MG250: Management

• Digital innovation:
 The design, use, adoption of digital technologies to deploy innovative processes by which
value is created.

• Different management perspective focus on alternative

explanations of the processes that generate value and hence on
what shall be done to facilitate and support value creation.
 Value creation process

• From a business viewpoint value creation is the processes, and

activities that lead to the production of a marketable good.
• Dominant value creation management paradigms build on this
definition even when the goods or services that are produces are
not marketable goods (i.e. public services)
 Value creation process industrial economy

• In industrial economy the value is measured on the gap

between the cost of producing the good and the value it
generates on the market.
• The idea of competitive advantage grounds on this definition of
value creation.
• A firm is said to possess competitive advantage when it can
define a production configuration which lead the generate
profits that exceeds the industry average.
 Value Chain

Administration
M
Human Resource Management A
Support R
Activities G
Technological Development IN
Procurement

M Service
Operations

Outbound
Marketing
Logistics

Logistics
Inbound

& Sales

IN
G
R
A
Primary Activities
INFORMATION SYSTEMS AND
BUSINESS STRATEGY

Laudon & Laudon

Laudon and Laudon 2014
 Value creation

• The value creation is the result of how resources are combined

(with the support of ICTs) to produce goods with specific
properties that define their value when exchanged.

• The effectiveness of the value creation process is determined by

the efficiency of the processes that are used to finalise the
production of goods that can be exchanged.

• The exchange of the ownership of the good is the ultimate object

of economic transactions
 Economic agents

• The concentration on activities needed to produce marketable

goods and the identification of value with the difference between
the “cost of production” with the monetary values the goods are
exchanged for applies to exchanges that involve buyers.
• Minimization of the transaction costs

• The same activities might not fully appreciate the uniqueness of

the output of digital technologies which concern digital objects.
 Digital objects

• Digital objects have unique characteristics (Kallinkos et. Al.,

2010):
 Editable
o They are flexible, can be modified continuously and systematically
 Interactive
o They enable contingent actions
 Open
o Can be access and modified, they are reprogrammable
 Distributed
o They are not contained in a single source or institution
• Digital goods are also non-material.
• They have to be inscribed into material objects to be used and
exchanged.
• Digital goods are computed.
• Any digital object needs to be processed and combined following
a set of instructions.
• They are modular and re-programmable.
• Consumers are users rather than buyer of digital objects .
Value creation process in digital context

Inscription
encoding computation aggregation in physical Use
object

Feedback
• The aggregation process is a contingent process which
aggregates and binds resources inscribing them into a “physical
object” for the temporal moment in time.
• The process is dynamic, modular and reversible.
• The business results as a complex web of algorithms which
interact in the process that determine what will be inscribed into
the physical object and how it will be inscribed.
 Value creation: beyond linearity

• The process of value creation moves from a linear sequences of

activities (Value Chain) towards an intricated web of algorithmic
relationships and interdependences.
• The value creation process around which this web al algorithmic
relationships and interdependences structures cannot be
managed following the linear relationships described in the value
chain model.
 Management challenges

• To effectively manage this nexus of algorithmics relationships

and interdependences calls for innovative approaches and
practices.
• Literature in digital innovation has identified multidimensional
factors that contribute to value generating mechanisms.
• Different streams of studies shed light on these factors.
 Examples of approaches

• Organizational
• Technological
• Market/economics
 Organizational

• To manage this complex nexus of relationships a specific set of

capabilities is needed.
• Capabilities generates value through a series of transformations,
by which the different algorithmic relationships and
interdependences are used and combined within the
organizational context.
• This capabilities determine what the organization is able to do
and how it does it.
 Organizational

• If an organisation has unique capabilities which are difficult to

copy or imitate, they become core competences.
• A core competency is a well-performed internal capability that is
central, not peripheral, to a company’s strategy, competitiveness,
and profitability.
 Identifying Core Competencies

• Core Competencies: A set of integrated and harmonized

abilities that distinguish the firm in the marketplace.
o Competencies typically combine multiple kinds of abilities.
o Several core competencies may underlie a business unit.
o Several business units may draw from same competency.
o Core competencies should:
– Be a significant source of competitive differentiation
– Cover a range of businesses
– Be hard for competitors to imitate
 Organizational

• Value generation does not necessarily overlap with revenue from

the creation of value for ‘customers’.
• Business firms may create value for more than one groups, some
of which may generate streams of income while others are
subsidized.
• Digital Innovation might face the challenge of balancing the
needs of generating value and generating sustainable revenue
streams.
 Technological

• Digital innovations can foster value creation facilitating

endogenous evolution, i.e. design the functionalities and provide
the resources needed to produce innovation within a platform
and ecosystem.
• Interfaces designed to coordinate the relationships between the
various actors involved (I.E. platform owner and complementors;
organisation processes and blockchain data; structure of the
interdependences in the AI learning algorithms, etc.)
 Technological

• The challenge is to: ‘establish governance mechanisms

that appropriately bound participant behaviour without
excessively constraining the desired level of
generativity’ (Wareham et al 2014)
• Key is to design solution able to balance the tension
between control by the platform owner to maintain
stability and provide autonomy of complementors to
encourage generativity
 Balance scalability (i.e platforms and ecosystems)

Design choices are needed to define a platform structure able to

balance different needs
• Standards vs variety
Design core standardised core functions, processes and outputs, and
Provide the means to foster innovation and keep attracting new complementors while maintaining old one

• Control and autonomy

Allow complementors to contribute to the growth of the products and services
Design control mechanisms to safeguard quality of the products and services

 Individual and collective identifications

Fulfil individual needs
directing individual contributions to the collective benefits of the ecosystem

(Wareham et al 2014)
 Competition (i.e platforms and ecosystems)

Platform and ecosystems need to be managed so to respond and

survive other platform ecosystems competitive treats.
Platforms and ecosystems can effectively cross-subsidize between
different categories of end users that are part of the ecosystem.
That is, the volume of transactions on and the profit of a platform
depend not only on the total price charged to the parties to the
transaction, but also on its decomposition.
 Launching a double- or multi-sided platform

• The need to reach quickly a critical mass of ‘customers’ at both

sides - ‘chicken-or-egg’ problem
 Strategies include:
 pushing for growth of both sides simultaneously: both sides are
subsidized;
 developing a single-sided platform first, then opening up for other groups
of customers e.g. Amazon changing from a books retailer to a platform for
other retailers;
 Exploit complementarities with an existing successful platform, e.g. PayPal
on eBay

• Deciding the mode of ownership

 Closed or open? Proprietary or public? Lean core or rich in functionality?
 To maintain scale

Platforms maintain scale by:

 locking-in users and complementors by creating high switching costs
And/ or
 Providing value to users by fostering generativity and continuous
innovation
and
 Providing value to users attracting complementors by providing
incentives, such as tools that facilitate their business
 Do not create distortions that jeopardise the
equilibrium

• Privileging one side in a manner that damages or alienate the

other,
• Monitor quality and quantity of the offer not to alienate the
different parties
• Forking: splitting the platform by creating a new one from existing
resources (parts of the core and interfaces) e.g. in open source
software
• Envelopment: being swallowed by another platform which
bundles the specialised functions with multiple other functions
changing the nature of the value creation trajectory
 Platform governance by enacting combinations
of control mechanisms

Drawing from Lawrence Lessig’s theory of alternative control mechanisms (Lessig

1999)
• Rules and regulation (e.g. the legal documents signed by
complementors and ‘agreed’ by users)
 They state the rights of each participant groups and their responsibilities
and keep them responsible for appropriate behaviour, e.g. quality of Airbnb
dwellings and behaviour of tenants
• Technology (the platform architecture that defines who does
what, and software and hardware tools that act as gatekeepers of
undesirable behaviour)
Interfaces are a mechanism of compliance, allowing certain actions and
making others impossible; algorithms that screen for inappropriate content
• Market (economic incentives and disincentives)
 e.g. offering incentives for owing or sharing property rights of innovative
ideas: giving ownership of innovative content to the developer provides
incentives for being creative; giving ownership to the platform facilitates
sharing and standardization and enriches the platform ecosystem;
 bearing the costs of participants misbehaviour (who is responsible to pay
for accidents, uber or the drivers?)
• Social norms (platforms as communities nurturing values,
cultures and expectations)
 Cultivating behaviour that favours the development of the platform, e.g.
voluntarily adding or spreading content considered positive on social
media platforms – but when is there public consent for supressing content
that is considered undesirable?
 Basic economics of digital platforms

• Exploiting network economics vs ‘conventional’ market economics

(i.e. optimal product or service pricing)
• Information and software have high initial costs but then can be
reproduced almost for free
• Network effects
 The risk of single firms becoming winners, taking almost all the market,
e.g. Google and Facebook
 Requires decisions on whether to create a new platform or join an existing
one (platforms upon platforms, e.g. google on internet, ushahidi
crowdsourcing using street mapping platforms)
• Disintermediation / re-intermediation dynamics of double-sided
platform can be understood by transaction cost theory
 Orchestration

• Different digital technologies contribute to an organization value

generation proposition.
• To ”optimally” manage each individual technology does not
guarantee “optimal” value creation for the organization.
 Not a linear

The value creation outcome is not the sum of the values

created by the individual digital technologies

Blockchain Value Data Value

creation
Platform Value AI Value

+ + + =Value
Analytic creation creation creation
s
 Orchestration

• The different digital innovations have trades off.

 Platforms or ecosystems generate values which might not complementary with AI, data
analytics value propositions.

• The value generating propositions of different digital technologies

have to be balanced to optimize the company value proposition

• From a managerial viewpoint it is extremely important to find the

right configuration, balance, among the different value generation
processes associated with the different digital technologies
Orchestration

Blockchain
Proc
ERP

AI
Value Data and
analytics

Platforms

Ebiz
CRM