Strategy and the New Economics of Information

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Strategy and the New Economics of Information

• P.B. Evans
• T. S. Wurster
• HBR, Sept-Oct 1997

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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
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Britannicas 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 worlds best content.
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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
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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
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Britannicas Vulnerability

• Dependent on personal selling
• What other industries may be vulnerable?

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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.
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Items That Depend On Information

• Supplier relationships
• Brand identity
• Process coordination
• Customer loyalty
• Employee loyalty
• Switching costs

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Note, for example- -

• At an auto dealership, much of the dealers
  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)

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Examples of Companies Competing with Information

• AMR and SABRE
• Wal-Mart with EDI
• Nike

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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
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Concepts of Reach and Richness

• Reach- -number of people exchanging information
• Richness- --Bandwidth the amount of information
  moved (stock quotes vs.video)-Customization
  -Interactivity

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Traditional Economics of Information
Richness
Bandwidth, customization, interactivity
Reach (connectivity)
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Third Thesis
Over timeusing electronic communication, organi
zations and individuals will be able to expand
their reach by many orders of magnitude, often
with a negligible sacrifice of richness. pg. 74
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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?

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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

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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.

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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

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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