The internet economy slides november 2017

THE INTERNET ECONOMY
Ville Saarikoski
Work in progress November 2017

SETTING THE SCENE
 May you live in interesting times – a chinese saying

 Would you tell your boss, something he really does
not want to know, which would probably cost him
and you your jobs, but which would be good for the
future of your organisation and your community?
 Who would?

TIME AND GROWTH PERSPECTIVE
 The diamond metaphor
 The digital business is a business that grows 100%
per year (not in revenue)
 This leads to changing of rights, scarcity becomes
abundance means abundance has to be governed
in new ways. Laws change

MY FAVOURITE 4
 Skill to innovate
 Skill to do research
 Skill to implement in practice, make visible! Do!
 A knowledge of something

THE CORE OF A STRATEGY
 Where are you
 Where are you going to
 The only problem in a paradigm shift is that you
need to redefine where you are and build your
perception of where you are on a new pespective
and new data

FROM ECONOMICS TO ECONOMICS OF
CONNECTIVITY
quantity
price demand supply

DIGITALISATION? – LOOK AT GOOGLE
 What did Larry Page and Sergei Brin digitalise?
 Do not digitalise (automize) old models and ways of
working, but try to understand (through theory) what
could be done in the future?
 ”Page” search is built on an understanding of Networks
 Details of Google’s search algorythm are a secret => In
the information economy you need to learn what needs
to be kept as a secret and when to benefit from
openness => earning with information
 Google earns with advertisement. Pricing is based in an
auction method. Auctions are one of the core
applications of Game Theory

The ocean
surface,
swimmer,
ocean bed
tools,
metaphor

 Nokia – the ”burning platform”
 The Post Office, The mail man’s bag
 Music, from selling DVD,s and CD´s to selling digital music and
subscriptions e.g. Spotify
 Newspapers declining amount of readers, search for new digital
business model
 The paper industry
 The retail shops and supermarkets challenged by e-commerce
 Universities challenged by online education
 Health care moving to ehealth, eprescriptions, patient records etc
 Changing structures e.g. airlines from brick to click i.e. value creation
with information
=>1) Pick up a market creating company, understand theory and apply
theory to case ( a good theory, explains, predicts, categorises),
=>2) look at it from an industry perspetive
THE MACRO SCENE IN FINLAND - OLD STRUCTURES REACH A
”TIPPING POINT” AND EXPERIENCE A ”MELT DOWN”? => UNDERSTAND THE
LOGIC OF THE NEW ECONOMY:

WHAT IS THEORY
 A cause and effect relationship (an explanation) that is
generalizable (e.g. the innovators dilemma) => allows
prediction
 A model (e.g. diffusion of innovation and Bass model) =>
allows prediction
 A definition (e.g. a definition of innovation) => allows
understanding (allows saying what it is not)
 Classification (e.g. modular, innovation, architectural
innovation, competence based innovation, radical vs
incremental innovation, disruptive innovation) => allows
understanding
Note what is the distinction (method vs theory)
- method is a process. It is steps to take. It is a
recipe

LIST OF THEORIES (CONCEPTS/IDEAS, WAYS OF
THINKING)
At the core to understanding digitalisation is understanding the
character of nformation, networks and interdependencies (game
theory),
1. Earning with Information
2. Wisdom of the crowds
3. Understanding interdependencies – game theory basics
4. Value creation and value capturing in a network environment
5. Measuring networks
6. How does Google search work?
7. Six Degrees and the logic of flat rate – are we only six
handhakes away from each other?
8. Long Tail – what happens to demand when supply is not
limited?
9. Reallocation of rights – dilemma of the commons

10. Build change by starting at an industry level
11. Groundswell
12. The innovators dilemma – Clayton Christensen
13. Creating Market Space – Mauborgne and Kim
14. Open innovation – Henry Chesbrough
15. The Mesh Business – Lisa Gansky
16. Business model Canvas - Osterwalder
17. Matching markets – Easley & Kleinberg chapter
10 (not discussed in class, under construction)
LIST OF THEORIES (CONCEPTS/IDEAS, WAYS
OF THINKING)

THE INFORMATION TECHNOLOGY REVOLUTION –
TECHNOLOGY IS ONE OF THE KEY DRIVERS OF CHANGE
Technology stage
The amount
of companies
Time
Diffusion stage
1980 1990 2000 2010
Growth of productivity
Process innovation
Compelementary competences
New ways:
-e-services
-customer driven quality
Dominant
Designs
© 2009 O. Martikainen

THE ARGUMENTS WERE GROUNDED IN
 Game theory
 An understanding of networks
 The character of information
10.7.2018Tekijä 16
Networks Crowds
Markets on Google
Books
https://books.google
.fi/books?isbn=1139
490303
Individual
Society
Corporation
• More´s Law
• The digitalisation of
just about everything
• Artificial and human
intelligence

LAUDON E-COMMERCE
Individual
Society
Corporation
Click
Society
CorporationBrick
Service
Technology
Laudon
Saarikoski

DEFINING E-COMMERCE AND E-BUSINESS
 E-commerce is the use of the Internet and the web
to transact business
 E-business refers primarily to the digital enabling of
transactions and processes within a firm, involving
information systems under the control of the firm
 P 49 Laudon e-commerce

EIGHT UNIQUE FEATURES OF E-COMMERCE –
LAUDON P 52-55
 Ubiquity: it is available just about everywhere at all times
 Global reach
 Universal standards
 Richness. Earlier there was a trade off between richness
and reach
 Interactivity: an online merchant can engage a
consumer in ways similar to a face to face
 Information density
 Personalization/customization
 Social technology: user content generation and social
networking
Note Prahlad: The New Age of Innovation N=1 R=G

SEGMENTATION
 B2B,
 B2C
 C2C
 Peer to peer
 Mobile commerce

THEORY 1 WISE CROWDS & INFORMATION
CASCADES

JAMES SUROWIECKI – THE WISDOM OF THE
CROWDS – ARE CROWDS WISE?
INFORMATION CASCADES
 How much do I weigh? An example of wise crowds
 Independence and some idea of the answer to the question
 Beware of preferential attachment and other biases
 Information cascades: Angela Hung, Charles Plott p 62
 experiment: which shows if you believe that you will be rewarded
for the group being right you will tell the truth, however if you are
rewarded as an individual you are tempted to follow the crowd…
 Co-ordination problems
 Brian Arthur, El Farol Problem
 Schelling points: where to meet in Delhi India Gate, C.P?
 Que behaviour
 Imitation is a rational response to our own cognitive limits
 On YouTube
http://www.ted.com/talks/james_surowiecki_on_the_turning_p
oint_for_social_media.html
 Group think

THEORY 2 THE STRENGTH OF WEAK TIES
GRANNOVETER-
SOCIAL NETWORKS AND TRIADIC CLOSURE
 Strong triadic closure: If nodeA has strong ties to
two other nodes e.g. C and D, then a strong or
weak tie should exist between C and D
(Grannoveter).
A
C
D
s
s
According to strong
triadic closure: there
should be a weak or
strong link ere
The theory does not say what is a strong
or weak link. It just says what happens if

NETWORKS THE STRENGTH OF WEAK TIES,
SOURCE P 47 NETWORKS, CROWDS AND MARKETS, DAVID EASLEY AND JON KLEINBERG
Strong triadic closure: If a node has strong ties to two other nodes, then a strong or weak tie should exist
between these two other nodes (Grannoveter).
Example The above picture does not violate this argument.
• if A-F were strong then there should be a tie (strong or weak) between F-G
• The link from A to C is strong, the link from A to D is strong. A link (weak or strong) must exist between C and
D
Note the link between A and B is a (local) bridge and it can not be a strong tie

INNOVATORS NETWORKS
s
w
w
w
w
s
s
s
What is missing

NETWORKS -DIFFUSION
In the example on the left, if 2/3 or
more of your connections are of a
particular colour, you will not
change color
Source: Matthew Jackson,
Coursera course on Social
Networks (note also book by M
Jackson)

THEORY 3 EARNING WITH INFORMATION
 Information as data in a good/service
 Information as data in a database
 Information as what you know (private) vs all know
(public)

TO EARN WITH INFROMATION, UNDERSTAND THE
CHARACTER OF INFORMATION
 Sunk cost, an investment cost which needs to be recovered
e.g. investment in a factory, ship or itangibles like knowledge,
patents or creating a movie or game
 Marginal cost, the cost needed to produce one extra item
 A principle of Economics: In a perfect market (total
competition) price will go toward its marginal cost.
 Costly to produce, cheap to reproduce, The marginal cost
of an information product => zero
 Search for value (exchange value) to the customer!
Different segments have a different value for the
product/service
 Searching = advertising in the internet world.
 Avoid commodotization i.e. the only difference between
competitors is price. Put in a populist way: avoid
competition
 Non Rivalry

WAYS TO EARN WITH INFORMATION I.E. HOW
TO AVOID COMPETITION
 Information asymmetry (information is power, what
do you keep secret), to an increasing degree
information is not only a feature of the product (e.g.
a movie) but a feature of a database (e.g. Netflix,
Facebook), algorythms and Big Data
 Bundling
 Customer lock in (the customer does not want to
move away because)
 Switching cost (switching to something else will
cost)
 Positive feedback, preferential attachment
 Network effects – very common in social media.
The larger the user base the more valuable it is for
an individual user (network externalities)
 Platforms, ecosystems

EXAMPLES
 An airline, revenue management
 Buying software – what price should you pay
 The price of customizing i.e. changing code

CASE SOFTWARE HOUSE
 The customer wants a software to support his
business
 The software house esimates that building the
software will cost 2 million. => will the customer
buy? Probably not. The software provider will
perhaps make a contract of e.g. one million up front
and 0,3 million annually as a service contract for
three years.

LAUDON P 167 COST OF CUSTOMIZING
Source Laudon et al Ecommerce 2017

THEORY 4 INTERDEPENDENCE, GAME
THEORY
 Competitive game theory . Nash equilibrium
 Collaborative game theory – Shapley value

GAME THEORY
 Imagine a lucrative market. Should you enter?
Everybody else is thinking, should they enter and
trying to guess what everybody else is thinking
 Game theroy assumes
 Everyone can think and will act rationally
 Each player acts purely on self interest

 You are seriously considering dropping out of school
 You really want your own car
 Your parents want you to stay at school
 Your preference
 Quit school and have your parents buy a car 4p
 Stay in school and get a car 3 p
 Quit school and not have a car 2p
 Stay in school and not get a car 1p
 Your parents preferences
 You stay in school and they don´t buy you a car 4p
 You stay in school and they buy you a car 3p
 You quit school and they do not buy you a car 2p
 You quit school and they buy you a car 1p
NEGOTIATING - INTERDEPENDENCE

3
3
4
1
1
4
2
2
Stay in school Quit school
Buy a car
Do not buy
a car
YOU
NEGOTIATING - INTERDEPENDENCE
Formula
 Choose two options for both parties so that they are
interdependent
 Try thinking what and how the other players value their choices
 Solve the game theoretic problem

HOW DO YOU SOLVE IT?
3
3
4
1
1
4
2
2
Buy a car
Do not buy
a car
Student
Parents

 Imagine you are the parent and the child chooses
”stay in school”,
3
3
4
1
1
4
2
2
Buy a car
Do not
buy a car
Student
Parents
This is the parents best
option, if student decides to
stay in school

 Imagine you are the parent and the child chooses
”quit school”
3
3
4
1
1
4
2
2
Buy a car
Do not buy
a car
Studen
t
Parents
This is the parents best
option, if student decides to
quit school
=>
Whatever the student
chooses, the parents
best choice is always ”do
not buy a car”.
Remember rule 2: if you
have a dominant strategy
use it! Therefore the
parent will not buy a car

 Imagine you are the student and the parent
chooses chooses ”buy a car”,
3
3
4
1
1
4
2
2
Buy a car
Do not buy
a car
Studen
t
Parents
This is the students best
option, if parent decides to
buy a car

chooses ”do not buy a car”
3
3
4
1
1
4
2
2
Buy a car
Do not buy
a car
Studen
t
Parents
This is the students best
option, if parent decides to
not buy a car
=>
Whatever the parent
chooses, the students
best choice is always
”quit school”. Remember
rule 2: if you have a
dominant strategy use it!
Therefore the student will
quit school

PROMISE
Parents: ”if you stay in school we will buy you a car”
1. When you make a promise, you are anouncing
that you will make a decision in the perceived
interests of the other player
2. When you make a promise, the choice you make
is usually expensive to you when it succeeds

THREAT: ”IF YOU QUIT SCHOOL WE WILL NOT
GO ON A TRIP”
1. You announce your willingness to make a choice you would
prefer not to make
2. Your Statement of a threat is expensive to you when it fails
3
3
4
2
1
3
2
1
Go on trip
Stay at
home
YOU
Parents

COMMITMENT: ONE PARTY ANNOUNCES IT IS
MAKING A CERTAIN CHOICE, AN IRREVOCABLE
CHOICE.
PARENTS: YOU KNOW THAT WE HOPE YOU STAY IN SCHOOL, BUT
WETHER YOU DO OR DO NOT, WE ARE NOT GOING TO BUY YOU A LAP
TOP
3
3
4
1
1
4
2
2
Buy a lap
top
Don´t buy a
lap top
YOU
Parents
Your ability to influence their decision in your favour no longer exists

WARNING:
ONE PARTY MAKES YOU AWARE OF THE
CONDITIONS THAT EXISTS, OR IN THE CASE OF
THESE EXAMPLES THE MATRIX
IMAGINE YOUR GRANDPARENTS HAVE LEFT A SIZEABLE
INHERITANCE FOR YOU, ON THE CONDITION THAT YOU FINNISH
SCHOOL. IF YOU DO NOT FINNISH SCHOOL, THE MONEY GOES TO
YOUR PARENTS´FAVOURITE CHARITY
4
4
2
1
x
x
1
2
Encourage you
to finnish school
Support a
charity
YOU
Parents

THE PRISONERS DILEMMA
 Story… Build the matrix

GAME THEORY – THE PRISONERS DILEMMA
LIISA B
PEKKA A
Keep silent Talks
Keep silent 1,1 5,0
Talks 0,5 3,3
The choice is made simultaneously (independent of each other), the game
is repeated
Solution: take it into pieces. If Lisa keeps silent, Pekkas best option is…If
Liisa talks… What can we conclude?
Note, both keeping silent would lead to the samllest cumulative solution
(social optimum). However the parties make their decissions
independently.

WHAT DOES GAME THEORY TEACH US?
(VICARIOUS THINKING I.E. WHAT WOULD THE
OTHER PLAYER(S) DO?
Company B (in red)
Company A
10,0 5,15
5,5 10,10

Company B (in red)
Company A
0,0 25,40 5,15
40,25 10,0 5,15
10,5 5,5 10,10
http://areena.yle.fi/1-2922031
Yhteiskunta ylös juoksuhaudoista Ville Saarikoski,
Arvassalo ry:n haastateltavana 3.9.2015
PRISONERS OF OUR CONSTRUCTS (INSTITUTIONS): AN INDIVIDUAL PLAYER
CAN NOT MOVE AWAY WITHOUT HIS INDIVIDUAL SITUATION BECOMING WORSE
EVEN IF E.G. TECHNOLOGY WOULD OFFER A BETTER (SOCIAL WELFARE)
OPTIMUM (EXAMPLES: NOKIA CASE, E-IDENTITY, ONLINE EDUCATION,
POLUTION)
Updated 18.1.2016

Company B (in red)
Company A
0,0 25,40 5,15
40,25 10,0 5,15
10,5 5,5 10,10
http://areena.yle.fi/1-2922031
Yhteiskunta ylös juoksuhaudoista Ville Saarikoski,
Arvassalo ry:n haastateltavana 3.9.2015
PRISONERS OF OUR CONSTRUCTS (INSTITUTIONS): AN INDIVIDUAL PLAYER
CAN NOT MOVE AWAY WITHOUT HIS INDIVIDUAL SITUATION BECOMING WORSE
EVEN IF E.G. TECHNOLOGY WOULD OFFER A BETTER (SOCIAL WELFARE)
OPTIMUM (EXAMPLES: NOKIA CASE, E-IDENTITY, ONLINE EDUCATION,
POLUTION)
Updated 18.1.2016
KORJAA

THE NEW ECONOMY, THE NEW OPTIMUM
The optimum
structures of
the industrial
economy
The new
optimum
structures of
the internet
economy

APPLICATIONS OF GAME THEORY
 Google advertising - Generalized second price auction
https://en.wikipedia.org/wiki/Generalized_second-
price_auction, example ”An auction of a car park”
 Vickery & Vickery Clark Groves Nobel prize
 https://en.wikipedia.org/wiki/The_Market_for_Lemons
 Game theory related Nobel Prizes:
 Holmström 2016
 Jean Tirole 2014
 Roth and Shapley 2012
 Aumann and Schelling 2005
 Akerlof, Spence, Stiglitz 2001
 Mirrlees, Vickrey 1996
 Harsnyi, Nash, Selten 1994
 Coase 1991
 Hicks, Arrow 1972

LECTURE: ARE YOU A STRATEGIC ACTOR?
 The Art of Strategy, A Game Theorist´s Guide to
Success in Business and Life, Dixit, Nalebuff – the
authors of an earlier book thinking strategically

VICARIOUS THINKING: TRY AND THINK WHAT
THE OTHER(S) WOULD DO?

GUESS WHAT NUMBER BETWEEN 1-100 I AM
THINKING OF, AFTER EACH GUESS I WILL TELL YOU
IF MY NUMBER IS MORE OR LESS
 If you guess correctly on the first round you get 100
Euro´s
 On the second round 80 Euro´s
 On the third 60
 On the fourth 50
 On the fifth 20

WHAT IS A GOOD STRATEGY?
 First guess (in the middle) 50: my number is higher
 Second guess 75 (in the middle of 50-100): my number is
lower
 Third guess 63 (roughly in the middle of 50-75): my number is
higher
 Fourth guess 69 (middle of 63-75): my number is higher
 Fifth guess. Now you know the number is 70,71,72,73,74 – a
one in five chance. My number is 72
 Game theory is all about interdependence. You easily get into
a mess by thinking: I think that you think that I think..
 Here I was assuming that you will use a logical strategy i.e.
guess the middle number. Therefore I did not choose any of
the middle numbers 50,75,63 or 69 as my number and was
actually left with the numbers 70…74 in this particular case
(higher, lower, higher, higher

RULE 1 LOOK FORWARD REASON BACKWARD
Pay-offs
Innova Dolla
1 1
3 2
2 4
4 3
Innova strong
in R&D, Dolla
financially
strong. The
Business
question
should Innova
invest in
R&D?
Note Innova
moves first.
low
DOLLA
high
high
DOLLA
low
low
high
INNOVA,
first move
Advice: start form the end: what would Dolla decide if in position
1 or 2?
2
1

RULE 1 LOOK FORWARD REASON
BACKWARD
Pay-offs
Innova Dolla
1 1
3 2
2 4
4 3
Innova strong
in R&D, Dolla
financially
strong. The
Business
question
should Innova
invest in
R&D?
Let´s look at
the second
move, what
options does
Dolla have?
low
DOLLA
high
high
DOLLA
low
low
high
INNOVA,
first move
1 or 2?
2
1
Dolla
would
choose
low 2
is
higher
than
one
Innova
would
get 3

Pay-offs
Innova Dolla
1 1
3 2
2 4
4 3
Innova strong
in R&D, Dolla
financially
strong. The
Business
question
should Innova
invest in
R&D?
low
DOLLA
high
high
DOLLA
low
low
high
INNOVA,
first move
1 or 2?
2
1 Dolla
would
choose
high 4 is
higher
than three
Innova
would get
2
Rule 1 Look Forward Reason Backward

Pay-offs
Innova Dolla
1 1
3 2
2 4
4 3
Innova strong
in R&D, Dolla
financially
strong. The
Business
question
should Innova
invest in
R&D?
Here we have
Dolla´s
options.
Which of
these two
would be best
for Innova?
low
DOLLA
high
high
DOLLA
low
low
high
INNOVA,
first move
1 or 2?
2
1

Pay-offs
Innova Dolla
1 1
3 2
2 4
4 3
Innova strong in
R&D, Dolla
financially strong.
The Business
question should
Innova invest in
R&D?
Here we have
Dolla´s options.
Which of these two
would be best for
Innova?
low
DOLLA
high
high
DOLLA
low
low
high
INNOVA,
first move
1 or 2?
2
1

RULE 1 LOOK FORWARD REASON BACKWARD
(BACKWARD DEDUCTION)
 Rules you have 21 flags on the field. The team to
remove the last flags wins. You are allowed to
remove 1,2 or 3 flags. Your team starts. What is
your strategy? Do you have a clear strategy?

THE SECOND TO LAST MOVE
 If you leave 4 flags, the competitor can choose
1,2,or 3 and you can always choose the last=> you
need to leave the competitor with four flags
 If you leave 8 flags, the competitor may choose any
number of flags 1,2,3 and you can choose the
appropriate number so that 4 will be left
 If you leave 12 flags…
 16
 20
=> You have a clear winning strategy: take one flag
(the competitor has 20) and make sure the competitor
has in the following moves 16, 12,8 and 4.

RULE 1: LOOK FORWARD REASON
BACKWARD

RULE 2: IF YOU HAVE A DOMINANT STRATEGY,
USE IT.
 In other words, If you have a choice which makes
sense whatever the other player(s) do, use it?
 Sounds trivial, but it is not as trivial as one would
think. Why? Let´s see!

chooses ”do not buy a car”
3
3
4
1
1
4
2
2
Buy a car
Do not buy
a car
Studen
t
Parents
This negotiation is easily solved the parents will make a
promise: ”if you stay in school, we will buy you (the
student) a car” – remember that in many casses after
reaching an agreement it is always good to make a
contract. You might ask why? –well this is not the best
choice for neither party.

CHANGING THE GAME!
 S 174-200 Strategic Moves

 Promise Example Parents: ”if you stay in school we will buy you a car”
1. When you make a promise, you are anouncing that you will make a decision in the
perceived interests of the other player
2. When you make a promise, the choice you make is usually expensive to you when
it succeeds
 Threat: ”If you quit school, we will not go on a trip”
1. You announce your willingness to make a choice you would prefer not to make
2. Your Statement of a threat is expensive to you when it fails
 Commitment: one party announces it is making a certain choice, an
irrevocable choice.
1. Parents: You know that we hope you stay in school, but wether you do or do not, we are
not going to buy you a lap top
STRATEGIES – CHANGING THE GAME P. 174-
200 THE ART OF STRATEGY

WARNING:
ONE PARTY MAKES YOU AWARE OF THE CONDITIONS
THAT EXISTS, OR IN THE CASE OF THESE EXAMPLES
THE MATRIX
IMAGINE YOUR GRANDPARENTS HAVE LEFT A SIZEABLE INHERITANCE FOR YOU, ON THE CONDITION
THAT YOU FINNISH SCHOOL. IF YOU DO NOT FINNISH SCHOOL, THE MONEY GOES TO YOUR
PARENTS´FAVOURITE CHARITY
4
4
2
1
x
x
1
2
Encourage you
to finnish school
Support a
charity
YOU

STRATEGIC MOVES P 185
Unconditional first move
Promise, response that
rewards the other player
at some cost to oneself
if he complies with
one´s demand
Commitment, creating a
fait accompli to which
the other must respond
Threat (response that
hurts the other player at
some cost to oneself if
he fails to comply with
one´s demand
Response rule fixing
conditional second
move

SCREENING
 Observing how the other reacts. Players should
watch what the other does, not what he says
 If you want to elicit information from someone else,
you should set up a situation where that person
would find it optimal to take one action if the
information (proprietary known only to the other
party) was of one kind, and another action if it was
of another kind.
 Example, Sue was in love with a successful
executive. He professed his love to her. Sue asked
him to get a tattoo, a tattoo with her name

AN EXAMPLE – WHERE WILL YOU MEET
 You want to go to a movie. The opposite gender
would want to go to a restaurant. You have agreed
to meet at 7 pm, but do not recall at which location.
Where do you go to?

VALUE CREATION VALUE CAPTURING – VICARIOUS
THINKING, EXAMPLES OF THE GAMES BUSINESSES PLAY
LIISA
PEKKA
Keeps
mouth shut
Talks
Keeps
mouth shut
-1,-1 -5,0
Talks -0,-5 -3,-3
Rule 2: If you have a dominant
strategy: play it! – why not so
easy?

VALUE CREATION VALUE CAPTURING – VICARIOUS THINKING,
EXAMPLES OF THE GAMES BUSINESSES PLAY
LIISA
PEKKA
Keeps
mouth shut
Talks
Keeps
mouth shut
-1,-1 -5,0
Talks -0,-5 -3,-3
strategy: play it! – why not so
easy?

LIISA
PEKKA
Keeps
mouth shut
Talks
Keeps
mouth shut
-1,-1 -5,0
Talks -0,-5 -3,-3
Nash Equilibrium

LIISA
PEKKA
Keeps
mouth shut
Talks
Keeps
mouth shut
-1,-1 -5,0
Talks -0,-5 -3,-3
strategy: play it! – removing
dominated strategies

Rule 3: Eliminate from consideration any
dominated strategies and strategies that are
never best responses, and go on doing so
successively p 121
Example: A pricing problem
42 41 40 39 38
42 43120
43120
43260
41360
43200
39600
42940
37840
42480
36080
41 41360
43260
41580
41580
41600
39900
41420
43120
41040
36540
40 39600
43220
39900
41600
40000
40000
39900
38400
39600
36800
39 37840
42940
38220
41420
38400
39900
38380
38380
38160
36860
38 36080
42480
36540
41040
36800
39600
36860
38160
36720
36720
B.B Lean´s price
Rainbo
w´s
end
price

successively p 121
42 41 40 39 38
42 43120, 43120 41360, 43260 39600, 43200 37840, 42940 36080, 42480
41 43260, 41360 41580, 41580 39900, 41600 43120, 41420 36540, 41040
40 43200, 39600 41600, 39900 40000, 40000 38400, 39900 36800, 39600
39 42940, 37840 41420, 38220 39900, 38400 38380, 38380 36860, 38160
38 42480, 36080 41040, 36540 39600, 36800 38160, 36860 36720, 36720
B.B Lean´s price
Rainbo
w´s
end
price
What should Rainbows
end decide , if B.B.Lean
chose 42?

successively p 121
42 41 40 39 38
42 43120, 43120 41360, 43260 39600, 43200 37840, 42940 36080, 42480
41 43260, 41360 41580, 41580 39900, 41600 43120, 41420 36540, 41040
40 43200, 39600 41600, 39900 40000, 40000 38400, 39900 36800, 39600
39 42940, 37840 41420, 38220 39900, 38400 38380, 38380 36860, 38160
38 42480, 36080 41040, 36540 39600, 36800 38160, 36860 36720, 36720
B.B Lean´s price
Rainbo
w´s
end
price
What should BB Lean decide
, if Rainbows end chose 42?

successively p 121
42 41 40 39 38
42 43120, 43120 41360, 43260 39600, 43200 37840, 42940 36080, 42480
41 43260, 41360 41580, 41580 39900, 41600 43120, 41420 36540, 41040
40 43200, 39600 41600, 39900 40000, 40000 38400, 39900 36800, 39600
39 42940, 37840 41420, 38220 39900, 38400 38380, 38380 36860, 38160
38 42480, 36080 41040, 36540 39600, 36800 38160, 36860 36720, 36720
B.B Lean´s price
Rainbo
w´s
end
price
Note B.B Lean would never choose 42 nor 38, eliminate them, Rainbows end would never
chose 42 nor 38 eliminate them

successively p 121
41 40 39
41 41580, 41580 39900, 41600 43120, 41420
40 41600, 39900 40000, 40000 38400, 39900
39 41420, 38220 39900, 38400 38380, 38380
B.B Lean´s price
Rainbo
w´s
end
price
Each has a dominant strategy:Rainbow’s end will always choose 40, B.B Lean will always
choose 40

RULE 4: HAVING EXHAUSTED THE SIMPLE AVENUES
OF LOOKING FOR DOMINATED STRATEGIES OR RULING
OUT DOMINATED ONES, NEXT SEARCH ALL THE CELLS
OF THE GAME FOR A PAIR OF MUTUAL BEST
RESPONSES IN THE SAME CELL, WHICH IS A NASH
EQUILIBRIUM OF THE GAME
Company B
Company C
0,0 25,40 5,15
40,25 0,0 5,15
10,5 15,5 10,10

RULE 5: IN A GAME OF PURE CONFLICT (ZERO SUM GAME), IF IT
WOULD BE DISADVANTAGEOUS FOR YOU TO LET THE OPONENT SEE
YOUR ACTUAL CHOICE IN ADVANCE, THEN YOU BENEFIT BY CHOOSING
AT RANDOM FROM YOUR AVAILABLE PURE STRATEGIES.
THE PROPORTIONS IN YOUR MIX SHOULD BE SUCH THAT THE
OPPONENT CANNOT EXPLOIT YOUR CHOICE BY PURSUING ANY
PARTICULAR PURE STRATEGY FROM THE ONES AVAILABLE TO HIM,
THAT IS YOU GET THE SAME AVERAGE PAYOFF WHEN YOUR MIXTURE
IS PITTED AGAINST EACH OF THE PURE STRATEGIES IN HIS MIXTURE.

THE ART OF STRATEGY
 Rule 1 Look forward reason backward
 Rule 2: If you have a dominant strategy, use it
 Rule 3: Eliminate from consideration any dominated
strategies and strategies that are never best responses,
and go on doing so successively
 Rule 4: Having exhausted the simple avenues of looking
for dominated strategies or ruling out dominated ones,
next search all the cells of the game for a pair of mutual
best responses in the same cell, which is a Nash
Equilibrium of the game
 Rule 5: In a game of pure conflict (zero sum game), if it
would be disadvantageous for you to let the oponent
see your actual choice in advance, then you benefit by
choosing at random from your available pure strategies.

FB, DEGREE CENTRALITY,CLOSENESS
CENTRALITY JA BETWEENNESS CENTRALITY-
FRIENDWHEEL
 Real life networks (e.g
friendwheel) friends are
also friends with each other
 Clustering Coefficient
measures how many of my
friends are frineds with
each other out of all
possible.
 https://www.youtube.com/w
atch?v=K2WF4pT5pFY

WHO IS IN THE BEST POSITION IN THE
NETWORK?
Source Coursera course Brinton& Chiang, Princeton
Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes
Princeton/Coursera
Anna
David
Calle
Eero
Benjamin
Filip

MEASURING A NETWORK 1: DEGREE
CENTRALITY (HOW MANY CONTACTS)
Anna
David
Calle
Eero
Benjamin
 David 3
 Calle 3
 Eero 3
 Filip 2
 Benjamin 2
 Anna 1
 Critic intuitively Calle should be in a more central position compared to
e.g. David or Eero. Calle holds the network together
 Benjamin connects Anna to the network. Intuitively Benjamin should
be more important than either Eero or Filip
Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes Princeton/Coursera

MEASURING NETWORKS 2: CLOSENESS
CENTRALITY (AM I IN THE CENTER?)
Anna
David
Calle
Eero
Benjamin
 Choose a person,
 Search for the shortest route
from the chosen to all others
 Count the average
 Do 1/average
 E.g. Anna: AB=1,AC=2, AD=3,
AE=3, AF =4, Anna has 5 in the network, average
(1+2+3+3+4)/5 = 13/5, 1/average 5/13 = 0,385
 Count others…
Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes Princeton/Coursera

Anna
David
Calle
Eero
Benjamin
Filip
 Now the order is Calle, David &Eero,
Benjamin, Filip, Anna
 A better result
 Calle and Benjamin perform better
 Challenge David and Eero do not
”glue” the network. Calle holds the network
together and also Benjamin connects Anna to
the network. Calle and Benjamin should
perform better
0,385
0,556 0,714
0,455
0,625
0,625
MEASURING NETWORKST 2: CLOSENESS
CENTRALITY,

MEASURING NETWORKS 3: BETWEENNESS
CENTRALITY (ARE YOU A GLUE OF THE
NETWORK?)
Anna
David
Calle
Eero
Benjamin
 Choose a person e.g. Calle,
 Choose a pair of nodes, go through all node
pairs
 Search for all the shortest routes between
a node pair
 On how many of the shortest routes is
the chosen person on
 E.g. choose Calle. Start first with Anna 1) AB, 1, 0
=> 0/1=0 2) AD, 1,1 =>1/1 =1 3) AE…=1 AF, 2,2
=>2/2=1 these all together 3. But count also all
others
 BA (already done i.e AB), BE..1,BD…1, BF 2/2=1
 DE=0,DF=0,FE=O All together 6

Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without
Calculus
See also Chiang Mung, Friends, Money and Bytes Princeton/Coursera
MEASURING A NETWORK 3: BETWEENNES
CENTRALITY (GLUE OF THE NETWORK)
Anna
David
Calle
Eero
Benjamin
Filip
 Order Calle, Benjamin,
Eero & David, Filip ja Anna
 Note Calle most important,
Benjamin more important than
David and Eero 0
4 6
0
1,5
1,5

SUMMARY
Degree Closeness Betweenness
Value Order Value Order Value Order
Anna 1 3 0,56 3 0 4
Benjamin 2 2 0,3 5 4 2
Calle 3 1 0,71 1 6 1
Eero 3 1 0,63 2 1,5 3
David 3 1 0,63 2 1,5 3
Filip 2 2 0,45 4 0 4
Anna
David
Calle
Eero
Benjamin

CLUSTERING COEFFICIENT
 Another way of thinking:
 A has four friends B,C,D,E
 Who could be friends with each other?
 BC, BD, BE, CD, CE, DE i.e. six.
 How many are realized in the picture (taken from
YouTube)?
 Only one (red) i.e one out of six, clustering
coefficient is 1/6
 Note there is another way of counting (another
definition) which does not always lead to the
same result)

THEORY 6 VALUE CAPTURING IN A NETWORK
ENVIRONMENT

THE GAMES BUSINESSES PLAY – VALUE
CREATION, VALUE NET FRAMEWORK
 The Right Game – use game theory to shape
strategy HBR July - August1995, Adam
brandenburg and Barry J Nalebuff
 The importance of value creation and value
capturing in Value Networks
 PARTS, Players, added value, rules, tactics, scope

THE VALUE NET , THE RIGHT GAME HBR
1995 JULY - AUGUST, ADAM BRANDENBURG
AND BARRY J NALEBUFF
Company
Supplier
Substitutor Complementor
Customer

THEORY 7 HOW DOES GOOGLE SEARCH
WORK

LOS ANGELES TIMES
Snowden gained almost 300,000 followers in
less than two hours after he tweeted his first
message Tuesday morning. Soon after, he
posted a cheeky swipe at his former employer,
the NSA, whose account only has 76,000
followers
Snowden NSA
1 out
degree300 000
in degree

RANDOM SURFER
Two choices
 You follow a link found on a page
 You take a random page and follow links from that
page

YOU ARE A FIRST TIME VISITOR IN A NEW TOWN AND YOU GO AND
ASK DAVID: WHAT IS THE BEST RESTAURANT AND ALSO WHO
KNOWS WHERE THE BEST RESTAURANTS IN TOWN ARE?
Anna Benjamin
Calle
David

DAVID ANSWERS AND ALSO TELLS YOU THAT HE RECOMMENDS YOU
ASK ANNA, CALLE AND BENJAMIN. YOU CONTINUE ANS ASK ANNA
CALLE AND BENJAMIN AND YOU ALSO ASK WHO DO THEY
RECOMMEND?
Anna
Benjamin
Calle
David

THE FOLLOWING NETWORK IS FORMED. WHO
SHOULD YOU LISTEN TO?
Anna
Benjamin
Calle
David
½ A
½ A
1/3 D
1/3 D
1/3 D
1C
½ B
½ B

CREATE THE EQUATIONS
Anna
Benjamin
Calle
David
½ A
½ A
1/3 D
1/3 D
1/3 D
1C
½ B
½ B
- A = 1/3D
- B =½ A + 1/3 D
- C= ½ A + ½ B
- D = C
- All information is equal
to one i.e.
- A+B+C+D =1
- Solve these equations
- A=0,129, B=0,258,
C=0,290 , D= 0,387
- Google PageRank will
give you the answer
D,B,C,A

CREATE THE EQUATIONS - CHECKED
Anna
Benjamin
Calle
David
½ A
½ A
1/3 D
1/3 D
1/3 D
1C
½ B
½ B
- A = 1/3D
- B =½ A + 1/3 D
- C= ½ A + ½ B+ 1/3D
- D = C + ½ B
- All information is equal
to one i.e.
- A+B+C+D =1
- Solve these equations
- A=0,129, B=0,1935,
C=0,290 , D= 0,387
- Google PageRank will
give you the answer
D,B,C,A

 You might also look up
 https://www.youtube.com/watch?v=BNHR6IQJGZs
 https://www.youtube.com/watch?v=KyCYyoGusqs tai
 https://www.youtube.com/watch?v=Ylare5LoDdE
 https://www.youtube.com/watch?v=u8HtO7Gd5q0

THEORY 8 MATCHING MARKETS – HOW MARKETS
EMERGE, MARKET CLEARING PRICES

MATCHING MARKETS (CHAPTER 10 EASLEY
KLEINBERG)
 See also…Experimental studies of Power and
exchange
 Source, Networks, Crowds and Markets, David
Easley and Jon Kleinberg 2010

Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
Wish list
Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
A matching market
MATCHING MARKETS

Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
By just removing Aleksi´s wish of
room 3, there is no match
Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
Identifying a constricted set
A GRAPH WITH NO MATCHING

Sellers
Room 1
Room 2
Room
3
Xin
Yoam
Zoe
Buyers Valuations
12,4,2
X values:
sellers a product at 12,
sellers b product at 4
sellers c product at 2,
8,7,6
7,5,2
INTRODUCE ”PRICE” – HOW MUCH THEY LIKE EACH
OBJECT (10.2 VALUATIONS AND OPTIMAL ASSIGNMENTS)
Sellers
Room 1
Room 2
Room
3
Xin
Yoam
Zoe
Buyers Valuations
12,4,2
8,7,6
7,5,2
Optimal assignment

WHAT IF THE BUYER WANTS TO OPTIMIZE HIS PAYOFF?
(10.3 PRICES AND MARKET CLEARING PROPERTIES P 255-257)
Sellers
a
b
c
x
y
z
Buyers
Valuations
12,4,2
X values (v) sellers
a product at 12,
sellers b product at
4 and sellers c
product at 2, The
payoff (profit) of
x = v-p
e.g.if he buys a for
4 his payoff is 12-4
= 8
8,7,6
7,5,2

LETS LOOK AT SOME ASKING PRICES
Sellers
a
b
c
x
y
z
Buyers Valuations
12,4,2
8,7,6
7,5,2
Prices
5
2
0
X will buy a,
”profit” 12-5 = 7,
note a is her
unique prefered
seller b = 4-2= 2,
c = 2 -0 =2
y will buy c,
”profit” 7-0 = 7
note c is her
unique preferred
seller
z will buy b,
”profit” 5-2 = 3
note b is her
preferred seller

EXCERCISE: WHO ARE THE PREFERRED
SELLERS IN THIS SET UP?
Sellers
a
b
c
x
y
z
Buyers Valuations
12,4,2
8,7,6
7,5,2
Prices
2
1
0

Sellers
a
b
c
x
y
z
BuyersPrices
2
1
0
Valuations
12,4,2
8,7,6
7,5,2
X would profit 12-2 = 10 from a,
4-1 =3 from b and
2-0= 2 from c => x would prefer a
Y would profit 8-2 = 6 from a,
7-1 =6 from b and
6-0= 6 from c => y has no unique
preference a, b or c is just as good
z would profit 7-2 = 5 from a,
5-1 =4 from b and
2-0 = 2 from c => a is z´s
unique preference

Sellers
a
b
c
x
y
z
BuyersPrices
2
1
0
Valuations
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y has no unique
preference a, b or c is just as good
5-1 =4 from b and
2-0 = 2 from c => a is z´s
unique preference
No clear solution

EXCERCISE 2 HOW ABOUT NOW?
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
Valuations
12,4,2
8,7,6
7,5,2

10.4 HOW DO YOU CREATE MARKET CLEARING
PRICES P 258-261
 Existence of market clearing prices: For any set
of buyer evaluations, there exists a set of
market clearing prices
 Optimality of market clearing prices: for any set
of market clearing priices, a perfect matching in
the resulting preferred seller graph has the
maximum tota valuation of any assignment of
sellers to buyers
=> How to construct market clearing prices

10.4 CONSTRUCTING MARKET CLEARING
PRICES P 258
I. At the start of each round, there is a current set of prices, with the
smallest one equal to 0.
II. We construct the preferred seller graph and check whether there is
a perfect matching
III. If there is, we´re done: the current prices are market clearing
IV. If not, we find a constricted set of buyers, S, and their neighbors
N(S)
V. Each seller in N(S) (simulatneously) raises his price by one unit
VI. If necessary, we reduce the prices: the same amount is subtratced
from each price so that the smallest price becomes zero.
VII. We now begin the next round of the auction, using these new prices

1. FIRST ROUND: WE GIVE ALL THE PRICE ZERO
AND SEARCH FOR CONSTRICTED SET N(S) AND
LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
0
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference

SEARCH FOR CONSTRICTED SET N(S) AND LOOK
AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
0
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference
=> N(S) is a and S is x,y,z, Give a price 1

2 SECOND ROUND: A IS 1, SEARCH FOR
CONSTRICTED SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
1
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a or b
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference

CONSTRICTED SET N(S) IS EITHER S = X,Z AND
N(S) = A (I.E. RAISE A BY 1) OR S = X,Y,Z AND N(S) = A,B
(I.E. RAISE A,B BY ONE)?
Sellers
a
b
c
x
y
z
BuyersPrices
1
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a or b
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference
=> Give a price 2 (S=x,z)

3. THIRD ROUND: A IS 2, SEARCH FOR CONSTRICTED
SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
Buyers
2
0
0
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer b
5-0 =5 from b and
2-0 = 2 from c => z would prefer a or b
=> Note both a and b are a constricted set

3. THIRD ROUND: A IS 2, SEARCH FOR CONSTRICTED
SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
2
0
0
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer b
5-0 =5 from b and
=> Note both a and b are a constricted set, S
is x,z), raise the price of a and b

4. FOURTH ROUND: A IS 3 B IS 1, SEARCH FOR
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y would prefer b or a
5-1 =4 from b and

4. FOURTH ROUND: A IS 3 B IS 1, SEARCH FOR
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y would prefer b or
a
5-1 =4 from b and
2-0 = 2 from c => z would prefer a or
b

10.5 HOW DOES THIS RELATE TO SINGLE ITEM AUCTIONS?
- GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0

10.5 HOW DOES THIS RELATE TO SINGLE ITEM AUCTIONS?
- GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-0 = 3
B payoff 0-0 = 0
C payoff 0-0
Chooses A, as does all
the others

10.5 HOW DOES THIS RELATE TO SINGLE ITEM
AUCTIONS? - GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-0 = 3
B payoff 0-0 = 0
C payoff 0-0
Chooses A, as does all
the others
=> Add one to price a

Sellers
a
b
c
x
y
z
Buyers
1
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-1 = 2
B payoff 0-0 = 0
C payoff 0-0
Chooses A,
A payoff 2-1 = 1
B payoff 0-0 = 0
Chooses A
A payoff 1-1= 0
=> Add one to price a

Sellers
a
b
c
x
y
z
Buyers
2
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-2 = 1
B payoff 0-0 = 0
C payoff 0-0
Chooses A,
A payoff 2-2 = 0
B payoff 0-0 = 0
Chooses A
A payoff 1-1= 0
=> Sold to buyer x at
price 2

AUCTIONS? – NOTE YOU COULD ALSO HAVE LEFT THE
ZERO´S
Sellers
a
b
c
x
y
z
Buyers
2
0
0
Prices
Sellers
a
b
c
x
y
z
2
0
0
Valuations
3,0,0
2,0,0
1,0,0

 Vickrey Auction, Nobel prize 1996
https://en.wikipedia.org/wiki/Vickrey_auction
 Vickrey Clark Groves mechanism
https://en.wikipedia.org/wiki/Vickrey%E2%80%93Clarke%E2%8
0%93Groves_auction
 http://www.nobelprize.org/nobel_prizes/economic-
sciences/laureates/
 Game theory related Nobel Prizes:
 Jean Tirole 2014
 Roth and Shapley 2012
 Aumann and Schelling 2005
 Akerlof, Spence, Stiglitz 2001
 Mirrlees, Vickrey 1996
 Harsnyi, Nash, Selten 1994
 Coase 1991
 Hicks, Arrow 1972

THEORY 9 SIX DEGREES AND THE LOGIC OF
FLAT RATE
 YouTube video the science behind six degrees of
seperation
https://www.youtube.com/watch?v=TcxZSmzPw8k

BUSINESS MODEL OF THE INTERNET
In the real (physical) world e.g. bottle of coke costs 2
Euro and 100 bottles would cost 200 Euro´s, why then
should the price for consuming e.g. 10 Gigs be the
same as 100 Mbytes?
 Which member of parliament sends the most
Chrismas Cards?
http://www.savonsanomat.fi/teemat/eduskuntavaalit/i
l-kari-k%C3%A4rkk%C3%A4inen-suoltaa-
joulukortteja/627307
 What happened when an operator allowed for
flat rate sms in Finland c 2005?

HTTP://WWW.VOICE.FI/VIIHDE/IL-EDUSKUNNAN-
JOULUKORTTIKINGI-LAHETTAA-4000-KORTTIA-
32568

SIX DEGREES
 Stanley Milgram – we are only six degrees away from
each other.
 How is this possible?
 What if we each have 100 friends
100*100*100*100*100*100 = 10 billion
 This is fine, however we are often friends with our friends
i.e high clustaring

Person 1
PERSON
100
Six degrees: The person with a lot of contacts
is a glue to the network – paths shorten
High clustering (red nodes) and super connected nodes
(yellow)

THEORY TEN – THE LOGIC OF FLAT RATE

WHY DOES PRICING NEED TO GO TOWARD FLAT
RATE (AWAY FROM TRANSACTION BASED)
 It is all about the efficient flow of information in networks
 Short paths are important (the longer the path i.e. the
more people i.e nodes on the way the more probable it
is that the message will distort.
 A Random network (graph) will connect early. Human
networks are clustered (we are friends of friends and
geographically located) for Human networks to connect
with low path distance we needed superconnected
people (nodes)
 Take the example of US president Donald Trump (a
super connected node). Would he be willing to pay for
each recipient receiving his tweet e.g. 20 million
recepients a 1 c equal 200 000 per tweet? Or would his
followers each be willing to pay a cent for reading
(receiving his message) => hence toward flat rate

The Long Tail and
change
Chris Anderson (2006) The Long Tail: What happens
to demand when supply is no longer limited
Remeber: Bricks and Clicks, The Virtual world
combines with the physical world

THEORY 12, REALLOCATION OF RIGHTS
(DILEMMA OF THE COMMONS)

THE REALLOCATION OF RIGHTS - A CENTRAL
QUESTION TO BUILDING THE INFORMATION
ECONOMY!
 Huge increases in transmission speeds
 Huge growth in storage and prcessing
capacity
 Reallocation of rights (Yochai Benkler,
Lawrence Lessig)
 Example
 Number portability
 Open wlan
 Creative commons (copy left)
 Public data: should data created with tax payer
money be available for free (open access)?
162
https://www.ted.com/
speakers/larry_lessig

EXAMPLE
NET NEURALITY,
VRT LIIKENNEKAARI
Amount of data,
Data intesivity
Netflix
Spotify
Facebook
How the internet actually works Net neutrality
https://www.youtube.com/watch?v=ZonvMhT
5c_Q

EXAMPLE
BIG DATA, REGISTERS, ALGORITHMS ETC E.G.
SPOTIFY, NETFLIX

STEPHEN JOHNSON - WHERE GOOD IDEAS
COME FROM
 http://www.ted.com/talks/steven_johnson_where_good_ideas_c
ome_from.html
 http://www.youtube.com/watch?v=NugRZGDbPFU
 Coffe house,city, web
 The adjacent possible
 Liquid networks
 The slow hunch
 Serendipity
 Error
 Exaptation
 Platforms
 Fourth quadrant

CAN YOU RECOGNIZE THE WORLD CHANGING?
 Trends and change
 What do you use that was used already 50 years ago?
 What do you use that was not available 50 years ago?
 Companies set goals:
 In three years from today x percent of turnover comes from products/services which do not
exist today. What is your situation?
 Timing and roadmap
 The secret to success in balancing between operational effectiveness and the art of
renewal
 Beware of being ahead of your times
 Do not destroy just for the sake of renewal
 Do not over design the product
 Do not wait to fulfill all customer needs
 Do not lock into present volumes and present profitability i.e. if present volumes and profits
are high you might say no to low performing suggestions.
 Let future proposals compete against each other, not against existing

THE INTERNET REVOLUTION (IN FINLAND)
 Old structures are being destroyed:
 Nokia – the ”burning platform”
 The post man´s bag is getting thinner
 Music from CD/DVD to iTunes and Spotify
 Newspapers from circulation to eyeballs and clicks
 The diminishing paper industry
 Webstores replacing the brick and mortar stores
 Universities facing the online education revolution
 Ehealth including eprescription, epatient records
 eGovernment, eCitizen
 Open data and the public sector
 Big data

 Success depends on the capability to create ideas,
on intangible assets, on information and know how
 Anybody can create all you need is ideas, a computer
and networks (compare this to the physical assets
needen in the industrial revolution)
 In the modern office (network) environment it is
difficult to perceive who creates, divides and captures
value.
Charles
Chaplin
modern times
WHY ARE INNOVATIONS IMPORTANT
The office

WHY ARE INNOVATIONS DIFFICULT? – AN
ORGANIZATIONAL PERSPECTIVE
 An organization performs effectively when processes, routines are well
defined and practised
 Present stakeholders, resources, investments support existing
businesses, but also create a lock-in into an existing paradigm, market
etc
 An innovation challenges and brakes resent routines
 Established practices blind
 A good new innovation can potentially challenge existing businesses

Innovate or die!
The Finns created the mobile
business, but struggled, stumbled
and fell when implementing the
mobile internet

WHEN ARE INNOVATIONS SUCCESSFUL?
 Why do you come to work by car – because
you can (and want to), because it is easier
compared with e.g. public traffic.
 Why was downloading music from the
internet (ilegally) so popular? - because
anybody could and it was so easy
 Innovations find and identify needs, create
new opportunities and markets. What will you
create in the future?

 Shaping the product/service/experience
 Creativity, The creative individual
 Innovation tools/methods
 Individual
 Team
 Using theories to innovate
 The innovation process
 The role of technology
 Leading/managing the innovative company
 Strategy and innovation
 Innovation as a process/project
 The network perspective
 The diffusion of innovations
VIEWS INTO INNOVATION, (SEARCH WORDS?)

WHAT IS YOUR ENVIRONMENT LIKE?
 Are you in a growth industry?
 Is the market maturing?
 Are you in a dying industry?
 Are you allowed to grow?
 Are you in the private or public sector?
 Have goals been set to transform, find new
markets, new services, new processes etc?

GROWTH PLAN
Adapted from: The
Innovator´s Guide to
Growth – Putting
Disruptive Innovation to
Work p 26
Scott D. Anthony,
Joseph V. Sinfield,
Mark W. Johnson,
Elizabeth J. Altman,
2008
Year 1 Year 2 Year 3 Year 4 Year 5
Number of
projects
launched
Expected
revenue in
year 5
Project
success
rate
New
growth
revenues
in year 5

 Incremental vs radical innovation,
 Competence creating vs competence
destroying innovation, Tushman and
Andersson (1986)
 Modular vs Architectural innovation,
Henderson Clark (1990)
 Sustaining vs. disruptive technologies
Christensen (1997)
INNOVATION, CATEGORISING AND DEFINITIONS

DEFINITIONS,
 Commersialization of a product or service
 Irreversible change, Schumpeter has described innovation as “a historic and
irreversible change in the way of doing things” and as “creative destruction”
(Schumpeter 1947).
 Purposeful change, Innovation refers to “the effort to create a purposeful
focused change in an enterprise’s economic or social potential” (Drucker 1985).
 Networks. The process of innovation is defined as “the development and
implementation of new ideas by people who over time engage in transactions
with others within an institutional context“(Van de Ven, 1986)
 Non linear process. Van de Ven et al (1999) define the innovation journey as a
“non linear cycle of divergent and convergent activities that may repeat over
time and at different organisational levels, if resources are obtained to renew
the cycle”

What are you like as an innovator?
 Exceptional thinking does not emerge in a
crowd (herd thinking) – nor does it emerge in a
vacum
 Independent thinking is not a team sport
 Name Finnish innovators, how about American
 We need examples to lead us

THINK THE IMPOSSIBLE
 To go where no man has
gone before (Star Trek)
 To see what no man has
seen before
 To look where no man
has looked before
Harvard's Robert D. Austin says that to lead innovation you have
to draw from art as much as from science Knowledge is
information, skill and attitude

READ STORIES AND BIOGRAPHIES OF INNOVATIVE
PEOPLE

The relationship between cause and consequence is not allways clear. It is
rarely evident.
What conects the following?
Anesthesia, Cellophane, cholesterol lowering drugs, cornflakes,dynamite,
the ice cream soda, Ivory soap, artificial sweeteners,nylon, Penicillin,
photography, Rayon, PVC, Smallpox vaccine, stainless steel, and Teflon.
All of the above were invented by accident. Only later some reasonable or new
way to use them was found.
CHANCE FAVOURS THE PREPARED
MIND– LUIS PASTEUR,
http://www.phildourado.com/b
log/2007_10_01_archive.html

THE SKILLS OF THE INNOVATOR
 The innovator's DNA : mastering the five skills
of disruptive innovatorsJeff Dyer, Hal
Gregersen & Clayton M. Christensen Boston,
MA : Harvard Business Press, 2011.
 Associating
 Questioning
 Observing
 Networking
 Experimenting
 Dyer, Jeffrey H.; Gregersen, Hal B; Christensen, Clayton M, The Innovators DNA, five
discovery skills seperate true innovators from the rest of us, Harvard Business review
December 2009

THE INNOVATOR HAS MANY FACES
 Lazy and hard working
 Lonely and social
 Holistic (sees the big picture) and an eye for detail
 Theory and practice
 Self conscious and humble
 Competent and aware of what does not know
 The maturity of an adult and curiousity of a child
 knows how to fill the lottery, but does not
nescessarily win, serendipity
 From many faces to working with different people in
networks

189
Be prepared to take notes everywhere and at
any time – seize the moment, carpe diem
TOOLS FOR INDIVIDUAL INNOVATION

Tools for innovation
You are are under pressure, in a
crisis, running out of time etc.
Would you start to innovate? What
tools would you use to innovate?

191
PEOPLE, IDEAS, OBJECTS
FOCUS ON WHAT FASCINATES YOU

192
Starting point february 2007
Situation september 14 2007
www.linkedin.com
BUILD YOUR NETWORKS, SHARE YOUR IDEAS
”INNOVATIVE LEARNING IS NOT CONFORMING”

JOBS TO BE DONE AND THE SKILL OF
OBSERVING
193

TABOO
 Dangerous ideas, taboos
194

Comparing unrelated things with
each other
195
USE METAPHORS - ASSOCIATING

STORYTELLING
196
7 dl of juice plus 8 dl of water how much juice do you
have?

THE DIAMOND METAPHOR
 The Internet is a Growth Business of almost 100%
per year?
 What does this mean

SLEEPING – MR SANDMAN
HUMOUR
198

THEORY 14 PUT YOUR TRUST IN METHODS

HOW TO MAKE TOAST
 https://www.drawtoast.com/
10.7.2018Author
201

THE INNOVATORS TOOLKIT
 Tools for four stages in the process
 Define the opportunity
 Jobs to be done
 Project charter
 Discover the ideas
 Resource optimization
 Scamper, substitute, combine, alter,mega/mini,
put to together, uses, eliminate,
rearrange/reverse
http://www.youtube.com/watch?v=ue5sGtGb_i0
 Random stimulus
 Develop the solution
 Design scorecards
 Demonstrate the innovation
 piloting

METHODS FOR CREATIVITY -
 http://en.wikipedia.org/wiki/Creative_problem_solving
 http://fi.wikipedia.org/wiki/Luovuustekniikka
 http://en.wikipedia.org/wiki/Mind_map
 http://fi.wikipedia.org/wiki/K%C3%A4sitekartta
 http://en.wikipedia.org/wiki/Ishikawa_diagram
 http://en.wikipedia.org/wiki/Brainstorming
 http://en.wikipedia.org/wiki/Affinity_diagram
 http://en.wikipedia.org/wiki/Morphological_Analysis
 http://en.wikipedia.org/wiki/Synectics
 http://en.wikipedia.org/wiki/TRIZ
 http://fi.wikipedia.org/wiki/Luovuustekniikka
 http://fi.wikipedia.org/wiki/Appelsiini/banaani
 http://en.wikipedia.org/wiki/De_Bono_Hats
 Tuplatiimi
 Learning Cafe

LEARNING CAFE METHOD –
PEOPLE ROTATE, INFORMATION
COLLECTS ON TO THE TABLES
Storytelling
- The
elements of a
good story
Surveying the
market,
- How to
observe
- What
questions to
ask
Competence &IPR
(intellectual property
rights)
- Know how, skill, attitude
- What do you know
- What do you need to learn
- Protecting your product
Future
- Roadmap i.e.
schedules on what
next
- Versions, pricing
strategies
- Creating market
space
Resources
- What do you have,
what do you need?
- Roles (CEO, COO,
CFO, Marketing,
R&D etc)
Testing the
market
- Pilot
projects
- prototypes
- Project plan

207
http://www.desai.com/our-approach/innovation-
funnel/tabid/88355/Default.aspx 15.2.2012
The innovation process view

THE CHRONOLOGICAL DEVELOPMENT OF MODELS OF
INNOVATION (TROTT 5 TH EDITION P 26)
208
Date Model Characteristics
1950/60 Technology-push Simple linear sequential process; emphasis on R&D; the
market is a recepient of the fruits of R&D
1970 Market pull Simple linear sequential process; emphasis on marketing; the
market is the source for directing R&D; R&D has reactive role
1970`s Dominant design Abbernathy and Utterback (1978) illustrate that an innovation
system goes through three stages before a dominant design
emerges
1980`s Coupling model Emphasis on ontegrating R&D and marketing
1980/90 Interactive model Combinations of push and pull
1990´s Network model Emphasis on knowledge accumulation and external linkages
2000`s Open innovation Chesbrough´s emphasis on further externalisation of the
innovation process in terms of linkages with knowledge
inputs and collaboration to exploit knowledge outputs
Excercise: draw these models on the innovation filter model

FUTURE?: THE NEW AGE OF INNOVATION
 R=G, N=1
209

THEORY 14 DIFFUSION OF
INNOVATIONS, DIFFUSION IN
NETWORKED STRUCTURES

 A new drug has
emerged into the
market place
 Doctors are
monitored when
they start
prescribing the
drug
 The doctors are
asked which other
doctors they would
go for advice
 Result show what
percentage of
doctors named by
N others have
adopted the drug
Source: Social and Economic Behavior in
Networks Matthew O. Jackson, Stanford

EXAMPLE: WHAT IS SPREADING/DIFFUSING?
HTTP://OPENEDUCATIONEUROPA.EU/SITES/DEFAULT/FILES/IMAGES/SCOREBOARD/SCOREBOARD_JUNE_2015.PNG

214
THE DIFFUSION OF INNOVATIONS, THE S
CURVE - ROGERS
https://en.wikipedia.org/wiki/Diffusion_of_innovations

THE BASS MODEL
 F(t) = A function, which describes how innovations
spread. We assume that a person has adopted an
innovation (=1) or has not adopted (=0). There is no
moving back in the model
 p = probability of spontaneous adoption of the
innovation i.e. not influenced by others
 q = probability of imitation adoption i.e. you adopt
because others have adopted
 At some monent in time the rate of adoption
(change in F(t) i.e. dF(t)/dt) = (p + q*F(t))*(1-F(t))
(1-F(t)) = those who have not yet adopted

 The solution to this equation is the S-curve if q > p
 Note when F(t) is close to one change dF(t)/dt is close
to zero
 Note when F(t) = 0 dF(t)/dt = p
This means that p and q can be measured with minimum
data
e.g How many of the participants of this course heard
about the course from friends (is an estimation of q)
How many found it in a brochure or on a website (an
estimation of p)
How many first found out about about PokemonGo on
Nintendo´s web site (p), how many heard about it from a
friend (q)

THE BASS MODEL ASSUMES NO UNDERLYING
NETWORK STRUCTURE
 The following are examples from a Coursera
Course: Social and Economic Networks, Matthew
O. Jackson Stanford

Gartner's 2014 Hype Cycle for
Emerging Technologies Maps the
Journey to Digital Business
http://www.gartner.com/newsroom/id/28
19918
Diffusion of innovations - The Hype
Cycle

e.g buying a game (to play with
other gamers)

Source Prof. Matthew Jackson, Stanford, Social Network
Course Coursera

LIST OF THEORIES
 Day 2
 Theory 1 Wise Crowds and information cascades
 Theory 2 The Strength of Weak Ties
 Theory 3 Earning with Information
 Day 3
 Theory 4 Interdependace, Game Theory
 Theory 5 Measuring Networks

LIST OF THEORIES
 Day 4
 Theory 6 Value capturing in a network Environment
 Theory 7 How Does Google Search Work
 Theory 8 Matching Markets
 Theory 9 Six Degrees
 Theory 10 The Logic of flat rate
 Theory 11 The Long Tail
 Theory 12 The reallocation of rights
 Day 5
 Theory 13 Diffusion of Innovations
 Theory 14 (recommendation) use methods when innovating
 Day 6
 Theory 15 The Innovators Dilemma
 Theory 16 Creating Market Space

227
Innovators dilemma: why a garage based
company can succeed when an incumbent
(large company) fails (Business aikido)
http://www.innosight.com/

THE INNOVATORS DILEMMA – COMPANIES TRADITIONALLY
FOLLOW A VALUE PROPOSITION, THE CHALLENGE OF
OVERSHOOTING CUSTOMER NEED => POORER IS BETTER
228

WHY DID WESTERN UNION THE LEADER
IN THE TELEGRAPH BUSINESS NOT
INVEST IN THE TELEPHONE
 The established processes, resources and values
encouraged investing in present customers.
 The Phone was in its early stages a short distance
mediium – performed porly on long distances
 Western Union saw that the phones performance in long
distance was getting better, but it continued investments
along its present value performance base
 When the future was evident, it was already too late

EXAMPLES OF DISRUPTIVE INNOVATION –CAN
YOU FIND ANY?

 https://hbr.org/video/2688242135001/the-explainer-
disruptive-innovation
 https://fi.pinterest.com/explore/disruptive-
innovation/
 https://apiumhub.com/tech-blog-
barcelona/disruptive-technology-innovations/
 http://www.claytonchristensen.com/key-concepts/

THEORY 16 CREATING MARKET SPACE

STRATEGIACANVAS EXAMPLE
( x-akselilla kuvataan asiakkaiden arvoja ja y-akselilla yrityksen ja sen
kilpailijoiden tarjontaa )

Remove
• Serve the customer
with what he really
demands i.e. what he
is willing to pay for
everything else is
removed
Make less
• All extra costs are made smaller
• E.g.self service payment
counters
Make better
• Be carefull in client surveys. The
customer might want more of
some service, provide it
Create
• Serve the customer with
something new that has
not earlier existed in the
industry
The new value
curve

USE THE STRATEGY CANVAS TO CREATE A
BLUE OCEAN STRATEGY
http://en.wikipedia.org/wiki/Blue_Ocean_Strategy
http://www.blueoceanstrategy.com/

THEORY 17 (RECOMMENDATION) BUILD
CHANGE AT AN INDUSTRY LEVEL

WHAT IS A MARKET
 Think of what you are good at? – how long it would
take you to do it? Who would you change services
with?
 What happened if you are better in everything?
 Absolute and comparative advantage
https://en.wikipedia.org/wiki/Comparative_advantag
e

 Look into Landon eCommerce 2014, describes the
shaping of several industries

HOW TO CREATE NEW MARKETS? – WHICH
MARKET IS/ARE EMERGING?
• Focus on
• Put theory into practice
• Lobby for new laws and regulations
• Regulators will ensure that competition will
exist also in new environments
• Create new structures (destroy old
structures) e.g. new ecosystems,
• New business models
• Focus on Lead users
• Establish market creating products
7/10/2018 Laurea University of Applied Sciences 242

EXAMPLE THE EMERGENCE OF THE MOBILE
MARKET
 Vision: ”mobile into your pocket”
 New infrastructure 3G, UMTS
 Laws:
 In Finland changes in telecom law e.g. allowing bundling of phone and
subscription, number portability,
 Progress in creating a dataroaming market by establishing cap prices in
the EU
 Business model: toward monthly flat rate pricing
 Key market creating products: mokkula (c 2004-2005) a data connection
to your computer, I-phone, (both arrivals from the outside to Finland), smart
phones 2011
 Structures:
 three competitors, service operator and new market entrants changed
the rules of the market
 Liberalisation of the telecom market in Finland in 1994 created
competition and encouraged new markets to emerge
 Future: ?

Name: 00601 Operative Systems and Commerce
FOCUS: INDIVIDUAL TRAVEL PLAN
E-SERVICE
CONNECT TO
REAL WORLD
VALUE
SERVICE PROVIDER /
BUSINESS MODEL
WHO IS
LOOSING?
COMMUNITY
MY
E-TOOLS
1
2
3
4
5
244
Bricks and
clicks
VALUE
CREATION/CAPTURING
IN A NETWORK
- value to me
- value to company
- value (cost, time, quality)
- blog
- web site
- wiki
- contact networks
-videomeeting
connectpro
- e-library
-- e-survey
Change in the
way of doing
things =
innovation =>
focus on the
process
flow of goods, information and
resources in a repair cycle
http://en.wikipedia.org/wiki/Lo
gistics
From data to
networking
Use this framework to
identify changes in value
creation and capturing after
adoption of services like
online booking and the
availability of online
customer recommendations

THE MUSIC INDUSTRY
 Excercise: Look at the video.
 Try and plot all the different earning cases on to the
business model canvas and identify the key elements
that remain the same through different cases.
 Discuss and identify cases on how the music industry is
changing.
 Take an example company and discuss how that
company can act in the market place to create a new
market.
 The video
 http://www.youtube.com/watch?v=Njuo1puB1lg
 CwF, Connect with fans
 RtB, Reson to buy

THE E-HEALTH INDUSTRY
 Excercise
 Identify a new entrant to the market
 Discuss its business model
 Look into possible new infrasrtucture elements it is
attempting to build on e.g. patient records,
eprescriptions,
 Look into databases and are these databases
hierarchical or is power given to the users? To what
extent is open data thinking allowed and applied to the
creation of new services?

 The education industry
 The Banking industry FinTech

POSITION YOUR BUSINESS IN A NETOWORK –
PORTER FIVE FORCES 1979
Present
competitin
By present
competitors in
the arket place
Barganing
power of
customers
Threat of new
entrant
Threat of
substitutors
Barganing
power of
suplliers
http://en.wikipedia.org/wiki/Porter_five_forces_analysis

GROUNDSWELL THE USER LEAD REVOLUTION –
IDENTIFY THE ROLE OF THE USER!
Individual
Society
Corporation

GROUNDSWELL CHARLENE LI, JOSH BERNOFF 2008
– IDENTIFY THE ROLE OF THE USER
 What is groundswell p 9(verkkovalta)?
 A social trend in which people use technologies to get things they
need from each other, rather than from traditional institutions
like corporations
 The strategy for corporations: If you can´t beat them, join them
 The BIG principle for mastering the groundswell p 18: Concentrate
on the relationship, not the technologies
251

TECHNOLOGIES AND CLASIFICATION P 18-
People
creating:
blogs,
user
generate
d
content
People
connectin
g: social
networks
and virtual
worlds
People
collabora
ting: wikis
and open
source
People
reacting
to each
other:
forums
ratings,
and
reviews
People
organizin
g
content:
tags
Accelarat
ing
consump
tion: rss
and
widgets
How they
work
Participatio
n
How they
enable
relationshi
ps
How they
threaten
institutional
power
How you
can use
them
See next slide for example

EXAMPLE: BLOGS
• How they work:A blog is a personal (or group) journal of
entries containing written thoughts links and often pictures
• Participation: Blog reading is one of the most popular
activities in Groundswell with one in four online Americans
reading blogs (2006). Video reviewing is also popular.
Podcasters and even podcast listeners are rare
• Participation: The authors of blogs read and comment on
others blogs. They also cite each other adding links to other
blogs from their own posts

EXAMPLE CONTINUED:
• How they threaten institutional power: Blogs, user generated
video and podcasts aren´t regulated, so anything is possible.
Few YouTube video uploaders check first with the subjects of
their videos. Companies frequently need to police employees
who post unauthorized content about their employees and
their jobs
• How you (a company) can use them: First listen, read blogs
about your company. Search for blogs with most influence.
Start commenting on those blogs

THE PROFILES, THE SOCIAL TECHNOGRAPHICS
PROFILE – KNOW YOUR CUSTOMER? P 40
• Creators:
• publish a blog,
• publish own web pages,
• upload video you created
• upload music you created
• write articles and post them
• Critics:
• publish a blog,
• post ratings/reviews of products or services
• comment on someone else´s blog
• contribute to on line forums
• contribute to/ edit articles in a wiki

THE PROFILES, THE SOCIAL TECHNOGRAPHICS
PROFILE – KNOW YOUR CUSTOMER? P 40
• Collectors:
• Use Rss feeds
• Add tags to web pages or photos
• Vote for web sites online
• Joiners:
• Maintain profile on social networking sites
• Visit social networking sites
• Spectators:
• read blogs
• watch video from other users
• listen to podcasts
• read online forums
• read customer ratings/reviews
• Inactives:
• None of these activities
http://www.youtube.com/watch?v=kGJTmtEzbwo

OPEN INNOVATION - CHESBROUGH
258
http://en.wikipedia.org/wiki/Open_innovation

CONCEPT 1:THINK OF YOUR BUSINESS AS A SERVICE BUSINESS – OPEN
SERVICE INNOVATION CHESBROUGHP37
259
Service-Based view of transportation
Selection
of vehicle
Delivery of
vehicle
Maintena
nce of
vehicle
Informatio
n and
training
Payment
and
financing
Protection and
insurance
Car purchase
or lease
(product-
focused
approach)
Customer
chooses
Customer
picks from
dealer
stock
Customer
does this
Customer
does this
Customer
dealer, or
third party
Customer
provides
Taxi Supplier
choose
Customer
is picked
up
Supplier
does this
Supplier
does this
Enterprise car
rental
Customer
chooses
from local
stock
Customer
picks up or
is picked
up
Supplier
does this
Supplier
does this
By the day Customer is
responsible
Zipcar Customer
chooses
from local
stock
From
Zipcar
locations
Supplier
does this
Supplier
does this
By the hour Customer
purchases from
supplier

Concept 2: Innovators must co-create with customers
 The value of tacit knowledge
 e.g. example riding a bicycle: go faster to stay up,
 balancing on a rope…
 One way:
 Let the customer themselves provide the information,
 Let the customer have control of the process
260
FOUR STEPS TO OPEN SERVICE INNOVATION:
Make
reservation
Arrive at
restaurant
Ask for
table
Go to
table
Receive
menu
Order drinks
and food
Eat Order
bill
Pay Visit
restroom
Leave
Chesprough Open services
innovation p 59

 Concept 3: Open innovation accelerates and
deepens service innovation
261
FOUR STEPS TO OPEN SERVICE INNOVATION

 Concept 4: Transform your business model with
services
262
FOUR STEPS TO OPEN SERVICE INNOVATION
Grocer Chef
Target market Consumers Diners
Value Proposition Wide selection, quality
price
Dining experience
Core elements Rapid inventory turns,
choosing correct
merchandise
Great food, skilled cooks,
atmosphere
Value chain Food suppliers, related
items, logistics,
information technology,
distribution centers
Fresh produce, local
ingredients, quality
equipment,
knowledgeable and
couteous service
Revenue mechanism Small markup over cost,
very high volume, rapid
inventory turns
High markups over cost,
low volume, alcohol, tips
Value network, ecosystem Other services on
premises, parking
Cookbooks, parking,
special events

THE MESH, LISA GANSKY,
WWW.MESHING.IT
Eg. hammer Mesh sweet spot
Eg. Tooth brush? Eg. Smart phones
How
often
do
you
use it
Often
Seldom
CostCheap
Expensive
p 22
Own-to-mesh
http://www.ted.com/talks/lisa_gansky_the_f
uture_of_business_is_the_mesh.html

THEORY 21 BUSINESS MODEL CANVAS

EIGHT KEY ELEMENTS OF A BUSINESS MODEL
P 325
 Value proposition
 Revenue model
 Competitive environment
 Competitive advantage
 Market strategy
 Organizational development
 Management team
 ?

REVENUE MODELS
 Advertising
 Subscription revenue model
 Transaction fee revenue model e.g. eBay (x % of
transaction)
 Sales revenue model e.g. amazon sells books
 Affeliate revenue model, companies steer business
to another company and receive a referal fee or
percentage (sisäänheittäjä)

CATEGORIZING E-COMMERCE MODELS
 B2B and B2C
 Major business to consumer models
 Etailer online retail stores
 Community provider
 Content provider
 Portals
 Transaction Brokers
 Markert creator
 Service provider

BUSINES MODEL GENERATION
Definition: A
business model
answers the
question how value
is created and
captured
www.businessmod
elgeneration.com
http://www.youtube.c
om/watch?v=QoAOz
MTLP5s business
model canvas 2 min
http://www.youtube.c
om/watch?v=8GIbCg
8NpBw Osterwalder
53

CASE
 http://www.youtube.com/watch?v=Njuo1puB1lg
 RtB
 CwF

BUSINESS MODEL GENERATION 9-ELEMENTS
(BUILDING BLOCKS) OF THE CANVAS
 Customer Segments
 mass market, niche market, segmented, diversified,
multisided platforms (or multisided markets)
 Value Propositions
 Newness, performance, customization, getting the job done,
design, brand/status, price, cost reduction, risk reduction,
accessibility, convenience/usability
 Channels
 Customer Relationships
 personal assistance, dedicated personal assistance, self-
service, automated service, communities, co-creation
 Revenue Streams
 asset sale, usage fee, subscription fees,
lending/renting/leasing, licensing, brokerage fees, advertising

BUSINESS MODEL GENERATION 9-ELEMENTS
(BUILDING BLOCKS) OF THE CANVAS
 Key Resources
 physical, intellectual, human, financial
 Key Activities
 production, problem solving, platform/ network
 Key Partnerships
 optimization and economies of scale, reduction of risk
and uncertainty, acquisition of particular resources and
activities
 Cost Structure
 cost driven (driving down costs), value driven, fixed
costs, variable costs, economies of scale (e.g. lower
bulk purchase rates), economies of scope(e.g. same
channel supports multiple products)

 Unbundling business models
 customer relationship businesses, product innovation
businesses, infrastruture businesses
 The Long Tail (selling less of more)
 Multisided Platforms
 bring together two or more ditinct but interdependent groups
of customers e.g. Visa, Google, eBay
 Free as a business model (Freemium) includes Bait
and Hook
 Non paying customers are financed by another customer
segment e.g. Metro, Skype
 Open Business Models
 companies systematically collaborate with outside partners to
create and capture value
BUSINESS MODEL GENERATION – 5
PATTERNS

Matching
marketshttps://www.youtube.com/watch?v=r7vzge
xzXOk

PLATFORM REVOLUTION – HOW NETWORKED
MARKETS ARE TRANSFORMING THE ECONOMY AND
HOW TO MAKE THEM WORK FOR YOU – GEOFFREY
G. PARKER, MARSHALL W. VAN ALSTYNE, SANGET
PAUL CHOUDARY

CONTENTS
1. Today
2. Network effects: the power of the platform
3. Architecture: Principles for designing a successful
platform
4. Disruption, how platforms Conquer and transform
traditional industries
5. Launch, chicken or egg? Eight ways to launch a
successful platform
6. Monetization, Capturing the value created by network
effects
7. Openness: defining what platform users and partners
can and cannot do
8. Governance: Policies ti increase value and enhance
growth
9. Metrics
10. Strategy
11. Policy
12. Tomorrow

4. PESTEL
 P – Poliittinen
 Kansainväliset sopimukset, EU-, alue- ja kehittämispolitiikka yms.
 E – Ekonominen
 Talouskehitys, talouskriisit ja lamat
 S – Sosiaalinen
 Ikärakenne, arvot, syntyvyys ja kulutuskäyttäytyminen
 T – Teknologinen
 Informaatio- ja tietoliikenne sekä virtuaalimaailma
 E – Ekologinen
 Ympäristötietoisuus, ilmastonmuutos ja infrastruktuurin muutos
 L – Lainsäädännöllinen
 Lainsäädännön rajoitukset

MIHIN KÄYTETÄÄN?
Menetelmällä
 Kartoitetaan muutosilmiöitä toimintaympäristöstä
 Selvitetään ilmiön tai organisaation nykyistä tilaa ja
tulevaisuutta
 Tunnistetaan, millaisiin muutoksiin on osattava
varautua strategiaa määriteltäessä

6. BOSTON CONSULTING GROUP MATRIX

5. ANSOFFIN IKKUNA TYÖKALUNA
 Pohditaan erilaisia vaihtoehtoisia polkuja yrityksen kasvuun
 Arvioidaan millaisia panostuksia ja riskejä eri vaihtoehtoihin
liittyy
Tuotteet/palvelut
Markkinat
Nykyiset Uudet
Nykyiset
Kasvu
nykyisten
markkinoiden
avulla
Kasvu markkina-
vaihtoehtoja
lisäämällä
Uudet
Kasvu
tuotetarjontaa
laajentamalla
Kasvu
moni- alaistumalla

TECHNOLOGY ROADMAPS
 Try and guess, how technology will change the
business
289

The internet economy slides november 2017

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