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IMS5023 : Information Enterprise Management and Marketing



Week 3

Information Enterprise and the Pricing of Information Products and Services

 

 

1. Introduction

This week's theme is one of the most complex in the management of information enterprises. Key concepts explored this week include 'value adding' (or 'added value'), and distinctive characteristics of information markets (as distinct from markets for manufactured goods) that impact on the pricing of information goods (ie information products and services).

Key References for this Week

Scott, Mark C. (1998) Value drivers: The manager's guide to driving corporate value creation. Chichester, Eng.: John Wiley.

Shapiro, Carl and Varian, Hal. (1999) Information rules: A strategic guide to the network economy. Boston, MA: Harvard Business School Press.

Other References

Porter, Michael E.& Millar, Victor E. (1985) 'How information gives you competitive advantage', Harvard Business Review, 63(4), July-August, pp. 149-160.

Porter, Michael E. (1980) Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.

Porter, Michael E. (1985) Competitive advantage: Creating and sustaining superior performance. New York: The Free Press.

Rheingold, Howard. (1995). The virtual community: Finding connection in a computerized world. London: Minerva (Mandarin Paperbacks).

Taylor, R. S. (1986) Value added processes in information systems. Norwood, NJ: Ablex.

 

2. DEFINITION OF 'INFORMATION'

Defining 'information' is an issue that is touched on often in studies of information management and systems. Definitions are many and varied. The definition we are using in IMS3010 is: 'The content and context of communication'.

Another interesting definition is: 'Anything that can be digitised' (Varian and Shapiro, 1999). This definition comes from the book Information Rules, which is a principal source for today's lecture.  

3. THE INFORMATION MANAGEMENT PERSPECTIVE

The 'mission' of information management as a professional discipline is : To help the development of organisations, communities, groups and individuals by improving information flows and recorded memory.

As illustrated in the Information Communities Model (Week 1), IM is concerned with using information to add value through:

We discussed the distinction between Enterprise Information and Information Enterprise in Week 1. The aspect of Information Enterprise that we focus on this Week is: how to earn an income from activities relating to information, which we have defined as the content and context of communication. Such income can derive from for-profit, not-for-profit, or subsidised provision of information goods or services.

The notion of 'context' of information maps closely on to the ideas of 'information communities', 'virtual communities', 'virtual knowledge communities', 'human networks' or 'information markets' that have been referred to frequently in the past two weeks. Information content products and services can only succeed if their are congruent with relevant information contexts. 'Information Enterprise' focuses mainly on content, including software Information Enterprise is an aspect of Information Technology located in the upper part of the IT Pyramid model, introduced in Week 1.

Information Enterprise depends on, but is less concerned with, hardware and network technology - the lower part of the IT Pyramid. Hardware and network technology is handled by a closely related but distinct business sector. What can be done by this sector strongly influences Information Enterprise and vice versa.

Business conditions for hardware (computers, routers etc.) are similar to those for manufactured goods and quite unlike those for information content.

If we wanted to find familiar terms for Information Enterprise, these would include 'publishing' or 'broadcasting' -  also both concerned primarily with content, but dependent on 'hard' technologies. Publishing and broadcasting involve identifying or creating a body of information, then organising, packaging and selling it.
NB Someone must buy the content, or subsidise its free distribution.

Other familiar terms are 'libraries', 'archives' and 'repositories' - these are about keeping the information secure for iterated use, or consultation in case of dispute.
NB Someone must pay for these things to happen.

4. THE INFORMATION ENTERPRISE VALUE CHAIN

Crucial to our understanding of Information Enterprise and the pricing of information products and services is a body of ideas connected with the concept of 'added value' or 'value adding'.

Added value

R.S. Taylor (1986) explained the concept of added value as:

Value of outputs > cost of inputs + processing
In other words, value is added when the value of outputs is greater than the sum of the costs of inputs plus the costs of processing.

'Value' is not synonymous with 'price'. As we have noted, the price to an end-user of an information product or service may be less than the costs of producing it, because subsidy may come into play. For example, public library service is free to a user (price is zero dollars) because the costs of inputs and processing are borne by state and local governments on behalf of all citizens, for the social good. Despite the price being zero dollars, the value exceeds the input plus processing costs, because the library transforms a range of disparate information resources into a coherent service, which shares out benefits fairly among its target information community.

Porter's concept of Competitive Advantage and the Value Chain model

Success or failure of any enterprise depends on its competitive advantage, either delivering a product or service at a lower cost, or offering unique benefits to a customer to justify a premium/ higher price.

In his 1980 book Competitive strategy, Michael Porter presented various techniques for analysing industries and competitors, and demonstrated how firms can create and sustain a competitive advantage in their industry. According to Porter, a firm's competitive strategy involved a search for a favourable competitive position against industry competition. The key elements of competitive strategy were cost leadership (ie aiming to be the lowest cost producer in the industry) and differentiation (seeking uniqueness along dimensions valued to customers). Scope of competitive strategy could be broad or narrow (narrow with either a cost focus or differentiation focus). Whatever strategy was selected needed to be sustainable relative to the competition.

In his 1985 book Competitive advantage, Porter demonstrated further how managers could evaluate a firm's competitive position, and implement specific action steps to enhance it. He explored links between corporate strategy and business unit (SBU) strategy, and further articulated his three generic competitive strategies: (1) cost leadership, (2) differentiation, and (3) focus.

Where a firm does not possess a competitive advantage overall, it may elect to focus on a narrow competitive scope within an industry. With a focus strategy, the firm will select one or more 'segments' of a market and tailor its strategy of serving that segment/ segments to the exclusion of others. Hence it seeks to gain a competitive advantage within those segments through exploiting differences within the industry. With a focus strategy, a firm can choose either a cost focus or a differentiation focus within the segment. The cost focus exploits differences in cost behaviour in some segments, and the differentiation focus, the particular or unusual needs of consumers in certain segments. In dedicating itself to the needs of defined segments, the firm seeks to serve fill the special needs of particular groups in a way that their broadly targeted competitors cannot.

In this book, he introduced a powerful technique for diagnosing and enhancing competitive advantage - value chain analysis. Porter and Millar's popular Harvard Business Review article the same year ('How information gives you competitive advantage') helped disseminate value chain analysis to a wider audience. This seminal article emphasised the central role played by information and information technology in adding value and creating competitive advantage for a firm, and demonstrated how a firm's information/ IT strategy could be effectively aligned with its overall business strategy.

Value chain analysis rapidly gained popularity, and has been applied and adapted by numerous management consultants, business writers, researchers and managers since 1985. It is a powerful theoretical representation of how enterprises add value and gain competitive advantage within their industry, and has considerable application to information enterprise.

To define Porter's key concepts associated with the Value Chain:

Value: Is what consumers are willing to pay for.

Value activities: Are discrete activities with a potential for creating value for a consumer.

Margin: Is the difference between total value, and the cost of performing value activities.

Through value chain analysis, a manager can separate (disaggregate) a firm's underlying activities in designing, producing, marketing and distributing its products or services in such a way as to enable the identification of strategically relevant value activities. A firm can gain competitive advantage by performing these activities better than its competitorsñit is from these activities that competitive advantage stems. Value chain analysis also assists in identifying linkages among activities central to competitive advantage. The value chain framework helps a manager to understand the behaviour of costs, and what creates value for the customer (differentiation). The technique facilitates the selection of appropriate technological strategies that contribute to competitive advantage.

Within each of the main categories of activities in the generic value chain, activities can be classified as: (1) directly involved in creating value; (2) indirectly involved in creating value; or (3) activities involved with quality assurance, monitoring, inspecting, testing.

The Value Chain Model shows how the activities of an enterprise divide into Support Activities and Primary Activities. The Support Activities provide the infrastructure or foundation that enables the Primary Activities to proceed. The Primary Activities, in turn, produce the revenue to maintain and improve the infrastructure.

In Porter's generic Value Chain, there are five components of Primary activity:

In Porter's generic Value Chain, there are four components of Support activity. Porter warns against regarding these functions as 'overheads' as each can be a significant source of competitive advantage for the firm. The four areas are:

'Cost Drivers' and 'Value Drivers'

In examining activities throughout the Value Chain, two major types of 'drivers' are isolated and analysed:

These relate to the two major types of competitive advantage identified earlier: being a low cost producer, or differentiating products/ services through adding some type of unique value to a consumer.

Associated strategies are gaining cost advantage by controlling the cost drivers of activities that represent a significant proportion of total costs; and gaining differentiation advantage through 'value-adding' in activities that make the greatest contribution to total customer value.

Porter identified the following ways of controlling cost drivers:

We will examine 'value drivers' more extensively a little later when we look at the frameworks Mark Scott presents in his 1998 book: Value drivers: The manager's guide to driving corporate value creation.

The generic Value Chain model is very versatile, and can be adapted to suit different industries. The model is introduced here because of its applicability to information enterprise. For example a joint  adapted the Value Chain to illustrate an important area of IE, namely electronic publishing. An inspection of the Irish-Norwegian project diagram immediately shows how well the general concept of the Value Chain can be related to IE. The term 'margin' in the diagram could equally well have been labelled 'net added value'. Other important models from Porter and Millar Closely related to the idea of the Value Chain, which describes activities within one enterprise (eg a business organisation) is that of the Value System. This view of value adding stresses the interdependence of any enterprise with its suppliers and customers. It links together the 'upstream' value chains of suppliers with 'downstream' value chains of customers. The customers of a particular enterprise might well be enterprises in their own right, adding further value to the product or service. Alternatively, the downstream stakeholders might be end-users or consumers. A recent emphasis in marketing is relationship marketing, which is concerned with the business advantages derived through building close and productive relationships with significant 'others' upstream and downstream, and with major stakeholder groups.

A further insight for IE provided by the value chain concerns industry sectors (yet another term for information communities or markets) which might be promising targets for IE. The Information Intensity Matrix relates the information-intensity of the product to the information-intensity of the value-chain needed to produce it. Individual industries can be mapped on to the resulting grid. Industries whose products are highly information-intensive are good targets for IE, because they need information products and services as inputs to their value chains. Thus, for example, pharmaceutical companies that are constantly seeking to create new products based on research information, are excellent potential customers for medical research journal publishers.

Finally, the Value Chain Model helps us understand what makes a particular market attractive to new entrants (competitors). In most situations, existing enterprises are not particularly keen to see competitors enter their 'territory'. (One exception may be when 'critical mass' is yet to be achieved in a marketñas discussed in Week 2. New entrants may actually help existing enterprises that have more work than they can handle). The Industry Attractiveness Model describes the factors and relationships that encourage or discourage potential new entrants deciding whether or not to engage in competition for a particular market.

Mark Scott's 'Value Drivers' Framework

While the fundamentals of Porter's model are still relevant today, one valuable text that builds on the foundation laid by Porter but updates it to better fit current business realities is Mark Scott's 'Value Drivers' set of frameworks. These are presented in:

Scott, Mark C. (1998) Value drivers: The manager's guide to driving corporate value creation. Chichester, Eng.: John Wiley.
 

The 'Value Drivers Roadmap' (Scott, p. 241)

Examine Scott's 'Value Drivers Roadmap'. This overarching framework illustrates how an enterprise's key 'Competencies' and 'Market Conditions' influence SBU (i.e. Strategic Business Unit) strategy and in turn overall corporate strategy, and link with overall company value (financial performance as measured in shareholder value), and what are the key 'value drivers' associated with each.  A Strategic Business Unit is defined as 'a distinct business, with its own set of competitors, that can be managed reasonably independently of other businesses within the organisation' (Bartol, K. & Martin, D.C. Management, New York: McGraw Hill, 1991, p.G-21).

Scott presents separately frameworks for Market Conditions and for Competencies. His Market Conditions model (Market Model Summary) is a development of Porter & Miller's 'Determinants of Industry Attractiveness' model (mentioned earlier). His Competencies Models appear to be a refinement of Porter's Value Chain (Value Drivers Summary 1 representing the Primary Activities and Value Drivers Summary 2 representing the Supporting Activities)

The Market Model Summary (Scott, p. 83)

Value Drivers Summary [1] (Scott, p. 144)

Value Drivers Summary [2], (Scott, p. 216)

Although Scott's is a general corporate marketing framework, it does offer a useful model for analysing areas of information enterprise within an organisation. It is a framework we will return to as we examine specific types of 'information enterprise' in IMS3010.

6. INFORMATION COMMUNITIES AS CUSTOMERS

Information products or services may be aimed at:

As explained in previous Weeks, the idea of 'information (or knowledge) communities' or 'human networks' whether physical or virtual is important in information enterprise. If they are not there to sell to, information enterprises must help create them! Every point in the Value Chain, or in the wider Value System, provides opportunities for input of information products or information services.

7.  PRICING OF INFORMATION (SHAPIRO & VARIAN 1999)

Shapiro, Carl and Varian, Hal (1999) Information rules: a strategic guide to the network economy. Boston: Harvard Business School Press. ISBN 0-87584-863-X.

This important work has already been mentioned, and a link provided to reviews of the book on the Amazon.com Website. This book is well worth reading, and anyone seriously engaged in information enterprise should buy it. The summary given in this section does not do justice to the richness of the book.

(It may be of interest to SIMS students that Hal Varian is Dean of SIMS at the University of California, Berkeley. Our School has been modelled on theirs and uses the same name).

Fundamental considerations

Marketing of information products and services

We have noted that:

Important factors in marketing information products include:

Pricing of information products

The three key strategies are:

Take account of:

APPENDIX A: Examples of 'Information Enterprise' - the experience of Prof. Don Schauder and key issues faced in establishing these Information Enterprises

Don's background includes a range of experience in the development of information products and services. I invite you to look at the Websites of some of the information enterprises which I have helped to establish or develop.

AMIC - the Australian Microcomputer Industry Clearinghouse. Established in the early 1980s, this was a direct predecessor to the current RMIT PC training facility. Its revenue came mainly from manufacturers of computer hardware and software - for whom it was a permanent exhibition - and from fees for training programs and facilities hire.

SOUTHDOC Southdoc Heritage Index. This long-term local history project, begun in the mid-1980 as a joint venture between Monash (Peninsula) and the City of Frankston has now come to fruition and was officially launched this year. The Index is a growing computer database of some 27,000 records, providing a local history of people, organisations, their activities and background in the Frankston area. It may be searched at Frankston Library, 60 Playne St, Frankston, Vic. Its revenue came initially from a Commonwealth Government job-creation unemployed people, and subsequently from funding allocations from the collaborating libraries. Volunteers giving of their time and skills have also been crucial to its survival.

INFORMIT/RMIT PUBLISHING INFORMIT's first CD-ROM, AUSTROM, was a pioneering endeavour in Australian electronic publishing. Jeff Leeuwenburg, Don and Tom were among those who made it happen. AUSTROM brought together the major Australian research databases in the social sciences. Many other products followed. From an initial investment of $30,000 INFORMIT achieved more than $2.5 million in after just three years of operation - while holding prices down to the minimum possible in order to maximise opportunities for people to access the information. INFORMIT's revenue has come from sales, and occasionally from grants (from government or other organisations) to produce particular products which need to be made available, but which cannot cover their costs through sales.

ULTIBASE is an awareness service for tertiary educators, which was founded at RMIT in the mid-1990s. Don coined the name, which the original steering committee accepted viz. University Learning and Teaching in Business, Arts, Social Sciences, and Education. ULTIBASE's revenue comes mainly from Commonwealth Government grants.

VICNET, as has been mentioned before, is one of the great success stories of the Victorian government's policies in IT, multimedia and the arts. Conceived at RMIT Libraries in the mid-1990s and developed initially as a joint venture of RMIT and the State Library of Victoria, it soon became a wholly State Library project. Don was one of its founding Directors and is still closely involved as a member of the Library Board of Victoria, a member of the VICNET Committee, and Chair of the Library Network Committee. VICNET's revenue comes from State Library and government grants (both State and Commonwealth), and its earnings as a specialised ISP (Internet Service Provider).

Don has also been the director of the South African Library for the Blind (Grahamstown, South Africa) the University of Natal Library (Pietermaritzburg, South Africa), the Prahran Colleage of Advanced Education Library (a predecessor of Deakin University Library), Chisholm Institute of Technology Library (a predecessor of Monash University Library) and RMIT Libraries. While at RMIT - apart from INFORMIT etc - he was also very close to the project which developed the highly innovative DocImage service of the Australian Securities Commission (now called ASIC), and to other pioneering events in electronic document storage and delivery.

Thus Don's involvement in information enterprise has been long and varied. It has included innumerable occasions when a key questions have been:

'Should there be a charge for this product or service?'

If not, who should fund it and on what basis? If yes, how should it derive its revenue?

How does the concept of competition affect pricing of information goods and services?

How far does the 'right to information' extend, and at what point does information become a privilege only for information communities whose members can afford to pay for it?

What are the appropriate policy, strategy, management and marketing approaches for provision of information products and services, and do they differ from those that apply to other goods and services?
 



Preparation for Tutorial 3

Study the Study the sites http://www.frequentflyer.com.au/ab_info.htm, http://wishlist.com.au, and http://www.divingobsession.com/index.tdf, examples of information enterprise. Make notes on the business models used, with special attention to pricing aspects of the model. Bring your notes to your Week 3 tutorial.

 



 
Tom Denison and Don Schauder