Creating and capturing value

1. Creating and capturing value

2. FONDAMENTAL QUESTIONS How can companies add value to their existing business practices? How can they capture part of the created value ? They must reinvent the way they are doing business and avoid reproducing existing processes as is on Internet Requires Imagination

3. Success stories …. Value created ….

4. CASE 1: NEWSPAPER

5. APPROACH WITHOUT ADDED-VALUE Place the Daily Edition on the Web As Is

7. HOW CAN ONLINE NEWSPAPERS ADD VALUE? • Continuous publishing • Personalization • Multimedia • Archives • Disaggregate • New revenue model • New Partners • B2C  B2B More Complex Business Model

8. Characteristics of the Internet Reach Flexible device and easy to use Personalization Interactivity Asynchronous communication Encyclopedic Nature Media Richness Impact of online news Worldwide 7/24 Continuous publishing Personalization of news Versioning Chat rooms/ polling e-mail notice of news Searchable engines of retrievable Archives Multi-Media What are the benefits of going electronic

9. The concept of the economic value • A consumer is ready to pay A$ for a product. • A producer is ready to produce it at a cost of B$. • Transaction costs are C$ • If A>B+C, there are potential gains from trade of (A-B-C)$. • An economic system is effective if transaction costs are low and all the gain from trade are carried out.

10. Creation of value • For potential gains of (A-B-C)$, one can create value by: • Reducing of the production cost, B. • Reducing of the transaction and search cost, C. • Increasing value of the good for customers, A. • Creating new products – transforming old products in new ones. • Allowing exchanges that would not have be made otherwise.

11. Transformation of informational products • An information goods is a product that can be reduced digital information: • Text, video, music, software or combinations of the above. • The informational technologies allow to disentangle the information and its physical support. This fundamentally changes the nature of the product. • Better design of products through better information on customers’ needs.

12. Increase in the value for the customers • Better design of products through better information on customers’ needs. • Increase the selection of products – reduction of compromise. • Matching buyers and sellers (production and needs) • Information on the available products • Increasing the visibility of one’s product • Providing information on sellers (and buyers) • " Customization" • Adaptation of product to customer

13. Reduction of production costs • Facilitate the coordination of production teams • Economies of scale in the management of the inventories. • Moving from a push strategy to a pull strategy • Reduction in the production of unwanted products

14. Reduction in the cost of transaction and distribution • Personalization • Presentation of information according to individuals • Facilitating after-sales services. • Complementary services • Online assistance • Economies of scale in distribution • Eliminate the cost of retailing • Price comparison tools • Reducing administrative cost of purchasing

15. Capturing Value The concept of market power Particularities of the Internet economy

16. The difficulty of capturing value • Consider a new gain from trade of (A-B-C)$ • Who will capture it ? • Both buyer and seller equally ? • Only the consumer ? • Only the producer ? • Note that the producer may even lose (cannibalization of existing markets)

17. What determines the producer’s share ? • The market structure • (number of competitors) • Flexibility of supply • Barriers to entry • (cost structure) • Differentiation of products • Information on prices • Flexibility in the pricing strategy

18. Particularities of the Internet economy • Low distribution and reproduction costs of the informational goods • Economies of scale in supply • Price comparison tools • Network effects (externality in demand) • Superior tools for collaborative work • More open markets • Less segmented markets

19. How the Internet affects competition in industries Entry of new products Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)

20. How the Internet affects competition in industries Entry of new products (+) Limits the power of conventional distribution channels (-) Consumers have more information (-) Reduction in switching costs Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)

21. (+) Increased efficiency of the industry, increases its size (-) Internet allows the creation of new products How the Internet affects competition in industries Entry of new products Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)

22. (-) Technology has allowed new entrants How the Internet affects competition in industries Entry of new products Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)

23. (±) Online procurement (-) Limits the need for intermediaries (-) Limits differentiation (access to the same products How the Internet affects competition in industries Entry of new products Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)

24. (-) reduction in differentiation • (-) More information on price • (-)Increase in the geographical scope of the firms • (-)reduction in variable costs How the Internet affects competition in industries Entry of new products Market power of buyers Market power of suppliers Competition among rivals Barriers to entry Inspired from Porter (2001)