blocks of all business models.
How can managers identify the processes that leverage their Internet business model?
How can the identify the processes that need to change?
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Web servers and email-based InteractionsOutsourced, Generic informationFocus on frequent tradersSalaried compensationAlliances with other service providersDiversified revenue stream including adsLow Fees on trading
Physical Retail Front OfficeAssigned Broker Provides Personal AdviceFocus on “high net worth” investorsSpecialized research staffCommission-based compensationProprietary, Custom informationHigh fees tied to trading
Case study:Digital Business is Not (just) New Technology
Traditional Brokerages
Online Brokerages
The Matrix of Changepredicts a rough transition
Copyright © 1994-1998 Erik Brynjolfsson IT, Productivity and Organization 26
Proprietary, custom Information
Retail Front
High Fees
Old Practices
+
+
+ -
Grid Rankings
+ Reinforcing practices
- Opposing Practice
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+
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-
-
Out
sour
ced,
gen
eric
Info
rmat
ion
Web
and
Em
ail f
or In
tera
ctio
n
Low
Fee
s
New
Pra
ctic
es
-
+-
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Lessons from the Research1. There’s a lot more to digital business than (just)
technology– Be ready to transform the whole business
2. Use technology to leverage existing assets– Transformation doesn’t mean cannibalization: Large firms
should build on their competitive advantages.
3. Understand business process complementarities using the Matrix of Change– Business processes are valuable only to the extent they
support and are supported by the rest of the system
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One Stop Financial SupermarketWrap Account with Single Annual FeeMultiple Access PointsAccess to Specialized researchPersonal Broker via multiple channelsProprietary, Custom informationNo fees for trading
A New Model for Merrill
New Online Brokerage
Model
“Unlimited Advantage”
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Last Laugh?“Now, Schwab is embarking on what may well prove its
riskiest move yet… Instead of trying to drive revenue through low-cost trades, Schwab says it will focus on providing investment advice to its clients. It is opening several new brokerage offices, where for the first time Schwab-employed "financial advisers" will provide investment tips and other services for a fee ….
In the not-too-distant future, "Schwab will be a lot closer to Merrill Lynch than it is to the Schwab of yesterday," predicts Charles "Chip" Roame, a former Schwab executive.”– Gasparino and Brown, Wall Street Journal, June 19,
2001, page 1 feature
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Lessons from the Research1. There’s a lot more to digital business than (just)
technology– Pizza Hut, MIT statistical Study
2. Use technology to leverage existing assets– UPS
3. Understand business process complementarities using the Matrix of Change– Merrill Lynch, Schwab
4. Be ready to re-invent, not just follow – A deep understanding of your real assets catalyzes creativity
Research and Practice Have Never Been Closer!