ISOM 2010 Notes

Week 1: Digital Economy 1

 Technology enables information, not all information is valuable only
those that are relevant
 Moore’s Law: Number of transistors in an integrated circuit doubles
every 18 months, computing power doubles OR costs halve
o Now we can afford to calculate high dimensional data
How IT Changes Business

 With lower costs, it allows for more IT (sensors, cookies) which can
process more data,
 Metrics: measuring the right things
 IT = Strategic business value
o IT adds efficiency and competitive advantage
Information Fundamentals
 Cost structure of information
o Information is expensive to produce but cheap to reproduce
o E.g marketing cost, editing cost, rentals, distribution
o Creation cost - paid only once (fixed cost)
o Production costs - per disk (variable cost)
o Cost keeps dropping
o Freemium:
 E.g Dropbox - initial services are free, and eventually we
are dependent on it, charge people from using
advanced features
o Divide the market:
 Dividing market into two sides, subsidizing/free on one
side and make profit from the other side
 E.g Google - free for individual customers, paid for
business users
 Capacity constraint
o Lot of recourses from labor, warehouse storage, etc
o But for digital products, it’s a lot less, no longer a top concern

Consumption of Information
 Two prominent features
o Experience goods - highly uncertain service until the
consumption is completed
 Customer evaluations vary dramatically
o Overload
 Trying to address the uncertainty of experience goods, the
uncertainly of customer experience is a key part of digital product
marketing.

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Week 4 (2): IT-Based Strategy and Network Effects

 2 sided markets have more positive feedback loops because an in

increase in one group of users can lead to a rise in another
o Exchange value
 Complimentary benefits
o g/s that add value to the product to provide complementary
benefits
 Staying Power: with more users, it’s more likely to stay around for a
long time,
o Low staying power = it will go away soon
 Tipping point: a point in time where network effects become so
valuable that only one winner emerges
 Network effects increase Barriers to entry, therefore entrants must
be very desirable
o Sometimes, incumbent products such as complementary
goods and switching costs will add to a product’s
technological functionality

How to effectively compete in networked markets

1. Move early: collecting as much clients as possible
a. Or be a fast follower
2. Subsidize adoption: pay people to try the product
3. Redefine the market: Blue ocean strategy
4. Form alliances and partnerships, creating network effects with each
other
5. Establish distribution channels
Inventory = death
a. Storage costs
b. Inventory depreciates
c. Zara places smaller orders more frequently

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 d. Just in time supply chain - precise information, there is timely
feedback from customers, needs cooperation between
departments
e. Vertical integration
i. Investing upstream and downstream
f. Core competencies
i. Amazon - technology and logistics, it is not their
products
g. Backward integration, tried to eliminate supplier, buyer
becomes more independent, higher buyer power

Intermediation
 Cars need for dealers, sometimes they are beneficial to supply
chain management
Supple chain profitability vs organizational profitability
 Profitability of supply chain increases if one or more organization
operates at less than maximum profitability
 Bullwhip effect: variability in order size and time increase at each
stage up the supply chain
o We need precise information as well as proper structure of
the supply chain (interorganizational information systems) to
reduce this effect
o A tiny change in retailer demand can result in high volatility
with the supplier

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After the midterm

Lecture 7 & 8 – Netflix 3 competitive advantages

The long tail
 As the tail gets longer, it becomes more important relative to the
body
 This means the e-commerce offers large variety of products, instead
of just focusing on popular products
 Shift from mass market to niche or previously obscure products

Collaborative filtering is not the competitive advantage,

 A classification software that monitors trends and cross searching
o Can be mimicked by competitors
o Product dimension – choose similar products
o User dimension – which one is selected by items like you,
learns from user selection
Crowd sourcing
 Cost-effective
Economies of scale = profit
 The website costs
o Cost of server – hosted by another company
o Design fee
 The cost of running a website is very homogenous
 With more subscribers, the cost per subscriber is lower

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  In 2011, Netflix had to split its streaming and DVD websites,
meaning that their costs increased and resulted in a drop in margin
 Internet pure play – no retail stores
o Must be careful because it can alienate users
o Need to encourage users to switch
 Netflix pushed its customers too hard even though it was the right
decision, as a result they lost 1 million users

3/ 18 - IT in Marketing
Marketing mix
1. Product – specify configurations and specification
a. Official – key attributes
b. Unofficial – reviews, word of mouth, recommendations
2. Place
a. Point of sales
i. Upselling and cross-selling
ii. Upselling encourages customers to purchase the
premium version of the products – Selective
distribution
iii. Cross selling invites customers to buy related or
complementary items – intensive distribution
b. Online distribution channel
i. Website and platforms: how to make the most of the
space? Data on website
ii. Disintermediation: removing distributions and retailers
iii. Challenges
1. Resistance to ads
2. Crowded online space
c. A/B Testing – to figure out the best place to sell products
i. Two or more versions tested simultaneously then
measured against each other
1. Must be same platform, same time frame
2. Should be run for longer, more observations

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 ii. Always ask smart questions, have goof controls, and a
large sample
iii. It is cheaper and more scalable

Ad campaign implementation：
 High quality websites
o Better content
o Well-designed websites
 High quality ad position
o Above the fold
o Above or nearer main content
 Eye tracking ad testing
o Uses heatmaps from eye tracking studies, areas where users
looked at the most are coloured red, then yellow, then blue,
then gray
o Users remember layouts so even when layouts change, users
may still look in the same areas
o FB puts their ads on the 3rd to 5th post, if ad is too intrusive,
customers will skip the ad
o It tracks attention but it is not positively correlated with
conversion of signups or purchases
3. Price
a. Staples: Dynamic pricing opportunities, the closer you are to
the store, the less discount you get, the closer users are from
competitors, the more discounts they get, geolocation
tracking and price discrimination
b. IP address can be used to determine a user’s rough location
from our internet connection, to router, to internet gateways
c. Uber - surge pricing to match driver supply and user demand
using GPS location
d. Airlines - holidays flight are more expensive, cookies and
username are used to identify users
4. Promotion
a. Advertising

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 i. Mass v.s targeted and personalized
ii. Static e.g news article v.s interactive e.g Instagram
b. Word of mouth
i. Viral marketing
ii. Social media promotion

Facebook - IT in promotion Case Study

 Precise (mobile) targeting
 Users provide all your demographic information and also your social
connection
 New initiative: Facebook audience network
 Fb ads will be display on your website and share profits at the end
 Digital strategy
o PROS: precise targeting
o CONS: does not leverage social ties, the attention challenges,
users are on a hike - lack easy to monetize, users of google
are on a hunt - task orientation expedition to collect
information
o Leverage platforms to reduce marketing or customer
acquisition costs
 Social games
o 30-50 million active users
o Network effects
o FB can promote games through social connections, and it’s
win-win because they also help strengthen social connections
o Leverage platform to help people improve existing
relationships or build new ones, lower costs and increase
customers willingness to pay for the products

EBay group gifts

 Upselling strategy
 Gains more users as people have to chip in to pay

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Online platform: Google Case

Google’s value: market capitalization

 Firm’s value = share value x number of shares
 Always use closing price or adjusted closing price
 Adjustment close - to take into account company actions such as
stock splits or buy backs

Understanding search
Query: search - spiders crawl the web and reports back to Google’s
databases
Organic or natural reach - ranked by relevance using different algorithms,
google method is PageRank - a site with more pages linking to them are
ranked higher
Topping the list
SEO: Search engine optimization
 The process of improving a page’s organic search results
 Fooling PageRank
o Link fraud - creating a lot of empty websites linking to your
main one, only used to promote
o Google are actively
 Spiders need time to update the database, there is a time lag 1-7
days, therefore new website may not be able to be searched at first
o Ask google to index your page directly - takes 20 minutes
How does Google work
 Has 1.4 million servers in over a dozen worldwide server farms
o Massive network of computer servers running software to
coordinate collective use
o Can coordinate and direct traffic to other servers to get
results, to those that are not overloaded

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Drivers behind increase online ad spending
 Increasing user time online
 Improved measurement and accountability
 Targeting abilities

Trackability
 TV and internet ads can be tracked instantly
 Easy A/B testing online tools allow advertisers to calculate ROI, test
creativity, and adjust ads instantly

Payment methods
 Cost per click
o Paid when web site visitor clicks on an ad - used by google
 From fixed price to auction
 Advertisers specify the maximum CPC they are willing to
pay
 Rank ads based on maximum CPC and quality of web
pages
 Advertisers pay one cent more than the second highest
bid
 Cost per thousand
o Paid for every thousand times an ad is displayed - magazines
o Less effective, no commitment
 Cost per action
o Advertiser paid every time a person does something (sale,
lead, etc)

Customer profiling and behavioral targeting

Web browser and server can identify

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  IP address - geographical area, can check if there’s too many
requests from the same IP address, it can prevent hacks/server
attacks
o Some IP addresses are linked to actual buildings/landmarks,
e.g if the IP address is used frequently from HKUST, then its
most likely a student or teacher
 Dynamic IP can be assigned to different people at
different times
o Geotargeting: identifying a user’s physical location for
purpose of delivering tailored ads or other content
o VPN can change a person’s IP address, it’s not that accurate, a
lot of people can use the same IP, people can share devices
o IP addresses can be recycled, internet IP not static
 Type of browser
 Computer type
 Computer operating system

Cookies are stored on the user’s computer, installed and retrieved by web
server, a file
 Cookies can be associated with a log in account profile on that
computer, but problem occurs when several people use the same
browser on the same laptop without logging on as separate users
 Cookies can’t tell if the user is different or not when the same user
logs on to the same website using different browsers
 Can help personalize a page, target ads, monitor traffic
 Know what you’ve shopped for and bought, displays products that
you are interested in, track your shopping cart
 Recovering cleared cookies: Store and backup this cookie
somewhere else or attach cookie with your username/profile, can
download cookies back

Ad networks: Google run ads on other websites such as gmail, google

news, blogger, 30% of Google’s revenue comes from running ads on
websites that Google does not own

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Google ad network is a distribution play
 Reaches more potential customers across more websites, more
sales rather than increasing price
 Content providers want as many advertisers as possible in ad
networks, since this increase
o Price of advertising
o Number of ads
o Accuracy of user targeting
o Network effects
o Revenue
 Google trends - breaks down data based on popularity in different
countries or regions - provides firsthand data in decision making -
aggregate trends
 Privacy concerns - email marketing, it customized advertisements
based on the emails that users received, it scanned all user emails
o Targeting can benefit web surfers, but users can feel
exploited or mistreated
o Opt-in: a program that requires customer content
o Mishandled user privacy can decrease targeting
opportunities, limiting growth across the online advertising
field
 Google is increasingly finding itself in precedent-setting cases where
the law is vague
 Google’s plan to protect user privacy
o Separates cookies, such as from google surfing and YouTube,
location cookie and other info cookie is separated
o Won’t link query history or registration to ads
o Places ad controls in the hands of users
o Allow users to install a cookie or plug-in that opts them out of
interest-based tracking

Preventing scams:
 click fraud
o Generating revenue for the host website by malicious party

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 o IP address tracking can be used to ensure there’s not more
than one click per computer
 Click farms - recruiting a network of users to engage in click fraud
with the goal of spreading IP addresses across several systems to
make a fraud effort
 Zombie networks - compromised by virus, not aware by the original
user, “clickbots”, controlled remotely
 Keyword stuffing
o Trying to promote oneself through keyword stuffing, putting
popular words on the website, to generate citations and
traffic, increasing their ranking for search result

Week 12 - Database

User to database application to DBMS to Database

Nestle leverages vanilla data

 McKenzie overalled their SAP system that removed the
obsolete/duplicated/inaccurate/incomplete products
 Saved 30m a year
 Business cares about casual relationship, not causation
 Data becomes information with context
 Information becomes knowledge through meaning

Database components
 Row/records - one observation of a unit
 Columns/attributes
 Many records become one table
 Database is a list of organized tables through keys that allows you
to enter access, and analyze data
 DBMS is the software for recreating, maintain and manipulating
data

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  DBMS and database help retrieve information and remove
redundancies
 Tables are linked through a common column (Key) e.g student ID -
the key can be a primary or foreign key based on the table - serving
different purposes

Data dictionary - summaries column names, type of column, size, and

criteria of the values, helps improves clarity and safeguards data inputs

SQL statements (Insert, Select, Update, delete), creating maintaining

Select helps get information
 Select (attributes)- From (the table name) - where (condition)

Fintech - Payments and Transfers

 Transfers across boarders are expensive and slow
 Fintech makes transactions into bulk transfers - so the fee is lower
o Aggregates individual transfers
 Cancel out transfers through a P2P model - removes international
transfers through domestic ones
 Create alternative and cheaper rails
o Blockchain technology

Cryptocurrency - no central regulating authority - blockchain is a database

which is decentralized (every node can check their balance, no need to go
through bank) and distributed (geographical location)
 It’s a peer-to-peer network
 Cryptography - creates a hash function that is tamper proof - one
way function - input can be any length, hash will be 256 bit integer
or a 64 digit hexadecimal number, the hash will be completely
different
 There can be multiple inputs and outputs because they refer back
to previous transactions

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  Sum of inputs should be greater than or equal to the sum of
outputs
 The difference in inputs/outputs is the transaction fee to miners
o Nodes that maintain ledger - compensation through 2 types
 The difference between inputs/outputs, higher
transaction fees ensure faster execution
 Block rewards - lists of transactions can claim a block - a
few bitcoins
o They keep entire history of bitcoin transactions

Applications - to raise funds

 Initial coin offering - for smaller companies that can’t afford IPO’s or
comply with regulations from the SCC, they sell coins
 Some can be scams - jesus coin - may not have a good business plan
- investors just want to rush and speculate

NFT (non-fungible tokens) -

 Easy to store, verify and transfer unique ownership - buy a picture
or tweets
 Challenges - helps prove ownership (one line of blockchain) - ir’s a
record but not an asset, can downplay his wealth to avoid being
taxed, wild volatility

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