New Economics of Information and Strategy

New Economics of Information and Strategy
Chuck Ehrlich © 1999, Chuck Ehrlich all rights reserved

© 1999, Chuck Ehrlich all rights reserved
Information Every business is an information business For example Health care spends 1/3 or $350b on costs associated with information capture, processing, etc. Manufacturing is shaped by information Even low tech products require market research, logistics and advertising © 1999, Chuck Ehrlich all rights reserved

Information is not just data
Includes qualitative judgments, affiliation, emotion are shared along with numbers and facts Denotation and connotation are inseparable © 1999, Chuck Ehrlich all rights reserved

Information is the glue
Holding together Value chains and supply chains Consumer franchises Organizations © 1999, Chuck Ehrlich all rights reserved

Corporations Held together by informational logic Certain kinds of information can be shared more efficiently within the boundaries of the corporation than across them Organized around information flows Organizational structures are information channels © 1999, Chuck Ehrlich all rights reserved

Brands Information consumers associate with a product Real or imagined Brand building tools are information channels Advertising, promotion, sales pitch, presentation © 1999, Chuck Ehrlich all rights reserved

Competitive advantage
Comes from information Toyota engineering, kanban, quality control American Airlines SABRE Wal-Mart logistics Coca Cola brand management © 1999, Chuck Ehrlich all rights reserved

Different economics Things Seller looses thing Manufacturing costs Wears out Exists in a location Information Seller retains Free copies Never wears out Everywhere and no where © 1999, Chuck Ehrlich all rights reserved

Economic returns Things Diminishing returns ex. Agriculture Increasing returns ex. Factories Information Perfectly increasing returns double the uses and halve the cost per use © 1999, Chuck Ehrlich all rights reserved

Economic markets Things: consistent with Efficient Markets Information: requires Imperfect Markets Ability to limit access through copyright, patent or secrecy is essential Without access limits information is worthless With limits, information is a monopoly © 1999, Chuck Ehrlich all rights reserved

Traditional links Between rich information and carrier The medium and the message Product related information and product itself Informational value chain and the physical value chain Blend economics of information and things in compromised bundles © 1999, Chuck Ehrlich all rights reserved

Compromises=vulnerability
Retail groceries Low product value, high inventory turnover Premium placed on selection is low Low tension between selection and inventory Book retailing Informational imperative for a large inventory Logistic imperative to minimize inventory Strong tension and suppressed value © 1999, Chuck Ehrlich all rights reserved

Richness and reach Information delivered physically is subject to a universal trade-off between richness and reach Richness—quality of information, accuracy, bandwidth currency, interactivity, etc. Reach—number of people who participate in sharing information © 1999, Chuck Ehrlich all rights reserved

Richness and reach: positioning
© 1999, Chuck Ehrlich all rights reserved

Asymmetries of information
Differences in knowledge that affect bargaining power For example selling a used car Seller knows condition Naïve buyer may not know condition or value Professional buyer has more information © 1999, Chuck Ehrlich all rights reserved

Asymmetries of information
Lack of information, or trust, breaks deals Asymmetries impose costs on the disadvantaged participant And often on the advantaged as well Many asymmetries arise from richness/reach tradeoffs © 1999, Chuck Ehrlich all rights reserved

Richness and reach Information channels imply asymmetries Some have access and others don’t Those with access use information to extract value from those without Eliminate the richness/reach tradeoff, make the channel accessible, and eliminate the asymmetry © 1999, Chuck Ehrlich all rights reserved

Connectivity & standards
Drivers behind the blowup of the richness/reach trade-off: Connectivity: the Internet, lower cost networks, higher speeds Standards: Web standards, Internet standards, Application Standards, Database standards, etc. Enabling new levels of richness and reach © 1999, Chuck Ehrlich all rights reserved

Deconstruction Dismantling traditional business structures as a result of Separating the economics of information and the economics of things Blowing up of the trade-off between richness and reach Reformulating new business structures based on the separate economics of information and things © 1999, Chuck Ehrlich all rights reserved

Example: newspapers before
Vertically and horizontally integrated value chain Intermediary Linking journalists and readers Bundle sharing cost and revenues Classifieds, display ads, news, features, cartoons, etc. © 1999, Chuck Ehrlich all rights reserved

Example: newspapers after
Unbundled Weather online news Classifieds replaced by eBay or online ads Classifieds: 40% of revenue, 10% of costs Enough to financially destabilize most papers © 1999, Chuck Ehrlich all rights reserved

Deconstruction A little can do lots of damage Always strikes where the incumbent can least afford it Insurgent’s greatest advantage is the incumbents unwillingness to fight on a deconstructed basis © 1999, Chuck Ehrlich all rights reserved

Example: retail banking

Example: retail banking
Profitability is driven by assets, income, and number of transactions Users of personal financial software are above average in all measures 12% of households 75% of banking profits © 1999, Chuck Ehrlich all rights reserved

Types of deconstruction
Break into value chain components Break along vertical links Suppliers, customers, & consumers Segregation of information flows into their own business Organizational relations renegotiated Employees, investors, & entrepreneurs © 1999, Chuck Ehrlich all rights reserved

Effects of deconstruction
Competitive advantage is de-averaged Fragment into multiple businesses Most profitable parts are most vulnerable Escalating competition Fewer ways to win Monolithic advantage breed monopoly © 1999, Chuck Ehrlich all rights reserved

Effects of deconstruction
Information businesses have value Source of competitive advantage and profit New opportunities for physical business Shipping companies with e-commerce Supermarkets as retail banks Wholesalers, retailers, distributors will be disintermediated © 1999, Chuck Ehrlich all rights reserved

Information business is different
Physical business: economies of scale, segmentation, operational effectiveness Information business: Setting standards, preemptive critical mass, controlling patents and copyrights, alliances, new technologies, changing business boundaries Race for monopoly position, winner take all © 1999, Chuck Ehrlich all rights reserved

Navigators emerge Software: Quicken Databases: Auto Trader Evaluators: Consumer Reports, JD Power Search engines: Yahoo! People: financial advisors Also known as Infomediaries © 1999, Chuck Ehrlich all rights reserved

Hierarchical Search: crawling up the trade-off

New world of navigation
Infinite choice Negligible searching (and switching) costs Fluidity Lack of a center (no hub) Adaptability Competition on affiliation, reach, richness © 1999, Chuck Ehrlich all rights reserved

Affiliation Reach constraints make navigators specific to sellers Without constraints, navigators affiliate with buyers Agency shift will force all players to shift their navigation offerings closer to consumer affiliation and greater reach © 1999, Chuck Ehrlich all rights reserved

Richness Rich about the consumer: segment of one Rich about the product: services, etc. Adding richness forestalls deconstruction Privacy is the Achilles’ Heel of the information economy Consumer as competitor What are you doing for her that she cannot do for herself? © 1999, Chuck Ehrlich all rights reserved

Summary Expect business definitions to change Deconstruction strikes where incumbents have the most to lose Waiting for someone else to demonstrate the feasibility of deconstruction gives the advantage of time to competitors. © 1999, Chuck Ehrlich all rights reserved

For more information Blown to Bits how the new economics of information transforms strategy by Philip Evans and Thomas Wurster, Harvard Business School Publishing, 2000 Other information at including references and course materials © 1999, Chuck Ehrlich all rights reserved

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