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20th Century Technology, Business, and Societal Evolution
1900 1950 2000
AgriculturalEconomy
IndustrialEconomy
InformationEconomy
Typical mathematical formula:D=B2-4AC
Equivalent FOR TR AN statement:D=B**2-4*A*CTelegraph
Technology Evolution
Social and Business Evolution
Photos reprinted with permission from AT&T and IBM
4
Technological Changes at the verge of the 21st Century
• The Internet and broadband networks– Low cost, standardized, global alternatives
• Old: expensive, specialized, and proprietary– Enable the transmission of multimedia digital information on a common communication
channel• The WWW and high-performance servers
– Flexible, standardized, powerful platforms for creating and storing information in all its forms (text, data, voice, and video)
• The Uniform Resource Locator (URL) and browser– Common approaches for identifying and locating information anywhere on the Internet and
easy-to-use tools for accessing, packaging, and displaying multimedia information• Multimedia digital devices
– Portable Internet access devices that provide a single point of entry to voice, television, and information (laptops, palm pilots, interactive TV set-top boxes, and game consoles).
• Wireless networks and protocols– Technology and supporting business infrastructure to enable access to the Internet,
untethered by physical wires• Object-oriented programming language and database technologies (Java, Jini, XML)
– Powerful new approaches to developing information systems that take full advantage of the flexibility, modularity, connectivity, and multimedia features of the Internet.
5
Before and After the “bubble”
• 1999, $32 billion (90% of the total invested by venture capitalists) invested in technology
• 2nd Quarter 2000 investment only 3%• Companies with valuation in excess of $1 billion
went out of business• 1/2000 – 1/2002: over 780 Internet firms went
out of business• By 2001 established firms began to take
advantage of the decreased strength of new entrants
6
Frameworks for analyzing the impact of IT on Strategy
• Value Chain Analysis
• Industry and Competitive Analysis (the five forces)
• The three generic strategies
• Strategic Grid Analysis
7
Value Chain Analysis
• For identifying and analyzing the stream of activities through which products and services are created and delivered to customers
• Evaluate the cost incurred and value created• Economies of scale: leverage capabilities and
infrastructure to increase revenues and profitability within a single product line or market
• Economies of scope: leverage capabilities and infrastructure to launch new product lines or business or enter new markets
9
Industrial vs. Networked Economy
Industrial Networked
Production and distribution technology
Machines, railroads, steam engines, telephones
Broadband networks, wireless networks, multimedia content creation, flexible/real-time knowledge access & management
Operating model The assembly line, marketing, sales, and after-sales service channels
Integrated supply chains and buy chains
Management model Hierarchy Teams, partnerships, consortia
Social/regulatory system Specialized work, pay-for-performance incentives, worker education, unions, antitrust laws
Ownership incentives, freelancing, virtual work, distance learning, digital copyright laws
11
Comparing Industrial and Information Economy
Characteristics Industrial Economy Network Economy
Criteria for Economic Success Internal, proprietary, and specialized economies of scale, and scope; Economies of scope are limited by the level of infrastructure specialization required
External, networked, and shared economies of scale and scope; Economies of scale and scope are dramatically increased by the ability to build new businesses on the non-proprietary, flexible, shared, and ubiquitous Internet infrastructure
Technological Innovations Production, communication, and distribution technologies
Distribution, communication, and information technologies; the ability to “assemble” component pieces
Operating Innovations Standardization of work; job specialization; assembly line operations; value chain industry structure
Knowledge work; job expansion; work teams (face-to-face and virtual); extended enterprise; outsourcing and partnerships; value networks
Management Innovations Hierarchical coordination and supervision; compliance-based control; pay-for-performance incentives; centralized planning & control
Networked coordinating and supervision; ownership incentives; information-based (“learning”) models of control; distributed planning and control
Societal/Regulatory Innovations Urban growth; mass transportation; social security and welfare; unions, federal regulations; domestic economy
Work-at-home; self-employment; personal pension and savings programs; global economy
Length of Time to Achieve Economies of Scale and Scope
Decades Uncertain
Dominant Industry Power Producers Solution assemblers and channel managers
12
Industry and Competitive Analysis
• The five basic forces:1. Bargaining power of suppliers
2. Bargaining power of buyers
3. Threat of new entrants
4. Threat of substitute products or services
5. Competitive intensity and positioning among traditional business rivals
14
Generic Strategies
• 3-strategies to achieve proprietary advantage within industry:– Cost leadership
– Differentiation
– Focus
• Key questions in each generic strategy:– Should we lower cost or differentiate our products and
services?
– Should we target a broad market or a narrow one?
15
Generic Strategies
Competitive Scope
Cost leadership
Cost focus
Differentiation
Differentiation focus
Broad Target
Lower Cost Differentiation
Narrow Target
Competitive Advantage
16
Strategic Grid Analysis
Factory Strategic
Support Turnaround
Goal: Improve performance of core processes
Leadership: Business unit executives
Project Management: Process reengineering
Goal: Improve local performance
Leadership: Local level oversight
Project Management: Grassroots experimentation
Goal: Transform organization or industry
Leadership: Senior executives & board
Project Management: Change management
Goal: I dentify and launch new ventures
Leadership: Venture incubation unit
Project Management: New venture development
IT Impact on Core Strategy
IT Im
pac
t o
n C
ore
Op
erat
ion
s
Low
High
High
17
Source: Source: McFarlanMcFarlan, Warren F., , Warren F., Tale of Two Airlines in the Information Age: Or Why the Spirit oTale of Two Airlines in the Information Age: Or Why the Spirit of King f King George III is Alive and Well !George III is Alive and Well ! Teaching Note, Copyright © 1995 President and Fellows Harvard CTeaching Note, Copyright © 1995 President and Fellows Harvard Collegeollege
STRATEGIC IMPACTSTRATEGIC IMPACT——APPLICATIONS DEVELOPMENT APPLICATIONS DEVELOPMENT PORTFOLIOPORTFOLIO
Strategic
Dependence
Existing
Operating
Systems
A - Major Electronic Components Firms
B - Major Brokerage
C - Large Agricultural Firm
E - Major Airline
F - Major Consulting Organization
G - Insurance Broker
StrategicFactory
Support Turnaround
High
Low High
A
CG
BE
F
Tale of Two Airlines TN, Slide 5 of 6Tale of Two Airlines TN, Slide 5 of 6
18
Analyzing the Impact of IT on Strategic Decision Making
• Can IT be used to reengineer core value activities and change the bases of competition?
• Can IT change the nature of relationships and the balance of power among buyers and suppliers?
• Can IT build or reduce barriers to entry?• Can IT increase or decrease switching costs?• Can IT add value to existing products and
services or create new ones?
19
Can IT be used to reengineer core value activities and change the bases of competition?
• IT systems are used to automate activities• 1950s and 1960s automate routine, information-intensive “back-office”
transactions (payroll processing, accounting, and general ledger postings).• Apply benefits to “front-office” activities (transactions for suppliers,
distributors, customers, and other value chain participants).• Increased benefits when IT is used to transform and inform• Streamlined and integrate value chain to eliminate redundancies, reduce
cycle times, and achieve greater efficiency and productivity.• American Hospital and Supply Corporation (AHSC) and American Airlines
(AA)– Used IT to fundamentally alter the basis of competition in their respective
industry;– Strategies that radically changed the cost structure
• Charles Schwab – Fundamentally changed the basis of competition
20
Can IT change the nature of relationships and the balance of power among buyers and suppliers?
• AHSC increased speed of fulfillment between suppliers and hospital buyers
• Suppliers succumbed to the pressure to put their catalogs online and join the electronic market
• Customers encouraged channel consolidation, unwilling to put up with the problems of using different supplier systems
• Chemdex established a neutral, third-party virtual marketplace for life sciences industry
• Global Healthcare Exchange (GHX); increased the bargaining power of suppliers
• Group Purchasing Organizations (GPOs); health care providers
21
Can IT build or reduce barriers to entry?
• AHSC and AA built and operated a proprietary system; for example, other airlines were forced to tie to the dominant force
• Overtime technology-based advantages decreased• Sustainable advantages are found in second-order barriers
– Exploiting the value information generated by the technology and the value of the community of suppliers, customers, and partners
• Internet technologies provide lower entry barriers in the online market– “knowledge and community barriers” provide a more sustainable entry
barrier within Internet-based electronic markets– Example: Amazon.com
• Order fulfillment capability with 99% on-time delivery• Attracts over 25 million customers• Shift from pure-play e-retailer to an online/offline logistics services provider
22
Can IT increase or decrease switching costs?
• To provide a sustainable source of revenues, an IT system ideally should be easy to start using but difficult to stop using
• Switching costs are substantially reduced, – easy to compare prices – difficult to achieve strong customer loyalty
• Intuit: avoid switching by storing personal information, switching requires re-entering
• Online bill paying service: integrate many services to avoid switching
23
Can IT add value to existing products and services or create new ones?
• Grocery stores: add the business of selling information; – sale scanner data on consumer shopping behavior
• Information content of products; a 2000 late model car has more computer chips than the U.S. National Defense Department in 1960; – Provide mechanics and manufacturers with driving
behaviors
• Transform products from analog to digital– Books, magazines, music, video, and games
25
Business models
• Network economy business models– Portals– Aggregators– Exchanges– Marketplaces
• Describes how a company made money and delivered value to customers, suppliers, partners, employees, and owners
– How is a software developer going to make money in the growing pressure to go to Open Source: Linux (Windows), Open Office (MS Office), GIMP (Photoshop)
• Industrial economy: “I sell insurance” or “I sell cars”; describes how a business was structured, what types of people were needed, and what roles they filled.
• Building blocks:– Concepts– Capabilities– Value
26
What is it? How will we?
An organization's business concept defines its strategy. The concept is based on analysis of:
Market opportunity Product and services offered Competitive dynamics Strategy for capturing a dominant position Strategic options for evolving the business
Attract a large and loyal community? Deliver value to all community members? Price our product to achieve rapid adoption? Become #1 or #2? Erect barriers to entry? Evolve the business to "cash in on strategic options?” Generate multiple revenue streams? Manage risk and growth?
An organization's capabilities define resources needed to execute strategy. Capabilities are built and delivered through its:
People and partners Organization and culture Operations Marketing/sales Leadership/Management process Business development/Innovation process Infrastructure/Asset efficiency
Achieve best-in-class operating performance? Develop modular, scalable, and flexible infrastructure? Build and manage strong partnerships with employees and the
community? Increase the lifetime value of all members of the community? Build, nurture, and exploit knowledge assets? Make informed decisions and take actions that increase value? Organize for action and agility?
A high-performing organization returns value to all stakeholders. This value is measured by:
Benefits returned to stakeholders Benefits returned to the firm and its owners Market share and performance Brand and reputation Financial performance
Deliver value to all stakeholders? Claim value from stakeholder relationships and transactions? Increase market share and drive new revenues off existing customers? Increase brand value and reputation? Generate confidence and trust? Ensure strong growth in earnings? Generate positive equity cash flow? Increase stock price and market value?
27
Users and Providers of Network
• Two key value chain roles:– Producers: design and build products and services
– Distributors: enable buyers and sellers to connect, communicate, and transact
28
Network Users—Focused Distributors Model
Model & Examples Model Differentiators Likely Revenues
Likely Costs
Own Inv. Sell online Price Set Online
Physical Product orService
RetailerToysRus.comStaples.com
Yes Yes No Yes Product/svc. sales
Advertising & marketing; Physical facilities, inventory & customer svc.; R&D; IT infrastructure
MarketplaceEloan.com InsWeb.com
Possibly Yes No No Transaction fees; Service fees; Commissions
Advertising & marketing; R&D; IT infrastructure
AggregatorAutoweb.com
No No No Possibly Referral fees;Advertising & marketing fees
Advertising & marketing; R&D; IT infrastructure
InfomediaryInternet Securities
No Yes Yes No Subscription fees; Advertising fees
Advertising & marketing; R&D; IT infrastructure; content acquisition
ExchangeeBay.comFreemarkets.com
Possibly Possibly Yes Possibly Depends on model
Advertising & marketing; Staff support for auctions (especially B-2-B); Inventory & logistics if inventory control; R&D; Technical infrastructure
Focused Distributor Business Model Trends Focused distributors that do not allow customers and the business community to transact business online are losing power. Aggregators are evolving to marketplaces and/or vertical portals. Multiple business models are required to ensure flexibility and sustainability. Focused distributors are aligning closely with vertical and horizontal portals or are evolving their model to become vertical portals.
29
Network Users—Portal Business Model
Model & Examples Model Differentiators Likely Revenues Likely Costs
Gateway Access
Deep Content & Solutions
Affinity Group Focus
Horizontal PortalsAOL.comYahoo!.comQuicken.com Small Business
Yes Through partnerships
with vertical & affinity portals
Possibly; Often through
partnerships
Advertising, affiliation & slotting fees; Possibly subscription or access fees
Advertising, marketing & sales; Content/info asset mgmt.; R&D; IT infrastructure
Vertical PortalsWebMD.com Covisint.com
Limited Yes No Transaction fees; Commissions; Advertising, affiliation & slotting fees
Advertising, marketing & sales; Content/info asset mgmt.; R&D; IT infrastructure; Legacy system integration to support transactions
Affinity PortalsRealtor.com iVillage.com
Possibly Focused on affinity group
Yes Referral fees;Advertising, affiliation & slotting fees
Advertising, marketing & sales; Content/info asset mgmt.; R&D; IT infrastructure
Portal Business Model Trends:Horizontal and vertical portals are emerging as dominant sources of power within consumer and business markets. Horizontal portals are joining forces with horizontal infrastructure portals to provide, not just access to content and services, but also access to network and hosting services. Large media and entertainment portals that represent convergence of data, telephone, television, and radio networks are emerging in the consumer space. These portals unite content development, packaging, and distribution components of the value chain. B2B portals provide both horizontal access to business networks and vertical industry-wide solutions.
30
Network Users—Producer Business ModelModel & Examples Model Differentiators Likely Revenues Likely Costs
Sell Physical Product/ Service
Sell Information-
based Product/ Service
Level of Customiza
tion
ManufacturersFord Motor Company Procter & Gamble
Yes Possibly Low to Moderate
Product sales; Service fees Advertising, marketing & sales; Content/info asset mgmt.; R&D; IT infrastructure
Service ProvidersAmerican Express Singapore Airlines
Yes Possibly Moderate to High
Commission, service or transaction fees;
Advertising, marketing & sales; Content/info asset mgmt.; R&D; IT infrastructure
EducatorsHarvard University Virtual University
Possibly Possibly Moderate to High
Registration or event fee; Subscription fee; Hosting fee
Content/info asset mgmt.; R&D;
IT infrastructure
AdvisorsMcKinsey Accenture
Yes Yes Moderate to High
Service fee; Registration or event fee; Membership fee; Commission, transaction or subscription fee
Content/info asset mgmt.; IT infrastructure
Information & News ServicesDow Jones Euromoney
Yes Yes Moderate to High
Subscription fee; Commission, transaction or service fee
Content/info asset mgmt.; Advertising, marketing & sales;
IT infrastructure
Producer PortalsCovisint Global Healthcare Exchange
Possibly Yes High Transaction or service fee; Subscription or membership fee;Consulting and Integration fee; Hosting Fee
Content/info asset; IT Infrastructure and
R&D; software development; Logistics
Producer Business Model TrendsProducers must be best-in-class – the #1 or #2 brand – to survive. Some large full service producers, like American Express and Citigroup in the financial services industry, and AOL Time Warner in the entertainment and media industry, are acquiring a full range of products and services and then integrating them to provide vertical solutions required by customers. These are offered through company-owned portals and also through a wide variety of distribution agreements. Industry supplier coalitions are forming to enable virtually-integrated business-to-business commerce within and across industry groups.
31
Infrastructure Providers—Distributor Model
Models & Examples Model Differentiators Likely Revenues
Likely Costs
Control Inventory
Sell Online Price Set Online
Physical Product or
Service
Infrastructure RetailersCompUSA.com Egghead
Yes Yes Not usually Yes Product sales; Service fees
Advertising & marketing; Physical facilities, inventory &
customer svc.; R&D; IT infrastructure
Infrastructure MarketplacesIngram Micro Tech Data
Usually Yes Not usually, but may be customized
Yes Transaction fees; Service
fees; Commission;
Channel assembly fee
Advertising & marketing; R&D; IT
infrastructure
Infrastructure AggregatorsC/Net ZD Net
No No No Possibly Referral fees;Advertising &
marketing fees
Advertising & marketing; R&D; IT
infrastructure
Infrastructure ExchangesConverge
Possibly Possibly Yes Yes Depends on model
Advertising & marketing; Staff support for auctions (especially
B-2-B); Inventory & logistics if inventory
control; R&D; Technical infrastructure
Infrastructure Distributor Business Model Trends:The speed of obsolescence of the technology, coupled with the complexity of the solution and slim margins, has forced massive consolidation in network and computing technology channels. For many, service revenues are driving profitability. Those distributors that take ownership of inventory are searching for inventory-less, just-in-time business models. Distributors that have the capability for custom configuration of products and services are gaining power.
32
Infrastructure Providers—Portal Model
Models & Examples Model Differentiators Likely Revenues Likely Costs
Internet/Network Access and
Hosting
Hosted Applications and
Solutions
Horizontal Infrastructure PortalsAmerica OnlineBritish TelecomDigex
Yes Through partnerships with non-infrastructure
portals & ASPs
Access fees; Commission, service or transaction fees; Subscription fees; Hosting
fees
R&D; IT infrastructure; Advertising, marketing and
sales
Vertical Infrastructure Portals IBM E-Business SolutionsGE Global eXchange Services
Often through partnerships with
horizontal infrastructure portals
Yes Licensing fees; Service & transaction fees;
Maintenance & update fees; Hosting fees
Advertising, marketing & sales; Content/info asset mgmt.; R&D;
IT infrastructure
Infrastructure Portal Business Model TrendsHorizontal infrastructure portals (ISPs, Network Service Providers, and Web Hosting Providers) are merging or partnering with horizontal content portals to increase value created through intangible assets such as information, community, and brand. Horizontal content portals such as AOL are vertically integrating with horizontal infrastructure providers, such as Time Warner Cable. (Note: Prior to the AOL Time Warner merger, AOL was both a horizontal portal and a horizontal infrastructure portal.) As Internet advertising revenues fall, horizontal portals such as Yahoo! that do not provide other sources of revenue are evolving their business models to include transaction-oriented services and revenue-sharing partnerships with infrastructure portals..Convergence of voice, data, and video channels and global acceptance of a common set of standards is leading to global industry convergence at the content and infrastructure levels. Aggressive pursuit of a growing market for hosted application services is leading to confusion as players with markedly different business models converge on a common competitive space. Two competing Vertical Infrastructure Portal (ASP) models are emerging: producer-ASPs (for example, Oracle, Siebel, SAP) provide online access to Internet-enabled versions of their brand-name software; distributor-ASPs (for example, US Internetworking and Jamcracker) offer application hosting of many software brands.
33
Infrastructure Providers—Producer Model
Models & Examples Model Differentiators Likely Revenues Likely Costs
Manufacture Equipment
Develop Software
Services/ Consulting
Equipment/Component ManufacturersIBMSonyLucentIntel
Yes Possibly Possibly Product license or sales; Installation &
integration fees; Maintenance, update
& service fees
R&D; Advertising, marketing and sales; Production;
Physical facilities & infrastructure; Specialized
equipment, materials & supplies; IT infrastructure
Software FirmsSAPSiebelOracleMicrosoft
Rarely Yes Possibly Product license or sales; Installation &
integration fees; Maintenance, update
& service fees
R&D; Advertising, marketing and sales; Production;
Physical facilities & infrastructure; Specialized
equipment, materials & supplies; IT infrastructure
Custom Software and Integration Service ProvidersAccentureScientValue-added Resellers
Possibly
Possibly Yes Commission, service or transaction fee
Access to specialized talent.; Professional development and training; Travel
Infrastructure Services Agency.comFederal Express
Rarely Possibly Yes Commission, service or transaction fee;
Hosting fee
Content/info asset mgmt.; R&D; IT infrastructure
Infrastructure Producer Business Model TrendsMany hardware and software producers were early adopters of online commerce, selling directly to Internet-savvy customers and through online distributors. For example, in 1999, over 80% of Cisco’s sales were through online channels—most of which was through online distribution partners.
34
Evolving Business Model
Expand
EnhanceExte
nd
Exit
EnhanceAdd functionality or features to current product/service offerings or improve
performance of existing business
ExpandAdd new product/service offerings or enter new geographic markets
ExtendEnter new line of business and/or add new
business models
ExitExit a business or market or drop a
product/service offering
Expand
EnhanceExte
nd
Exit
Expand
EnhanceExte
nd
Exit
EnhanceAdd functionality or features to current product/service offerings or improve
performance of existing business
ExpandAdd new product/service offerings or enter new geographic markets
ExtendEnter new line of business and/or add new
business models
ExitExit a business or market or drop a
product/service offering
35
Evolving Business Model Example —American Express
ExpandEnhance
Ex
ten
d
Ex
it
ExpandEnhance
Ex
ten
d
Ex
it
36
Evolving Business Model Example —Amazon.com
ExpandEnhance
Exte
nd
Exit
ExpandEnhance
Exte
nd
Exit
37
Analyzing Business Models
Step 1: Profile your current business modelStep 2: Determine how you might evolve your current
model and/or identify new models to pursueStep 3: Use the business model analysis framework to
prioritize new models and initiatives– Evaluate the concept (opportunity)– Evaluate the capabilities and resources required– Evaluate the value proposition (return to all stakeholders)
Step 4: Use the analysis in Step 3 as a benchmark to develop real-time performance monitoring systems
Step 5: Revise your strategy, implementation plan, and performance measurement systems on an ongoing basis