Changing the Firm’s Digital Backbone: How Information Technology shapes the Boundaries of a Firm

Stephan Billinger & Michael Jacobides

Research Fellow, Strategic and International Management Area

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The presentation

Introducing the phenomenon Prior theory Research design The case study Summary contribution

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Service UnitCMT UnitFabric Unit

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Creating a vertical architecture:The case of Fashion Inc.

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Arrows: Firm buying

Arrows: Firm selling

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Why did Fashion Inc. not outsource but open-up its boundaries instead?

Comments from managers “Why should we get rid of the ‘staple part’ of our value chain?”

“Innovation is not changing a style or a color – it’s in the fabric!”

Benefits Operational Efficiency and Effectiveness

Strategic Capabilities and Propensity to Innovate

Use of the Market Benchmark supports Corporate Resource Allocation

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The role of IT at Fashion Inc.‘s redesign

„The old IT infrastructure cannot do it…“

„We need a new IT system!“

How does Information and Communication Technology (IT) influence a firm’s boundary choices?

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IT and firm boundaries / IT and modularity in firms

Research that follows the TCE tradition suggests– IT reduces transaction costs (Ciborra, 1993)– IT reduces internal, external coordination costs (Malone et al, 1987)– IT leads to external coordination (Clemons et al, 1993; Hitt, 1999)

IT in firms– “Electronic markets”, “electronic hierarchies” (Malone et al, 1987) – IT facilitates communication in MNEs (Andersen & Foss, 2005)

Looking at firms: Technology, organizations and (internal) boundaries– Modular organizations (Sanchez & Mahoney 1996; Baldwin & Clark

2000; Schilling 2000; Schilling & Steensma, 2001)– Modularization: Disaggregated production chain (Schilling, 2002)

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The theory gap and the research design

Research has not looked at:– How does Information and Communication Technology (IT)

influence a firm’s boundary choices?

The setting was chosen on conceptual grounds, rather than because of its representativeness (Firestone, 1993)

Inductive case study to identify micro-level mechanisms

Verification of case-study results using an IT database

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Comparing the old and the new IT system

The problem in daily business

The old IT system The new IT system

“How do we get prices out of the IT system?”

System allows only buying, selling can only be pursued after certain

steps

System supports buying and selling along the entire value chain

“How can we react to several customers along the value chain?”

Scenario planning is not possible

Scenario planning with IT simulation tools

… … …

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New IT: An Enterprise Resource Planning (ERP) system that plays an architectural role

Overall Tasks

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Master Production Schedule

Production Requirements Planning

PurchasingManufacturing

Planning &Control

Master Data Management

Core TasksERP systemssupport thesefunct-ionalities only recently

Network Configuration

Network Forecasting

Network Demand Planning

Network Tasks

Partly adopted from Schuh & Roesgen, 2006

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SourcingFiber

KnittingFabric

Re-finement

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Vertical packages determine vertical scope

Processesprocuredinternally

Processesprocuredby externalpartners

FiberWare-house

RawFabricWare-house

DyedFabricWare-house

FabricWare-house

Vertical Package 1

Vertical Package 2

Vertical Package 3

Vertical Package 4

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Summary contributions

Different types of IT play different roles in organizational design – Architectural IT vs. productive IT vs. mediating IT

Vertical packages determine vertical scope– Vertical packages are a particular configuration of processes that

fulfil a distinct business need Architectural IT (e.g. an ERP system)

– is required to rapidly configure and reconfigure vertical packages

– enables modularity within an organization

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Implications

Firm boundary decisions – A firm’s overall boundaries are the sum of its individual transactional

choices – combining these choices can generate benefits– Vertical scope is determined by dynamically changing configurations of

vertical packages Organizational design

– Permeable value chains are based on rapidly reconfigurable modularity– Modular structures are central for creating markets within and across

organizations Information Systems

– IT can help to simulate vertical integration while addressing intermediate markets

– To understand firm boundaries, we need to study architectural technologies (e.g. ERP) rather than mediating technologies (e.g. EDI)

Thank you!