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The Information and Services Economy a.k.a. Business Architecture and Services Science. IS210, Week 6 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006. A new dominant logic for marketing. Marketing in the goods economy: financial optimization and the 4 P’s

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The information and services economy a k a business architecture and services science l.jpg

The Information and Services Economya.k.a.Business Architecture and Services Science

IS210, Week 6

Profs Bob Glushko & Anno Saxenian

UC Berkeley School of Information

Fall 2006


A new dominant logic for marketing l.jpg
A new dominant logic for marketing

  • Marketing in the goods economy: financial optimization and the 4 P’s

    • Product

    • Price

    • Placement

    • Promotion

  • Marketing in the services economy: communication across organizational boundaries

    • An ongoing social and economic process

    • Knowledge is fundamental source of competitive advantage

    • Inherently customer-oriented and relational

    • Goods as distribution/delivery mechanisms for services


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Emerging services-centered logic

Intangible resources are key

  • Service provision, not goods, is fundamental to economic exchange

  • Specialized competences (skills and knowledge) or services are primary goal of exchange;

  • Goods are intermediate, not end, products that transmit knowledge and are used by consumers in value-creation process;

    Customers co-create value

  • Customers always co-producers of services via relational exchange;

  • Value is perceived & determined by consumer;

    Role of the enterprise

  • The enterprise can only make value propositions;

  • Wealth is obtained through application and exchange of specialized knowledge and skill.


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A services economy curriculum

  • Marketing strategy: competences and capabilities in creation of value, resource advantage theory

  • Management of cross-functional business processes to support development of capabilities & competences for market-driven organization

  • Integrated marketing communication

  • Consumer behavior: relational

  • Pricing: building and maintaining value propositions, management of long-term customer equity

  • Marketing channels: coordinating marketing networks and systems

  • Supply chain mgmt: management of value constellations and service flows


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The core competence of the corporation

  • “Competitiveness in long run derives from ability to build, at lower cost and faster than competitors, the core competencies that spawn unanticipated products.”

  • Core competences are collective learning in the organization—particularly how to coordinate diverse production skills & integrate multiple technology streams

    Sony’s miniaturization capabilities

    Citicorp’s operating system for 24/7 operation

  • Core competence is communication, involvement, and deep commitment to working across organizational boundaries: need to blend deeply specialized and different types of expertise


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Core competence of the corporation II

  • Core competence does not diminish with use, but needs to be nurtured & protected, serve as engines for new business development

    3M sticky tape competence => “post-it” notes, coated abrasives, magnetic tape, photo film, pressure-sensitive tape… (substrates, adhesives, coatings.. .)

  • Tests for identifying core competencies

    • Provides access to variety of markets

    • Makes significant contribution to perceived customer benefit of end product

    • Difficult for competitors to imitate


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From core competences to core products

  • Core products are the tangible link between core competences and end products – the components or subassemblies that contribute value to end products (e.g. Canon’s desktop laser printer “engines.”)

  • To sustain core competence companies seek to maximize world manufacturing share in core products: producing for both external and internal customers provides market feedback as well as revenue that insures maintenance of core competencies.

  • A dominant share in core products allows company to shape the evolution of applications and end markets.


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From SBU model to core competencies

  • SBU model of the corporation sees company as portfolio of autonomous businesses.

    • Unit of analysis is discrete businesses with related products

    • Resources get trapped (imprisoned) in business units

    • Innovation is bounded by immediate opportunities; hinders hybrid opportunities for innovation

  • View company as portfolio of corecompetencies, core products, and market-focusedcore businesses.

    • Unit of analysis is businesses and core competencies

    • Top management enunciates strategic architecture, builds competencies for long term

    • Strategic architecture makes resource allocation priorities transparent; provides template for allocation decisions, forces organization to identify and commit to technical and business linkages across businesses that will provide competitive advantage


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The challenge: learning v. monitoring

What do modern economic organizations need to do?

  • Motivate talent, encourage initiative, innovation, development of core competencies

  • Coordinate/monitor activities of/between internal and external units

    Organizational options: Devolve decision-making authority and access to relevant information within corporation, focus on core competences/products

    Governance options:

    Maintain ownership of assets but decentralize internally;

    Spin-off units to market, focus assets on core competences;

    Result is less a hierarchy than a federation or network


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Learning by monitoring

Governance options in a network

Arms-length, market relationships between units– discrete transactions, maximizes autonomy, no trust

Hybrid relationships of co-production, co-design—”learning by monitoring” with “studied trust”

Institutionalization of continuous, joint conversation about common goals as well as apportionment of gains and losses => mutual experimentation and definition of roles

Ownership relationships between units— blind trust, maximizes control


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Business processes, collaborations, and transactions

“The model of business organization shapes need to exchange information across organizational boundaries.” Bob Glushko, Document Engineering

  • Business processes are synchronized by loosely coupled information exchanges using documents

Business process

Business process

transaction

transaction

transaction

transaction

COLLABORATIONS

transaction

transaction

transaction

transaction

Enterprise Boundary


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New directions in the social sciences

  • W. Brian Arthur “Complexity and the Economy” Science, 1999

  • Duncan J. Watts Six Degrees: The Science of a Connected Age, 2002

    “The story of the sciences in the twentieth Century in one of a steady loss of certainty. Much of what was real and machine-like and objective and determinate at the start of the century, by mid-century was a phantom, unpredictable, subjective, and indeterminate.”

    W. Brian Arthur “The End of Certainty in Economics” Einstein Meets Magritte Conference, 1994


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The end of certainty in economics

  • What defined science at start of century?

    • The power to predict

    • The clear distinction between subject & object

  • What does the loss of predictive power in sciences mean for economics? Other social sciences?

    • Economics claims to be a science: a body of well-reasoned knowledge; has maintained “certainty”

    • But is the economy like a gigantic machine?


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Origins of modern economics

English and Scottish enlightenment, 18th c.

All nature is but Art* unknown to Thee

All Chance, Direction, which thou canst not see

All Discord, Harmony, not understood

All partial Evil, universal Good:

And, spite of Pride, in erring Reason’s spite

One truth is clear, “Whatever IS, is RIGHT”

Alexander Pope An Essay on Man, 1733

*Art: artifice, technique, or mechanism


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The search for a grand theory

  • Hidden simplicity behind traffickings of traders and manufactories and butchers and bakers…the “invisible hand”

  • Economy as a gigantic machine; if we understood the working of its parts we could predict the whole.

  • Goal: Grand Unified Theory of economics

    • Theory of the consumer, rational human behavior + theory of the firm = microeconomics

    • Aggregate theory of the economy = macroeconomics

  • Economics as predictive science becomes mathematics (e.g. models of rational expectations)


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But there were problems . . .

  • Human beings: not orderly machine components—they have foibles, caprices, emotions.

    • Finessed with “economic man”: perfectly rational being who reasons perfectly deductively on well defined problems

  • Technology: destroys the orderly machine by changing the entire economy.

    • Couldn’t be finessed so technology either ignored or treated as exogenous by economics.

      Economic man (subject) needs to operate on well-defined Problems (object) to make orderly, predictive theory possible. And well defined Problems should have well-defined Solutions. The solutions are building blocks for next aggregated level of theory.

    • Works for simple problems with one decision maker….


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Economics and indeterminacy

  • Once you acknowledge that people don’t have complete information and well defined, predetermined preferences you encounter problems of logical indeterminacy.

    • People create world that forms their expectations, but don’t (can’t) do so in a perfectly logical deductive way;

    • Our ideas and preferences co-create the world that our forecasts attempt to predict, and problems are indeterminate.

  • Impossibility of separating subjects of the economy (the people that form it) from the object (the economy itself) creates large areas of indeterminism.

  • Examples: Crashes and bubbles


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Economy constructed by its agents

  • Economy emerges from our subjective beliefs, which in aggregate structure the micro economy, shape financial markets, direct flows of capital and govern strategic behavior and negotiations.

  • These subjective beliefs are not determinate in advance: they co-evolve, arise, decay, change, mutually reinforce and mutually negate.

  • Subject and object cannot be neatly separated.

  • Creates possibility of “studied trust” rather than either opportunism or “blind trust”


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Complexity and the economy

Complexity economics as non-equilibrium theory (vs. standard economics seeks static patterns in behavioral equilibrium) with nonlinearities and positive feedbacks: multiple equilibria, increasing returns, importance of small events.

  • Complex systems with multiple elements adapting or reacting to patterns created by the elements;

  • In natural sciences: elements (cells in immune system, ions in a spin glass) co-create; systems evolve

  • Application to economics: human agents become the elements in the systems (bankers, consumers, firms, investors) but they do have strategic intent, behavior


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The economy as a complex system

The El Farol Bar Problem

  • Agents cannot assume or rationally deduce expectations; must discover them over time

  • Failure of beliefs, expectations to converge over time as predicted by standard economic models; rather divergent beliefs that exhibit mutually reinforcing expectations among sub-populations

  • Alternating periods of high and low volatility (comparable to the bubbles and crashes in financial markets)

    Out-of-equilibrium theory of the economy: economy as process-dependent, organic, always evolving


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Six degrees: science of a connected age

  • Why does a large complex connected systems behave differently than a dissociated collection of components?

    • Small disease outbreak => epidemic

    • Crickets chirping => synchronization

    • Single genes => genetic traits

  • How does individual behavior aggregate to collective behavior? Parts don’t sum up in a simple fashion, but interact to generate “bewildering” emergent behavior

  • The “science of networks” recognizes that “what happens and how it happens depends upon the network” which itself has evolved historically.


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Emergent effects

  • Complex systems are self-constituting and coherent systems driven by interaction of equals, without any central authority or control.

  • Need to understand dynamics of the network and dynamics on the network.

  • Importance of phase transitions in different spheres, from social to chemical to physical.