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1999, Chuck Ehrlich all rightsreserved 1

New Economics of

Information and Strategy

Chuck [email protected] 1-415-441-7140

www.ehrlichorg.com
http://www.ehrlichorg.com/http://www.ehrlichorg.com/

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Information

Every business is an information business

For example

Health care spends 1/3 or $350b on costsassociated with information capture,processing, etc.

Manufacturing is shaped by information

Even low tech products require marketresearch, logistics and advertising

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Information is not just data

Includes qualitative judgments, affiliation,emotion are shared along with numbers and

facts

Denotation and connotation are inseparable

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1999, Chuck Ehrlich all rights

reserved 4

Information is the glue

Holding together

Value chains and supply chains

Consumer franchises

Organizations

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Inventory

Physical correlate of deficient information

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Corporations

Held together by informational logic

Certain kinds of information can be shared

more efficiently within the boundaries of thecorporation than across them

Organized around information flows

Organizational structures are informationchannels

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Industries

Shaped by the same kind of informationallogic as the value chains within companies

but in a weaker form

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Brands

Information consumers associate with aproduct

Real or imaginedBrand building tools are information

channels

Advertising, promotion, sales pitch,presentation

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Competitive advantage

Comes from information

Toyota engineering, kanban, quality control

American Airlines SABREWal-Mart logistics

Coca Cola brand management

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Different economics

Things

Seller looses thing

Manufacturing costsWears out

Exists in a location

Information

Seller retains

Free copiesNever wears out

Everywhere and no

where

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Economic returns

Things

Diminishing returns ex. Agriculture

Increasing returns ex. Factories

Information

Perfectly increasing returns

double the uses and halve the cost per use

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Economic markets

Things: consistent with Efficient Markets

Information: requires Imperfect MarketsAbility to limit access through copyright,

patent or secrecy is essential

Without access limits information is worthlessWith limits, information is a monopoly

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Economics

Fundamentally and qualitatively differentfor Things and Information

Information embedded within a Thing hasmixed economics

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Traditional links

Between rich information and carrier

The medium and the message

Product related information and product itselfInformational value chain and the physical

value chain

Blend economics of information and thingsin compromised bundles

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Links are being broken

By connectivity

Information can travel by itself

Unbundling the economics of

information and things

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Compromises=vulnerability

Retail groceriesLow product value, high inventory turnover

Premium placed on selection is low

Low tension between selection and inventory

Book retailingInformational imperative for a large

inventory

Logistic imperative to minimize inventory

Strong tension and suppressed value

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Richness and reach

Information delivered physically is subjectto a universal trade-off between richness

and reachRichnessquality of information, accuracy,

bandwidth currency, interactivity, etc.

Reach

number of people who participate insharing information

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Richness and reach

Richness

Reach

TraditionalTrade-off

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Richness and reach:

positioning

Richness

Reach

Wal-Mart, Toyota (EDI)

Citibank (trading)

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Asymmetries of information

Differences in knowledge that affectbargaining power

For example selling a used carSeller knows condition

Nave buyer may not know condition or value

Professional buyer has more information

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Asymmetries of information

Lack of information, or trust, breaks deals

Asymmetries impose costs on the

disadvantaged participantAnd often on the advantaged as well

Many asymmetries arise from

richness/reach tradeoffs

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Richness and reach

Information channels imply asymmetries

Some have access and others dont

Those with access use information to extractvalue from those without

Eliminate the richness/reach tradeoff,

make the channel accessible, andeliminate the asymmetry

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Connectivity & standards

Drivers behind the blowup of therichness/reach trade-off:

Connectivity: the Internet, lower costnetworks, higher speeds

Standards: Web standards, Internetstandards, Application Standards, Databasestandards, etc.

Enabling new levels of richness and reach

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Deconstruction

Dismantling traditional business structuresas a result of

Separating the economics of information andthe economics of things

Blowing up of the trade-off between richnessand reach

Reformulating new business structuresbased on the separate economics of

information and things

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Example: newspapers

before

Vertically and horizontally integratedvalue chain

IntermediaryLinking journalists and readers

Bundle sharing cost and revenues

Classifieds, display ads, news, features,cartoons, etc.

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Example: newspapers after

Unbundled

Weather online

E-mail newsClassifieds replaced by eBay or online ads

Classifieds: 40% of revenue, 10% of costs

Enough to financially destabilize most papers

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Deconstruction

A little can do lots of damage

Always strikes where the incumbent can

least afford it

Insurgents greatest advantage is the

incumbents unwillingness to fight on adeconstructed basis

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Reconstruction

Follows deconstruction using newbusiness definitions

Navigators (see below) emerge as a newFunction

Industry

Competitive opportunity

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Example: retail banking

CustomerRetailSales(ATM,

teller, 800)

Trans-action

systems

Productoriginationand

packaging

Before

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CustomerBrowser

AfterQuicken

AOL

Banksoftware

Phone call

Primary Bank

Other Banks

Mutual Fund

Auto Lender

Yahoo!

e*Trade

CarPoint

Motley Fool

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Profitability is driven by assets, income,and number of transactions

Users of personal financial software areabove average in all measures

12% of households

75% of banking profits

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Example: automobile sales

Before: dealers

After: online brokers

Autobytel, AutoVantage, CarMax, CarPoint

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Types of deconstruction

Break into value chain components

Break along vertical links

Suppliers, customers, & consumers

Segregation of information flows into theirown business

Organizational relations renegotiatedEmployees, investors, & entrepreneurs

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Effects of deconstruction

Competitive advantage is de-averaged

Fragment into multiple businesses

Most profitable parts are most vulnerableEscalating competition

Fewer ways to win

Monolithic advantage breed monopoly

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Effects of deconstruction

Information businesses have value

Source of competitive advantage and profit

New opportunities for physical businessShipping companies with e-commerce

Supermarkets as retail banks

Wholesalers, retailers, distributors will bedisintermediated

I f ti b i i

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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 businessboundaries

Race for monopoly position, winner take all

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Navigators emerge

Software: Quicken

Databases: Auto Trader

Evaluators: Consumer Reports, JD Power

Search engines: Yahoo!

People: financial advisors

Also known as Infomediaries

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Navigators

Look like small business

Provide the leverage for competitive

advantageDrive fundamental power shifts among

other players

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Navigators

New function

New industry

New competitive opportunity

Will appropriate most of the value

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Disintermediation

Richness

Reach

Traditionaldisintermediationsacrifice richness

for reach

Newdisintermediationadd richness and

reach

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Online Brokers

Richness

Reach

Full serviceBroker

Schwab today:Internet delivery

ADDED RICHNESSPersonalized advicePortfolio trackingFinancial dataQuotes and trades

Schwab 1975Telephone orders

Schwab 1989Touch-tone orders

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Computer retailing

Richness

Reach

Dealers/direct sales

Dell today:Internet delivery

ADDED RICHNESSIndividual configurationsPackage pricingTechnical support

Superstores

Dell 1984telephone/fax

Hi hi l S h li

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Hierarchical Search: crawling

up the trade-off

Richness

Reach

Mall

Store

Department

Aisle

Brand

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New world of navigation

Infinite choice

Negligible searching (and switching) costs

FluidityLack of a center (no hub)

Adaptability

Competition on affiliation, reach, richness

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Affiliation

Reach constraints make navigatorsspecific to sellers

Without constraints, navigators affiliatewith buyers

Agency shift will force all players to shift

their navigation offerings closer toconsumer affiliation and greater reach

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Richness

Rich about the consumer: segment of one

Rich about the product: services, etc.

Adding richness forestalls deconstructionPrivacy is the Achilles Heel of the

information economy

Consumer as competitorWhat are you doing for her that she cannot

do for herself?

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Richness

Value of sellers richness goes up as reachincreases

Grab attentionValue of sellers richness goes down as

navigators richness catches up

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Summary

Expect business definitions to change

Deconstruction strikes where incumbents

have the most to loseWaiting for someone else to demonstrate

the feasibility of deconstruction gives the

advantage of time to competitors.

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Summary

Strategy really matters

Value of winning increases, as does the

cost of losingIncumbents can be insurgents, if they

choose. But its hard.

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For more information

Blown to Bits how the neweconomics of information transforms

strategyby Philip Evans and Thomas Wurster,Harvard Business School Publishing, 2000

Other information at www.ehrlichorg.comincluding references and course materials
http://www.ehrlichorg.com/http://www.ehrlichorg.com/

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