1 INTRODUCTION CHALLENGES OF MANAGING IN A NETWORK ECONOMY Theme 1: Market Structure and Industry Dynamics

New choices for designing and building industries, markets, and organizations. IT expands processing capacity enabling convergence of voice, video, and data. Real-time transactions, interactivity and connectivity.

Theme 2: Evolving Business Models. The business models that dominated the Industrial Economy are evolving to take advantage of the capabilities of the new technologies and business practices of the Network economy, giving rise to new sources of power and differentiation. Theme 3: IT Impact.

Important dimensions are:

The impact of IT on core operations and The impact of IT on core strategy.

Theme 4: Prioritizing IT Investments. Shift in IT investment priorities and decisions from a cost-avoidance, project centered approach to an asset-based, strategic option approach. The IT Business Value Scorecard Categories of Benefits Goals and Measures Internal Improve infrastructure External performance; Create an efficient, flexible online/offline

Type I: Benefits from Investments in a Networked IT Infrastructure Functionality

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2 and Flexibility increase the functionality and range of platform for doing business with customers, strategic options that can be pursued suppliers, and partners Sample Measures: Decrease the cost and/or improve the performance of internal IT operations; enable new IT applications to be created at lower cost, in less time, and with less risk; expand the range of internal IT initiatives Sample Measures: Decrease the cost and/or improve the performance of doing business online; decrease the time, cost and risk of launching new online business initiatives; expand the reach of existing IT enabled businesses and the range of business opportunities that can be pursued. Streamline and integrate channels to market, create new channels, and integrate multiple online/offline channels Sample Measures: Supply chain or distribution channel performance improvements; cost savings or cost avoidance for the organization and its customers, suppliers, or partners; decrease time to market or just-in-time order replenishment; enable new channels to market and/or extend the reach and range of existing channels Improve the performance of knowledge workers in customer, supplier, and partner organizations; add information value to existing products and services; create new information-based products and services Sample Measures: Provide information to customers, suppliers, and partners that enables better decision-making; charge a price premium for products and services based on information value-added; launch new information-based products and services; increase revenue per users and add new revenue streams

Type II: Benefits from Doing Business on a Networked IT Infrastructure Commerce Improve internal operating efficiency and quality Sample Measures: Internal process performance and work flow improvements; cost savings or cost avoidance; increased quality; decreased cycle time

Type II: Benefits from Doing Business on a Networked IT Infrastructure Content / Knowledge Improve the performance of knowledge workers and enhance organizational learning Sample Measures: Enable individuals to achieve and exceed personal performance goals; increase the speed and effectiveness of decision making; increase the ability of the organization to respond quickly and effectively to threats and opportunities

Type II: Benefits from Doing Business on a Networked IT Infrastructure Community Attract and retain top talent; increase Attract and retain high quality customers, satisfaction, engagement, and loyalty; suppliers, partners, and investors; increase create a culture of involvement, external stakeholders satisfaction,

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3 motivation, trust, and shared purpose Sample Measures: Length of time to fill key positions; attrition rate, trends in hiring and retaining top talent (over time, by industry, by region) engagement, and loyalty Sample Measures: Customer, supplier, partner satisfaction and lifetime value; average revenues per customer and trend over time; level of personalization available and % that use it; churn rate

Theme 5: Assimilation and Organizational Learning. The time required for successful organizational learning and assimilation of rapidly changing technologies limits the practical speed of change. Identifying and Assimilating IT

Theme 6: Buy versus Make. External industry, internal organizational and technological changes are increasing the pressure on organizations to buy rather than make IT applications and services. Theme 7: Partnerships among Key Constituencies as IT Evolves. cooperation among four key constituencies:

High

levels

of

engagement

and

Business Executives IT Executives Users Technology Providers / Partners Three Eras of IT Evolution Administrative Framework Era 1 Mainframe Era 2 Regulated monopoly Free market Target for IT Use Back office automation Individual decision making Justification/ Benefits Organizational productivity Individual effectiveness

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4 Microcomputer Era 3 Internet working Shared partnership and productivity Electronic integration and learning Business advantage

Theme 8: Protecting IT Assets and Managing Risks. The ability to ensure high levels of security, privacy, reliability, and availability is a core capability that determines an organizations ultimate success and survival. Theme 9: Pervasive Computing: Opportunities and Risks. Shift in IT that has dramatically changed the way people access and use technology, the way organizations exploit it, and the way it is developed and managed. CREATING BUSINESS ADVANTAGE WITH IT From Agricultural Economy to Network Economy Agricultural Economy 1900

Industrial Economy 1950

Network Economy 2000

Internet and broadband WWW, URL Multi-media and digital devices Wireless OOP, Java XML etc

The driving force behind every change is: INNOVATION Comparison of Industrial and Network Economies Characteristics Criteria of Economic Success Technological Innovations Operating Innovations Management Innovations Societal Innovation Time taken to achieve economies of scale and scope Dominant Industry Power Industrial Economy Internal. Economies of scale and scope limited to the internal Infrastructure Production Standardization of work Hierarchical co-ordination Urban growth Decades Producers Network Economy External. Shared economies of scale and scope Information Knowledge management, Outsourcing Network Co-ordination Work from home Uncertain Channel Managers, Solution assemblers

Forces that shape Business Strategy. 1. Value Chain

Three frameworks are used to analyze the impact of IT.

Identify the activities that make up the value chain. Identify the costs vs the value created for each activity. Identify where in the value chain is the maximum economies of scale and scope created. The answer to step#4 = Market Power!

2. Industry and Competitive Analysis

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5 Suppliers Bargaining power of Suppliers and Channel Buyers Bargaining power of Customers and Channel

Competitive Intensity among Rivals Threat of Substitute Products 3. Strategic Grid Analysis High Factory Goal: Improve performance of core processes Impact of Core Operations Leadership: BU exec PM: Process Re-engineering Support Goal: Improve Local performance Leadership: Local PM: Grass root exp Low Impact of Core Strategy Five questions to answer: Strategic Goal: Transform Org Leadership: Senior Exec & Board PM: Change Mgmt Turnaround Goal: Launch new ventures Leadership: Venture Unit PM: New venture development High Barriers to Entry

Analyzing the impact of IT on Strategic Decision Making.

1. Can IT be used to re-engineer core value activities and change the basis of competition? Migration from back office solutions (Accounts/Payroll) to front office solutions (e.g.: CRM) i-e from automation to transformation. e.g.: AHSC (American Hospital Supply Corporation) and AA (American Airlines) Both the firms automated internal operations and then focused on self-servicing customers without reducing quality of service and products. Why should the self servicing customers not charged for the new service? Answer: Costs Vs Benefits. e.g.: Schwab Brokerages case. Web access @ $29.95. Full service offline @$80. Re-configuration of Supply Chain Pull affect of keeping up => suppliers were forced to keep their catalogues on-line. Result: Reduction in cycle time and cost are reduced. Channel Consolidation increased. Companies erect barriers based on their competitive priorities. Option 1: Significant investment in IT infrastructure (Not sustainable in the long run) Option 2: Exploit the value of:

2. Can IT change the nature of relationships and the balance of power among buyers and suppliers?

3. Can IT build or reduce barriers to entry?

Information generated by technology and Loyal community of suppliers, customers and partners - Knowledge and community barriers

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Amazon.coms first movers advantage and investment. $500 million for the development of web based order fulfillment capability to manage 31 million units in 6 months.

More than99% orders arrived on time. Knowledge management (customer preferences) done through TPS, MIS, DSS Decline on internet => move away from retail to services (online/offline logistics support) Investor (Time and Warner) spent $100 million and posted its first profit in the 4 th quarter the same year.

4. Can IT increase or decrease switching costs?

IT systems should be easy to start using but difficult to stop using. Past: Switching costs were high. Present: Low Challenge: How to increase the switching costs? Grocery stores are also selling POS data No of computer chips in a car by 2000 > Entire US DoD in 1960! Digitization and its impact on supply chain. CRAFTING BUSINESS MODELS

5. Can IT add value to existing products and services or create new ones?

Change the Question and You Change the Game

What business are you in? What is your business model?

Linking Strategy to Value

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7 Seeing is Believing Some Examples Mint.com. Mint.com is a free online personal finance service that aims to be an easy and secure way to manage and save money online. The service is accessible anywhere, anytime over the web. Mint.com also tries to save users money by suggesting ways to save that are personalized and objective. The company claims that users are presented with an average of $1,000 in savings opportunities in their first session. The service also sends users email and SMS alerts about upcoming bills, low balances or unusual spending.

PatientsLikeMe . PatientsLikeMe is a company which gathers and sells medical data. They do this by providing an online platform to share real-world health experiences in order to let people help themselves, other patients like you and organizations that focus on medical conditions. PatientsLikeMe can make profit by selling all available data to other organizations.

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8 Google AdWords . Google AdWords is Googles main advertising product and main source of revenue. AdWords offers pay-per-click (PPC) advertising, cost-per-thousand (CPM) advertising, and site-targeted advertising for text, banner, and rich-media ads. The AdWords program includes local, national, and international distribution.

Dropbox . Dropbox is a web-based file hosting service that uses cloud storage to enable users to store and share files and folders with others across the internet, using file synchronization. Dropbox has a free basic plan and several payable subscription plans for more storage.

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9 Team Fortress . Team Fortress is a free to play team- and class-based online multiplayer video game, developed by Valve Corporation. It is distributed online through the Steam service, a platform that sells or distributes all kinds of online games. As a free-to-play title, Team Fortress gets its income from micro transactions for unique in-game equipment through Steam. People can buy gear, weapons and hats to personalize their character. They can even design their own digital in-game products and sell them through Steam. The game itself revolves around two teams, each with access to nine distinct characters, battling in a variety of game modes set in different environments.

Concepts, Capabilities and Value What is it? An organisations business concept defines its strategy. The concept is based on analysis of:

How will we? Attract a large and loyal community? Deliver value to al 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? 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 to increase value? Organise for action and agility?

Market opportunity Product and service offered Competitive dynamics Strategy of capturing dominant position Strategic options for evolving the business

An organizations capabilities define resources needed to execute strategy. Capabilities are built and delivered through its:

People and partners Organisation and culture Operations Marketing/ sales Leadership/ management process Business development/ Innovation process Infrastructure/ Asset efficiency

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10 A high performing organisation 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 stakeholders relationship 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 and cash flow? Increase stock price and market value? Focused Distributors [Amazon, Etrade etc] Focused Infrastructure Distributors [Ingram, staples.com] Portals [Quicken, AOL] Infrastructure portals [Docomo, Earthlink]

Classifying Network Business Models Business built on a networked infrastructure Businesses providing a networked Infrastructure Producers [ford, China airlines etc] Infrastructure Producers [Oracle, Cisco]

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Shift from the Value Chain to the Value Web EXAMPLE: AUTO INDUSTRY

Create component, product, or provide services, raw material and talents

Design and build product and services, and most importantly solutions that meet a specific customer or the market need.

Enable buyers or sellers to connect, communicate and transact business.

Consumers or business willing to pay for a product, service or solution.

Classifying Network Business models

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Focused Distributors. Focused distributors provide products and service within a specific industry or market niche. For example E- loan is a market place that connects buyers and sellers in financial service industry and LandsEnd.com is an online retailer that sells clothing a nd accessories. The five type of focused distributer business models retailers, marketplace, aggregators, infomediaries, and exchange are differentiated from each other by the following characteristics. Focused Distributor Networked Business Model Model and Examples Retailer Model Differentiators Own Inventory Yes Sell Online Yes Price Set Online No Physical Product or Service Yes Product/ Service Sales Advertising and Marketing; Physical Facilities, Inventory & Customer Service; R&D; IT Infrastructure Advertising and Marketing; R&D; IT Infrastructure Advertising and Marketing; R&D; IT Infrastructure Advertising and Marketing; Staff Support for Auctions; Inventory and Logistics if Inventory Control; R&D; Technical Infrastructure Likely Revenues Likely Costs

Marketplace Aggregated/ Infomediary Exchange

Possibly No Possibly

Yes No Possibly

No No Yes

No Possibly Possibly

Transaction Fees; Service Fees; Commissions Referral Fees; Advertising and Marketing Fees Depends upon Model

Portals Business Model Model and Examples Horizontal Portals Vertical Portals Model Differentiators Gateway Access Yes Deep Content and Solution Through partnership with vertical and affinity portals Yes Affinity Group Focus Possibly; often through partnerships No Advertising, Affiliation and Slotting fees; Possibly Subscription or Access fees Transaction Fees; Commissions; Advertising, Affiliation and Slotting fees Advertising, Marketing and Sales; content/ Info Asset Mgmt; R&D; IT Infrastructure Advertising, Marketing and Sales; Content/ Info Asset Mgmt; R&D; IT Infrastructure; Legacy System Integration to Support Transactions Advertising, Marketing and Sales; Content/ Info Asset Mgmt; R&D; IT Infrastructure Likely Revenues Likely Costs

Limited

Affinity Portals

Possibly

Within affinity group

Yes

Referral Fees; Advertising, Affiliation and Slotting fees

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Producers. Producers design and make, and may also directly market, sell, and distribute, products and services. Producers often hold the position of power within traditional business markets. During the late 1990s, many worried that new online entrants would dominate the information age. The demise of many once- powerful dotcoms shifted the balance of power in favour of established players.

Producer Business Model Model and Examples Manufacturers Model Differentiators Sell/serve online Yes Sell/ serve offline Yes Level of customization Low to Moderate Product Sales; Service Fees Advertising, Marketing & Sales; Content/ Info Asset Mgmt; R&D; IT Infrastructure Advertising, Marketing & Sales; Content/ Info Asset Mgmt; R&D; IT Infrastructure Content/ Info asset Mgmt; R&D; IT Infrastructure Content/ Info asset Mgmt; R&D; IT Infrastructure Likely Revenues Likely Costs

Service Provider

Yes

Possibly

Moderate to High

Commission, service or Transaction Fees Registration or Event Fee; Subscription Fees and Hosting Fees Subscription Fees; Registration or Event Fee; Membership Fee; Commission, Transaction or Service Fee Subscription Fees; Commission, Transaction or Service Fee

Educators Advisors

Yes Yes

Possibly Usually

Moderate to High Moderate to High

Information and News Service

Yes

Possibly

Moderate to High

Content/ Info asset Mgmt; R&D; Advertising, Marketing & Sales; IT Infrastructure

Infrastructure Distributors. Infrastructure distributors enable technology buyers and sellers to transact business. Four categories of focused distributor, key differentiating features, and trends are shown at right.

Infrastructure Distributors Business Model

Model and Examples Infrastructure Retailer

Model Differentiators Own Inventory Yes Sell Online Yes Price Set Online Not Usually Physical Product or Service Yes

Likely Revenues

Likely Costs

Product Sales / Service Fees

Advertising and Marketing; Physical Facilities, Inventory & Customer Service; R&D; IT Infrastructure Advertising and Marketing; R&D; IT Infrastructure Advertising and Marketing; Staff Support for Auctions; Inventory and Logistics if Inventory Control; R&D; Technical Infrastructure

Infrastructure Marketplace Infrastructure Exchange

Usually Possibly

Yes Possibly

Possibly Yes

Yes Yes

Transaction Fees; Service Fees; Commissions Depends upon Model

Infrastructure Portals Model and Examples Model Differentiators Internet/Network Access and Hosting Horizontal Infrastructure Portals. Yes Hosted Applications and Solutions Through partnership Access Fees; Commission, R&D; IT Infrastructure; Likely Revenues Likely Costs

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Includes: Internet Service Providers (ISPs), Network Service Providers and Web Hosting Horizontal Infrastructure Portals. Includes: Producer and distributor Application Service Providers (ASPs) Often through partnership with Horizontal Infrastructure Portals with non-infrastructure portals & ASPs Yes Service or Transaction Fees; Subscription Fees; Hosting Fees Licensing Fees; Service and Transaction Fees; Maintenance and Update Fees; Hosting Fees Advertising, Marketing and Sales Advertising, Marketing and Sales; Content/ Info Asset Mgmt; R&D; IT Infrastructure

Infrastructure Producers. Infrastructure producers design, build market and sell technology hardware, software solutions and services. Producers may sell and provide after sales service directly or they may share this responsibility with online/ offline channel partners including retailers, distributors and portals. Infrastructure Producers Business Model Model and Examples Equipment/ Component Manufacturers Model Differentiators Sell/serve online Yes Sell/ serve offline Yes Level of customization Low to Moderate Product License or Sales; Installation or Integration Fees; Maintenance, Update and Service Fees R&D; Advertising, Marketing & Sales; Production; Physical Facilities and Infrastructure; Specialized Equipment; Material Supplies; IT Infrastructure R&D; Advertising, Marketing & Sales; Production; Physical Facilities and Infrastructure; Specialized Equipment; Material Supplies; IT Infrastructure Access to Specialized Talent; Professional Development and Training; Travel Content/ Info asset Mgmt; R&D; IT Infrastructure Likely Revenues Likely Costs

Software Firms

Yes

Yes

Moderate to High

Product License or Sales; Installation or Integration Fees; Maintenance, Update and Service Fees

Custom Software and Integration Infrastructure Service Firms

No

Yes

High

Commission Service and Transaction Fees Commission Service and Transaction Fees; Hosting Fees

Yes

Yes

High

Sample Costs, Revenues and Asset Sample Cost Categories Cost Category People and Partners Advertising, Marketing, Sales Business Development Materials and Supplies Specialized Eqpt (Excluding IT) Research and Development Physical Facilities and Infrastructure Information Technology (IT) Infrastructure Description Cost to acquire, develop and retain skills and expertise needed to execute strategy; includes employees and partnerships. Cost of offline and online advertising, marketing and sales. Cost of designing and launching new businesses, developing and acquiring partners. Cost of physical materials used in production of products and delivery of services; includes general purpose and specialized supplies and components. Cost of equipment especially capital equipment used in design, production, delivery and distribution. Cost of designing and developing digital business products and services; may overlap with IT infrastructure costs. Cost of corporate and regional headquarters, sales offices, factories, warehouses, distribution centers, retail stores, service centers etc. Cost of computers and equipment (e.g. printers, data storage devices) Cost to operate and maintain data centers. Cost to design, develop, implement and maintain software. Cost of voice, data and video network equipment 9e.g. physical cables, routers). Cost of operate and maintain networks. Sample Revenue Options Revenue Category Description

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Commerce Revenues Product Sales Commission, Service or Transaction Fees Subscription Fees Registration or Event Fees Advertising, Slotting, Affiliate & Referral Fees Sell or license physical or information based products. Charge a fee for service provided; can be a set fee or a % of the cost of a product or service. Content Revenues Charge for receipt of updated information on a topic or a broad range of topics for a specified period of time (e.g. annual). Charge a fee for attendance at an online event, workshop or course. Community Revenues Collect a fee for hosting a banner advertisement or special promotion. Collect a fee for an exclusive or non exclusive partnership relationship. Collect a fee each time a visitor clicks through from your site to other companys site. Membership Fees Charge a fee to belong to a private group or service.

Infrastructure Revenues Software/ Hardware Sales Installation and Integration Fees Maintenance and Update Fees Hosting Fees Access Fees Sample Asset Categories Asset Category Current Assets Financial Assets Marketable Securities Property Plant & Eqpt Inventory Securities Real Estate Accounts Receivable. Cash and Convertible Notes. Investment made as part of a cash management program. Tangible Assets Physical facilities. Fixed assets required to produce products and services. Asset held for resale. Investments Stock held by one firm to enable joint control over shared business activities. Stock held by one firm in anticipation of a return at some time in future. Investment in property in anticipation of a future return. Description Sell or license a technology product. Charge either a set or variable fee for services provided; large scale fixed price projects are often broken into a series of discrete projects with well defined timeframes and deliverables; variable fees are often based on time, materials and expenses incurred while working on a project. Charge a fee for software/ hardware maintenance & updates. Charge a fee for hosting a software application, web site, data center or network. Charge a fee for providing access to a network and/ or to an Internet service.

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