One impact of the ASP industry on business is the blurring of the old boundaries in IT services between in-house and ASP vendors. In the traditional view, services are merely an add-on to the in-house sector—they are by definition at least, 'nonproductive.' In ASP, services either support the growth and survival of the in-house IT department or they are perceived as socially desirable but not economically essential. Thus, IT consultancy services are important support services for short-term strategies, while 'pay as you go' is perhaps nice for business but not essential to the survival of ASP industry. At the centre of the ASP industry and critical to its wealth-producing capacity is the need for partnership, around which ancillary services revolve.
What is commonly overlooked in this view is, first, the notion that the relationship between In-house and ASP is one of interdependence, not dependence. And, second, that the categories of ASP and In-house are not distinct and isolated domains, but represent two sides of a continuum. Thus, contrary to the traditional view, in ASP the growth of services helps support the growth of In-house. As the industry evolves and becomes more complex, the need for new services and specialization in the division of labour continues to increase. In-house migrates into strategic management and monitoring of IT standard while ASP migrates into value-added services so that 'business IT becomes a service in a package form.' As the boundaries between In-house and ASP become more blurred through the use of improved communications technologies, the opportunities for entrepreneurs continue to increase.
As the ASP industry matures, a premium is placed on ideas and strategic use of data flow technology for new business development, rather than on economics of scale or cost displacement alone. The entrepreneur, therefore, becomes the primary user of new technology and ideas for strategic advantage. As a premium is placed on innovative ideas, small businesses acquire an advantage in being flexible enough to evolve new products and services. Moreover, as such innovation precedes, the role of small business as a source of employment continues to increase in significance, particularly in the ASP like partnerships. Inevitably, even large corporations (like IBM and most major players) in the ASP industry, are providing opportunities for corporate entrepreneurs to test new ideas under conditions where 'normal' corporate constraints on risk-taking and new investments in internal ideas are relaxed. Corporations as large as IBM are providing opportunities for entrepreneurs to flourish internally. The term "intrapreneur" has been coined to describe this internal entrepreneur.
When technological innovation is the main force leading to lower costs, the firm's ability to create a competitive advantage depends on its technological skills. Technological innovations often bring costs down—sometimes significantly—thus making the cost reduction solely attributable to economies of scale seems comparatively minor. The enterprises responsible for these innovations draw a significant competitive advantage from them in terms of cost, notably when they succeed in maintaining an exclusive right upon them for a long period. Vendors can only benefit from experience through sustained effort, efficient management and constant monitoring of costs (Dussauge, Hart & Ramanantsoa, 1994).
An ASP may deploy one or more of Porter's classic theories of Competitive Strategies: differentiation, cost leadership, focused differentiation, or cost (Portor, 1985). The use of such competitive tactics may include internal growth or innovation, mergers or acquisitions, or strategic alliances with other enterprises or members of the same group of enterprises. However, most enterprises elect to use the New-game strategy which can be defined as a deliberate attempt to modify the forces shaping competition and the definition of the business by particular competitors (Buaron, 1981). Let's take Microsoft and Oracle, both big players in the ASP industry. The difference between spontaneous change in their competitive environments and new-game strategies has less to do with the objective characteristics of the ASP phenomenon than with their individual attitudes with respect to the ASP phenomenon. In the first case, changes are seen as external to them, requiring adaptation. In the second case, however, certain initiatives by them are responsible for some changes in the industry and they have therefore, deliberately based their strategy on them. Such strategies alter the pace of the change, generally making it more rapid and direct the focus of change in ways that will best benefit the innovating enterprise(s).
Web Services technology is one of the most important foundations for ASP new-game strategies. Thus, by accelerating the pace of Web Services in the industry, a competitor with good capability in the technology reinforces its own competitive position. There are numerous papers warning that such accelerated Web Service evolution increases the difficulty that other competitors have in adapting to ASP (Gottschalk, Graham, Kreger & Snell, 2002; Hondo, Nagaratnam & Nadalin, 2002; The Stencil Group, 2002; Wilkes, 2002). By modifying the nature and the relative importance of the key factors for success in the ASP industry, Web Service technological changes that are introduced by one or more of the vendors can lead to favourable changes in the competitive environment. In an industry built upon high volume, new technologies that are introduced by some of the competitors that nullify or minimize the impact of scale can significantly alter the nature of the competitive environment by making size a drawback rather than an advantage. Thus, referring back to the example of ASP content distribution, these innovations were driven by the actions of a few relatively small competitors, Microsoft and IBM. The changes that occurred in the competitive environment were thus the result of new-game strategies designed to change the rules of competition to their advantage: under the new rules, it was no longer a disadvantage to be a small producer. The competitive impact of such strategies is especially strong when the other competitors cannot use the same type of technology because it is not easily available, for lack of training or for financial reasons.
During the period when an enterprise controls an exclusive technology, it can easily recoup its investment through high prices; but by the time this technology becomes more widely dispersed, prices tend to fall dramatically with the advent of new entrants. These investments are a significant entry barrier to competitors. However, the enterprise still manages to retain dominant position and good level of profitability in business, since it had recouped its initial investment many times over.
Though the big vendors' strategy depends on several factors, it is not etched in stone; rather, it will vary with the changes in the industry's key factors for success and the relative advantage that its technology represents. Two types of competitive behaviour with respect to technology can be observed:
Switching from a differentiation strategy based on a technological advantage to a cost leadership strategy based on scale, accumulated experience and a dominant market position;
Constant effort to innovate and improve technology, thereby maintaining a dynamic competitive advantage.
Oracle's relative success so far can prove that firms displaying the first type of strategic behaviour are generally those that have been able to attain a dominant position because of exclusive technology. As their technology becomes diffused over time, however, they tend to resort to competitive advantage based upon their accumulated experience, good reputation and distribution network.
The second type of strategic behaviour for vendors confronted with the erosion of their technology-based competitive advantage is a sustained effort to improve or even 'reinvent' their technology; rather than 'milking' their initial technological advantage, such firms choose to create a new competitive advantage through technological innovation.
A vital difference between the ASP model and traditional system life cycle is that error in this initial phase may not proof fatal. That is because the model supports a smooth and easily controlled change method even after it goes into operation, mainly due to its third party controlling nature.
Table 3 describes the four general phases of any IS, which also serves as a common link for understanding and comparing different types of business processes used for building and maintaining systems within the ASP model.
Statement of problem IS expectations.
Changes in expectations by time.
Deciding what the system should deliver.
Users' quite often lack a total understanding output.
IS running as part of the process to support business goals achievement.
Power and control issues within organization.
Operation and Maintenance
Enhance system and correct bugs.
Diagnose/correct problems within time pressure.
It is easy to focus on individual ASP investments rather than their cumulative impact. Intelligent enterprises budgets for individual applications of technology and the IS staff works on a project basis. For some intelligent enterprises, the combination of all its individual investments in technology far exceeds their individual impact. A good example is SAP. Here, continued investments in ASP changed the software provision industry and SAP's own view of its fundamental business.
By becoming a necessity ASP may not create much benefit for intelligent enterprises that invest in it, except that ASP allows the enterprise to continue in a line of business. Who does benefit from investments of this type? The cynical answer might be the vendors of various kinds of ASP products and services. However, a better response is that customers benefit from better quality goods and services and especially better customer service.
Looking at our two earlier examples, customers are much better off with the presence of ATM and CRS. An ATM is convenient and allows one to access cash without presenting a check at his or her own bank. With an ATM, you do not have to worry about a foreign bank accepting your check; from ATMs around the world you can withdraw cash. While airlines have certainly benefited from computerized reservations systems, so have customers. You can use a CRS to compare flights, times, ticket prices, and even on-time statistics for each flight. A consumer can make a reservation on a flight and complete the transaction over the telephone or the Internet. Economists talk about a concept called 'consumer surplus.'
How does consumer surplus relate to investments in strategic and competitive information technology? From a theoretical standpoint, consumer surplus increases as prices drop. The competitive use of ASP reduces costs and prices through applications like those in banking and airlines. The competitive use of ASP has, in many instances, reduced prices (or held down price increases), which contributes directly to consumer surplus. Technological competition may not always create an economic consumer surplus, but it does provide benefits in the form of service and convenience. A bank ATM can save time for the customer, something the customer may be able to value from a dollar/ pound standpoint. The fact that two firms (IBM and Microsoft) had a similar web service launched within few months of each other means that the technology was not able to deliver a sustainable advantage from its investment. Neither was it able to raise its prices directly to pay for their Web services, so the benefits from their investments in ASP all went to the customers.
While the strategies of ASP vendors can thus change over time, a clear strategic direction is indispensable to success. In addition, the transition from one strategy to another is a very difficult and risky undertaking, since it requires a complete reorientation of the vendors' efforts and radically different patterns of resource allocation. As we have seen, technology is often a major factor behind both differentiation and cost leadership strategies. It is also a critical factor in "new-game" strategies.