PoEB Digital Firm 2 2024-2025 PDF

PoEB: The Digital Firm 2024-2025 PoEB 2: The Digital Firm Winner takes all? Pipelines, platforms and beyond Prof. dr. Hans P. Borgman Prof. Dr. Hans Borgman 0 PoEB: The Digital Firm...

PoEB: The Digital Firm 2024-2025 PoEB 2: The Digital Firm Winner takes all? Pipelines, platforms and beyond Prof. dr. Hans P. Borgman Prof. Dr. Hans Borgman 0 PoEB: The Digital Firm 2024-2025 The Digital Firm: Course Outline Introduction 1. IT and Strategy 2. Winner Takes All? 3. AI and the Future of Work 4. What is IT Success? 1 Prof. Dr. Hans Borgman 1 PoEB: The Digital Firm 2024-2025 Porter's competitive framework (external view) Industry perspective: using IT to positively influence any of the 'five forces' Competitive advantage Sustainable advantage? 2 "New technologies can create jarring shocks in an industry. Consider how the rise of the Internet has impacted the five forces for music retailers. Traditional music retailers like Tower and Virgin found that customers were seeking music online. These firms scrambled to invest in new e-commerce channels out of what was perceived to be a necessity. Their intensity of rivalry increased because they not only competed based on the geography of where brick-and- mortar stores are physically located, they began to compete online as well. Investments online are expensive and uncertain, prompting some firms to partner with new entrants such as Amazon. Free from brick-and-mortar stores, Amazon, the dominant new entrant, has a highly scalable cost structure while the old brick-and-mortar guys were left straddling both online and offline models, unable to gain the efficiency of the singularly focused Amazon that ran lean, free of retail stores. Add to this the fact that in many ways the online buying experience is superior to what customers saw in stores. Customers can hear samples of almost all tracks, selection is seemingly limitless (the long tail phenomenon—think 'Spotify'— and data is leveraged using collaborative filtering software to make product recommendations and assist in music discovery. Tough competition, but it gets worse because CD sales aren’t the only way to consume music. The process of buying a plastic disc now faces substitutes as digital music files become available on commercial music sites. Who needs the physical atoms of a CD filled with ones and zeros when you can buy the bits one song at a time? Or don’t buy anything and subscribe to a limitless library instead. From a sound quality perspective, the substitute good of digital tracks purchased online (mp3) is almost always inferior to their uncompressed CD counterparts (WAV). To transfer songs quickly and hold more songs on a digital music player, tracks are encoded in a smaller file size than what you’d get on a CD, and this smaller file contains lower playback fidelity. But the additional tech-based market shock brought on by digital music players (particularly the iPod) has changed listening habits. The convenience of carrying thousands of songs trumps what most consider just a slight quality degradation. iTunes sales rose to make Apple the number one reseller of music, online or off. But Apple itself was hit by a substitute product—music streaming. Spotify started outside the United States, where licensing schemes were often more favorable and easier to obtain. To be clear, Apple Music is a giant, but it’s still the number two service Prof. Dr. Hans Borgman 2 PoEB: The Digital Firm 2024-2025 behind early mover Spotify, despite all of Apple’s advantages. All this choice gives consumers (buyers) bargaining power. They demand cheaper prices and greater convenience." (From: Gallaugher, 2024, section 3.4) Prof. Dr. Hans Borgman 2 PoEB: The Digital Firm 2024-2025 Winner takes all? Beyond the pipeline inbound outbound marketing logistics operations logistics and sales service procurement technological development human resources infrastructure 3 https://www.wired.com/story/the-amazonification-of-buying-a-new-car/?bxid=5cec27553f92a45b30f2093d&cndid=55287740&esrc=bounceX&mbid=mbid%3DCRMWIR012019%0A%0A&source=Email_0_EDT_WIR_ NEWSLETTER_0_DAILY_ZZ&utm_brand=wired&utm_campaign=aud-dev&utm_content=WIR_Daily_022723&utm_mailing=WIR_Daily_022723&utm_medium=email&utm_source=nl&utm_term=P1 Prof. Dr. Hans Borgman 3 PoEB: The Digital Firm 2024-2025 Platforms: own the shopping centre 4 Prof. Dr. Hans Borgman 4 PoEB: The Digital Firm 2024-2025 2x Image page Inse 29/08/2019 Pipelines, Platforms, and the New Rules of Strategy 1 Platforms: Are Pipeline Business Models becoming obsolete? 29/08/2019 Pipelines, Platforms, and the New Rules of Strategy STRATEGY Pipelines, Platforms, and the New Rules of Strategy STRATEGY by Marshall W. Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary Pipelines, Platforms, and the FROM THE APRIL 2016 ISSUE New Rules of Strategy B by Marshall W. Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary ack FROM THE APRIL 2016in 2007 ISSUE the five major mobile-phone manufacturers—Nokia, Samsung, Motorola, Sony Ericsson, and LG—collectively controlled 90% of the industry’s global profits. B That year, Apple’s iPhone burst onto the scene and began gobbling up market share. ack in 2007 the five major mobile-phone manufacturers—Nokia, Samsung, Motorola, 5 Sony Ericsson, and LG—collectively controlled 90% of the industry’s global profits. By 2015 the iPhone singlehandedly generated 92% of global profits, while all but one of the That year, Apple’s iPhone burst onto the scene and began gobbling up market share. former incumbents made no profit at all. By 2015 the iPhone singlehandedly generated 92% of global profits, while all but one of the former How canincumbents we explainmade theno profit at all. iPhone’s rapid domination of its industry? And how can we explain its competitors’ free fall? Nokia and the others had classic strategic advantages that should have How can we explain the iPhone’s rapid domination of its industry? And how can we explain its protected them: strong product differentiation, trusted brands, leading operating systems, competitors’ free fall? Nokia and the others had classic strategic advantages that should have protected them: strong product differentiation, trusted brands, leading operating systems, https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy 1/13 https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy 1/13 Prof. Dr. Hans Borgman 5 PoEB: The Digital Firm 2024-2025 Platforms: own the customer Requirements Acquisition Replacement Ownership 6 Identifying opportunities where IT can help in servicing customers across the life cycle is central in this framework. Sometimes companies may need to spend or partner with others in order to attract companies to the more profitable part of their own value proposition. Amazon forms a good example: they spend money on including the New York Times book reviews, but this helps to drive customers into the actual sales process. Allowing them to sell used books will help increasing their loyalty and will help in collecting even more customer information. Owning the platform is becoming more and more important. Apple sells New York Times subscriptions without sharing customer data with the publisher, and Amazon’s Kindle Fire does the same. Google follows with Android, all platforms are ever more stringent against apps bypassing their app store, and the next battle is always around the corner, such as now with content production by Netflix, Amazon, Apple and others. Prof. Dr. Hans Borgman 6 PoEB: The Digital Firm 2024-2025 7 Platforms and the value of a network 7 Smirnoff's law describes broadcast networks which increase in value in proportion to the number of nodes n (V=n) Metcalfe's law describes how the value in a network without clustering grows geometrically at the rate of n2 Reed's law applies to networks with clusters (sub-networks), which increase in value at an exponential rate 2n Prof. Dr. Hans Borgman 7 PoEB: The Digital Firm 2024-2025 Metcalfe's law and reaching the critical mass “Get big fast” and “get large or get lost” Some lessons from Metcalfe’s Law : 1. Adoption of digital technologies takes times before network value > network costs; Network costs > 2. Early adopters don’t benefit from network network value value; 3. A critical mass needs to be reached before network value is created. Metcalf’s original transparent (1980) Prof. Dr. Hans Borgman 8 PoEB: The Digital Firm 2024-2025 Metcalfe's law: an over- estimation? Critics say: Metcalfe’s law is overestimation of network and are causing stock markets to overevaluate internet-based companies, such as Google, Facebook, Snapchat, Twitter… Metcalfe, B. (2013). Metcalfe's law after 40 years of ethernet. Computer, 46(12), 26-31. Metcalfe answering his critics with a study using Facebook data. What he finds: he was right all along... Prof. Dr. Hans Borgman 9 PoEB: The Digital Firm 2024-2025 Contestable Markets: Strategies based on network effects Contestable Market Constant threat of new entrants contesting existing players Low entry and low exit costs. ‘Hit and run’ markets First Mover Advantage If a first entrant gains a competitive advantage through control of resources. Second over Advantage Second-mover benefits from first-mover by appealing to its existing customer base. Critical Mass strategy Pricing strategy, Focus first on small group of users (FB, Uber), Law of the Few (Gladwell, 2000). 'influencers' Winner Takes All Installed base of consumers, Lock-in, Switching Costs Prof. Dr. Hans Borgman 10 PoEB: The Digital Firm 2024-2025 First Mover Advantage A market participant has first-mover advantage if it is the first entrant and gains a competitive advantage through control of resources. With this advantage, first-mover is likely to achieve a superior performance and a monopoly-like status (Wikipedia; Feng et al, 2020). Examples: Evans and Schmalensee, 2016: 24 Prof. Dr. Hans Borgman 11 PoEB: The Digital Firm 2024-2025 Second Mover Advantage 1) Customer Development. From an existing company or competitor, you can learn what customers want. 2) Product Management. By analyzing the first-movers you can learn about what works best. 3) Customer Acquisition. By analyzing the first-movers you can learn about what works best. 4) Procurement. If it’s a new market, the marketing and sales your competitor does may help to educate customers of the value of your products and actually expand the market. Second movers can concentrate on selling the switch rather than educate and sell the product. https://mfishbein.com/4-second-mover-advantages-why-competitive-markets-can/ Prof. Dr. Hans Borgman 12 PoEB: The Digital Firm 2024-2025 Reaching the critical mass “Get big fast” and “get large or get lost” Some lessons from Metcalfe’s Law: Network costs > 1. Adoption of digital technologies takes times before network value network value > network costs; 2. Early adopters don’t benefit from network value; 3. A critical mass needs to be reached before network value is created. Metcalfe (1980) Prof. Dr. Hans Borgman 13 PoEB: The Digital Firm 2024-2025 The Chasm in Bell Shaped Diffusion Adoption of digital goods starts later, but after reaching critical mass Technology enthusiast Technology skeptics grows faster Jump in competition Improvement productivity Being the first Being the safe adopter of proven technology Prof. Dr. Hans Borgman 14 PoEB: The Digital Firm 2024-2025 Crossing the Chasm Seducing new adopters/customers to adopt the Digital Mass new interactive technology to lock them in and % user adoption creating an installed base of networked customers. What is needed: s as lM ca Critical mass strategies: iti Cr Chasm 1. Pricing strategy (e.g. low prices devices or tools); Diffusion failure 2. Focus first on small group of users (e.g. FB, one Time college campus at a time; Uber, one city at a time). 3. Law of the Few (Gladwell, 2000). Focus on connecters (e.g. Influencers) who bridge the chasm. Prof. Dr. Hans Borgman 15 PoEB: The Digital Firm 2024-2025 Strategies based on Network Effects “Get big fast” and “get large or get lost” WTA Lock-in FMA SMA NWE NWE = network effects CM = critical mass FMA = first mover advantage WTA =- winner take all CM SMA – second mover advantage Prof. Dr. Hans Borgman 16 PoEB: The Digital Firm 2024-2025 A more detailed view… social grouping Size and form network protocols & standards Network value bandwagon language For details read: James Currier, The Network Effects Manual: 13 Different Network Effects (and counting) https://www.nfx.com/post/network-effects- manual#asymptotic-marketplace-2-sided 17 Prof. Dr. Hans Borgman 17 PoEB: The Digital Firm 2024-2025 Amazon's Flywheel or 'wheel of growth' 18 Prof. Dr. Hans Borgman 18 PoEB: The Digital Firm 2024-2025 Platforms (winner takes all?) cross-side effect + or - + group 1 group 2 + or Same-side (users, (sellers, Same-side or - effect buyers,...) advertisers,...) effect - platform content providers complementors developers ad servers (product pages, reviews, (using platform tech, e.g. (sold to partners or (e.g., Paypal) own content) AWS) outsiders) 19 Prof. Dr. Hans Borgman 19 PoEB: The Digital Firm 2024-2025 Requirements 3. Network effects (platforms & Co) Acquisition Replacement Ownership high marketplaces platforms indirect network effects cross-side or social media data networks communication networks low high same-side or 20 direct network effects The placement of some of the above logos is debatable but serves as a rough guideline. Netflix users benefit from better recommendations because of other viewers (like Google's search results), Amazon sellers are happy with more buyers but not as much with more sellers (competitors), WeChat users need more users to chat with, etc. Prof. Dr. Hans Borgman 20 PoEB: The Digital Firm Why are network effects so important? From an offensive perspective: build strong market position From a defensive perspective: entrenchment and fortifcation From a valuation perspective: assessing the value of a network/platform 21 21 PoEB: The Digital Firm 2024-2025 Increasing Returns and Network Effects (Microlecture 2.2) - Network effect: in economics and business, a network effect exists if a consumer’s utility of using a product increases with the number of other consumers using the product (Birke, 2009). - Direct network effects: increase of value depends number of users of network (e.g. telephone, Whatsapp, Skype, LinkedIn etc.) - Indirect network effects: spawns production of increasingly valuable complementary goods (e.g. printer cartridges, games for game consoles, DvDs for DvD players, apps for smart phones) but also in the case of two-sided markets and digital platforms. Note: the micro-lectures were dveloped for last year's (2023-2024) course by a different lecturer, Prof. dr. Peter van Balen. These 'micro-lectures' are also an integral part of this year's exam materials. The relevant slide decks (from last year) are included on Canvas, but only the slides used in the micro-lectures are relevant for the exam. Prof. Dr. Hans Borgman 22 PoEB: The Digital Firm 2024-2025 23 Data: November 2023 (https://www.platformeconomy.com/blog/newtop100) Prof. Dr. Hans Borgman 23 PoEB: The Digital Firm 2024-2025 Network Effects vs Virality: the case of Zoom Not everything relies on network effects! Zoom’s virality and product quality have helped it grow rapidly. Zoom has willingly sacrificed network effects to unlock virality at scale. But no network effects mean less staying power through locked-in users Easy-in, easy-out 24 Zoom’s primary value proposition has always been external facing. A free (or paid) Zoom user can initiate a video call by simply sharing a link, without requiring an account or download at the other end. https://breadcrumb.vc/the-difference-between-virality-and-network-effects-6bf00723bda5 Prof. Dr. Hans Borgman 24 PoEB: The Digital Firm 2024-2025 Internet of Things: Data and connectivity as value drivers Internet of Things Analytics Software is eating the world Social Data-driven business models Eco-systems Mobile Governance Infrastructure Cloud 25 The advent of Social, Mobile, Analytics and Cloud (or SMAC) and IoT (Internet of Things) has fueled near-ubiquitous connectivity, shifting companies from using IT exclusively at product-level to using IT all the way from product-level to the level of a 'system of systems'. Competition, accordingly, is now including the question of dominance at this 'system of systems' level. Prof. Dr. Hans Borgman 25 PoEB: The Digital Firm 2024-2025 Inside a platform company: Amazon See https://www.linkedin.com/pulse/united-states-amazon-its-flywheel-economy-jon-nordmark/ The picture is from 2019, unfortunately not updated since. Prof. Dr. Hans Borgman 26 PoEB: The Digital Firm 2024-2025 Amazon Q3 2024 27 Most recent filing (Q3 2024). Profitability breakdown of individual activities not communicated by Amazon. Prof. Dr. Hans Borgman 27 PoEB: The Digital Firm 2024-2025 Beyond platforms: Open innovation Free beer & free speech? 28 Free/open source software is software that is free and whose code can be accessed and potentially modified by anyone. Many of the best software is actually open source and they do not only attract volunteer programmers, but many companies pay their employees to work (sometimes fulltime) on these projects. There is a whole world opening up once you dive into this, around motivations, social dynamics, power struggles and more. Recommended! Prof. Dr. Hans Borgman 28 PoEB: The Digital Firm 2024-2025 Open innovation invite the best and brightest 29 Prof. Dr. Hans Borgman 29 PoEB: The Digital Firm 2024-2025 Open innovation: sharing is a two-way street Overlapping goals Common competitor 'Sharing is caring'? 30 Prof. Dr. Hans Borgman 30 PoEB: The Digital Firm 2024-2025 Open innovation Silicon Valley is the new Detroit 31 Prof. Dr. Hans Borgman 31 PoEB: The Digital Firm 2024-2025 The Digital Firm: Course Outline Introduction 1. IT and Strategy 2. Winner Takes All? 3. AI and the Future of Work 4. What is IT Success? 3 2 Prof. Dr. Hans Borgman 32