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Special Columns
Arindam Chaudhuri, Editor-in-Chief, 4Ps B&M Chief Consulting Editor's Desk
Rajita Chaudhuri
K.K.Srivastava Special Feature
Sutanu Guru
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STEVEN J. KAHL, FACULTY OF ORGANISATIONS AND STRATEGY, UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS
How Customers Influence the Evolution of New Products
Innovation is happening all around. But companies that are careful in understanding how consumers use a particular product are the ones which succeed in the long run.
 
As a result, contrary to conventional wisdom, IBM’s decision to unbundle software from hardware in 1969 was not the only reason why the software industry began to grow in the 1970s. Establishing a dominant use around MRP proved pivotal for industry growth because it helped establish a more standard practice of use and customer expectations, which software entrepreneurs could leverage in their product offerings.

Learning New Uses and Market Expansion

As manufacturers continued to use the MRP system, they learned about its deficiencies. One survey in 1980 showed that only 10% of MRP customers achieved full benefit. Experts identified the core problems as how MRP scheduled material requirements and the lack of integration with other planning systems. Papers presented at industry meetings indicated a growing recognition of the limitations of MRP. Eventually in the early 1980s a new application called Manufacturing Resource Planning (MRP II) was developed that addressed some of these issues.

During this time period, new mini- and microcomputers were introduced. These machines lowered the cost of ownership and enabled smaller manufacturers to purchase MRP II applications. Smaller manufacturers have similar functional requirements as larger manufacturers but have fewer resources, which means they tended to implement the software in a highly centralised manner. In contrast, larger manufacturers distributed different implementations across departments throughout the organisation. As a result, two uses of MRP II emerged that differed in how the applications were deployed within the organisation.

These new uses continued to stimulate industry growth. At this point, the software industry split into vendors that focused on larger manufacturers and others that concentrated on the smaller midsize manufacturers.

 
Radical Technological Change

In the late 1980s, a radical new technology called “client/ server” emerged that changed how software applications processed information and data. This new technology required software vendors to learn new technical skills and change the design of the applications. One software vendor, SAP, estimated that this transition cost approximately $1 billion. Generally accepted theory predicts that such radical technological changes enable new firms to replace established firms. However, in this case, many established firms successfully navigated through this technological change. In fact, vendors that targeted midsize manufacturers were much less likely to fail than those that targeted the large manufacturers.

A closer inspection of how midsize and large manufacturers used the new technology helps explain why some MRP II vendors were more successful than others. During this time period, ERP emerged as the new software platform that leveraged the client/server architecture. The main innovation behind ERP was not new functionality, but integrating the core MRP II functionality with other financial, human resource, and sales processes. Also occurring at this time period was a growing interest in redesigning business processes to improve integration, or what became known as Business Process Re-engineering (BPR). Consultants envisioned ERP as the software application that would support this new process integration that BPR promoted.

Many large manufacturers applied ERP software to configure new business processes according to the emerging BPR principles. This represented a substantial change in use from MRP II, in particular, moving toward centralisation and evaluating the software based on broader business goals. However, midsize manufacturers were less interested in BPR and continued to use ERP in the same highly centralised fashion as they did MRP II.

Software firms that targeted the large manufacturers had difficulties recognising this new use. Interestingly, the industry analyst company, Gartner Group – not the software vendors – coined the term “ERP.” However, vendors that targeted midsize firms did not face this additional challenge. As a result, the successful migration through the client/server transition depended less on innovative technical capabilities and more on the ability to anticipate and respond to the changes in customer use.
          
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