Week 04 – Competition and Partership
Competing in Crowded Markets: Multimarket Contact and the Nature of Competition in the Enterprise Systems Software Industry-Siddharth Bhattacharya
The ESS market has grown in size and consists of several horizontal markets around specific software components. Although individual ESS firms do not develop all the software components, each firm typically offers several of these components. ESS firms should benefit from competing in as many product markets and serving as many vertical industry segments as possible. Theories of multimarket contact suggest that ESS firms can engage in tacit collusion and mutual forbearance to reap performance benefits. Second, many of the markets where ESS firms operate are crowded with rivals. Crowded markets subject firms to high market domain overlaps with their industry rivals and adversely impact their performance. Thus the paper asks the following research questions: Should ESS firms compete in as many markets as possible? Second, are they better off by avoiding crowded markets?, Do they benefit by repeatedly facing rival firms in multiple markets. The data comes from an unbiased industry group(Reed Elsevier Inc.) that employed a consulting organization to collect revenue and other information for nearly a complete set of ESS firms through surveys every other year. Additional elements such as firm size and alliances are acquired from other independent sources including the Mergent Online company database, Security and Exchange Commission filings, Gale Group database, and One Source Business Browser. The empirical analysis consists of a time fixed effects, random-coefficients regression. Results show that once a firm sells a component it benefits by creating templates for different vertical industry segment. Higher multimarket contact leads to better firm performance. Externality benefits might indeed be diluted by heightened rivalry. Finally, results reveal that firms operating in crowded markets and experiencing high market overlap can enhance their performance through multimarket contact. Robustness checks are put in place to rule out endogeneity concerns and validating the use of the random effects model.
Paper: Ceccagnoli, Marco, Chris Forman, Peng Huang, and D. J. Wu. “Cocreation of Value in a Platform Ecosystem! The Case of Enterprise Software.” MIS quarterly (2012): 263-290.
This paper examines whether participating in an ecosystem platform improves the business performance of small independent software vendors(ISVs). By analyzing the partnering activities and performance indicators of a sample of 1,210 small ISVs with SAP over 12-year period (the data source: CorpTech database), the authors find that collaborating with an ecosystem platform is generally associated with an increase in sales and a greater likelihood of IPO. The effect is stronger for ISVs that have stronger downstream capabilities and greater intellectual property rights.
To evaluate the performance of ISVs, the authors measure two metrics: sales and the likelihood of IPO. They present robust empirical evidence showing that the decision to partner is, on average, associated with both an increase in sales and a greater likelihood of an IPO. To enhance identification of causal effects they adopt a variety of approaches, including the use of fixed effects panel data models with instrumental variables. The instruments are based on an ISV’s personal connections to SAP in the years prior to partnering, obtained from Linkedln, and the propensity of similar ISVs to partner with SAP
Chi et al. (2010). Information technology, network structure, and competitive action. Information Systems Research, 21(3), 543-570.
Researchers in competitive dynamics have demonstrated that firms that carry out intense, complex, and heterogeneous competitive actions exhibit better performance. However, there is a need to understand factors that enable firms to undertake competitive actions. This study focuses on the sparse-versus-dense network structure of inter-organizational networks and aim to theoretically and empirically investigate how these contrasting types of network structure interact with IT to influence firm competitive behavior. They argue that firms could benefit from both types of network structure, but the extent to which they exploit their network positions is contingent upon their use of IT.
This paper extends the AMC framework to the action repertoire level of analysis by examining how a firm’s network structure interacts with its use of IT system to jointly influence the firm’s competitive behavior through increasing the firm’s awareness of opportunities for developing new competitive actions and its capability and motivation to act on the opportunities.
They tested the hypotheses on a sample of firms from the global automobile industry, about 12 major automakers over 16 years from 1988 to 2003. They find that network structure rich in structural holes has a positive direct effect on firms’ ability to introduce a greater number and a wider range of competitive actions. However, the effect of dense network structure is contingent on firms’ IT-enabled capability. Firms benefit from dense network structure only when they develop a strong IT-enabled capability. Our results suggest that IT-enabled capability plays both a substitutive role, when firms do not have advantageous access to brokerage opportunities, and a complementary role, when firms are embedded in dense network structure, in the relationship between network structure and competitive actions.
Tanriverdi, H., & Uysal, V. B. (2011). Cross-business information technology integration and acquirer value creation in corporate mergers and acquisitions. Information Systems Research, 22(4), 703-720.
Mergers and acquisitions (M&A) are common and important economic activities across many sectors of the economy. However, the role information technology plays in the process is ambiguous. This paper tends to investigate why and how cross-business information technology integration(CBITI) capability of an acquirer increase value for shareholders in M&A.
The main theory lies in the cross-business organizational integration, which could create additional value over and above the sum of the two firms’ individual value. In the scenario, cross-business IT integration could coordinate the create-creation process. The paper specifies there are five CBITI, 1. integration of IT infrastructures; 2. integration of IT applications and data; 3. integration of IT human resource management practices; 4. integration of IT vendor management; 5. integration of IT strategy-making practices. Then it also explains four major causal mechanisms behind the value-creation: 1. generating IT cost savings; 2. minimizing potential disruptions to business operations; 3. enabling the realization of business synergies; 4. enabling regulatory compliance and reduce costs of compliance. The paper also points out that different complementary resources of different industries could offer significant synergy potential. Based on these theories, it proposes that the CBITI level of an acquirer positively affects the performance of the acquirer in a new acquisition, and it positively affects the abnormal stock returns of the acquirer, the industry relatedness of target moderate the relationship between CBITI level of an acquirer and performance of it in a new acquisition, both in the short run and long run.
It collects data from different sources including a survey and different databases. Then they use the event study methodology to measure forward-looking expectations of the capital markets about the impact CBITI has. The hypotheses are supported by the results. This study contributes to the M&A literature in IS, finance etc and has important implications for CIO.
Tafti, A., Mithas, S., Krishnan, M. S. (2013). The effect of information technology-enabled flexibility on formation and market value of alliances. Management Science, 59(1), 207-225.
By using a sample of 169 firms that spanned 50 industries, Tafti, Mithas, and Krishnan (2013) were able to investigate the effect of information technology (IT) architecture flexibility on strategic alliance formation and firm value. Three distinct dimensions of IT architecture flexibility, open communication standards, cross-functional transparency, and modularity, were considered. Open communication considers the adoption of an open standard across firms, such as Extensible Markup Language (XML), which allows more connectivity and information transferring between firms. Cross-functional transparency is defined as the skills and abilities that are widely deployable, visible, and accessible across different functions in a firm. Finally, when a firm is modular, it is able to decompose processes into atomic, fine-grained units of functionality which can then be combined easily with other modules to efficiently construct a new process. The study considered the effect of these three dimensions of IT architecture on three types of alliances, arm’s-length, collaborative, and joint-venture alliances respectively. Arm’s-length alliances most closely resemble market transactions and are better suited for the transfer of highly codified explicit knowledge across firm boundaries. Next, collaborative alliances involve the sharing of firm specific or tacit knowledge, a recombination of products/services/processes, or heavy coupling of interoganizational business processes. Finally, joint-ventures create an entirely new business entity through the allocation of partnered resources.
Various Poisson and binomial panel models were run on a dataset that was created by combining various sources including InformationWeek, Compustat, and the Bureau of Economic Analysis. Results found that open communication and modularity are associated with the formation of arm’s-length and joint-venture alliances respectively. Overall, IT architecture flexibility enhances the value of all types of alliances, especially collaborative alliances. Effectively, these results suggest that in collaborative-intensive alliances, reconfiguration of resources and modification of processes can be facilitated by appropriate investments in IT.
Ali Tafti, Sunil Mithas, M. S. Krishnan, (2013) The Effect of Information Technology–Enabled Flexibility on Formation and Market Value of Alliances. Management Science 59(1):207-225.
Whereas prior IS studies have focused on the effects of IT in reducing transaction and coordination costs in inter-organization relationships, there has been little understanding regarding the role of flexible IT architecture as an enabler of interfirm collaboration. This study is among the first to examine whether IT architecture flexibility facilitates strategic alliance formation and enables firms to derive value from alliances. The authors 1) examine the effect of three dimensions of IT architecture flexibility (open communication standard, cross-functional transparency, and modularity) on formation of three types of alliances (arm’s-length, collaborative, and joint-venture alliances, respectively) and 2) study how capability in IT flexibility moderate the value derived from alliances.
Utilizing a data set from 169 firms that are publicly listed in the US and that span multiple industries via panel data models (with random effects and fixed effects), they found that adoption of open communication standards is associated with the formation of arm’s-length alliances, and modularity of IT architecture is associated with the formation of joint ventures. Results also showed that the value of alliances is enhanced by overall IT architecture flexibility, implying that all three dimensions of flexibility are important in the value derived from arm’s-length, collaborative and joint-venture alliances.
This study suggests a need for greater consideration of the role of flexibility in IT-driven business process to understand the underpinnings of IT business value in inter-organizational context. I am quite enjoying reading a well-organized paper like this one. The authors showed us a template to write a clear and straightforward paper with a balance between creating knowledge and empirical investigation.
|Chellappa et al. (2010)||Sid|
|Chi et al. (2010)||Xi|
|Tanriverdi and Uysal (2011)||Leting|
|Ceccagnoli et al. (2012)||Jack|
|Tafti et al. (2013)||Joe, Heather|
Dr. Ali Tafti at University of Illionis, Chicago, will be joining us as a guest speaker on Feb 7 at 10:40 AM. His bio is available is here.
Please read his Management Science paper on strategic alliance closely and come up with a question to him.
I am pleased to announce that Dr. Peng Huang at Smith School of Business, University of Maryland will join us as a guest speaker on January 31 at 10 AM. His website is at http://penghuang.com/
Please be sure to read his paper from Week 4 by next week and come up with a question to him (although we will discuss this paper on Feb 7).
Ceccagnoli, M., Forman, C., Huang, P., and Wu, D.J. (2012) “Cocreation of Value in a Platform Ecosystem: The Case of Enterprise Software,” MIS Quarterly (36:1) pp. 263-290.