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Strategy and the New Economics of Information

Strategy and the New Economics of Information. P.B. Evans &T. S. Wurster HBR, Sept-Oct 1997. “Executives-and not just those in high-tech or information companies-will be forced to re-think the strategic fundamentals of their businesses.” pg. 71. Britannica’s Downfall:.

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Strategy and the New Economics of Information

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  1. Strategy and the New Economics of Information P.B. Evans &T. S. Wurster HBR, Sept-Oct 1997

  2. “Executives-and not just those in high-tech or information companies-will be forced to re-think the strategic fundamentals of their businesses.” pg. 71

  3. Britannica’s Downfall: “….demonstrates how quickly and drastically the new economics of information can change the rules of competition, allowing new players and substitute products to render obsolete such traditional sources of competitive advantage as a sales force, a supreme brand, and even the world’s best content.

  4. Britannica/McColl-Who is the Competition Not other encyclopedias--the computer New Technology Changes the Basis of Competition -New players, substitute products -Changes the basis of competitive advantage -Sales force -Product -”Not me”/Not in the information business -Economies of intense personal selling -Autos, insurance, real estate, travel

  5. Issues -Supplier relationships -Process coordination -Customer loyalty -Employee loyalty -Switching costs

  6. Central Thesis “Over the next decade, the new economics of information will precipitate changes in the structure and in ways the ways companies compete.” pg. 71

  7. Britannica’s Vulnerability: • Dependent on personal selling • What other industries may be vulnerable?

  8. Group Assignment Each group identify one other industry that you think will be extremely vulnerable to the “new economics of information.” In doing this, try to come up with some industries affected by competitive factors OTHER than personnel selling.

  9. Items That Depend On Information • Supplier relationships • Brand identity • Process coordination • Customer loyalty • Employee loyalty • Switching costs

  10. Note, for example- - • At an auto dealership, much of the dealer’s margin comes from an asymmetry of information • That is, the salesperson knows costs and prices, without much effort, the customer does not (this is changing)

  11. Examples of Companies Competing with Information • AMR and SABRE • Wal-Mart with EDI • Nike

  12. A Second Thesis: “What is truly revolutionary about the explosion in connectivity is the possibility it offers to unbundle information from its physical carrier.? Pg. 73

  13. Concepts of “Reach” and “Richness” • Reach- -number of people exchanging information • Richness- --Bandwidth: the amount of information moved (stock quotes vs.video)-Customization -Interactivity

  14. Traditional Economics of Information Richness Bandwidth, customization, interactivity Reach (connectivity)

  15. Also Applies to Shaping the Organization • Boundaries of an organization are shaped by the economics of exchanging information-Rich information- -narrow internal group-Thinner information- -markets • The point at which one mode becomes less cost/effective than the other determines the boundaries of the organization

  16. Now, consider “nets” • Intranet (WWW) • Extranets • Intranets

  17. Third Thesis “Over time[using electronic communication], organizations and individuals will be able to expand their reach by many orders of magnitude, often with a negligible sacrifice of richness.” pg. 74

  18. Rethink the Value Chain • What happens to Toys “R” Us and Home Depot when a Web search engine gives consumers more choice? • What will happen to supplier relationships when a buyer posts its purchasing requirements on an Internet bulletin board? • Newspapers? • Retail banking?

  19. Theses Four & Five: • “As it becomes easier for customers to switch from one supplier to another, the competitive value of one-stop shopping and established relations will drop.”-pg.76 • “Competitive advantage will be determined product by product, and therefore providers with broad product lines will lose ground to focused specialists.” - pg. 76

  20. Note the comment on Banking • Bankers, like encyclopedia executives, deny their future • Security concerns, lack of PC penetration • “But, the 10% that do represent 75% of the value of the retail banking system.”

  21. Final Theses: • Existing value chains will fragment into multiple businesses, each of which will have its own sources of competitive advantage • Bargaining power will shift as a result of a radical reduction in the ability to monopolize the control of information

  22. And • Customers’ switching costs will drop, and companies will have to develop new ways of generating customer loyalty • Incumbents could easily become victims of their obsolete physical infrastructures and their own psychology-At risk: Branches, shops, sales forces

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