“IT Doesn’t Matter”

• Carr insists at great length that the quality of management doesn't matter because
IT is really an "infrastructure" technology like electricity, the steam engine and
the internal combustion engine. IT, he argues, ultimately devolves into
commoditized ubiquity, like lightbulbs and telephones. Infrastructure technologies
—as opposed to proprietary technologies—inherently preclude opportunity for
sustainable competitive advantage.
Argument against “IT Doesn’t Matter”
• It's not free and easy access to a commodity that determines its strategic economic
value to the company; it is the way that commodity is managed that determines its
impact.

Decision Analysis and Utility Theory (pp. 221-264)

- Utility is an alternative way of measuring the attractiveness of the result of a
decision.
- Net dollar returns do not always accurately reflect the ‘attractiveness” of the
possible outcomes from our decisions.
- Risk Averse
o The gain of a specified number of dollars increases utility less than the
loss of the same number of dollars decreases utility.
o The same increment has a decreasing utility for most people, or to get the
same utility, each increment must be larger.
- Risk Seeking
o Gain of a specified amount of dollars increases the utility more than a loss
of the same amount of dollars decreases the utility.
- Risk Neutral
o Gain or a loss of a specified dollar amount produces a change of the same
magnitude in your utility.

Decision Analysis and Value of Information (pp. 265-288)

- The expected value of perfect information provides an upper bound for the
expected value of information in general.

Newly Vulnerable Markets-Channel Conflict (Clemens Lecture)

- Newly Easy to Enter
o Regulatory, technology, consumer preference change
- Attractive to Attack
o Presence of strong customer profitability gradient
- Difficult to Defend
o regulatory restrictions on incumbents,
o fixed commitments to existing customers to maintain current prices
o investments in inappropriate systems physical infrastructure.
- Protecting digital content from unauthorized distribution has been the industry’s
main concern regarding online music.
- Theory of competitive strategy
 o newly vulnerable markets, that is, of markets that have been rendered
easier to attack as a result of technological innovation or other change
- Strategies to avoid vulnerable attacks
o End cross-subsidiaries by price differentiating
o Have new groups sign longer contracts
o Bundling more services
- Newspaper Industry
o Thus we may conclude that the industry is neither easy to enter, either by
reporters themselves or by new entrants who do not yet enjoy a strong
reputation for reliability and timeliness, nor attractive to attack, based on
the absence of a strong customer profitability gradient among readers of
most daily news stories.
o we have agreed that, as in the music industry, the physical distribution of
the paper and its ads is cross-subsidizing other activities; this cross-
subsidy may indicate that advertisers are being over-charged by
newspapers, now that alternative means of distribution may be available to
advertisers. This in turn creates significant vulnerabilities for newspapers.
o Strategies
 Focus on audience willing to pay for news
 Provide news that does not require advertising
 Use online distribution complementary
CapitalOne
- information-based strategy as the use of scientific testing to drive mass
customization, enabling them to deliver “the right product to the right customer, at
the right time and at the right price.”
• Easy to enter — It must be possible for new entrants to enter the market and attack
established firms. Potential barriers to entry, including regulatory restrictions and costs
associated with acquiring distribution or production facilities, must be low enough to
provide new entrants with the ability to attack.
• Attractive to attack — New entrants must perceive that it will be profitable for them
to attack. That is, they must believe that there are market segments where the
difference between the costs associated with serving those segments and the prices that
they can charge those segments will be sufficient to provide favorable profits.
• Difficult to defend — There must be some obstacles that prevent incumbents from
immediately duplicating the strategies of new entrants, and thus that allow new entrants
sufficient time to realize the benefits from their entry.
- Capital One senior management believes that their advantage has been sustainable
because it is based on a complex combination of structure, information, skills,
culture, and commitment.
- The erosion of profitability however suggests that without fundamental
differences in resources, innovations like differential pricing and effective market
segmentation will become strategic necessities rather than continuing as sources
of competitive advantage. If the skills required for information-based strategies
are sufficiently difficult to acquire, and if they are sufficiently general in their
 applicability, then Capital One should enjoy a prolonged period of profitability,
exploiting a sequence of opportunities in newly vulnerable markets in other
industries.

Reducing Buyer Search Costs

- very mathematical

Outsourcing
- What should be outsourced? It is generally agreed in the popular business press
that a core competence should not be outsourced
- we may conclude that if an activity is a core activity then it is directly part of the
firm’s mission.
Reasons for outsourcing
- Economies of scale arise when for any reason average costs decline as production
increases.
- Economies of scope, arise when the total costs of producing several related goods
or services together are lower than the sum of the costs of producing them
separately.
- Economies of specialization arise when the cost of performing only one activity
is lower than the cost of performing that activity as one of a portfolio of activities.
Outsourcing Screens
- Screen 1: A firm should consider an activity to be a keeper if the size of the
economic loss that can result from an outsourcing contract is too great to absorb
and if the loss, should it occur, would destroy the firm.
- Screen 2: A firm should consider an activity to be a keeper if the size of the
expected economic loss that can result from an outsourcing contract exceeds the
expected economic gains.
Types of Risk
• Shirking
• Poaching
• Opportunistic Renegotiation
Transactions Costs
- Costs incurred by Risks
- Costs to prevent Risks
Shirking, represents deliberate under-performance on a task that is difficult to
measure, while still claiming full payment as if the task had been fully accomplished
and had been completed in accordance with agreed upon standards of performance.
Poaching represents the theft and subsequent misuse of information or training and
expertise, given in trust for the accomplishment of a specific purpose, now used for the
gain of the recipient of the information and to the detriment of the giver.
Opportunistic Renegotiation becomes possible when either party comes to enjoy an
unanticipated increase in power. The party with power can exploit the strategic
vulnerability of the other
Contractual Mechanisms
 - Walk away from outsourcing
- Vertical Integration: buy the outsourcer
- Pseudo-Vertical Integration: long term contract with outsourcer
- Own the important assets, if you are the weaker one

eCommerce Strategies (Clemon’s Lecture)

- The forces that would determine the ultimate structure of electronic marketplaces,
would be characterized by consumer preferences for the nature of their
commercial interactions.
Strategic Drivers:
Are determined by consumers’ preferences, determined in part by search costs and
information availability or by available forms of product distribution. These drivers will
determine the competitive environment; that is, they will influence or determine the
structure of entire industries and the strategies of firms in these industries.
- Individual or bundled goods?
- Long or short term relationship?
Four possible eCommerce Business Environments
- eSpot: Narrow scope and transaction
- eStore: Wider scope and transaction
o Intermediaries enjoy considerable power over producers who supply their
eStores.
o Values added to customer: Consolidation of Products, Shopping at same
place for all products, Bundling
- eLink: Narrow scope and ongoing relations interaction
o This scenario will emerge if producers in an eSpot scenario attempt to
produce stronger and more stable customer relationships, including
exploiting relational pricing and relational design of product and service
offerings, in order to protect their role from incursion by intermediaries,
through a move to the eLink scenario.
o Such loyalty becomes more likely when long-standing commercial
relationships lead to better prices, better tailoring of product offerings, and
superior service for consumers.
- eChain: Wider scope and ongoing relations interaction
o Developing a strong eBrand
o Customized Presentment

Consumer Information Endowment

- There is enough information for the products to appear distinct but not enough
information for the buyers to identify product locations with certainty.
- If the buyers’ fit cost parameter is high enough that the seller can only hope to sell
to buyers that are very close (closer than a), then the buyer would want to reduce
buyer fit costs, in order to be able to charge a higher price.
- Increased information about a product raises the willingness to pay of only those
customers whose ideal location is “close” to the product
 - In the presence of even very small costs associated with the dissemination of
information, the sellers will choose to make only enough information available to
the market, to separate them from their competitors.

Hyperdifferentation: The Delights

- The value of being different has increased, since differentiation is more easily
achieved and more easily communicated.
- The art of reducing the importance of price as the principal determinant of
customers’ selection among alternative goods and services.”
- That is, hyperdifferentiation seeks to encourage customers to select goods and
services based on deep delight, delight that provides value sufficient to distinguish
one offering from all of its competitors, so that the purchaser is less concerned
with price differences between the selected product and the available alternatives.
- Once again it is important to note that hyperdifferentiation is not about being
better in any absolute sense nor does it require being more expensive to produce;
rather, it is about being better for each customer, and thus more profitable to sell.
- The product being considered has no effective competition, and thus the product’s
price is determined by its value to customer rather than by the best competitor’s
cost to produce.
- In a differentiated market it is better to delight someone than merely to please
everyone. So avoid middle, stake out vacant position, and let a newly efficient
market produce your rewards.

Pricing Information
- Information is costly to produce
- Once the first copy has been produced, most costs are sunk
- Multiple copies can be produced at roughly constant per-unit costs
- There are no natural capacity limits
- Strategies
o Differentiate your product
o Achieve a cost leadership
- Differential Pricing:
o Personalized Pricing
o Versioning
o Group Pricing

Versioning Information
- You must make clear to your users which version is appropriate for them
- Analyze your market and analyze your product
- Promotional Pricing:
o Coupons are worthwhile only if they segment the market.

Networks and Positive Feedback

- The value of connecting to a network depends on the number of other people
already connected to it
- Positive Feedback: makes the strong stronger, and the weak weaker (death spiral).
It leads to extremes: dominance of the market by a single firm or technology
- Tippy: a market can tip in favor of one player or another
- Supply-side economies of scale: traditional positive feedback (larger firms and
production = lower unit cost) (Ford)
o Dissipates when market gets large enough
- Demand-side economies of scale: Customers value the product more since more
users are using them (Microsoft)
o Gets stronger when market gets larger
- Success and failure are driven by consumer expectations, just as much as anything
else
- IT industries have the combination of both Supply-side and Demand-side
economies of scale, which produces a strong positive feedback
- Network Externalities: large networks are more attractive to users than small ones
- Metcalfe’s law: The value of a network goes up as the square of the number of
users
- Igniting positive feedback
o Revolution vs. Migration
 Revolution: Offer compelling performance, but no compatibility
 Migration: Offer compatibility, but at the sacrifice at potential
performance
o Openness vs. Closed
 Open: no one vendor dictates and controls the standards, adds
value to industry
 Closed: control product standards, adds value to your firm
- Generic strategies in network markets:
o Performance play: (Closed and Incompatible) introduce a new,
incompatible and controlled technology (Nintendo)
o Controlled Migration: (Closed and Compatible) Offer customers a new
and improved technology that is compatible with your existing tech.
o Open Migration: (Open and Compatible) New product is supplied by
many vendors, very friendly to consumers (Modems and Fax machines)
o Discontinuity: (Open and incompatible) Favors suppliers that are
efficient manufacturers (CDs)