Business Transformation: Lessons from the Matrix of Change

Prof. Erik BrynjolfssonCenter for eBusiness, MIT Sloan School

October, 2004 Generous support for this research was provided by the Center for

eBusiness under grants from BT and CSK

Copyright © 2004 Erik Brynjolfsson. Reproduction prohibited

ebusiness.mit.edu

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What are the key assets at Dell?

Michael Dell

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Computerization > Computers

Image by Ralph Clevenger

IT Capital (10%)

Technological Complements (15%)

Organizational Complements (75%)

Intangible Assetsare more important in

the Information Economy

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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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CustomerCustomerCustomerCustomer Global Global InternetInternetGlobal Global

InternetInternetWeb Web

serverserverWeb Web

serverserver

FirewallFirewallFirewallFirewall

CorpCorpI/SI/S

CorpCorpI/SI/S

InventoryInventoryInventoryInventory

ProductsProductsProductsProducts

CustomersCustomersCustomersCustomers

DataDatabasesbasesDataData

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. Use technology to leverage existing assets

– Transformation doesn’t mean cannibalization: Large firms should build on their competitive advantages.

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The Organization as aCollection of Processes

Evolution:– Many business processes “evolve” over time

Co-Evolution:– Ecology of “memes” will tend toward stable clusters of

technologies, structures and processes

Design:– “Supermodularity” can prevent piece-meal trial and

error from finding optimal cluster

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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 new business model?

How can the identify the processes that need to change?

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Web servers and email-based Interactions

Physical Retail Front Office

Case study:Digital Business is Not (just) New Technology

Traditional Brokerages

Online Brokerages

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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 Office

Assigned Broker Provides Personal Advice

Focus on “high net worth” investors

Specialized research staff

Commission-based compensation

Proprietary, Custom information

High fees tied to trading

Case study:Digital Business is Not (just) New Technology

Traditional Brokerages

Online Brokerages

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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 Office

Assigned Broker Provides Personal Advice

Focus on “high net worth” investors

Specialized research staff

Commission-based compensation

Proprietary, Custom information

High fees tied to trading

Both are Coherent Systems

Traditional Brokerages

Online Brokerages

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The Matrix of Change Helps identify critical enforcing and conflicting

interactions within an existing organizational system Helps identify critical enforcing and conflicting

interactions within a proposed organizational system Helps identify how to transition to a proposed

organizational system; Can provide useful insights regarding

– change feasibility– implementation sequence– location– implementation pace

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

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Grid Rankings

+ Reinforcing practices

- Opposing Practice

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The analysis of Schwab Online is

much more encouraging

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Lessons from the Research1. Use technology to leverage existing assets

– Transformation doesn’t mean cannibalization: Large firms should build on their competitive advantages.

2. 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 Supermarket

Wrap Account with Single Annual Fee

Multiple Access Points

Access to Specialized research

Personal Broker via multiple channels

Proprietary, Custom information

No fees for trading

A New Model for Merrill

New Online Brokerage

Model

“Unlimited Advantage”

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Merrill Lynch’s New Business Model

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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, page 1 feature

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Lessons from the Research1. Use technology to leverage existing assets

– UPS

2. Understand business process complementarities using the Matrix of Change

– Merrill Lynch, Schwab

3. Be ready to re-invent, not just follow – A deep understanding of your real assets catalyzes creativity

To Learn More about the Matrix of Change – and to get your own free copy of the software – please visit:

http://ebusiness.mit.edu/moc

The Center for eBusiness is the largest industry-sponsored research program at the MIT Sloan School. To learn about the Center, visit http://ebusiness.mit.edu

The Internet and the Dynamo