CIO Pocket MBA: Economic Positioning of the I.T Organization

Background: Recently I completed the CIO Pocket MBA program at Boston University. This was a fantastic experience that I highly recommend to any leader in the I.T space. The insightful and inspiring professors are reputable thought leaders who have spent years researching various aspects of technology, management, business, and financials. Additionally learning from industry peers was equally valuable. During my time there I feverishly took a lot of notes in order to capture and ultimately share the knowledge. Keep in mind – these are raw notes that only scratch the surface from multi-hour/multi-day long sessions. My intent is not to replicate the knowledge as it was presented, but more to quickly disseminate key points that stood out to me. To fully benefit I highly recommend you sign up for the next round of this program (http://bit.ly/1juJEIP).

Five Technology Forces

1. Moore’s Law – smaller, faster, cheaper
2. Metcalf’s Law – exponential growth of connection. Scale shifts from the supply side to the demand-side. Connections grow exponentially.
3. Bandwidth – the amount of information that can be moved is virtually unlimited. Size is no longer an impediment.
4. Data – Data is generated with each process with every transaction. When data becomes information it has value.
5. Mobility – location is now a characteristic of transactions. Location can be monetized.

These five forces are causing shifts in technology and the new economy to move at blistering speeds.  Once upon a time one of those dimensions would be a limiting factor. Now it’s all coming together in an unlimited/explosive way.

Innovation Cycle

1. Innovation drives Disruption.
2. Disruption leads to bankruptcy or transformation.
3. Transformation leads back to innovation.

Most Organizations

1. Struggle to be more innovative.
2. Are concerned about being disrupted.
3. Don’t know if they can transform.
4. Within each area you organize to create and capture value.

Innovation

1. Drives disruption.
2. Enables new ways creating value.
3. New sources of value.
4. New ways to capture value.
5. New ways to grow and extend value.
6. You will either drive innovation or be driven by it.
7. You will either be disrupted or be a disruptor.
8. It’s all about value.

Discussion: Apple – what business are they in?

1. They’re in the business of disrupting…
2. Music, phones, mobile, etc…

Discussion – is Innovation an overused word?

1. Prof: I ask companies if they’re organized to be innovative? Usually the response is: what does that mean?
2. Companies set up to innovate, innovate in a deliberate manner.
3. It’s not about how often you innovate, when you innovate, etc… it’s about being prepared to innovate.

Business Models & Process Drive Value

1. [(Partners + Key Activities + Key Resources interact) -> creates Cost Structures] -> Value Proposition creates value.
2. Capture Value: Customer Relationships-Customer Segments+Distribution Channels = Revenue Stream.
3. Repeat for growth.
4. I.T has creates faster and new ways to create and capture value.

Value

1. Value creation methods – production and consumptions (services and information goods, they must the experienced).
2. Value capture methods.
3. Value extensions and growth.
4. Value is simply belief. You believe a pair of jeans is worth $x and are willing to pay that or less for it.

Value Creation

1. Old Economy
   1. Economies of scale = (Fixed Cost + Variable Cost)/Units of Output, aka Average Unit Cost.
      1. This is what the industrial revolution is all about.
   2. Business structure.
      1. This exists to move information.
      2. 60% of white collar jobs are about aggregating and moving information to the next level (Bureau of Labor Statistics).
      3. Centuries old model.
2. New Economy
   1. How many jeans does Levi’s make in a day, shoes Nike makes in a day, computers Apple makes in a day -> ZERO. It’s all sourced.
   2. In the old economy you owned assets in order to control assets. In the new economy, you can control it without owning it, all enabled by technology.
   3. It allows companies to quickly change who they’re sourcing from, while still maintaining control, especially in areas that aren’t a core competency (e.g. Apple has no inherent manufacturing ability).
3. New Business Models enabled by Technology
   1. Platforms (extend & scale)
      1. Architecture that allows the ability to launch new abilities.
      2. Has option value.
         1. When you put a platform in place, you don’t know what you’re going to be using the platform for next year.
         2. E.g. a non-option is a car manufacturing plant, you can calculate NPV, it only does that one thing, and can only do that one thing.
         3. Apple iTunes Platform: Started with Music, now handles movies, iTunes U, POD Casts, iBooks, etc…
   2. Long Tails
      1. E.g. Amazon & Netflix.
      2. They moved from a brick and mortar to online.
      3. Your cost structure changes when you do this. You still have fixed costs, but your variable costs associated with the transaction goes away (selling one eBook is the same as selling 1,000).
      4. In terms of volume, information goods you can afford to sell single items that won’t sell much.
      5. Online shifts scale to the demand side.
   3. Sourcing (production, design innovation, collaboration)
4. Business Processes
   1. Value Chain
      1. Old Economy: everything was created the same way through something called the value chain.
      2. A sequence of bilateral interactions that turn inputs into outputs.
      3. Inbound logistics -> production -> output logistics
   2. Mediation Strategies – Business Process Redesign
      1. Reshaping the way things get done vs. what gets done.
      2. Boston Children’s Hospital is using technology to extend its reach.
      3. What’s your value system? And if you can cut out pieces in the middle while still selling at the same price you can improve your overall margin.

Value Capture

1. Simple point of sale system.
2. Compound point of sale systems.
   1. Any purchase where the produce or service has multiple price components.
   2. E.g. theater = you buy ticket, and later buy popcorn, drinks, etc… once you cross a physical threshold, they have a geographic monolog and therefore are able to charge a higher price.
   3. You have to have some additional information in order to pull it off in order to separate out pricing components.
3. Two-sided market systems.
   1. A system where the organization has two revenue sources and the price of one has an impact of the demand for the second.
   2. E.g. newspaper has subscription revenue and ad revenue. If subscription revenue goes down, it affects how much you can charge for the ad. If the ad revenue goes down you have to increase subscription price.
   3. Two sides: money side, subsidy side.
4. Complex Pricing
   1. Bundling, versioning (premium edition, limited edition, etc… doesn’t cost more to make), and personal pricing.
   2. Requires information to pull this off.
5. Availability of information enabling companies the ability to assess “Willingness To Pay” in order to maximize value capture.

Value Extensions and Growth

1. Stage 1: Growth through the establishment of, or move form, physical to electronic based transactions (Barnes and Noble).
2. Stage 2: Growth from expanding the volume and type of products sold through the electronic platform (Amazon).
3. Stage 3: Growth through providing services to buyers (increased value content) and sellers to help drive sales (eBay).
4. Stage 4: Growth from collection, analyzing, leveraging, and using information (Progressive).
   1. Insurance companies make their money by investing the float.
   2. Progressive knows that when people get married or get a phone, their driving behavior changes. Thus have custom marketing to those people to best leverage that data.
   3. Progressive noticed settlement costs spike when a lawyer got involved.
   4. Developed an immediate settlement capability, and that it’s worth it to offer a little more upfront to settle it immediately than to wait for a lawyer to get involved.
   5. Now have a USB device that’ll monitor your driving behavior and give you a quote.
   6. Only the good drivers would use such a thing – this gives Progressive intel on who their best customers are.
5. Stage 5: Growth from becoming a platform for platforms

During an innovation transformation/industry transformation

1. Business processes and business models go away when they no longer are able to generate value.

Five Forces Analysis

1. Read more: http://en.wikipedia.org/wiki/Porter_five_forces_analysis)
2. Customers (touches the organization)
3. Substitutes
4. Consumer (not the same as customer, user of the value)
5. Payor (not the same as customer, where you capture the value from).
6. Sometimes one person is the same, but e.g healthcare – insurance is the payor vs. the patient who is the consumer.

Questions

1. Are you in the new economy, old economy, or in transition?
2. I.T sits in the center of transitioning from old to new.
3. I.T *is* the new economy.