Section 1: Managing Competition with IT

Section 1: Managing Competition with IT

“Introduction … Competing with IT … Digital goods … Network effects”
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Summaries

  • Managing Competition with IT > Competing with IT > Why do organisations build Information Systems
  • Managing Competition with IT > Competing with IT > First, Second and Third order effects of using IT
  • Managing Competition with IT > Competing with IT > Why organisations have to use IT
  • Managing Competition with IT > Digital goods > Properties of digital goods
  • Managing Competition with IT > Network effects > Network effects

Managing Competition with IT > Competing with IT > Why do organisations build Information Systems

  • One of the first questions to ask is why do businesses and organisations use information technology? What do you think is the answer? I want you to pause the video and think about this question.
  • Why do businesses and organisations use information technology? Over the years that I have asked this question to students in my classes I have received many responses.
  • Here is an illustration of some of them: control the organisation, manage data, communicate within the organisation, manage knowledge, store and retrieve data, timely reports on activities, securing the data of the organisation, share knowledge, help with doing business, reach out to markets, get feedback from customers, because competitors are using IT, implement business strategy.

Managing Competition with IT > Competing with IT > First, Second and Third order effects of using IT

  • Can consequences be only negative or positive? Can we think of different types of consequences? Certainly! MIT scientists have conceived three types of consequences that result from the use of IT. Rockart and Malone wrote in 1991 that IT has first, second and third order effects.
  • First order effects are immediate effects of using a technology.
  • When cars were introduced in the U.S. in place of horse-drawn carts, people could travel faster and make more trips.
  • With the invention of cars the second order effect was that people could travel more… …and go to places they would otherwise not have visited.
  • The increase in processing speed and volume… …some departments and personnel may not be needed at all and may shift to other tasks.
  • When cars were introduced and began to be used widely cities started building roads, buildings… …started creating parking lots and eventually suburbs of cities emerged as people realized… …that they could stay far away from their place of work and use the car to commute.
  • The difference is in many years and you can see here that roadways… …or commuting pathways have been created which have emerged because now people have cars… …and they can use them to travel to different parts of the city.

Managing Competition with IT > Competing with IT > Why organisations have to use IT

  • Prof: Modern commercial firms have to use IT. It is not simply an option anymore for such firms.
  • The competition has evolved in such a manner that firms have to use IT. Use it effectively or face severe negative consequences.
  • Competition in markets refers to how different firms try different things to attract customers.
  • Professors McAfee and Brynjolfsson from Harvard and MIT respectively… …say that since about the mid-90s the nature of competition in U.S. firms has changed and a new dynamic has emerged.
  • This difference is between the leading firms in the industry… …those with highest relative market share, and the laggards, those with lowest market share.
  • The most prominent third order effect of use of IT by firms is that of industry concentration.
  • This means that the leading firms tend to take more and more of the market share which are known as the Winner-take-all markets.
  • In practically every industry, a few firms with larger market shares consolidate their position and gain more at the cost of the others.
  • Now, if we see this on a graph and I am plotting a graph here… …of market share which is on the vertical axis, so I will call this market share of top twenty largest firms.
  • This if we plot and in market share terms, we will just call this, say, hundred percent market share, which means… …say one firm has the entire market and then we can break this down into 80, 60, 40 and so on.
  • Here if we look at the dates, let’s say we are starting at 1965… …and we look at the period from 1995 to say about 2005… …what we will find basically is that the market share of these firms may have remained relatively stable across 30 years or so and then… …post 1995, owing to the massive investments in IT, this share of the market for the top twenty largest firms has increased significantly.
  • Turbulence means the change in ranks of firms as they compete for market share.
  • Increased turbulence means that firms that are rank one in a given year may have rank 10 in the next.
  • You may find another company which does something different… …which is low ranked for a few years but in 1995 may grab market share and dominate the rankings till 2005.
  • A third effect of IT is that of the increase in the spread or difference between the profits of the best and worst firms.
  • If we look at the profit margins of firms in the top 25 percent… …and those in the bottom 25 percent the gap is widening since the mid-nineties owing to the increased use of IT. Again, we can draw this on a graph and show what this effectively means.
  • Now, I have here on the vertical axis the percentage gap between best and worst performing firms.
  • How is it changing competitive dynamics? It turns out that firms that are competing successfully and are the winners are using a simple method.
  • This is the step of propagation of the best ideas throughout the firm.

Managing Competition with IT > Digital goods > Properties of digital goods

  • Prof: Let us consider digital goods and their properties.
  • That’s easy, isn’t it? Nowadays just about anything can be digitised or made available in digital form.
  • Guru: So my car is digital too? Prof: You have a car, Guru? Guru: What do you think? Prof: No, cars can’t be digitised.
  • Modern cars have a lot of digital goods in them.
  • Guru: Of course! Prof: Like all other types of goods, digital goods have certain properties.
  • Why? To ensure that we are able to manage digital goods and innovate with them.
  • One of the most important properties of digital goods is cost.
  • Such goods are typically expensive to produce the first time, but cheap to reproduce.
  • Stock quotes are expensive to collect from the trading system and display.
  • They can be copied and spread at very low cost.
  • Related to this property is the fact that digital systems do not have significant capacity constraints.
  • Making a movie for the first time does have capacity constraints, as a lot of time and money are required.
  • It is often the case that both the hardback and paperback versions cost about the same to produce.
  • For digital goods too, versions can be made quite inexpensively.
  • With some limited func-functionality, and also as paid versions with better features.
  • Nowadays books are released in three versions: hardback, paperback and digital or e-book version.
  • How good a movie is not known when we the buy the ticket.
  • People who sell such goods provide samples, for people to experience the goods, briefly to help them buy.
  • Movie trailers, book excerpts are all samples that let a person experience the good.
  • You can see a digital picture many times or play an MP3song endlessly.
  • This is another property-digital goods do not deteriorate over time.
  • Can anyone steal a digital good? Guru: Sure they can.
  • Lock-in to technology happens when use technology, get use to it and cannot work without it anymore.
  • This property is not of digital goods as much as it is a property of information technology that delivers the digital goods.
  • It enhances the value of the information within digital goods by making it available easily, for instance.
  • Organisations too get locked-in to the technology they buy and invest in.
  • People are trained on the system and a lot of crucial activities are done with the system.
  • After buying a new smartphone, you may have to incur further costs and put in effort to move your contact details… …your pictures and documents, and also all the settings that you had on the old phone.
  • Sometimes switching costs can be quite high and so organisations land up using a particular technology for years.
  • A key aspect of managing systems is to try and keep switching costs down while upgrading or changing the system.

Managing Competition with IT > Network effects > Network effects

  • Prof: Let us recap some of the properties of digital goods.
  • Digital goods are expensive to produce but cheap to reproduce.
  • Digital goods can also have many versions produced easily and at low cost.
  • Value of digital goods is understood after they are experienced, or used.
  • Digital goods and information technology together create network effects.
  • The network effect refers to benefits coming to one person as more people join the group that is using the technology.
  • Well-known example of network effects is that of people using social networks.
  • The thing to keep in mind is that where digital networks and digital goods are concerned, network effects are quite pronounced.
  • Another phenomena that is visible with network effects is that of feedback.
  • When people join a network and they like it, they give feedback to others.
  • Just like people do when they join a network like Facebook.
  • This positive feedback creates a virtuous cycle where people keep joining the network based on what they hear from others.
  • As this happens, suddenly the enrolment in the network grows significantly.
  • Scientists call this the S-curve of network effects.
  • In the S-curve, the number of users in the network initially remains flat or low for a period of time, as the network gathers momentum.
  • Then comes a time when the positive feedback is very strong, and then the number of users begins to increase significantly.
  • This a threshold point, where a critical mass is reached and the network grows much more than before.
  • The key insight for manager is that if you want your product to succeed using a network effect… …you have to achieve positive feedback, such that you can reach the tipping point where a lot of customers start using your product… …based on what they have learned from others.
  • Feedback on the network can be positive or negative.
  • Positive feedback will work for you if you want your network to grow.
  • Negative feedback could result in as dramatic a drop in users of the network, as positive feedback increases users.
  • Take a situation where you have two products A and B. These could be any digital products like mobile phones, or social networks, or even online auction sites.
  • The reason could be good feedback that she hears about A, or that she simply wants to join a network that already has members.
  • For the first four or five years, they had the same market share and customers purchased one or the other of the products.
  • By about 1980, VHS started winning out and the network effects started kicking in.
  • Because VHS was being chosen by many, stores started keeping more VHS players… …movie studios started releasing more movies on VHS tapes, other manufacturers started making VHS players… …and across the world more and more people started using VHS. Around the mid-1980s, VHS achieved a tipping point and started growing rapidly.
  • Less people were buying Betamax, fewer stores were carrying the product and fewer movies were available on the format.
  • The markets had tipped in favour of VHS. Guru: But these were analog, not digital products.
  • Though not digital goods, they illustrate the concepts of network effects and tippy markets quite well.
  • Today there are a growing number of digital goods that are peer-produced.
  • These kinds of digital goods have certain important properties.
  • Peer-produced goods are typically of very high quality and are available freely.
  • Such digital goods are also non-rivalrous in nature.

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