Business Intelligence

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Business Intelligence

• De prijs van informatie

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Business Intelligence Systems

• Cost, price and value of information

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Production cost
Variable cost (traditional)

Fixed cost

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Cost of information
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Production cost
Variable cost (information)

Fixed cost

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Cost per product (traditional)
Contribution of variable cost

Can you interpret scale effects in this figure?
Contribution of fixed cost

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Discuss cost leadership in the following
industries

• Car manufacturing
• Cement (ENCI)
• Retail
• Restaurants
• Banking

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Cost per product (information)

Contribution of variable cost
Contribution of fixed cost

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Discussion items

• How to become a cost leader in traditional
  products?
• How to become a cost leader in information
  products?

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Discussion items

• How would you set a price if you were a
  monopolist?
• How would you set a price in in a fully
  competitive market?
• Can you explain now why cost leadership and
  differentiation are essential strategies?

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Discussion items

• Discuss cost structure, price and strategies in
  the following markets
• Regular mail
• Express mail
• Telecommunication (voice, voip?)
• Air travel
• Personal computers
• Operating Systems
• Note Scale effects are different in information
  products!)

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Value of information products
Supporting activities
The margin can only exist if the amount the
customer is willing to pay for the
product/service exceeds the production cost
Infrastructure
Human resource management
Margin
Technology
Procurement
The customer is not going to pay more than the
added value of the product for his/her value
chain the customer value
Inbound logistics
Outbound Logistics
Marketing Sales
Operations
Service
Margin
Primary proces
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The pricing inequality

• For sustainable business, the following
  inequality must hold
• production cost lt price lt customer value
• Customer value is customer dependent!!! (pto)

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What is the price of a 0.5 l of Coca Cola at the
following locations?

• At the supermarket
• At the gas station
• At the railway station
• At McDonalds
• At Beluga
• At Schiphol in the tax free zone restaurant
• At Schiphol at the gate
• On the plane at Easyjet

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Pricing information
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Market Entry by Bill Gates

• Over 200 years old The Encyclopedia Britannica.
  Price of the books 1990, around 2000 euro.
• In 1992, Microsoft bought Funk Wagnalls, a
  second class encyclopedia, sold at dump prices

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.

• Microsoft digitalized the content of Funk
  Wagnalls, produced a multimedia CD called
  Encarta, and put in the store for 100 euros.
• Microsoft sold Encarta to Compaq and Dell and the
  likes for an even lower price, who put it on new
  PCs for free.

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..

• The Encyclopedia Brittanica lost market share, ,
  and started to look for an electronic strategy
• Move 1 An on line library for education,
  available for 2500 euro per year. For most
  schools, much too expensive.
• In 1996, turn over of Encyclopedia Britannica was
  cut by 50.

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• In 1996 Encyclopedia Britannica introduced a CD
  version for around 250 euro and a on line
  membership for individuals,
• It was too little, too late Brittanica changed
  ownership in 1996, was reorganized and the CD was
  offered for various prices in different direct
  mail campagnes.

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2002

• Brittanica DVD 50 USD
• Encarta CD 31 USD, DVD 58 USD.
• New technology changed the price (of the content
  of the) Encyclopedia Britannica in 10 years from
  2000 euro to 31 euro.

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Back-to-School Essentials
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(No Transcript)
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What happened?

• Information is hard to produce, and easy to
  reproduce
• High fixed cost, low variable cost
• Bill Gates changed the rule of the encyclopedia
  information game
• Lower production cost, bigger scale

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Porter Industry Appeal (5 Forces)
Government Legislation
Competitors
Suppliers
You
Substitutes
Customers
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Remark on production cost of a digital
encyclopedia

• Content is very hard and costly to compose.
  However, when the encyclopedia is composed, this
  money is gone sunk cost!
• Variable cost changed from
• Printing and logistics (classical scale effects)
• CD DVD
• On line version (unlimited scale effects)

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Is this completely new?

• No, Telecommunication industry knows this already
  for years
• Same for airline industry (extra passengers dont
  incur extra cost)

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If you cant differentiate

• The story of the tough competitors
• Company A sells at 10, company B sells for 9
• A sells for 8 and B for 9.
• A sells for 8 and B for 7.
• Where does it stop?

It stops at the marginal cost price 0
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Yellow pages in the USA

• 10.000 USD for CD version in 1986, provided by
  Nynex.
• Pro CD hired hundreds of chinese typists and
  reentered all the data into a computer.
• Pro CD hired once again hundreds of chinese
  typists and reentered all the data into a
  computer.
• Pro CD corrected the differences and was in
  business.

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Gele gids cont.

• CDs were on sale for several hundreds of dollars
• One year later American Business Information, did
  the same, and others followed.
• Sales price is now 20 USD per CD.
• On the internet the informatie is freely
  available, and money is being made by
  advertisements.

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Competitive markets

• Marginal cost are zero, cost per unit are small,
  if the number is big.
• Hence companies go for market share, high
  numbers, low price.
• In the end, price is equal to the production cost
  of the cost leader, and far away from the
  customer value.

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Monopoly markets
Sales price
30 USD
10 USD

1000 pcs
4000 pcs
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Differentation revisited

• Stay out of the way of cost based competition,
• Unless you can be the ultimate cost leader
• By differentiation, you can create a more
  monopoly like position, and price according to
  customer value, rather than in terms of cost per
  product, or even worse, marginal cost

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Strategy (old economy advice)

• In a market where no differentiation is possible,
  be the cost leader, or get out
• In a market where differentiation is possible,
  seek a spot where the margin between production
  cost and differentiated customers value is
  maximized.
• Make sure that your position is sustainable!!

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Loss leadership

• Cost leadership is hard to beat, once the market
  share is significant. Market share is therefore
  crucial, and in an appealing industry there is
  only one cost leader. Thus, the first to move in
  has the first mover advantage.
• Amazon.com went first after market share, then
  after profitability. This meant attracting
  customers at a price below marginal cost. The
  bigger the loss, the more succesful the strategy
  Loss Leadership

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Cost leadership

• Cost leader pitfalls
• Complatency dont set price too high and make it
  to easy, your industry will attract fortune
  seekers
• Signal that rivals will be met with fierce
  competition, and low prices.

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Know your added customer value

• Personalized pricing Different customers,
  different added value, different prices
• Kow your customer CRM, market intelligence (use
  of ICT)
• Versioning produce different products for
  different segments of customers
• Group Pricing make different prices for
  different segments