Xerox Professor and Area Coordinator of Computer and Information Systems, Management Science and Operations Management, William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York
Software as a Service (SaaS) delivers a bundle of applications and services through the Web. Its on-demand feature allows users to enjoy full scalability and to handle possible demand fluctuations at no risk. In recent years, SaaS has become an appealing alternative to purchasing, installing, and maintaining modifiable off-the-shelf (MOTS) software packages. We present a game-theoretical model to study the competitive dynamics between the SaaS provider, who charges a variable per-transaction fee, and the traditional MOTS provider. We characterize the equilibrium conditions under which the two coexist in a competitive market and those under which each provider will fail and exit the market. Decreasing the lack-of-fit (or the cross-application data integration) costs of SaaS results in four structural regimes in the market. These are MOTS Dominance ? Segmented Market ? Competitive Market ? SaaS Dominance. Based on our findings, we recommend distinct competitive strategies for each provider. We suggest that the SaaS provider should invest in reducing both its lack-of-fit costs and its per-transaction price so that it can offer increasing economies of scale. The MOTS provider, by contrast, should not resort to a price-cutting strategy; rather, it should enhance software functionality and features to deliver superior value. We further examine this problem from the software life-cycle perspective, with multiple stages over which users can depreciate the fixed costs of installing and customizing their MOTS solutions on site. We then present an analysis that characterizes the competitive outcomes when future technological developments could change the relative levels of the lack-of-fit costs. Specifically, we explain why the SaaS provider will always use a forward-looking pricing strategy: When lack-of-fit costs are expected to decrease (increase) in the future, the SaaS provider should reduce (increase) its current price. This is in contrast with the MOTS provider, who will use the forward-looking pricing strategy only when lack-of-fit costs are expected to increase. Surprisingly, when such costs are expected to decrease, the MOTS provider should ignore this expectation and use the same pricing strategy as in the benchmark with invariant lack-of-fit costs.
The use of telemedicine to improve patients' health has been evolving rapidly over the past few years. Initially, our clinical research focus was on the development of effective ways for treating chronically ill patients, mostly those suffering from neurological disorders. While we identified the medical benefits of this information technology, there remains a salient strategic question addressing its competitive impact. In this paper, we analyze the impact of introducing telemedicine on the market share of the specialty hospital deploying this technology and on the competing hospitals in the region. Our analytical results prove that, contrary to earlier expectations, the value of telemedicine relative to in-person visits is not always increasing with the distance of the patient from the hospital. This result explains why patients located far from the specialty hospital may not prefer telemedicine care. We prove that telemedicine, unlike numerous other e-commerce applications, does not lead to the "winner takes all" phenomenon. We found that the advent of telemedicine changes the competitive equilibrium between specialty hospitals and community hospitals. Both hospital types will significantly benefit from delivering complementary care to chronic patients, rather than continuing to compete with each other.
This paper identifies and measures the various business value benefits that accrue as a result of implementing and integrating large-scale enterprise information systems. Specifically, we look at the integration of electronic medical records for all patients with the radiology information system and a picture archiving and communication system at a regional medical center. Our work is among the first to carefully study and analyze the impact of enterprise information systems at a large-scale service organization that produces intangible outputs--health. It extends the literature on information economics by quantifying the benefits in process dynamics as a source of ongoing firm-level performance improvements. The key dimensions of measurements include financial revenues, operating lead times, and subjective satisfaction levels by the clinical staff and by the referring physicians. Analyses of longitudinal data suggest that performance levels along a key metric--clinical process lead time--showed a significant improvement immediately after the deployment and integration of the systems. The evidence reveals that performance kept improving for the following 12 months at an impressive learning rate of 63 percent. Moreover, the reported satisfaction level after installation was higher among referring physicians who actively used the full spectrum of technological functionalities at their own clinics or at the hospital's site. Finally, we present a general framework for capturing the actual tangible and intangible benefits of enterprise information systems installation and integration in a clinical context.
Knowledge transferred in the open market via a price mechanism enjoys the benefits of avoiding internal competition, learning from external competitors, and accumulating diversified knowledge. In the market, users can access a repository of knowledge for a single price (repository pricing) or knowledge items in the repository can be sold individually (knowledge pricing). However, users have been found to prefer repository pricing but not the knowledge in the repository. This irrationality can cause market failure because users derive a suboptimal level of utility from the knowledge repository, and vendors have contradictory pricing and knowledge strategies. We empirically examine a joint explanation from two competing theoretical perspectives that accounts for this inconsistency nicely: The mental accounting perspective endorses repository pricing because it entices users with the benefits of the whole repository, whereas the transaction decoupling perspective finds expression in individually priced knowledge because it prevents the discrete benefit of knowledge from becoming obscure. By integrating the two theoretical perspectives and considering price, knowledge, and user characteristics simultaneously, the results offer important implications for the market transfer of knowledge. Repository pricing attracts users and is essential to initiate the transfer process, whereas knowledge pricing generates knowledge preference and is thus an effective approach for learning.
Although the Web has grown to several billion pages over the past few years, just a few of the Web sites get most of the visits. Such sites, called portals, attract visitors and advertisers and provide a lot of valuable content at no charge to the visitors. The portals attract a disproportionate amount of the Internet advertising dollars and have the ability to influence the success of new electronic commerce ventures. Using monthly audience data, we examine relative market shares of Web sites in search engines, travel, financial, news, and other categories. We find clear evidence of increasing disparity in page views, with the top Web sites getting an increasing share of the market. Using economic modeling, we show that this disparity is a result of a development externality that exists in this industry: the sites that have more viewers get more revenues; this in turn allows them to develop more content and attract an even greater number of viewers.
Several information goods, such as movie distribution rights or newspapers, are sold either at spot prices, or through forward subscription buying. Our paper considers a firm that offers an information good through spot buying, forward buying at a reduced price, or a combination of the two. The time lag between forward buying and spot buying brings about an uncertainty in a consumer's reservation price for the good at the time of advance purchase. We propose a consumer decision-making model that captures this fundamental feature and provides interesting insights into the key elements of consumer behavior. We establish that a consumer offered the choice between forward buying and waiting to (possibly) buy the good on spot faces the trade-off between a lower unit price and the value of updated preferences. We also establish that consumers preferring forward buying have a relatively high expectation and low uncertainty in their reservation prices for the good at the time of advance purchase, while those preferring spot buying have a relatively low expectation and high uncertainty in their reservation prices for the good. We apply the model to formulate and analyze the firm's problem when it is either a price taker or a price setter. When the firm is a price taker, the choice is whether to offer the good for only forward buying, only spot buying, or a combination of the two. With an example, we show that when both the spot price and the discount on forward buying are moderate in values, the seller chooses the mixed strategy of offering both forward and spot buying simultaneously. When the firm is a price setter, the goal is to choose the offering(s) and the price level(s). With the example, we show how firms selling information goods can increase their revenues by using a mixed offering strategy with both spot and forward offerings. This strategy lends itself to second-degree price discrimination by the seller when there are groups of customers potentially heterogeneous
The Internet commerce technologies have significantly reduced sellers' costs of collecting buyer preference information and managing multiple prices. Advanced manufacturing technologies have also improved sellers' manufacturing flexibility. These changes allow an online seller to offer custom products at discriminatory prices. We show that these technologies offer significant advantages to an early adopter who gains market share and profits at the expense of the conventional seller. Not only does the customizing seller charge more for customized products, it also provides standard products but charges more for them than in a conventional market. The benefits of customization disappear when both the competing sellers adopt customization. They now compete not just on prices but also on degree of customization. Consequently, we see that the sellers "over-customize," to the detriment of their profits. Both the sellers know this when choosing their customization strategies and yet they both end up choosing to customize. A seller that does not customize sees a sharp decrease in profits if its competitor customizes. This is an instance of the "Prisoner's Dilemma" type of situation in technology adoption. This confirms some key findings in IT productivity and strategic IT investments literature.
We analyze the competitive and economic implications of information technology, the allocation of decision nights, and task bundling during business process reengineering. The popular reengineering literature advocates employee empowerment-decentralizing decision authority and consolidating tasks as complementary strategies. Our analysis reveals, however, that implementing these two changes simultaneously is suboptimal in many cases. Decentralization and consolidation decisions can occur separately or together; the optimal combination depends on the effectiveness of technology aimed at skill enhancement and the customers' sensitivity to time and quality. We identify those process parameters that can cause decentralization and consolidation to have opposite effects on process performance; we also point to other parameters, such as customer-to-customer variability, which can cause them to complement one another. Finally, we explain why, in a time-based competitive marketplace, firms are more likely to centralize their decision-making process while concentrating their information technology investments on enhancing productivity and intraorganizational communications.
This paper describes the results of a recent field study of computer integrated manufacturing (CIM) adoption strategies in U.S. manufacturing firms. The purpose of the study was to identify the extent to which CIM technologies are in use in U.S. firms, the impact of a facility's process characteristics on the CIM development process, and the adoption policy being followed implicitly or explicitly. The survey focused on manufacturing process characteristics, the CIM development process, the CIM architecture, and perceived value and benefits. Our results indicate that CIM implementations follow a definite temporal pattern with respect to the adoption of certain information technologies. We also find evidence of labor substitution through CIM, although the direct labor jobs that are lost are partially replaced by engineering and design tasks. While most CIM users find that their CIM projects successfully meet their initial operational goals, the technology seems to be poorly integrated in most sites. More crucially, it appears that CIM does not live up to its promise: it is not being adopted as a strategic information system for competitive missions. The initiative for CIM programs is usually generated from the bottom-up by small groups of technical experts who tend to focus on localized data-processing concerns. This gradual bottom-up approach appears to severely restrain, rather than enable, plant-wide integration for critical crossfunctional business processes such as order fulfillment or the introduction of new products. The decentralized, bottom-up, development pattern of these information systems reinforces the existence of many incompatible divisional islands of automation, thereby negatively affecting the competitive capability of the firm.
Benchmarking is the quantitative method most commonly used when managers contemplate procuring a large business information system. It consists of running a group of representative applications on the systems offered by vendors to validate their claims. The implementation of benchmarking can be very costly, as users need to convert, run, and test applications on several partially compatible computer systems. Benchmarking works well in modern database management systems (DBMS)-oriented applications because the system performance is more a function of the database structure and activities than of the complexity of the application code. Earlier research focused primarily on designing various benchmarks for database systems; the decision problem associated with finding an optimal mix of benchmarks has largely been overlooked. In this paper, we examine the problem of defining the most economical process for generating and evaluating the appropriate mix of benchmarks to be used across the contending information systems. Our analytical approach considers information-gathering priorities, acquisition and execution costs, resource consumption, and overall time requirements. We present a multiobjective decision-making approach for deriving the optimal mix of benchmarks; this approach reflects the major organizational objectives in more than simple one-dimensional numerical terms. A practical example illustrates the utility of this approach for evaluating a client-server relational database system.
We address the case where a user contracts for the delivery of a new information system from an independent vendor, both of whom are risk-neutral. The delivery task is partitioned into two consecutive stages: system design and software development. The parties can contract for each stage separately or specify an initial contract that covers both stages. We compare the impact of different contracting structures on prices, project value, project completion probability, and the value to the developer of obtaining the first stage of the contract. Specifically, we show that a two-stage contracting can lead to a higher business value than stage-by-stage contracting. When there is competition for the design stage, the vendors bear more of the software development risk, and the probability the system will be completed depends on the contract structure.