Introduction to Information Strategy
and Economics
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Agenda
Introduction
- What you will learn
- Course structure
- Teaching style
- Grading policy
- Pointers for success
Strategy
- Value chain
- Competitive advantage
- Porter’s five forces model
- Class participation
- Assignments
- Final Exam
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Teaser…
We are seeing a growing tendency for
companies to sell products in bundles to
customers. . Microsoft Office which is a
bundle of Word, Powerpoint etc which used
to be primarily sold separately in the past.
What factors make bundling more
attractive?
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Teasers…
A leading manufacturer of printers spent
additional money to slow down its
printers. Intel spent extra effort (and
money) on each chip to disable certain
processors to slow it down. Wasn’t faster
supposed to be better? Then why are
these companies degrading their
products?
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More teasers…
On p2p networks like Kazaa, empty and big
files having attractive names like “Lord of
the rings” are frequently available. There
were some rumors that it was the RIAA
which was involved in posting these files.
What is the rationale for people to make this
allegation against RIAA.?
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What you will learn
This course will help you:
– Understand the relationships between Economics, Strategy,
and Competitive Advantage
– Explore different ways that Information Technology (IT) and
Electronic Commerce (EC) can be used to create
Competitive Advantage
– Describe the economic principles that may enable firms to
create profitable e-business strategies
– Evaluate options for leveraging technology to create
sustainable e-business strategies
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Course structure
Lecture 1
Introduction, IS
strategy
Lecture 2
Pricing,
Versioning
Lecture 3
Network effect,
Lock-in
Lecture 4
Contextual
Marketing, Privacy
Lecture 5
Innovations,
Standards
Lecture 6
Intermediaries
B2B
Lecture 7
Auctions, piracy
Final Exam
In Class
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Teaching Style
Lecture
Articles,
Text book
Case Study
Fundamentals
Application
Preparation
material
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The 3 P’s (your role)
Preparation
- Articles, textbook chapter, case
Participation
- Contribution to discussion in class
Performance
- Assignments and final exam
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Grading
Class Participation
(Lectures 2-7)
20%
Assignments
(2)
35%
Final Exam 45%
Distribution of grade for class will approximately follow school guidelines
A: 35-40%, B: 45-60%, C:5-10%, F- if required
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Class participation
Do’s (examples)
- Bringing work related relevant experience
- Analysis of an article/case being discussed
- Citing anecdotal evidence of the concept being discussed
- SWOT analysis
Dont’s (examples)
- Restate facts straight from the case/article
- Being discourteous to other students when they are making a
point
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Class participation
Points: 0-4
Quality of point made not number of times
spoken
Recorded right after class (online access)
Six sessions (Lectures 2-7).
Top five scores will be considered (5 4 =
20)
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Assignments
Individual
Two
points each ( 2 = 35)
Based on case studies
Timely completion
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Final exam
Will cover:
- Lecture
- Textbook chapters assigned
- Articles and cases assigned
In class exam
Format: TBD
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Pointers for success
Be prepared
- Read and analyze cases and other reading assignments
before class
- Finish assignments on time
- Be punctual
Participate in class discussion
Provide Feedback
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Feedback
Important to structure future lectures.
Did the lecture satisfy teaching objectives?
Rate the lecture in terms of clarity
Comment
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Agenda
Introduction
- What you will learn
- Course structure
- Teaching style
- Grading policy
- Pointers for success
Strategy
- Strategic positioning
- Sustainable advantage
- Porter’s five forces model
- Value configuration
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Learning objectives
Distinguish between strategy and operational
effectiveness
Identify the six principles of strategic positioning
Identify the strategic mistakes made by dotcoms
Explain how a firm’s performance is determined and
identify the different types of business models
Analyze an industry structure using Porter’s five
forces model
Explain how a sustainable adv. can be achieved
Identify the different types of value configurations
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Detailed plan
Strategy
Determinants of performance
Sustainable advantage
- how to achieve it
Porters five forces model
Value Configuration
- Strategic vs. operational effectiveness
- Key issues in strategic positioning
- Mistakes made by dot-coms
- Value chain
- Value shop
- Value network
- Business models and types
- Impact of Internet
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What is Strategy?
Strategy is a comprehensive master plan stating
how the corporation will achieve its mission and
objectives.
Strategy is the creation of a unique and valuable
position, involving a different set of activities
(Porter).
Strategies can exist at multiple levels
- Corporate, Business unit, Functional area
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What is Strategic Management
Strategic management is the set of
managerial decisions and actions that
determine the long-run performance of a
corporation. It includes:
– Environmental scanning
– Strategy formulation (., long-range planning)
– Strategy implementation
– Evaluation and control
Source: Essentials of Strategic Management, . Hunger & .
Wheelen (2001)
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Strategy vs. operational effectiveness
Each firm is in involved in several activities
. manufacturing, marketing, selling
OE is about performing each activity better
than rivals
- Japanese automakers in 80’s
Strategy: Perform different activities or
similar activities differently
- Southwest vs. other airlines
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Operational effectiveness
Relative Cost
Quality
Production frontier
High Low
High
Low
A
B
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Strategic positioning
Variety-based positioning
- Jiffy Lube
Need-based positioning
- Ikea
Access based positioning
- Carmike
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Key issues
Making tradeoff
- Neutrogena
Fit between activities: harder for a rival to match an
array of interlocked than to imitate a single activitiy
- Southwest
Growth trap
- Maytag
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The Six principles
Strategic
Positioning
Right goal
Value
proposition
Distinctive
Value chain
Tradeoff Fit
Continuity
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The Dotcom follies
Not delivering real value (performance)
- click through rates, unique visitors instead of profits
- concentrating on advertising as revenue source
Finger in all pies
- rushing into everything instead of making tradeoffs
Inability to maintain control over proprietary
assets
- outsourcing leading to competitive convergence
Competing on price
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Business Model
• Components & linkages
• Dynamics
Environment
• Competitive
• Macro
PerformanceChange
• Properties
• Underpinnings
Determinants of Performance
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What is a Business Model?
“the method of doing business by which a
company can sustain itself ”
– Michael Rappa, Professor, NC State, Raleigh
“the method by which a firm builds and uses
its resources to offer its customers better
value than its competitors, and in the process
make money” - Afuah & Tucci
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Type Basic Idea Examples
Commission Fees levied on
transactions
E*-trade, Priceline
Advertising
End-user subsidized Yahoo
Markup Value added in sales Amazon
Production Value added in
production
Microsoft
Referral Fees for referring
customers
Autobytel
Subscription Fees for unlimited use AOL
Fee-for-service Fees for metered
service
ASP’s
Types of Business Models
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Examples of Business Models
Weill & Vitale define 8 “atomic” business
models:
– direct-to customer content provider
– full-service provider virtual community
– whole of enterprise value net integrator
– shared infrastructure
– diverse intermediaries (portals, agents, auctions,
aggregators)
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Internet as a transformer of business
models
Properties
l Mediating technology (interconnection, B2B, C2C etc)
l Universality (geographical boundaries removed)
l Network externalities (Metcalfe’s law)
l Distribution channel (Napster, online software distribution)
l Information asymmetry shrinker (buying cars)
l Infinite virtual capacity (Moore’s law applicable to internet)
l Transaction cost reducer (search cost, collecting info. on products)
l Reduces barriers of entry (cost of setting up a website)
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Impact of Internet on 5C’s
Coordination (inefficiencies removed –worth $200 billion)
Commerce (enables B2B, C2C)
Community (user groups – ratings and feedback)
Content (news, stock quotes, games)
Communication (e-mail, web-phones, real time video)
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Business Model
Environment
Performance5 C’sCoordination
Commerce
Community
Content
Communication
Change
Impact of Internet on 5C’s
Internet
Properties
• Mediating technology
• Universality
• Network externality
• Distribution Channel
• Transaction cost reducer
…..
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Where we are…
Strategy
Determinants of performance
Sustainable advantage
- how to achieve it
Porters five forces model
Value Configuration
- Strategic vs. operational effectiveness
- Key issues in strategic positioning
- Mistakes made by dot-coms
- Value chain
- Value shop
- Value network
- Business models and types
- Impact of Internet
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A Brief History of IT for
Competitive Advantage
The potential of IT for creating strategic advantage
was recognized in early 1980s
Early work led by Harvard Business School strategy
professor Michael Porter:
– Competitive Strategy, 1980
– Competitive Advantage, 1985
W. McFarlan, “IT Changes the Way You Compete,”
Harvard Bus. Review, 1984
Early case studies of innovative use of IT: American
Airlines SABRE, Otis Elevators, etc.
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How do we define and achieve
competitive advantage?
Competitive advantage means:
“Being able to earn a ROI (return on investment) that
is persistently above the average for a given industry.”
(not just a temporary advantage or high ROI)
– - Crowston & Treacy, “Assessing the Impact of IT on Enterprise
Level Performance” 1986.
How do firms achieve competitive advantage?
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Sustainable Advantage
The strategic “positioning” school of strategy
(Porter)
- Select the right “position” in an “attractive” industry
- Perform different activities or similar activities differently
Means of achieving:
- Benefits of size in targeted markets
- Access advantage
- Exercising options
-Economies of scale
-Economies of scope
-Experience
-Inputs
-Markets
- Patents
- Antitrust38 ISMT 510
How Can You Deploy IT to Create a
Competitive Advantage
Identify novel uses of IT that are consistent with and
support your strategy
These novel uses of IT may:
– Reinforce your cost leadership position
– Allow you to provide product/service differentiation to your
customers (or suppliers)
Strive to “lock-in” your customers (or buyers)
through innovative uses of IT
– Use the “create-capture-keep” strategy (Clemons)
– What factors can enhance customer “lock-in” or “switching
costs??
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Why is Michael Porter important?
First strategy writer to analyze why information and IT can
be critical to competitive advantage
– Competitive Strategy 1980; Competitive Advantage, 1985;
Competitive Advantage of Nations, 1992
What contributions is Porter best known for?
– Five forces model
What makes an industry “attractive” to compete in?
– 2 x 2 matrix of core strategies
What are possible strategies for achieving advantage?
– The value chain: How can we analyze the core activities that
firms perform?
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Porters five forces model
Used to analyze industry or market
Potential profitability or attractiveness
Options to affect competitive position
Applied to particular companies, market
segments, industries or regions
Based on microeconomic principles
- supply and demand, substitutes
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Porter’s “Five Forces Model”
(as applied to discount retail industry)
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Strategic Implications of
Five Forces Analysis
A given industry is unattractive when:
– Rivalry is strong
– Barriers to entry are low
– Competition from substitutes is strong
– Suppliers and customers have strong
bargaining power (relative to you)
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More Strategic Implications of
Five Forces Analysis
A given industry is ideal when:
– Rivalry is moderate
– Barriers to entry are high
– Good substitutes don’t exist
– Suppliers and customers are in a weak
bargaining position (relative to you)
– Do these industries exist?
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What strategies lead to competitive
advantage?
Competitive Objective
Target
Market
Segment
Low Price Product or
Service
Differentiation
Broad
market
Narrow
market
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How to Apply Porter for Making Strategy
Focus on “attractive” industries to compete in
Target industries with attractive “structural properties” and exit
from industries with poor structural properties
List all the players in an industry
Identify and analyze buyers and suppliers
Select one of the four strategies
Ensure that activities are consistent with each
other
Identify uses of IT to support your strategy
Outsource non-critical activities to other providers
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Analyze industry structure of
using Porter’s five forces model.
Make your recommendation regarding the
profitability of entry in this industry.
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Value Configuration
From a social sense, why do firms exist?
- they create value
Values configuration is the method by which
the firm creates value
Three types:
- Value chain (. manufacturing – series of activities)
- Value shop (. hospital - a specific set of activities)
- Value Network (. intermediary)
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Porter’s Value Chain
(well suited for analyzing product/manufacturing firms)
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Value Shop
Specific problems
Primary activities
Problem
finding
Problem
Solving
Choice Execution
Control and
evaluation
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Value Network
Intermediaries
Primary activities
Network promotion/
contract management
• Sell services
• Evaluate membership
• Contract
• Monitor and enforce
Service provisioning
• Enable buying and selling
• Support buyers & sellers
• Ancillary services
Infrastructure operations
• Administration
• Operate IT systems
• Maintain liquidity
• Link with ancillaries
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Key Takeaways
Course polices and grading criteria
Strategy vs. operational effectiveness
Six principles of strategic positioning
Determinants of firm performance
Porter’s five forces model
Sustainable advantage
Value configuration
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