Vinod Jain is an expert in global and digital business, former business professor, consultant, speaker, and author of Global Meets Digital.
In 2003, Nicholas Carr, who was editor-at-large of the Harvard Business Review at the time, wrote an article in HBR titled “IT Doesn’t Matter.” He claimed that the evolution of information technology had followed a pattern similar to that of earlier technologies, like electricity and railways, which are essentially commodities now. In his view, “The opportunities for gaining IT-based advantages are already dwindling. Best practices are now quickly built into software or otherwise replicated. And as for IT-spurred industry transformations, most of the ones that are going to happen have likely already happened or are in the process of happening.”
Further, Carr claimed that IT is no longer a source of competitive advantage for firms. Any advantages that IT might bestow upon a firm are available to every firm that makes the same investment. The article generated a great deal of discussion―some for, but many against, Carr’s prognostication.
That IT does matter is a self-evident fact for most people today. As early as 1997, research by Erik Brynjolfsson and Lorin Hitt confirmed that companies that were the heaviest users of IT were more productive than their competitors. But, if proof was still needed, look at the world’s most profitable companies: The list includes companies that derive their competitive advantage directly from IT and those that make extensive use of information technologies.
What is value creation?
The concept of value (and value creation) is fraught with many misconceptions. What value is, how it is created, for whom it is created and who captures it are often misunderstood, even by successful companies. A company creates value when its product solves a customer’s problem for which the customer is willing to pay. Value creation and value capture are why companies exist; they are a critical aspect of any company’s strategy. Companies create value when customers purchase their products, and they capture some of that value for themselves to remain in business.
Who captures the value thus created? Well, value is shared among the customer, the company (shareholders), complementors and other stakeholders. “Complementors” are companies that sell a product or service that complements the product or service of another company by adding value to their mutual customers. For instance, Microsoft is a complementor to Dell Computers; Microsoft’s operating system is used in Dell computers. The other stakeholders can be any other companies or organizations that expect some financial gain from the purchase transaction, such as the government (taxation authorities), lenders, ecosystem partners, communities and so on.
How is value created?
How a company creates value and captures value are the defining questions in strategy. A company creates and captures value through one or more of at least four approaches: cost reduction, innovation, creating a new market and increasing customers’ willingness to pay.
Companies can attempt to reduce costs through greater efficiency in operations. This can help improve how customer purchases take place, profitability and free up resources to reinvest in the company’s growth. In the digital world, companies don’t just try and improve existing processes to reduce costs; they can use new technologies such as artificial intelligence, machine learning and robotics to help improve productivity and strengthen their market position.
Information technologies are behind most of the innovations we see today in practically all fields of human endeavor, and their progress has been exponential, as suggested by Moore’s Law and Metcalfe’s Law of network effects. Moore’s Law implies that computing power doubles every 18 months to two years at the same cost. Metcalfe’s Law means that the value of a network grows exponentially as the number of the network’s users increases.
Creating New Markets
Creating a new market means access to new customers and new opportunities for value creation and capture. To do this, a company could expand its existing market; capture new markets within its existing industry, in adjacent industries or in completely new industries; or even create a new business category. Irrespective of what approach a company decides to follow, IT always has a major role to play in its expansion. Uber and Airbnb, for example, both created new business categories for the transportation and hospitality industries, as did Dropbox for file storage and sharing, Apple for smartphones, Spotify for legal music streaming and many others.
Expanding into an adjacent line of business—and using its core strength, namely some 3.5 million Uber drivers worldwide—Uber launched Uber Eats, a food delivery service in the U.S. Uber Eats is now available in more than 6,000 cities across 45 countries, according to the company’s website. From selling books online, Amazon expanded into adjacent lines of business, including e-books, digital content, magazine distribution, publishing and e-book readers.
Increasing Customers’ Willingness To Pay
Getting customers to pay for the products they purchase is how companies capture value created by such products. Customers’ willingness to pay for a product or service depends on several interrelated factors, such as: how precisely the product meets customers’ needs, price, brand image, perception of quality and durability; availability of close substitutes; the product’s value proposition; after-sale service; the context of where the product is to be purchased; the type of product and other factors.
Customers are generally willing to pay more for products that have the features they value and that meet their specific needs. Through localization and personalization, information technologies have permitted companies to customize their products relatively easily to meet the needs of specific customers and customer groups precisely. Using data analytics, companies can better understand customer needs, which helps create and capture more value for the products they sell, in addition to greater customer satisfaction and better customer retention.
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