How can organizations achieve competitive advantages using ERP systems through managerial processes?

Transcription

1 How can organizations achieve competitive advantages using ERP systems through managerial processes? Carl Erik Moe 1, Erik Fosser, Ole Henrik Leister and Mike Newman Agder University College, Servicebox 422, 4604, Kristiansand, Norway Abstract Enterprise Resource Planning (ERP) systems have become a standard for collecting all business areas in one system. For some organizations it is a necessity for doing business, while others use it to outperform competitors. Prior research in the area of ERP systems and competitive advantage is dispersed and insufficient. Based on literature review and in-depth interviews at two Norwegian enterprises we have developed a framework which we believe gives insight into the areas managers should focus on when implementing ERP systems. Our study supports the claim that ERP systems in themselves do not create a competitive advantage. Instead, they form an information basis which managers can utilize to outperform competitors. A good relationship between IT/IS managers and the rest of the management is crucial. The importance of top management support was highlighted and linking ERP and a data warehouse as a bolt-on was very beneficial in one of the enterprises. 1 All correspondence should be directed to Carl.E.Moe@hia.no

2 Introduction Enterprise Resource Planning (ERP) systems aim to integrate all business processes into one enterprise wide solution by having one centralized database that all business areas have access to [21]. The integration facilitates information flow throughout the entire company [22]. It is possible to customize the ERP system to fit the original business processes. However this is usually not recommended because of the high cost and problems with system upgrades and maintenance difficulties [12]. Benefits from using ERP-systems are said to be revolutionizing [10]. However as our literature review shows, there are also stories of failures, cost overruns and problems with change management, hence it is of vital importance to understand how to achieve the promised benefits. Prior research Lengnick-Hall et al. [16] claims that ERP systems do not offer competitive advantages in themselves, but has to be coupled with social and intellectual capital within the firm. This is supported by others [14; 20; 23]. The overall benefit lies in the quality of integrating an organization s information flow and business processes [5]. By doing this the enterprise can optimize resources. However, others have argued that ERP can be part of making a competitive advantage in some situations [3]. Drawbacks with ERP systems have also been reported. Managers have not been aware of the difficulties in changing processes and organizational culture to fit the ERP system and struggled with change management [21; 18]. ERP systems may eliminate competitive advantages that organizations possessed before the implementation [3], due to the common systems approach. Future needs of the enterprise can be hard to predict and further development of the ERP system is unknown to the buyer [18]. Drawbacks with lock-in of an organizations processes and principles into a specific software solution have been reported [15]. Shortcomings may lead to extensive switching costs, and it can be costly to combine the ERP system with other software products [22]. Not much research has been done on managerial processes concerning ERP systems and creating a competitive advantage [20; 3; 13]. More research has been done on the topic of implementation and realizing the

3 benefits of ERP systems [9; 13]. A few studies has focused on mature systems up and running and achieving competitive advantage. This era has been called the Post-Net era [3] and second wave [6]. Kalling [14] focuses on how ERP systems and strategic management processes can lead to a competitive advantage. He suggests a framework to improve understanding of processes to achieve competitive advantage and uses the concept bricolage [7]. By this he means learning through trial and error and local tinkering. He argues that this may lead to improved work practices, new capabilities and therefore a strategic advantage. Many studies argue that it is important to have an open environment built on trust [16; 23]. The innovative organization which lies on top of the mechanistic ERP system should focus on open communication, consensus, alignment and flexibility [23]. The findings are dispersed and have sprung out of different school of thoughts. Most have never been tested empirically. To structure our research, we developed a framework based on previous findings, shown in table 1, below. In our paper the resource-based view is used to define competitive advantage, the definition of resources [28] including broad aspects as brand names, in-house knowledge of technology, employment of skilled personnel etc. Mata et al. [20] concluded that managerial IT skills is the only attribute expected to create a competitive advantage. Powell and Dent-Micallef [23] found that flexible culture and supplier relationships are important. The results support the resource-based approach, and help to explain why some firms outperform others using the same ITs. Table 1: Overview of significant prior research Research domain Our Research Topic Prior Research General Common System Paradox [3; 18; 16] Competitive advantage ERP systems and comp. advantage [16; 3] The organizations comp. advantage [16; 3; 13; 14; 2] The managers comp. advantage processes [20; 1; 23; 16; 14] Foundation for The managers knowledge of the [1; 16] competitive advantage organization and the ERP system Training Own curiosity

4 Research domain Our Research Topic Prior Research Communication [23; 20; 16] Cultures [23; 15; 25; 21; 2] Business competent IT/IS dept. [20; 13; 17] Top management support [23; 22] Organizational structures and proc- [23; 16; 13; 25] esses Extraction of information [16; 8] Creative usage of information [16; 8] Extension of the ERP system [26; 24; 4; 27; 19] Processes Future focus areas [13; 14; 1] Plans for achieving comp. advantage [14] Hurdles to achieve comp. advantage [18; 14; 22; 21] Based on the literature review we expect that ERP-systems can lead to competitive advantages, but that this depends on specific foundations in the organisation and on specific managerial processes. Our research question is therefore What foundations and managerial processes can lead to competitive advantages when using ERPsystems? To answer this we collected data at two organisations that were using the same ERP-system, and we will in the following briefly present our research approach before we present the results. Research approach We carried out 16 semi-structured interviews at the two organizations locations. As part of our triangulation we did an analysis of their IT/ISstrategies. The interviewees were asked to read through the Interpretation and analysis and the Discussion chapter for confirmation of our findings. Both companies are in the food industry. Foody had revenue of 485 millions NOK in 2004 and an IT budget of 4.5 million. Sllims revenue was 1.5 billions, and the IT budget was as much as 27.5 million. Foody had one department dealing with technology with only 3 employees, led by the director of finance. Sllim has both an IT and an IS department, both with their own manager. Results and analysis The chapter reports our main findings; table 2 below gives an overview.

5 General All but one of the managers at Sllim said they were satisfied or very satisfied with their ERP system. The unsatisfied manager claimed that the system gave little support to his department s processes. At Foody five of the seven interviewed were satisfied with the ERP system. One was not satisfied and expressed it this way: The system is too hard to work with and navigate in.. It is an A4 system, which force us to change to fit the system. The biggest benefit at both organisations was integration of data. This enabled them to streamline their value chain and internal processes across the entire business. The biggest drawback was that it was a bit too complex. Other drawbacks mentioned were that the sales module was not good enough, the system was too technical, and a lot of skills were needed to both use and manage it. Competitive Advantage At Sllim competitive advantage was something that had been discussed right from the start. Almost everyone stated that an ERP system could only give competitive advantage together with other systems or special competence. The director of IS explained that if their goal only was to maintain the status quo, they would be better off without the system. But when they added the data warehouse, they achieved an enormous data basis, which could give competitive advantage. At Foody they had difficulties in seeing potential for competitive advantage. The only two that really saw the advantage of the ERP system was the CIO and the director of finance. They explained what benefits the system could give, but had less focus on how they could differentiate themselves. We wanted to know what different managers did to achieve a competitive advantage with basis in the system. We were especially interested in how they were able to arrange information, define structures and processes, customise the system, and manage employees. At Foody they mostly talked about improving. The answers we got at Sllim were reflective, but quite varied because of different areas of responsibility. The director of finance stated:

6 I try to exploit the available tools in SAP, without investing money in new functionality. There are a lot of possibilities in the ERP systems, e.g. HR, to utilize our resources more efficiently. Other managers at Sllim focused on a tight cooperation with the business and tried to develop the business processes. Others again worked with parameter settings to optimize the system. The organization focused continually on training to enhance the user skills. They were also doing projects with suppliers and customers to extend their value chain. There was clearly focus on how to continuously develop and improve their work routines. Foundation for Competitive Advantage We wanted to know if the knowledge of the organization and the ERP system combined could be a source of competitive advantage. The two organizations are fairly different in this respect. Sllim rely on their IS department to improve their processes and to be innovative. The knowledge about both the organization and the ERP system are at its greatest in this department. The employees had worked in the company for a long time and knew the organization and the ERP system well. At Foody they focused on the knowledge about the system and not the organization. Some thought they were finished with the implementation. The need for continual improvements, adjustments and the managers need for someone to push them were highlighted. The managing director confirmed that the combination of knowledge about the organization and the ERP system could be a source of competitive advantage. At the same time he was not very supportive concerning this. Business competent IT/IS department is believed to be important. Sllim had a well established IS department with high focus on business knowledge as well as systems development. Dividing the IT and IS department helped them to avoid technical issues and focus on business development. The functional managers overwhelming trust in the IT/IS department impressed us. Their knowledge about the enterprise s processes and their strong determination to solve problems made them very effective. The IS department had tight communication with the users. Structured interviews to gather users opinions, was done once a year. Less structured communication was done continuously by walking

7 around. At Foody the managers were divided concerning this issue. One indicated that their IT department had too much focus on technology instead of information systems as a whole. Another said that the IT department s knowledge was insufficient about his department s routines. However, the majority had a very different view. We asked the individual managers how and if they encouraged their employees to utilize the information in the ERP system. The answers at Sllim were a bit diverse. Many reported that in some way they focused on extracting information and that the link to the data warehouse was very important. The data warehouse helped the employees to get structured reports that were used to further develop the organization. The director of IS explained that they focused on best practice and tried to transfer new, innovative knowledge to other departments. However, the ERP system was not set up to use information creatively. The job of the system was to deliver information to their data warehouse where all analysis was done. Foody was concerned with how to extract information from the ERP system. When new ways of using the system was revealed, manuals were distributed to the various departments. The director of finance and other members of the original implementation team often developed intuitive user guides to help the employees get more out of the system. The director of production said they had a long way to go to use information creatively. Others argued that they were now in a phase two and could focus more on benefits. The two organizations are at different levels, Sllim has had their ERP system for some time. They have created their own data warehouse which enables them to do comprehensive analysis and find creative improvements. Foody has not yet managed to stabilize their ERP system to develop their analytical skills. This topic of extension of the ERP system was mentioned by different managers during the interviews, at both enterprises. The bolt-ons could produce more firm specific advantages if configured properly. Sllim has had success with their data warehouse, whereas at Foody the managing director stated that we should probably have a data warehouse.

8 Processes There had been limited focus on pre-analysis in both organizations. Still, Sllim had done more. The managers had some examples on what they did in the pre-phase of implementation. Not everything was done in the context of competitive advantage, however. Interviews were conducted to detect employees need for support, and a number of requirements were identified from the entire organization. By tuning the system to the organization and the other way around, they achieved a good fit between system and organization. They had a Phase II of the implementation where they focused on how to exploit the extra efficiency gains of the system. We wanted to know if the organizations had any plans or strategies on how competitive advantage could be achieved and if these were followed up and evaluated. This topic was discussed to identify their systematic approach to achieving a competitive advantage. It seemed that both organizations used their business strategies as pointers for what projects and processes they would initiate. They had however troubles with relating this to competitive advantage. Discussion How mature and stable the ERP system is, has impact on the level of utilization [22]. Markus and Tanis s [18] framework describes four phases in an ERP systems life cycle; the chartering phase, the project phase, the shakedown phase, and the onward and upward phase. Foody is still in the shakedown phase, whereas Sllim is in the onward and upward phase. The fact that the two enterprises were in different phases and that Sllim has been running their ERP-system for two more years than Foody has to be considered when we discuss the findings. But it was still a paradox that Foody had spent so little time on how the ERP system could give them a competitive advantage. Managers at Sllim have a more comprehensive and clearer strategy on how to succeed. This could also affect their level of adoption. The data warehouse gave them a competitive advantage and the ERP system was a part of this configuration. This is in line with [19] concerning data warehousing and [3; 14; 16] on information utilisation.

9 ERP implementations [14; 16] may eliminate competitive advantages an organization has. Features that made them unique and hard to imitate may be destroyed because of the adjustments to the system. At Foody, one situation may illustrate this effect. The director of production preferred an old customised system, it gave him all the information he needed and it was specially designed to fit his department s processes. Others told us that they were good at production, which confirms that the old system may be better suited for that department. Mata et al. [20] described four important managerial skills to achieve a competitive advantage. These are IT managers ability to: 1) understand business needs, 2) cooperate with other managers, 3) coordinate IT activities, and 4) anticipate future IT needs. Three of these skills were identified at Sllim, only one at Foody. We did not find evidence for the dual core structure, but it could be that it is used unconsciously. The dual core structure consists of an operational technical core and a strategic learning core [16]. At Sllim, they had opened for cross functional training. Users feeling they would benefit from extending their knowledge about surrounding departments ERP processes could freely join. This can be seen as a path towards a dual core structure. In both organizations the IT/IS department worked as a driver for ERP implementation and utilisation. The CIO and the director of finance at Foody were capable of being change agents. At Sllim, the IS department was really driving all other departments forward. One manager there told us that their competitive advantage consisted of an organizational culture compound with the ERP system which was not possible to copy, but he could not put words to it. It could be that he talked about a strategic important resource that fell under two of the conditions developed by Barney [2]; causal ambiguity and social complexity. This resource might be a tacit capability which was intertwined in social network and relationships [2]. Powell and Dent-Micallef [23] argues that supplier relations can create a competitive advantage. Managers at both companies talked about the importance of extending their value chains. One of the main reasons for implementing the ERP system at Foody was the possibility to exchange information with their biggest customer.

10 Summing up Our study has confirmed some of the concepts from prior research. We confirmed that ERP systems do not give competitive advantage on their own, but can be the information basis for achieving an advantage. The few managerial skills mentioned in the literature have also been confirmed. What stood out as a beacon is the importance of a good relationship between the IT/IS manager and the rest of the management. The importance of top management support was confirmed. The management and organizational culture, and good supplier relations were also confirmed to some degree. The framework we developed can be important for further research. Below is a modified version of Table 1 with a summary of results and an overview of our contribution. Table 2: Framework and findings Research Domain Our Research Topic Support General Common System Paradox No support Competitive advantage Foundation for competitive advantage ERP systems and competitive advantage The organizations competitive advantage The managers competitive advantage processes The managers knowledge of the organization and the ERP Training Communication Cultures Business competent IT/IS department Top management support ERP systems ability to create a competitive advantage had strong support in one organization and only weak support in the other No evidence indicating that managers had a structured process Weak support for the learning loops described in the prior research, but it could be incorporated and hidden in training. Opinions were highly dispersed and ranged from no support to strong support. Only a few highlighted the importance, but these few were strongly convinced. Strong support Strong support

11 Research Domain Our Research Topic Support Organizational structures and processes No or very weak support for the concept of the dual Extraction of information core structure in both Creative usage of information enterprises. Extension of the ERP system Strong support for the importance of bolt-ons. Pre analysis Some support for the importance of pre-analysis. Processes Future focus areas. None of the organization had structured plans. Plans for achieving competitive advantage Both had focus areas and projects, but the link was Hurdles to achieve competitive advantage not always visible. Hurdles described in prior research have been supported. References 1. Andreu R, Ciborra C (1996) Organisational Learning and Core Capabilities Development: The Role of IT. J Strat Inf Sys. 5:2, Barney JB (1991) Firm Resources and Sustained Competitive Advantage. J of Man 17:1, Beard JW, Sumner M (2004) Seeking Strategic Advantage in the Post-Net Era: Viewing ERP Systems from the Resource-Based Perspective. J Strat Inf Sys 13:2, Bendoly E, Kaefer F (2004) Business Technology Complementarities: Impacts of the Presence and Strategic Timing of ERP on B2B E-commerce Technologies Efficiencies. Int J Man Sci 32:5, Brady JA, Monk EF, Wagner BJ (2001). Concepts in Enterprise Resource Planning. Thompson Learning, Boston 6. Brown CV, Vessey I (2003) Managing the Next Wave of Enterprise Systems: Leveraging Lessons from ERP. MIS Q Exec 2:1, 65-77

12 7. Ciborra C, Jelassi T (1994) Strategic Information Systems: A European Perspective. John Wiley and Sons Ltd., Chichester. 8. Daft RL (1978). A Dual Core Model of Organisational Innovation. Acad of Man J 21:2, Davenport TH (1998) Putting the Enterprise Into the Enterprise System. HBR 76:4, Davenport TH, Harris JG, Cantrell S (2002) The Return of Enterprise Solutions: The Director's Cut. Retr Oct 1st 2004, from xd/xd.asp?it=enwebandxd=_ins%5cresearchreportabstract_174.xml. 12. Holland C, Light B, Kawalek, P (1999) Beyond Enterprise Resource Planning Projects: Innovative Strategies for Competitive Advantage. Proc 7 th Eur Conf Inf Sys 1: Kalling T (1999) Gaining Competitive Advantage through Information Technology: A Resource-Based Approach to the Creation and Employment of Strategic IT Resources. Lund Business Press, Lund 14. Kalling T (2003) ERP Systems and the Strategic Management Processes that Lead to Competitive Advantage. Inf Res Man J 16:4, Kumar V, Maheshwari B, Kumar U (2003). An Investigation of Critical Management Issues in ERP Implementation: Empirical Evidence from Canadian Organizations. Technovation 23:10, Lengnick-Hall CA, Lengnick-Hall ML, Abdinnour-Helm S (2004). The Role of Social and Intellectual Capital in Achieving Competitive Advantage through Enterprise Resource Planning (ERP) Systems. J Eng and Tech Man 21: 4, Markus ML, Benjamin RI (1996). Change Agentry the Next IS Frontier. MIS Q 20:4, Markus ML, Tanis C (2000). The Enterprise Systems Experience From Adoption to Success, Zmud, R.W. (Ed.) Framing the Domains of IT Research: Glimpsing the Future through the Past. Pinnaflex Ed. Resources, Cincinnati. 19. Martin J (2000) A Fast Fix. Manufacturing Sys (MSI), 18:3, Mata FJ, Fuerst WL, Barney JB (1995) Information Technology and Sustaining Competitive Advantage: A Resource-based Analysis. MIS Q 19:4,

13 21. O Leary DE (2002) Enterprise Resource Planning Systems: Systems, Life Cycle, Electronic Commerce and Risk. Cambridge Univ. Press, Cambridge. 22. Pearlson KE, Saunders CS (2004) Managing and Using Information Systems (2nd ed.). Leyh Publishing LLC, New Caledonia. 23. Powell TC, Dent-Micallef A (1997) Information Technology as a Competitive advantage: The Role of Human, Business and Technology Resources. Strat Man J 18:5, Rich N, Hines P (1997). Supply Chain Management and Time Based Competition: The Role of the Supplier Association. Int J Distr and Log Man 27:3-4, Somers TM, Nelson KG (2003). The Impact of Strategy and Integration Mechanisms on Enterprise Systems Value: Empirical Evidence from Manufacturing Firms. Eur J Op Res 146:2, Unal A (2000) Electronic Commerce and Multi-Enterprise Supply/Value/ Business Chains. Inf Sci 127:1-2, Vassiliadis P, Quix C, Vassiliou Y, Jarke M (2001) Data Warehouse Process. Man Inf Sys 26: 3, Wernerfelt B (1984) A Resource-based View of the Firm. Strat Man J 5:2,