Why Low-End Service Providers Have Trouble Becoming High-End
For companies looking to get more competitive, moving up the value chain to strengthen the brand seems like a no brainer. But for information technology service providers, it’s a decision that should be met with caution, according to new research from Maryland Smith.
It turns out that service providers at the lower end of the value chain mostly find that their efforts to move up yield limited success. As to why companies keep trying to move up the value chain, Maryland Smith’s Anandasivam Gopal says it’s because they are led to believe that they should by consultants and the like.
The real question, he says, is why do these companies keep failing?
“Many companies have tried to either create products on their own or have tried to get into high-end consulting or services where the competition is already fierce,” says Gopal, the Dean's Professor of Information Systems at the University of Maryland’s Robert H. Smith School of Business. “Eventually, they are forced to go back to what they used to do.”
The paper, published in Information Systems Research, examines the phenomena of firms trying to move up the value chain through agent-based modeling – a simulation-type methodology that mimics firms movements along the value chain under various conditions.
From the simulations, Gopal says, there were three factors that played a major role in finding success moving along the value chain – resource acquisition, learning capabilities and strategic orientation.
Oftentimes, he says, companies failed because they didn’t learn from previous lessons or adequately adapt to competition higher up in the chain. That might include a company not changing its hiring practices, resources and managerial style to match the environment, he says.
“The only way to succeed in the long run is to have a learning-adaptable mindset so that you learn from your mistakes and improve, as opposed to doing the same things again and again,” says Gopal. “A lot of these companies moving up the value chain spent a year and a half to two years essentially making the same mistakes, and that is because they use the same processes that they used to use in their own market even after they moved into the new market.”
The same principles apply to high-end service providers seeking to move down the value chain to be more accessible to consumers, Gopal says. Success in that capacity is dependent on a company’s learning capabilities and how it is able to adjust to the new target market, he says.
Whether the goal is to move upward or downward, Gopal says, companies that want to succeed need to strategically orient themselves by making changes that suit their target market and function with their available resources and capabilities.
However, thinking about fallback strategies is also recommended for when things don’t go according to plan.
“Just as it is difficult for Walmart to become a Neiman Marcus-type store, it is difficult for Neiman Marcus to compete with Walmart at lower price levels,” says Gopal. “Companies would benefit from considering an exit strategy if what they hoped from their move does not match reality.”
Read the full research, “Is the Grass Greener? On the Strategic Implications of Moving Along the Value Chain for IT Service Providers,” in Information Systems Research.