Simon Business School

University of Rochester

CIS 401, Information Systems for Management

Fall B 2021

Reading Assignment for Monday, November 8th

There is no case write-up or anything written due for the second class.

Read the Business Models: An Introduction article available through Amazon for $2.99:

https://goo.gl/MaLngX

Come up with five companies not mentioned in the article, that have Operational Excellence, Product
Leadership, Service Leadership, Customer Intimacy, and Value Chain Coordinator as their respective
value discipline, i.e., one example company for each value discipline. Try to come up with examples
that much of the class is likely to be familiar with. Be prepared to support your choices in class. Note
that I think of Operational Excellence as competing primarily by having a cost advantage over your
competitors. In addition, Product Leadership is providing customers with a unique product or service,
i.e., one they can’t get at least of the same quality from other firms. Finally, Service Leadership is
providing a standard product or service, i.e., one you can get from other firms, particularly well.
 CIS 401A, Information Systems for Management

Fall B 2021

Instructor:

Roy Jones rjones@simon.rochester.edu

Office Hours:

Monday 2 – 3 pm
Wednesday 4 – 5 pm

I plan on having office hours booked through Calenday.

In the meantime, please send me an email if you would like to meet during office hours or another
time.

Lecture Meeting Time

Monday 8:30 – 10am and 10:20 – 11:50am G-118

Lab Instructor

Xinyi Liu xinyi.liu1@simon.rochester.edu

Lab Meeting Time

Wednesday 9 – 10am and 10:20 – 11:20am G-118

TA Office Hours:

TBA
Required Texts (available for purchase online):

Information Systems: A Manager’s Guide to Harnessing Technology, v. 9.0, by John Gallaugher,

Published by Flatworld Knowledge and available online at:

https://students.flatworldknowledge.com/course/2598752

Note that the text is available for online in a number of formats: $39.95 for online access, $59.95 for online
access and eBook downloads, $64.95 for online access and a color text, and $84.95 for online access,
eBook downloads, and the color text.

Optional Texts:

New Perspectives Microsoft Office 365 & Access 2016 (Introductory or Comprehensive)
or New Perspectives on Microsoft ACCESS 2013 (Introductory or Comprehensive)

Course Objective:

Information technology is transforming firms, markets, products, and processes with remarkable speed. This
presents managers with new challenges and valuable opportunities. Firms are turning to information technology not
just to solve isolated problems, but also as a catalyst for organizational change and as an integrating force that can
span functions, time, and space.

The objective of this course is to teach you some frameworks for analyzing the use of information technology in
organizations. While the focus of lectures will be on the frameworks themselves and using them for analysis, the
assignments will give you further opportunities to use the frameworks for analysis, and the assignments and class
discussions will provide numerous opportunities to enhance your communication skills. The course is designed with
line and senior managers in mind, as opposed to the managers of the IS function. The course focuses on:

electronic business;

databases;

the strategic use of information technology;

search, social media, and mobile and cloud computing;

data mining, AI, and data visualization;

the impact of information technology on organizations.

Grading:

Case Write-ups 20%

Assignments 20%
Class Participation 10%
Midterm, Friday, December 10th 20%
Final, TBA 30%

Note that students will receive a single grade for CIS 401A in Fall B and CIS 401B in Spring A.
The assignments and case write-ups are to be done in teams. However, most assignments have been designed to be
done individually.1 One of the best things you can do to help insure your success in the class is to try and do the
assignments with one other person with a similar background with the application in question. While doing
them alone may theoretically be preferable, working with someone else of a similar background reduces the chances
of getting stuck and frustrated with some relatively trivial mechanical detail. Then, after attempting the assignment
individually or in pairs, meet as a team to discuss your approaches and solutions before finalizing the team’s
submission. Every term some students are disappointed with the results of the midterm. Inevitably, in almost every
such case, the student did not actually do the assignments. Instead, they merely looked at and “understood” what
their team submitted. There is no substitute for actually doing the assignment.

Regrade requests must be made in writing within one week of the item’s return. The entire assignment or exam may
be regraded, not just the questions requested, so that the grade may go up or down. For each question or part of
question a re-grade is requested, there is a 1-point “re-grade fee” that is refunded if the re-grade request is
warranted, i.e., more points are awarded. While most people only request a re-grade when they think it is
warranted, occasionally people request a significant percentage of the exam be re-graded seemingly hoping to
get another few points. This is neither fair to the instructor nor the rest of the class that is not engaging in
frivolous re-grading. From an economic perspective, you should only seek a re-grade on a question if you
think there is at least a 50% chance you deserve at least one additional point. Again, the 1-point fee is only if
you request a re-grade on a question and the instructor determines that no additional points are warranted.

Team Problems:

One of the hallmarks of a Simon education is the experience of working on teams. While almost always a learning
experience, sometimes teams run into problems working together. If you begin to run into problems with your team
(or a particular team member), please let me know as soon as possible. If I don’t hear about problems until the end
of the term, there isn’t much I can do.

Class Participation:

The best way to appreciate many aspects of the use and impact of information technology is through class
discussion. I view this course as a cooperative learning experience and expect students to share insights from their
work experiences as well as the readings. As such, it is essential that students be prepared for class.

Although class participation is a small component of your grade, I expect that you will be prepared for class
discussion each class. Good comments are relevant to the topic at hand and provide further insight. Frequently,
there are not “right” answers. Better comments are made clearly and are well supported. In addition, it is important
to foster a positive learning environment. While it is fine, perhaps even good, to disagree with another student, be
sure to do so in a thoughtful and considerate manner. Demonstrating mastery of advance material at inappropriate
times does not help foster a positive learning environment. Asking “dumb” questions often does help; frequently
many other students have the same question and are relieved someone asked it.

Exams:

Please contact me immediately if you anticipate missing an exam.

1
The one exception to this is the Amazon’s Best Data Mining assignment.
Honor Code:

While you are expected to work with members of your own team on assignments and case write-ups,
you should not be working with students from any other team. In addition, you should not be using
solutions or student assignments from previous terms (except when these have been distributed in class
this term). In short, any written work should be entirely your own (or your team’s for assignments and
case write-ups). Please contact me with any questions or concerns.

Fall B Course Outline**

Date Topic Reading

Monday 1-Nov Introduction Chapter 1
Wednesday 3-Nov Lab 1: Introduction to Databases Chapter 16.1 - 16.4

Monday 8-Nov Business Models and Value Disciplines Business Models article
Wednesday 10-Nov Lab 2: E-R Diagrams and basic queries

Monday 15-Nov Scaling Business Models and Amazon I* Chapter 8

Wednesday 17-Nov Lab 3: Group By and multi-table queries*

Monday 22-Nov Amazon II

Wednesday 24-Nov No lab (Thanksgiving break)

Monday 29-Nov Data Mining Chapter 16.5 - 16.6

Wednesday 1-Dec Lab 4: Data Mining in Access*

Monday 6-Dec Netflix and Digital Content* Chapter 5

Wednesday 8-Dec Lab 5 Exam Review*
Friday 10-Dec Fall B Exam

*Assignment due the night before

**Subject to change. Changes will be announced in class and on Blackboard

 10/31/2021

CIS 401
Information Systems for
Management

Lecture #1: Introduction

November 1st, 2021

1

Who is the world’s richest man?

1
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Elon Musk

Elon Musk

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Jeff Bezos #2

Who could have been

the world’s richest woman?

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MacKenzie Bezos

Actually 3rd

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Earth from Space

What does it cost to take a picture

of earth from space?

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Space X $52m

11

$55m

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Price coming down

13

Google: earth from space

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Google one of
Many Firms

15

Incredible World
• Uber is world’s largest taxi service, but owns no vehicles

• Airbnb is world’s largest accommodations provider, but doesn’t

own a single hotel or rental property

• Alibaba is the world’s most valuable retailer, but doesn’t own any
inventory

• Facebook is the world’s most visited website, but doesn’t create

any content

• Agree?
Source: From Gallaugher text v 9.0

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Graph
100000

90000

80000

70000

60000

50000

40000

30000

20000

10000

0
0 10 20 30 40 50 60 70 80 90 100

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Amazon Stock

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Facebook’s Growth

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What happened?

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Who has an iPhone? Some Apple product?

21

The Point
•Living in a sea of bits

•Tremendous opportunities for creating value

•How do you create value?

•How do you capture that value?

22

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What are the most valued

US companies?

23

Largest US Firms

Observations?

24

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Walmart vs. Amazon (2006 – 2016)

25

Walmrt Amzn Now

2016 Walmart $190b

2016 Amazon $263b

26

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Information Technology
•In very general terms, what 2 things do we do
with information technology?
–
–

•Initially most applications of IT did which of

these two?

•Today, it’s increasingly the other

–With what notable exception? Why?

27

Agenda
• 4 Handouts
– These lecture notes
– Course Information
– Business Model reading assignment for class next Monday
– Installing Microsoft Access
• Need for lab next Wednesday, November 10th
• Windows users may be all set, please confirm
• Mac users, please start soon

• Course Outline Highlights

• Course Overview
• Information Technology Perspective
• The Power of Information Technology
• Adoption of Technology
• Impact of Information Technology on an Organization
• Business Process Reengineering

28

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Course Outline Highlights

• Plan to have office hours booked through Calendy
• If you want to meet or need anything, send me an email

• Grading
– Case Write-ups 20%
– Assignments 20%
– Class Participation 10%
– Midterm, Friday, Dec 10 20%
– Final, TBA 30%

– You will receive a single grade for CIS 401A and B

• Honor Code

• * in course outline denotes days when assignments are due the night before

29

Text Online

30

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My Background
• Born in Philadelphia
• Moved to Minnesota, Texas, Germany, Minnesota, Massachusetts, Minnesota, Massachusetts, New Hampshire,
California, and then to Rochester
• Education
– BA, History
– MS, Computer Science
– PhD, Business
• Work
– Taught computer science at Stanford
– Did administration
– Founded consulting firm, developed databases for many firms, including American President Companies, Apple, Applied
Materials, Chevron USA, GO Corporation, Regis McKenna, Strategic Decisions Group, and Wells Fargo Bank.
– More recently Rio Tinto
– Have a joint appointment at the medical center
• Service
– Business Analytics and Information Systems Track undergrad adviser
– Data Science adviser
– Chair of Undergrad Curriculum Committee
– Recently serviced on University long-term strategy committee, Project Imagine
• Hobbies: skiing, tennis, hiking, biking
• Questions?

31

Learning IT
•Different than accounting, marketing, and
finance
•Impacts almost everything
•Incredibly broad
–Catalyst to help you learn from each other about IT
topics you’re interested in
•Will teach some frameworks to help us think
about using IT strategically
•Goal is have a context to think about using IT to
create value and to be able to ask good questions

32

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***vZoomEarth

33

Information Technology Overview

Data Processing Information

Algorithms and Programming

Applications: Spreadsheets and Databases

IS: Analytics, Electronic Business, Data Mining, and Social Media

Business Process Reengineering

Organization and Strategy

34

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Information Technology Perspective

•1980: Apple, Microsoft, IBM, Dell
•1990: MS-DOS, WordPerfect, 1-2-3, LANs
•1995: Internet???
•2000: INTERNET!!!
•2007: iPhone
•2010: iPad
•2020: AI
•2025: ???
35

The Power of
Information Technology

•Nature of Information

•Moore’s Law

•Metcalfe’s Law

36

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Lamborghini Aventador

37

2 x Lamborghini Aventador

38

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Google: earth from space

39

Marginal Cost of an
Information Good = 0
•What is an information good?

•Examples: pictures, movies, songs, books,

games, software, algorithms

•The economics of information are

fundamentally different that physical goods

•Actually changes the nature of competition

40

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Gordon Moore

41

Intel founders

42

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Silicon Wafer

43

Moore’s Law

44

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Graph
100000

Transistors
90000

80000

70000

60000

50000

40000

30000

20000

10000

0
0 10 20 30 40 50 60 70 80 90 100
Time

45

Graph
100000

Price/
90000
Performance
for80000
IT

70000

60000

50000

40000

30000

20000

10000

0
0 10 20 30 40 50 60 70 80 90 100
Time

46

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Example: Automotive Technology

47

Bob Metcalfe

48

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Xerox Alto

49

Bob Metcalfe with cable

50

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Metcalfe’s Law

51

Value of a Network
N nodes in a network
each can communicate with
the N-1 other nodes
N • (N - 1) = N2 - N ≈ N2

• Suppose Value = N2
– What is the value of a 5-node network?
– What is the value of two 5-node networks?
– What is the value of joining two 5-node network together to make
one 10-node network?
• Look for cases where the value of a product to an individual user
increase with the number of other users?
• Example?

52

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The Power of
Information Technology
• Nature of Information
– Margin cost of production and
distribution of information is zero
– Economics of information goods
fundamentally different than physical
goods
• Moore’s Law
– Price/performance of information
technology improving by a factor of 2
every two years
• Metcalfe’s Law
– Sometimes the value of information
good products will exhibit a network
externality where the value of a product
to an individual user increases with the
number of other users of the product

53

Adoption of Technology
• Industrial Revolution
–Substitution Effect

–Frequency Effect

–Structural Effect

• Information Revolution
–Substitution Effect

–Frequency Effect

–Structural Effect

54

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What is Business Process

Reengineering (BPR)?

55

Impact of Information Technology

on an Organization
•Automation

•Rationalization

•Reengineering

•Paradigm Shift

56

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Examples of Paradigm Shifts

57

Is BPR BS?
• Michael Hammer: “use the power of modern information
technology to radically redesign our business processes in order
to achieve dramatic improvements in their performance.”

• “Every few months, our senior managers find a new religion. One
time it was quality, another it was customer service, another it
was flattening the organization. We just hold our breath until
they get over it and things get back to normal.”

• Is it more than just doing things smarter?

58

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Suppose you were head of Purchasing or Accounts

Payable and you had to cut 20% of your budget.

Where would you start?

59

How would you go about cutting

20% from Ford’s AP budget?

60

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After Reengineering

61

IBM Credit Corporation

•processing financing applications for
customers’ orders
•response time reduced from 6-14 days to 4
hours
•dramatic increase in productivity
•move from a multistep serial process to a
single empowered case manager

62

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The Old Linear Process

in IBM Finance

Credit
Checking
Pricing

Terms and
Conditions

Issuance
63

IBM Finance Empowers a Case

Manager (‘Deal Structurer’)
Advisors

Request

Response

Deal Structurer
64

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How did we get long sequential processes?

Are they bad?

Credit
Checking
Pricing

Terms and
Conditions

Issuance
65

BPR Examples

•Ford Accounts Payable

–enter data once, eliminate invoice

•IBM Credit
–create case manager, eliminate hand-offs,
–use experts only as needed

•Is there substance to this idea?

66

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Is BPR BS?
• “Nearly all of our processes originated before the
advent of modern computer and communications
technology. They are replete with mechanisms
designed to compensate for “information poverty.”

• “Reengineering is the fundamental rethinking and

radical design of business processes to achieve
dramatic improvements in critical, contemporary
measures of performance, such as cost, quality,
service, and speed.”

67

Managing the BPR Effort

•Focus on the critical processes
•Think broadly
•Consolidate a business vision
•Determine key quantifiable business
measures
•Identify IT and organizational levers:
People, Process, and Technology

68

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BPR Wrap-up
• Redesigning a business process
– top-down TQM
• IT is often an enabler
– Replacing material flows with information flows
• Lead to changes in job design, organizational structure, and
management systems
– People, Processes, and Technology
• Organizational change is almost always essential and frequently difficult
– Role of top management
• Why isn’t BPR a one-time redesign to exploit IT?
• Is IT essential for BPR?
• Example: Hip Replacement
1. Replace hip
2. PT to build strength for walker
3. Make home walker compatible
4. Discharge

69

Digitalization:
Replacing Bricks with Bits
• Examples
– Photography
– Music
– Healthcare
• Imaging
• Electronic Medical Records
– Advertising
– Classes during Covid
• Firms
– Amazon
– Netflix
– Facebook
• What are the benefits?
• In summary:

70

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Introduction Wrap-up
• Early to mid stages of the structural effect of the Information Revolution
• Information has some unique and powerful characteristics
• Impact being fueled by Moore’s Law and Metcalfe’s Laws

• Reengineering often involves digitalization: replacing material flows with information flows

• Course focus is on strategic use of IT

• Goal: Acquire frameworks to think about information technology and how it
– Impacts firms’ business processes
– Changes firms’ strategies
– Impacts firms’ organizational structure
– Changes industry structure

• Lab this Wednesday – Introduction to Databases

• For class next Monday

– Read Business Model article
– Make sure you have access to Microsoft Access
– Mac users should buy Parallels right away

• Purchase text: https://students.flatworldknowledge.com/course/2598752

• Questions?
71

36
Lexus E-R Diagram
 Simon Business School
University of Rochester

CIS 401, Information Systems for Management

Fall B 2021

Installing Microsoft Access

Starting in lab on Wednesday, November 10th, we will be using Microsoft Access.

I would like you to make sure you have access to Microsoft Access by Monday, November 8th, so you
have time to troubleshoot any problems.

For Windows Users

If you are running a Windows machine and have Microsoft Office installed, you likely already have
Microsoft Access (Access 2016 or Access 2019 and probably Access 2013 should all be fine). If you do,
you are all set. If you don’t, please work with Simon IT to get Microsoft Access.

For Mac Users

Microsoft Access is not available for MacOS. The recommended way to run Microsoft Access is to
purchase Parallels1, which will allow you to run Windows on your Mac.2 This is a three-step process:

1. Purchase Parallels for $39.95 through the UR Tech Store. It may take a few days for you to
receive an email with your license, so please do this asap.
2. Install Parallels. If you have trouble, please go to the Simon IT Help Desk.
3. Once you have Parallels installed on your Mac, you then need to go to the Simon IT Help
Desk to have Windows and then Microsoft Office with Microsoft Access installed.

1
If you are already running Boot Camp or another Windows virtual machine on your Mac, you don’t need Parallels.
2
You will also need Parallels or another way to run Windows applications on your Mac for GBA 411 in Spring A.
 11/7/2021

1010 Picture

CIS 401
Information Systems for
Management

Lecture #2: Business Models

and Value Disciplines
November 8th, 2021
2

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Administriva
• Last Time
– Early to mid stages of the structural effect of the Information
Revolution
– Information has some unique and powerful characteristics
– Impact being fueled by Moore’s Law and Metcalfe’s Laws
• Today
– Lexus Database Design example
– Business Models
– Creating Value
– Value Disciplines
• Upcoming Due Dates
– Next Sunday night – Amazon case write-up
– Tuesday, November 16th – 1st Database Assignment

• Questions?

SQL Queries
Select Field
From File (or Table)
Where Condition (is true)

Condition

Field Operator Value

Number (37) String Value of a field

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Q4: How many shares of

Yahoo does Jones hold?
SECURITY HOLDING
Select Qty
S# SName
From Investor, Security, Holding I# S# QTY
S11 Microsoft
Where SName = Yahoo I24 S11 500
S12 Kodak
and IName = Jones I27 S17 300
S15 IBM
and Holding.I# = Investor.I# I24 S15 500
S17 Xerox
and Holding.S# = Security.S# I31 S15 75
S18 Amazon
I31 S12 313
S27 Yahoo
I27 S27 917
I24 S15 2700
INVESTOR I24 S18 90
I# IName IPhone I31 S27 370
I24 Schenk 275-4183
I27 Smith 275-1234
I31 Jones 275-3398

Problems with
Investor-Security-Holding
INVESTOR-SECURITY-HOLDING

I# IName IPhone S# SName QTY

I24 Schenk 275-4183 S11 Microsoft 500
• Jones’ phone # changes I27 Smith 275-1234 S17 Xerox 300
I24 Schenk 275-4183 S15 IBM 500
• redundancy I31 Jones 275-3398 S15 IBM 75
• Schenk sells everything I31 Jones 275-3398 S12 Kodak 313
I27 Smith 275-1234 S27 Yahoo 917
I24 Schenk 275-4183 S15 IBM 2700
I24 Schenk 275-4183 S18 Amazon 90
I31 Jones 275-3398 S27 Yahoo 370

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Is Security, Investor, Holding Best?

• Normalized (3NF) is Best
– no redundancy
• Entity-Relationship Diagram
– Entities: something that can be uniquely identified
• Represented as rectangles
– Relationship: an association between entities
• Represented as diamonds

– Relationships have 3 types of cardinalities

• One to One: 1 – 1
• One to Many (or Many to 1): 1 – N (or N – 1)
• Many to Many: N – M (or N – N or M – N or M – M)

Entity-Relationship Diagrams
(ERDs)
• Entities identified by unique keys
• Cardinalities read over a relationship
–A single investor holds a single security or potentially
many?

Investor Holds ? Security

–A single security is held by a single investor or potentially
many?

Investor
? Holds Security

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Relational Form of a Database

• A list of all tables and fields in a database, possibly with primary
keys underlined
• Relational form of the Stock Broker’s Database
– Security: S#, SName
– Investor: I#, IName, IPhone
– Holding: I#, S#, Qty
• Converting from an E-R diagram to the relational form
– All entities become tables
– A many-to-many relationship also needs to become a table. Why?
• A database may have multiple E-R diagrams that all lead to the
same relational form
– Often a many to many relationship can be thought of as an entity that
has two One to Many relationship with the other two entities
• Example of Security, Investor, Holding on next slide

2 E-R Diagrams for Investor, Security,

and Holdings Database

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Lexus Dealership Pic

11

Database Design
for a Single Lexus Dealership
–What pieces of information do you need to track?
• Don’t worry about the timing and process of
information collection
• What information do you need overall?

–What are the entities (groups of related info)?

–How do they relate to one another?

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Database Design for a Single Lexus

Dealership: Data Elements
• This is all data needed for all steps in all related processes
– While it’s helpful to think of data needed in each step, we’re building a static,
not sequential data model

• This Excel spreadsheet will be posted on Blackboard after class.

13

Database Design for a Single

Lexus Dealership: E-R Diagram
• Left to right and top to bottom order doesn’t matter
• Often helpful to start with someone doing something,
e.g., Customer or Pilot to the extent that applies

• We will use a tool called ERDPlus.com to create E-R diagrams

– Directions will be provided with the first assignment
– This solution will be posted after class
– Note that in ERDPlus.com
• A single vertical line means 1
• Three lines going into means Many

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Business Models
• Background: The Discipline of Market Leaders

• 3 Components
– Value-creation Model

– Profit Model
• Revenue
• Transactional, e.g., Amazon and eBay
• Subscription, e.g., Netflix
• Licensing, e.g., software, Associated Press
• Cost structure

• Unit economics
• Key drivers of profitability

– Logic
• Business goal
• How will you meet it?

• How does this approach compare to others you’ve learned about?

15

Value
• What is value?

• How do you calculate it?

• In theory what does it represent?

• How does Apple create value making iPhones?

• How do you measure how much value a firm creates?

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Apple Value

Consumer Value $1300

Price $900
Average Cost $600

• How much value was created?

• How much of that did Apple capture?

• What are you actually measuring?

• Implication

17

How do barcode scanners

create value for Walmart?

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What is EDI?
How does it create value for Walmart?

19

EOQ

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How does having a firm-wide communications

network create value for Walmart?

21

What is Vendor Managed Inventory?

How does it create value for Walmart?

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Value Disciplines
• Operational Excellence
–Competing primarily through having a cost advantage

• Product/Service Leadership
–Product leadership is offering a unique product or service
–Service leadership is delivering a standard product or
service particularly well

• Customer Intimacy

• Value Chain Coordination

23

Small Group Discussion

• Have you used Google Forms before?

• Identify a spokesperson for your group

• Decide on the best example of a firm for each of the five
value disciplines:
– Operational Excellence
– Product Leadership
– Service Leadership
– Customer Intimacy
– Value Chain Coordination
• Try to come up with examples most of the class will likely
have heard of
– https://forms.gle/WMoJuhPfEDSPxJ5F9

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Value Discipline Examples

(spreadsheet posted after class)

25

Other Examples

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Why Value Disciplines?

• Look at how use IT to create value

• IT choices depend on value discipline

– Operational Excellence
– Product/Service Leadership
– Customer Intimacy
– Value Chain Coordination

• Dynamic marketplace sometimes requires excellence on multiple

disciplines
– Achievable through new technology

• Difficult to focus on improving on more than a single dimension at

a time

27

Wrap-up
• Lab this Wednesday
– Another E-R diagram example
– Start doing single-tables in Microsoft Access
– Make sure you have access to Microsoft Access
• Likely PC users already do
• Mac users should install Parallels, Windows, and then Microsoft Access
• Details on Blackboard

• Upcoming Due Dates

– Next Sunday night – Amazon case write-up
– Tuesday, November 16th – 1st Database Assignment
• SQL Query
• Come up with an E-R diagram for Amazon
• Simplify as much as you want
• Must be able to handle an order for multiple itesm
• Convert E-R diagram to relational form
• Nothing in Microsoft Access for the 1st database assignment
– Before lab next week, also do Microsoft Access Practice Problems
• Should be straightforward after lab this week
• Will post a solution with the assignment
• Lab next week and future assignments will build on this material

• Next Monday
– Scaling Business Models
– Start Amazon discussion

• Questions?

28

14
 11/29/2021

1010 Picture

CIS 401
Information Systems for
Management

Lectures #3 and 4:
Scaling Business Models
and Amazon
November 15th + 22nd, 2021 2

1
 11/29/2021

Agenda
• Today
– Today in Tech: AI x 2
– Finish Value Disciplines discussion
– Databases Overview
– Scaling Business Models
– Amazon
• 3rd Databases Lab Wednesday
• Upcoming Due Dates
– 1st database assignment due this Tuesday night
– Microsoft Access practice problems before lab Wednesday
• Just single-table queries in Microsoft Access
• Not being turned in
• Already have a solution
– 2nd database assignment due Tuesday, November 30th

• Please fill out the following survey regarding preferred times for TA office hours:
https://forms.gle/WnWvzash4HkGv8aE9

• Questions?

Zoom Etiquette
• Please have your video on
• Please have audio on mute
• If you have a question, please raise your virtual hand (bottom of
participants window) and wait for me to call on you
• When I call on you, please unmute, ask your question, and then mute
again AND put your virtual hand down
• Please have your screen name start with your preferred name
– “Roy Jones” if your preferred name is your actual name
– “Beth (Elizabeth Johnson)” if your namesis Elizabeth but you go by “Beth”
– I will call you by whatever name is first
– Please let me know if I mispronounce your name
– Phonetic spelling is appreciated, e.g., E-Yun (Yiyun Wang)
– Your screen name can be changed by clicking to the right of it in the
participants list
• For the most part, I am not monitoring chat

• Questions?
4

2
 11/29/2021

Today in Tech: Tesla Asleep

NHTSA investigate Tesla

3
 11/29/2021

Value Discipline Examples

(spreadsheet posted after class)

Other Examples

4
 11/29/2021

Why Value Disciplines?

• Look at how use IT to create value

• IT choices depend on value discipline

– Operational Excellence
– Product/Service Leadership
– Customer Intimacy
– Value Chain Coordination

• Dynamic marketplace sometimes requires excellence on multiple

disciplines
– Achievable through new technology

• Difficult to focus on improving on more than a single dimension at

a time

Databases Overview
• Started with SQL
– Select, From, Where
– When we say Holding.I# = Investor.I# we are doing an Implicit Join
• Database Design
– 1 proper form for a database: no redundancy
– Database design is a reflection of how a firm does business
– Entity-Relationship (E-R) Diagrams is a tool for database design
– Relational form is just a list of all tables and fields in each table
• All entities become tables
• Many to many relationships also become tables
• Single-table queries in Microsoft Access
– Graphical user interface to SQL
– Actually 3 views: Datasheet, Design, and SQL
• Lab Wednesday
– Two more E-R diagram examples
– Group By
– Expressions
– Multi-table queries
• After Thanksgiving – Data Mining and Data Mining in Microsoft Access

• Questions?

10

5
 11/29/2021

Impact of Internet on
Buyer’s Process

•Awareness
•Information Search
•Evaluation
•Purchase

11

Type of Products
•Initially most B2C sales were in these
categories:
–Computers and computer equipment
–Travel
–Brokerage
–Books and music
•Why?

12

6
 11/29/2021

Evaluating Business Models

•Drivers of Change: IT and Networks
•How does the business scale?
–Impact of doubling number of Internet users on
revenues and costs
–E.g., Ford, Yahoo, Amazon, eBay
•Key Issues
–Do they sell online?
–Is the firm selling a physical product or an
information product?
–Is there a network externality?

13

eBay Founding

14

7
 11/29/2021

Originally AuctionWeb, Labor Day

‘95

15

Business Models

Will be posted after class

16

8
 11/29/2021

Network Externalities
• From economics
• 2 views, same bottom line
– Metcalfe’s Law
N nodes in a network
each can communicate with the N-1
other nodes
N • (N - 1) = N2 - N ≈ N2

– Value to an individual consumer increases with the number of

other users of product
• Value to N users = N * (V + inc extra from others) > N * V,
where V = Value to 1 user with no other users

– Which of the four firms has the most significant network

externality?
17

Cost Structures
•Physical Goods have no development costs
•Information Goods have no unit costs
•Broad spectrum
–Pure Physical Goods, e.g., bricks or non-
genetically engineered pork bellies
–Cars
–Satellites
–Pure Information Goods, e.g., music, search

18

9
 11/29/2021

Business Models = BS?

What makes a model useful?

19

Questions Our Model

Can Help Answer
1. Which firms will have gross operating profit be a
high percentage of sales? Why?
2. Which firm least impacted by growth of Internet?
3. Which firm benefit most?
4. Of the three Internet firms, which one is most
fraught with trouble early on?
5. Of the other two Internet firms, which one is
most likely to have sustained an early loss?

20

10
 11/29/2021

Reality

21

Gross Margin
Gross Margin = (Rev – COGS) / Rev
= 1 – (COGS / Rev)

•If Gross Margin is decreasing, COGS must be

increasing

•If Gross Margin is increasing, COGS must be

decreasing

22

11
 11/29/2021

Why have Yahoo and eBay had

Gross Margin decrease over time?

23

Why has Amazon’s Gross Margin

increased by 60% between 2010 and 2018?

24

12
 11/29/2021

Jeff Bezos #2

25

Jeff Bezos #2

26

13
 11/29/2021

Andy Jassy new CEO

27

Largest US Firms

28

14
 11/29/2021

2020 Closures

29

2020 Eg

30

15
 11/29/2021

Amazon 1y stock

31

Walmart and AWS

32

16
 11/29/2021

Walmart/Google

33

Amazon Video
•What do you think of Jeff Bezos?

•What is striking about Amazon’s business?

•How is it different from Barnes and Noble?

•What’s interesting?

34

17
 11/29/2021

***v Amazon Video

35

Thoughts?

36

18
 11/29/2021

FAA approval

37

Amazon
Why start with physical books?
Not experience
Non-perishable
Small and shippable for not too much money
Better availability
Selection
Sort and search

Slides with notes will be posted after class

38

19
 11/29/2021

Amazon vs. BN Cust

Customer Perspective Amazon Barnes and Noble

Selection Experience

Convenience/Deliver Chairs, space, coffee

Functions with authors

Immediacy

39

Amazon vs. BN BM

Business Model Amazon Barnes and Noble

No stores

Economies of Scale in Inv.

40

20
 11/29/2021

EOQ

41

Amazon vs Online
What are the pros of buying a physical book from Amazon
instead of another online retailer?
Service, e.g., Sunday delivery
Deliveries faster and better
Recommendations
Reviews
Search Inside the Book

• Observations?

• Example of:

42

21
 11/29/2021

Competing with Amazon

•How hard to enter market?

•How hard to take business from Amazon?

•What is Amazon’s weakness?

43

Individualized Pricing

•Individual pricing vs. dynamic pricing

•Pros of individualized pricing

•Cons of individualized pricing

44

22
 11/29/2021

Should Amazon do individualized pricing?

•Could they do it?

•Are they doing it?

•Poll: Should Amazon do individualized pricing?

45

Individualized Pricing, cont.

•Anyone taken pricing class?

•What do they say about individualized

pricing?

•Other forms of individualized pricing?

•How do they use dynamic pricing?

46

23
 11/29/2021

Legality of Price Discrimination

47

Cash Conversion Cycle

•What does it mean to have a negative cash
conversion cycle?

•Suppose Amazon’s was -20. What was it worth

to Amazon in FY 2020?

•Excel will be posted after class.

48

24
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Selling other Firm’s Products

•Why is this good for Amazon?

•Why do other firms do it?

•Why have Amazon handle fulfillment too?

•Why else is it good for Amazon?

49

Amazon Prime

•What do you think analysts thought about it?

•Is it a good thing?

50

25
 11/29/2021

Amazon Kindle

•Why start Kindle?

•Why start Kindle Fire?

•Problems with iOS app?

51

Same Day Delivery

•Pros

•Cons

52

26
 11/29/2021

Exponential Growth
100000

90000

80000

70000

60000

50000

40000

30000

20000

10000

0
0 10 20 30 40 50 60 70 80 90 100

53

Amazon’s Revenue ($Billions)

$450

$400

$350

$300

$250

$200

$150

$100

$50

$0
1995 2000 2005 2010 2015 2020
54

27
 11/29/2021

Amazon’s Stock Price

55

Fire Phone

56

28
 11/29/2021

Fire Phone Exit

57

Why didn’t Fire Phone succeed?

58

29
 11/29/2021

Film

59

Amazon Echo

60

30
 11/29/2021

Amazon’s Businesses
• Books
• Other Products
• Other Retailer’s Products
• eBooks
• Kindle
• Kindle Fire
• Fire Phone
• Instant Video and Digital Music
• Amazon Fresh
• Films
• Amazon Echo
• Amazon Web Services
61

Impact on Income Inequality

If retail were the only industry becoming more concentrated, it would be one thing.
But a relative few winners are taking a disproportionate share of business in a wide
range of industries, including banking, airlines and telecommunications. A study by the
Obama White House’s Council of Economic Advisers found that in 12 of 13 industry
sectors, the share of revenue earned by the 50 largest firms rose between 1997 and
2012.

That in turn may help explain why the income gap has widened in recent years.
Essentially, the corporate world is bifurcating between winners and losers, with big
implications for their workers.

Research by Jae Song of the Social Security Administration and four colleagues found
that most of the rise of inequality in pay from 1978 to 2013 was because some
companies were paying more than others — not because of a wider gap between
high-paid and low-paid workers within a company.

“Employees inside winning companies enjoy rising incomes and interesting cognitive
challenges,” the Stanford economist Nicholas Bloom, one of the co-authors of that
paper, wrote recently in Harvard Business Reveiw. “Workers outside this charmed
circle experience something quite different.”

62

31
 11/29/2021

Do most M&As generate shareholder value?

63

Why did Amazon buy Whole Foods in 2017?

64

32
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Does Whole Foods have Low Prices?

Is that good or bad for Amazon?

65

Amazon cut prices

66

33
 11/29/2021

Why did Amazon cut prices?

67

***v Amazon Go

68

34
 11/29/2021

How hard would it be for us to

open a comparable store?

69

Amazon 2018 Financial Results

70

35
 11/29/2021

Amazon Q4 2018
Financial Results HighlightsQ3 2020
• Q4 Revenue $72.4 billion, up 20% from $60.5 billion
• Q4 Net income $3 billion, up 58% from $1.9 billion
• Echo Dot best-selling item
• Alexa’s ability to answer questions improved 20%
• North American sales up 18% to $44 billion
• International sales up 15% to $20.8 billion
• AWS grew 45% to $7.4 billion
• Subscription services up 25% to $4 billion
– What are subscription services?
• Other jumped 95% to $3.4 billion
– What is other?
– How does it compare to net income?
• 2nd Headquarters in Arlington, VA (and not NYC)

71

Q4 2020

72

36
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Q2 2021

73

Q3 2021

74

37
 11/29/2021

Future Competition

75

Key Insights
• To what extent does Amazon exhibit each of the value disciplines?
– Operational Excellence
– Product Leadership
– Service Leadership
– Customer Intimacy
– Value Chain Coordinator

• Poll: What is Amazon’s primary value discipline?

• Information Goods

• Threats to Amazon

• Questions?

76

38
 11/29/2021

Additional Amazon Topics

•Amazon Arbitrage

•Climate Change

•Fulfillment

•AWS

•Amazon vs Alibaba

77

Walmart

78

39
 11/29/2021

Amazon

79

What’s going on?

80

40
 11/29/2021

Amazon suppliers

81

Amazon Arbitrage

82

41
 11/29/2021

Walmart’s Price

83

Walmart Price with Shipping

84

42
 11/29/2021

Who wins and loses

with Amazon Arbitrage?
•Customer?

•Point and Ship?

•Amazon?

•Walmart?

85

Amazon Climate

86

43
 11/29/2021

Deviating from Focus on Customer:

Huge Advertising increase

87

Next Page

88

44
 11/29/2021

Tweaking Search Results

89

Latest Drone

90

45
 11/29/2021

Amazon hub

91

Amazon Plane

92

46
 11/29/2021

Delivery Service PartnerVertically

Integrating into Delivery

93

Why is Amazon vertically integrating

into shipping and delivery?

94

47
 11/29/2021

Why has Amazon’s Gross Margin

increased by 60% between 2010 and 2018?

95

1010 Picture

96

48
 11/29/2021

AWS

97

AWS Rev Growth 2020

98

49
 11/29/2021

***v AWS Commercial

99

AWS Customers

100

50
 11/29/2021

Biggest Customers
•Advantages of Cloud Computing
–Scalability
–Reliability
–Security
–Lower labor and hardware costs
–Shift from fixed capital cost to variable cost

101

Zoom AWS

102

51
 11/29/2021

Advantages of Cloud
•Lower Cost
•Scalability
•Expertise
•Speed and Flexibility

•How many of your firms use AWS or another

cloud provider? Why?
•What has the experience been like?

103

Incredible World
• Uber is world’s largest taxi service, but owns no vehicles

• Airbnb is world’s largest accommodations provider, but doesn’t

own a single hotel or rental property

• Alibaba is the world’s most valuable retailer, but doesn’t own

any inventory

• Facebook is the world’s most visited website, but doesn’t create

any content

Source: From Gallaugher text v 9.0 (2022)

104

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 11/29/2021

Amazon vs Alibaba

105

Amazon vs.

Amazon Alibaba
Business Model Retail + Market Place Market Place
Market Capitalization $931b $569b
2018 Revenue $233b $53b
Gross Merch. Value ??? $768b
Profit $10b $9b
Net margin 4% 17%
Domestic Marketshare 58% 50%

106

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Amazon GMV

107

Amazon and COVID

108

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Managerial Insights
What are the managerial insights from Amazon?

109

Amazon Summary

110

55
 11/29/2021

Wrap-up for Monday, Nov 22nd

•No lab this Wednesday
•2nd database assignment due Tuesday, Nov. 30th
• Already have everything you need

•Monday, November 29th – Data Mining

•Wednesday, December 1st – Data Mining lab
•Friday, December 10th – Midterm

•Have a great Thanksgiving!

111

56
 11/28/2021

Data Mining

CIS 401
Information Systems for
Management

Lecture #5: Data Mining

November 29th, 2021

1
 11/28/2021

Administrivia
• Today
– Midterm
– Today in Tech
– Finish Amazon
– Introduction to Data mining

• Lab Wednesday– Data mining in Microsoft Access

• Schedule Change
– Instead of doing Netflix case next Monday, we will do an Information, Capacity, and Pricing
simulation
– This will reduce workload for next week
– Will also be no lab next week

• Upcoming Due Dates

– 2nd Database Assignment due tomorrow night
– Data mining assignment will be due Tuesday, December 7th

Midterm
• During class on Friday, December 10th
• Will cover the material we have done through next Monday
including:
– Business models and value disciplines
– Scaling business models
– Amazon
– SQL queries
– Single- and Multi-table queries and Group By in MS Access
– Data mining
– Information, Capacity, and Pricing simulation
• You should read Chapter 4 from the text on Zara
– I will not discuss the reading before the exam in class or in private
• Additional logistics will be announced no later than next Monday

2
 11/28/2021

***v Matt Damon$100m

Staples Ctr

3
 11/28/2021

Crypto.com

•What is crypto.com?

•Why are they spending so much on

advertising?

•What does this have to do with CIS 401?

7

9th largest crypto exchange

4
 11/28/2021

IRS Seized

Amazon finish

10

5
 11/28/2021

J&J Vaccine Pause

11

More Fun with Numbers

• Risk of blood clot:
6 / 7 million = less than 1 / million
• Risk of dying in the US from Covid-19:
563k / 328m = 1.7 / 1000
• Why isn’t it that simple?
• 6 blood clots were all women 18 – 24
– Risk is presumably higher for this group
• Why are they pausing?
• With data mining we can do better than overall the risk
reward tradeoff makes sense, e.g., possible strategies
– Just men
– Men and women over 50

12

6
 11/28/2021

AstraZeneca Risk/Reward in UK

13

Amazon Malls

14

7
 11/28/2021

The Power of Habit

15

The Power of Habit

• Habits consist of
– Cue
– Routine
– Reward
• For example
– I used to have 1 – 3 Panda licorice bars after
dinner every night
– Cue: finishing dinner
– Routine: licorice
– Reward: sugar high, doing something for
myself?
• To change habits, need to change routine
– I started having yogurt with fruit instead
• Also discusses Target and pregnant women
• https://amzn.to/3e5kTF9

16

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Definitions of Data Mining

• The discovery of new information in terms of patterns
or rules from vast amounts of data.
• The process of finding interesting structure in data.
• The process of employing one or more computer
learning techniques to automatically analyze and
extract knowledge from data.

• Huge and increasing amounts of data create

opportunities to extract value from it

• Sometimes called business intelligence, data

analytics, or business analytics

17

Data Mining vs. Data Warehousing

•The data warehouse is a historical database
designed for decision support.
•Data mining can be applied to the data in a
warehouse to help with certain types of
decisions.
•Proper construction of a data warehouse is
fundamental to the successful use of data
mining.
•Most enterprises (Fortune 500 companies)
already have data warehouses. They are now
trying to get value from their data with data
mining techniques.

18

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 11/28/2021

Knowledge Discovery in
Databases
•Data mining is actually one step of a larger
process known as knowledge discovery in
databases (KDD).
•The KDD process model comprises six phases
–Data selection
–Data cleansing
–Enrichment
–Data transformation or encoding
–Data mining
–Reporting and displaying discovered knowledge

19

Google Trends = DM

20

10
 11/28/2021

FB News Feed DM

21

Goals of Data Mining and

Knowledge Discovery (PICO)
•Prediction:
–Determine how certain attributes will behave in
the future.
•Identification:
–Identify the existence of an item, event, or
activity.
•Classification:
–Partition data into classes or categories.
•Optimization:
–Optimize the use of limited resources.

22

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 11/28/2021

Data Mining Example I: Hurricanes

• What do you think people buy before hurricanes?

• What do we learn from data mining?

–
–

PT + B

23

Data Mining Example II: Pregnancy*

• Why might Target or another company be interested in identifying pregnant customers?
– Volume
– Major life event => changing buying habits
• Average parent spends $6800 on baby items before a child’s 1st birthday
– Convenience
– Want to target parents before the baby arrives

• How could they identify them?

– Not only know what you purchased
– Can buy other data, e.g., ethnicity, job history, education, own home
– If you buy cereal, but not milk, they know you get milk somewhere else
• Can send you a coupon
• In general will guess what you buy and try to get you to buy it at Target
– Pregnant women buy unusually large quantities of unscented lotions around the beginning of the 2nd
trimester
– In the first 20 weeks, they tend to buy vitamins
– They also buy scent-free soap and cotton balls, and lots of washcloths, all at once, a few months after
buying lotions and vitamins
• Signals they are close to their delivery date
– Buying a stroller
– For each customer they can estimate the probability they are pregnant and can then target likely one

* From Chapter 7 of The Power of Habits

24

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Data Target Has

25

Target and Pregnancy

26

13
 11/28/2021

Problem
About a year after Pole created his pregnancy prediction model, a man walked into a Minnesota
Target and demanded to see the manager. He was clutching an advertisement. He was very
angry.

“My daughter got this in the mail!” he said. “She’s still in high school, and you’re sending her
coupons for baby clothes and cribs? Are you trying to encourage her to get pregnant?”

The manager didn’t have any idea what the man was talking about. He looked at the mailer. Sure
enough, it was addressed to the man’s daughter and contained advertisements for maternity
clothing, nursery furniture, and pictures of smiling infants gazing into their mothers’ eyes.

The manager apologized profusely, and then called, a few days later, to apologize again.

The father was somewhat abashed.

“I had a talk with my daughter,” he said. “It turns out there’s been some activities in my house I
haven’t been completely aware of.” He took a deep breath. “She’s due in August. I owe you an
apology.” 27

Ramifications
•Does this cause a problem for Target?

•How did they solve it?

28

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Target Comment
We “have made considerable investments in understanding our guests’
preferences. To assist in this effort, we’ve developed a number of research tools
that allow us to gain insights into trends and preferences within different
demographic segments of our guest population. We use data derived from these
tools to inform our store layouts, product selection, promotions and coupons.
This analysis allows Target to provide the most relevant shopping experience to
our guests. For example, during an in-store transaction, our research tool can
predict relevant offers for an individual guest based on their purchases, which
can be delivered along with their receipt. Further, opt-in programs such as our
baby registry help Target understand how guests’ needs evolve over time,
enabling us to provide new mothers with money-saving coupons. We believe
these efforts directly benefit our guests by providing more of what they need and
want at Target—and have benefited Target by building stronger guest loyalty,
driving greater shopping frequency and delivering increased sales and
profitability.”

“Target Baby is able to track life stages from prenatal care to car seats and
strollers…. (The) Target Baby Direct Mail Program… (has driven) sizable
increases in trips and sales.”

29

Common Data Mining Techniques

•Association Rules

•Classification

•Clustering

30

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 11/28/2021

Association Rules
•Association rules are frequently used to
generate rules from market-basket data.
–A market basket corresponds to the sets of items a
consumer purchases during one visit to a
supermarket.
•The set of items purchased by customers is
known as an itemset.
•An association rule is of the form X=>Y, where X
={x1, x2, …., xn }, and Y = {y1,y2, …., yn} are sets of
items, with xi and yi being distinct items for all i
and all j.

31

Classification
•Classification is the process of learning a
model that is able to describe different
classes of data.
•Supervised learning, i.e., the classes to be
learned are predetermined.
•Learning is accomplished by using a training
set of pre-classified data.
•The model produced is usually in the form of
a decision tree or a set of rules.
32

16
 11/28/2021

Decision Tree Example

33

Rules Extracted
from Decision Tree
•One of the rules extracted from the decision
tree
IF 50K > salary >= 20K
AND age >=25
THEN class is “yes”
•Another rule
IF 50K > salary >= 20K
AND age < 25
THEN class is “no”

34

17
 11/28/2021

Clustering
•Unsupervised learning or clustering builds
models from data without predefined classes.
•The goal is to place records into groups where
the records in a group are highly similar to each
other and dissimilar to records in other groups.
•The k-Means algorithm is a simple yet effective
clustering technique.
–Will do an example at the end of class, time
permitting

35

Other Data Mining Techniques

•Sequential pattern analysis
–Look for a sequence of itemsets
•Regression
–Special case of classification, i.e., classification rule is
a function mapping variables to a target variable
•Neural Networks
–set of interconnected nodes designed to imitate the
functioning of the brain
•Genetic Algorithms
–class of randomized search procedures capable of
adaptive and robust search over a wide range of
search space topologies.

36

18
 11/28/2021

Data Mining Applications

• Marketing
– Marketing strategies and consumer behavior. Advertising, Service location,
Customer Segmentation, Targeted mailing
• Finance
– Fraud detection, creditworthiness and investment performance analysis
• Manufacturing
– Resource optimization of workers, machines and materials
• Healthcare
– Image analysis, genetic analysis, side effects of drug, and treatment
effectiveness, process and cost optimization in healthcare services

37

More Examples of Data Mining

•Readings
–Walmart
–Amazon
–Netflix
•Other Examples
–American Airlines
–Trading stocks
–Wegmans

38

19
 11/28/2021

Today in Tech

39

Examples
• Fitness-tracking app Strava can be used to identify US military bases
• Other Strava users potentially allow burglars to see when and where
you’re working out
• Tweets stamped with location can be used to identify someone’s home
with 65% accuracy
• 80% of UK thieves use social media to case targets
• Location data reveals shopping habits and how and where we drive
• Orbitz acknowledged they showed more expensive travel option to
Apple Mac users
• WSJ found some retailers adjusted prices based on browsing history and
location

• Can turn off apps’ access to location data and delete apps you don’t use

40

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 11/28/2021

Amazon’s Best
• Keys for online businesses
– Getting traffic
– Monetize traffic
• Amazon
– Sells physical products
– Sells Kindles and eBooks
– Sells other retailers’ product
• Now considering using email to promote “Amazon’s Best”
products
– What products should be promoted?
– Who should receive a promotion for a particular product?
• Why not send promotion to everyone?
• We will focus on who should receive a promotion for a
particular product

41

Customer Data for

Amazon’s Best Promotion
•Gender + RFM (Recency, Frequency, Money)
•# in Categories: Children, Youth, Cooking,
Do-It-Yourself, Reference, Art, Geography
•Purchased Offer for:
–Italian Cooking, Historical Atlas, Italian Art
•Who should be offered Amazon’s Best latest
book: “The Art History of Florence”

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Amazon’s Best: Customer Table

43

Method
• make offer to 1000 people (test)
• determine profitable segments
– cost = $1/offer
– gross profit = $7/book
• not incl. $1 sunk cost of offer
• test has 8% response rate
• How much did we make on the test phase?
– How many bought?
– Profit = $7 * # Bought - $1 # of offers
= $7 * # Bought - $1000
=
• Profitable only by segmenting
• What did we get in the test phase?
• Make offer to promising of remaining 10,000 (roll)

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Amazon’s Best:
Current Book (test)

•How should we segment the customers?

45

2-Phase Process: Test and Roll

• Total of 11,000 customers
• Break customers into two groups
–1,000 in Test
–10,000 in Roll
• We make offers to all customers in the test phase
• We use that data to come up with customer segments
we believe (estimate) to be profitable
• In the roll phase, we only make offers to the
remaining 10,000 customers that are in segments we
believe are profitable based on test phase results

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Example of Segmentation
• We might choose to segment based on Gender and # of previous
Art purchases
– Will later discuss how to choose what variables to segment on
• Two values for Gender in data: 1 and 2
• Might be 11 values for Art, e.g., 0 – 10
• If we did all combinations of both, how many would we have?
• Don’t want too many segments, because we lose statistical power
• Will therefore do ranges for variables that have more than a few
values, e.g., 0, 1 – 2, and 3+ for Art
• What is the total number of segments if have two values for
gender and 3 for Art?

47

Gender and Art Segmentation

• 2 values for Gender (1, 2) and 3 ranges (0, 1 – 2, 3+) for Art:

• What is the breakeven percentage?

• Which of the test segments are profitable?
• In the roll phase, i.e., to the remaining 10,000 customers, we will only make
offers to those customers that are in groups we believe will be profitable

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To estimate the probability a coin is heads,

we might flip it 4 times
16 possible outcomes:

Probability of Number of Heads in 4 Flips

43.75%

37.50%

31.25%

25.00%

18.75%

12.50%

6.25%

0.00%
0 1 2 3 4

• Odds of no heads with 4 flips of coin and estimating Pr{Head} = 0 is (½)^4 = 1/16
• If we flip coin 40 times, odds of 40 straight Tails, Pr{Heads} = 0 is (½)^40 < 1 in 1 trillion
• In general, we are more confident in estimates based on more data
49

Downside of More Segments

• As the number of segments increases, the average segment size decreases
– Leads to a loss of statistical power
• Concern is we estimate that it’s profitable and it’s not, i.e., it’s < 14.28%
– Graph shows the distribution of estimated probabilities when actual probability is 10%
– Probability we incorrectly estimate it’s profitable is the area under each curve to the right of 14.28%
– Much more likely to happen when N = 10 than when N = 100, because when N = 100 it’s very unlikely
we’ll estimate it’s greater than 14.28% when it’s actually 10%

Distribution of Estimated Probability when Actual Probability is 10%

25

N = 100
20

15

10

5
N = 10

0
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 50

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 11/28/2021

Bias in Estimates
• Sometimes our estimates are high, sometimes they are low
• But we only make offers to segments where estimate is > 14.28%, i.e., high
• Let’s say the actual probability a customer in a set of segments is 1/7 or 14.28%
• Estimates will vary around 14.28%
• We will choose segments where estimate is greater than 14.28%
• Think we will be profitable, but we won’t. In expectation, we will break even (actual is 14.28%)
• Bias is from only choosing segments with estimates > 14.28%, likely our estimate is high
• In general, will not do as well as expect because of bias
Estimate when Actual is 1/7 (14.28%)
14

12

10

0
0% 3% 6% 9% 11% 14% 17% 20% 23% 26% 29% 51

How to Create a Segmentation

• Figure out what fields you want to use in your segmentation.
• Determine how many values or ranges you want for each
field.
• Total number of segments is the product of the number of
options for each of the fields you are segmenting on.
• Example: By Gender and Art Category
• Tradeoff:
– Want more segments to find ones where customers are likely to buy
– But as you have more segments, you lose statistical power

52

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By Gender

• Poll: Is Gender a good variable to include in a

segmentation?
53

Performing a Segmentation
1 Design and Create a Table in Access to capture
the information that defines a segment, e.g.,
Segment #, Gender, Art Low, and Art High
2 Populate the Segmentation Table with records
• Every customer goes in exactly one segment
• Need to worry about the maximum value
• Total number of records is the product of the number
of possible values for each field we are segmenting on
3 Use the Segmentation Table to evaluate the
performance of your segmentation

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By Gender and Art Category

• Poll/Question: How many segments

should we make offers to in the roll
phase?

• Which segments should we make offers

to?

• What are the estimated roll profits?

55

Calculating the Estimated Roll Profit

• Let’s start with an easier problem:

– How much would the test profits be if we had just made offers to profitable groups?
– How many people purchased? 14 + 6 + 4 = 24
– How many offers did we make? 66 + 7 + 12 = 85
– Profits in Test Phase = $7 * Sold - $1 * Offers
= $7 * 24 - $1 * 85
= $168 - $85
= $83
• So how much are the estimated roll profits?

• In general, Estimated Roll Profits are ten times what the test profits would have been if we only
made offers to profitable groups
• Looking at the profitable groups from the test phase
– How many people purchased? Gross Profit = $7 * #
– How many people received an offer? Cost = $1 * #
– Profit in Test phase = $7 * purchased - $1 offers made
– Estimated Roll Profits = 10 * Profits in Test Phase
• For example, segmenting on Gender and Art:
– Estimated Roll Profits = 10 * $83 = $830
56

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By Gender and Monetary

• Poll/Question: How many segments

should we make offers to in the roll
phase?

• What are the estimated roll profits?

57

Choosing Between Segmentations

• Key factors in decision
–Estimated roll profits
–Number of segments
• What happens as the number of segments increases?
• Poll/Question: Which segment would you choose?
–A or B? Segment Est. Roll Profits # Segments
–B or C? A $1,000 16
B $1,200 14
–C or D?
C $1,800 18
D $2,000 36

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By Art Category and Monetary

***Needs to be odd

Where is Segment 7?

59

Changing Group Definitions

60

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Two 3’s of Data mining in Access

1. Create table in MS Access to capture segment
information
2. Add Segmentation records to that table
3. Use table in query to evaluate segmentation
performance

Query has 3 parts

1. Fields from segmentation table
2. Current history 3 times with Group By changed to count,
sum, and average
3. Make sure when looking at a segment only looking at
customers in that segment by either drawing a relationship
(if segmenting on all values) or adding the customer field,
changing Group By to Where, and then requiring the
customer field to be between low and high for that segment

61

Creating a Segmentation Table

and Records
• Can create table in Access and then add records one
at a time
–Can use AutoNumber field type for Segment #
–This is the simplest way
• Can create records by copying and pasting them to
reduce data entry and the chance of error
–Probably better to not use AutoNumber field type for
Segment #
• Can create in Excel and then import table design and
records
–Have had problems doing this with Parallels, but seems to
work fine on a PC and with the virtual machine
–Recommend not doing this if you’re using Parallels

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Amazon’s Best and Online Advertising

• Amazon’s Best – who likely to buy
• Other parts of Amazon
–Where to purchase ads
–What books and products to recommend
• Web Site Revenue
–Display (CPM)
–Click-through (choosing what ads)
–Commission
•Google

63

Wrap-up
• Coming up with a segmentation on your own
– Correlation table in Excel or other statistical analysis

• Upcoming Due Dates

– 2nd Database Assignment due tomorrow night
– Data mining assignment will be due Tuesday, December 7th

• Remaining Fall A schedule for CIS 401

– Lab this Wednesday – Data mining in Access
– Lecture next Monday – Information, Capacity, and Pricing simulation
– No lab next Wednesday
– Midterm on Friday, December 10th

• Questions?

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CIS 401
Information Systems for Management

Lecture #6: Information, Capacity, and

Pricing Simulation

December 6th, 2021

Midterm
• On Friday, December 10th
– 8:30am section will start at 9am
– 10:20am section will start at 10:35am
• Will cover the material we have done through today including:
– Business models and value disciplines
– Scaling business models
– Amazon
– SQL queries
– Single- and Multi-table queries and Group By in MS Access
– Data mining
– Information, Capacity, and Pricing simulation
• You should read Chapter 4 from the text on Zara
– I will not discuss the reading before the exam in class or in private

1
 12/5/2021

Midterm Logistics
• 8:30am section will take the exam from 9 – 10:15am this Friday, December 10th
• 10:20am section will take the exam from 10:35 – 11:50am this Friday, December 10th
• Will be an open-book, open-note online exam on Blackboard
• Unless you have permission to be remote on Friday, you are expected to be in the classroom
• If you are a remote student, you are expected to be on Zoom with your video on until you have
submitted your exam
• The exam will be mostly multiple choice and short answer
– The questions will be in random order and you will not be able to go back
– Most people will not have time pressure, so you should take your time with each question, give your best
answer, and go to the next question
– Make sure you are half done halfway through the exam
• Everyone should be logged until zoom because I will answer questions through chat
– In class students should not join audio and have video off
– Students with permission to be remote, should have video on
• You should not need to use Microsoft Access or any database during the exam
• You should not use Microsoft Access or any database during the exam

• Questions?

The Power of
Information Technology
•Nature of Information
•Moore’s Law
•Metcalfe’s Law

N nodes in a network
each can communicate with
the N-1 other nodes
N • (N - 1) = N2 - N ≈ N2

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 12/5/2021

Digital Transformation:
Replacing Bricks with Bits
• Examples
– Photography
– Music
– Healthcare
• Radiology
• Electronic Medical Records
– Advertising
• Firms
– Amazon
– Netflix
• How were DVDs better than VHS?
– Facebook
• What are the benefits?
• In summary:

Value Disciplines
• Operational Excellence

• Product/Service Leadership
–Product is what you do, may be product or service.
–Service is how well you deliver your product, whether it’s
a product or service.
–Thus a firm with a great service, exhibits product
leadership

• Customer Intimacy

• Value Chain Coordination

3
 12/5/2021

Scalability of Business Models

•Whether they sell online
•Nature of product
–Physical product
–Information good
•Presence of a network externality
–1-sided
–2-sided

Amazon
• Adds value through information
–Review
–Recommendations
–Search inside the book
• Primary vulnerability – immediacy
–Working on
• Primary value discipline – service leadership
• Also good example of
–Operational excellence – no stores and less inventory
–Customer intimacy – recommendations
–Value Chain Coordination – Amazon Marketplace
• AWS

4
 12/5/2021

Amazon Summary

Databases
• Database design – no redundancy
• Entity-Relationship Diagrams
– Cardinality (1-1, 1-N, N-N)
• Conversion to relational form
– All entities become tables
– Relationship becomes a table only if it is many to many
• SQL queries
– Select Field
– From Table
– Where Condition
• Access queries
– Single-table
– Multi-table
– Group By

10

5
 12/5/2021

Data Mining
•Tradeoff
–Want lots of segments to pick out customers
likely to buy
–As increase number of segments, lose statistical
power
•Total number of segments is the product of
the number of options for each of the fields
you are segmenting on
•Estimated Roll Profits
= 10 * ($7 * purchased - $1 offers made)

11

Information, Capacity, and Pricing

Simulation
•Objectives
•Understanding the demand function
•The simulation model
•Play the game
•Post-game debrief
–Analyze your competitive performance
–Options for improvement
•Strategic implications for managers

12

6
 12/5/2021

Fishing Game Registration

If you haven’t already, please:

1. Register for Tradewind business by going to

www.tradewindbusiness.com and then clicking on
“Register”.

2. Join our class by doing the following:

a) Click on Class List

b) Fill in the class code from the email: 7692-AB18-D927-C5A7
c) Click on the “Add class section” button to the right

13

General Rule
• Please only play game if you’re going to play the whole game
– If you start, but don’t finish, it messes up the game for others

• Do NOT close your Browser

– If possible, use Chrome
• Safari (Only on MAC)
– If necessary: IE (Only 11 and above), Opera, Firefox

• Do NOT Page Refresh

• Do NOT ‘go back’

• Maybe play in pairs in classroom (ideally multiple of 3)

– Person on left is CEO, makes decision
– Person on right is analyst
• Reviews data
• Makes recommendation to CEO

14

7
 12/5/2021

iCAPS Simulation Objectives

•Identify the information needs for business
managers
•Compete in the collaborative and
competitive nature of industries
•Hands-on strategic decision making in a
competitive simulation

15

Interpreting the demand function

$150

$120

Price
($/lb)

$15

40 Quantity (lb) 180 200

16
16

8
 12/5/2021

Understanding the demand

function
•Price as a function of volume
•Gross Income = Volume * Price
•Net Profit = Volume *(Price – Unit Cost)

$150
Price

Volume 200
17

The fishing company’s dilemma

•There are few companies providing fish
•You will be allocated Randomly to lakes
(=Market); Each lake will have 3 to 5 teams
competing with each other
•There is NO interaction between one lake and
the other
–Your Decision:
• How many pounds should we each fish per day?
–How to manage when
• we DO Not know the demand curve?
• we DO Not know ex-ante what others are providing?

18

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Login Screen:
www.TradewindBusiness.com

Note: You should check your email for the validation notice

19

Class Code (in email)

7692-AB18-D927-C5A7

20

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 12/5/2021

Should have already joined class section

By using the “Class List” Tab

Type in the class code

Press “ Add class section”

XX VV
****************F

21

“Join’” our game from the

HOME Screen

After you have joined, wait at

the lobby for others to join in
22

11
 12/5/2021

The interactive Simulation

Enter Lobby; wait for others to do the same
Professor will Start the Game

You will be assigned a lake

Decide how much to supply;

wait for everyone to also decide

Finish
23

Enter your Production Quantity

And, Press “Submit”

24

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 12/5/2021

Business Dashboard

25

Dash board Example

26

13
 12/5/2021

27

Interactive Decision Support

28

14
 12/5/2021

Move this Handle….

29

Decision Dashboard

30

15
 12/5/2021

…
Now, it gets interesting

Why did it happen?

31

Benchmark
Information:

32

16
 12/5/2021

Hurry Up

Lost $ last round…

33

Send out the fleet…

34

17
 12/5/2021

Performance Evaluation

• Best performance Analytic:

• How would you compare the initial rounds and the last
few in terms of competitive decision-making?
_____________________________________________
_____________________________________________
• What was the relationship between the market share and
total profit?
_____________________________________________
_____________________________________________

35

End of Game Analytic

Try to economically explain the relationship The Winner

between these 5 measures below:

36

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 12/5/2021

After Game Analytics View (I)

Can choose All, or a Specific lake

37

John Nash (A Beautiful Mind)

38

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 12/5/2021

The “Nash” and “Collusive” target

39

Another Class

40

20
 12/5/2021

Managerial Summary (I):

Signaling is Critical
What could you calculate in helping your
capacity decision making?
_____________________________________
_____________________________________
How/what did you ‘signal’ to others in your
market?
_____________________________________
_____________________________________

41

The Seattle Times

Airline ‘Signaling’
“…The most sweeping of the Justice Department's antitrust investigations
is the price-fixing probe. Investigators are examining whether the Airline
Tariff Publishing Co.'s massive computer system used by airlines and travel
agents has become a tool for carriers to signal others on price changes,
and whether that amounts to illegal price-fixing.
For example, one carrier might signal that it plans to reduce a fare in two
weeks. However, if other airlines decline to match it, then the planned
fare increase could be scrapped before ever taking effect.
In some cases, the airlines will test the
waters by labeling the fare ``FU'', a signal to
others that a change is under
consideration….”

42

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43

WSJ, March 19, 2002

“…In recent years, when the economy was strong and airlines were flying
high, carriers rarely attacked each other in their core hub cities. But airline
executives say this kind of thrust-and-parry feud happened frequently in the
netherworld of airline reservation computers in the past. In the early 1990s,
during the heyday of airline pricing battles,
several airlines were known to include "FU'' in
fare codes as a way to signal displeasure to
competitors. Airline price signaling became such an issue that the
Justice Department ended the industry practice of proposing fare changes in
computer reservation systems. Instead, airlines can only offer fares that are
immediately available for sale….”

44

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 12/5/2021

45

Oligopolistic Competition (Cournot)

•Multi-period Cournot Market
–Each period companies select quantities
•Decision variable: Quantity produced by competitor
𝑖 in period 𝑡 (𝑞 ε [0, ∞])
•Linear downward sloping demand function
–Market price in period 𝑡 is 𝑷𝒕 = 𝑴𝒂𝒙 𝟎, 𝑷𝟎 − 𝒎𝑸𝒕 with
𝑸𝒕 = 𝜮𝒊 𝒒𝒊𝒕
–E.g.: 𝑃 = 150 − 0.75 ∗ 𝑄
•Constant marginal production cost, $C per unit
•Profit for firm is given by: 𝜫𝒊 = 𝑷𝒕 − 𝑪 ∗ 𝒒𝒊𝒕
• We make sure in the game that: C < {𝑷𝟎 - 100*m }, so it is at least profitable to
produce one hundred units per market (lake)

46

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Oligopolistic Competition
(Cournot)
• n firms in the lake
• If each other firm sets quantity 𝑞 , the profit for each firm is:
𝑴𝒂𝒙 𝟎, 𝑷𝟎 − 𝒎𝒒𝒄 ⋅ (𝒏 − 𝟏) − 𝒎𝒒 − 𝑪 ⋅ 𝒒
⋅ ⋅
• Maximizing, (equate derivate w.r.t. q to zero), we set our 𝑞 =
• If all firms do the same math, we get the Cournot-Nash outcome:

𝑷𝟎 𝒄
𝒒=
𝒎⋅ 𝒏 𝟏
⋅
• Total market quantity is and market price is 𝑃 = +𝑐⋅
⋅

• Max (Total collusive market) Profit is given by 𝑞 ∗ such that:

𝝏 𝑴𝒂𝒙 𝟎, 𝑷𝟎 − 𝒎 ⋅ 𝒒∗ ⋅ 𝒏 − 𝑪 ∗ 𝒏𝒒∗
=𝟎
𝝏𝒒∗
𝑷𝟎 𝑪
– 𝒒∗ =
𝟐𝒎⋅𝒏
𝑷𝟎 𝑷𝟎 𝑷𝟎
– Profit per firm: Π∗ = ∗ 𝑷𝟎 − 𝒏 ⋅ 𝒎 ⋅ −𝐶 =
⋅

47

Oligopolistic Outcomes
• Max (Total collusive market) Profit Π ∗ is given by 𝑸𝒕 such
that:
𝝏 𝑷𝒕 𝑪 ∗𝑸𝒕 𝝏 𝑴𝒂𝒙 𝟎,𝑷𝟎 𝒎𝑸𝒕 𝑪 ∗𝑸𝒕
• = =𝟎
𝝏𝑸𝒕 𝝏𝑸𝒕
𝑷 𝑷 𝑷
–Π∗ = 𝟎 ∗ 𝑷𝟎 − 𝒎 ∗ 𝟎 − 𝐶 = 𝟎
–Equilibriums:
𝑷
–Walrasian (competitive) total market equilibrium: 𝑸𝒘 = 𝟎
𝑸
–Nash equilibrium quantity per player: 𝒒𝒊𝑵 = 𝒘
n = number of competitors in the market (= lake)
𝑸
–Collusive (unstable) equilibrium quantity per player: 𝒒𝒊𝑪 = 𝒘

48

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 12/5/2021

Oligopolistic Competition (Cournot)

•Demand function is not known, and CAN vary
over time..
•Participants don’t know who else is in the
market
•Decisions for quantity are made simultaneously
–The best response by competing firms is revealed
only ex-post
•The actual past performance matrix on a period-
by-period basis of all competitors in their own
market is always revealed to each competitor
•The global best performance for the last period
and over all periods is shared after each round
49

50

25
 12/5/2021

51

USA Airlines Mergers

52

26
 12/5/2021

What Happened on January 9th?

53

54

27
 12/5/2021

Dr. Navya Mysore

was frustrated
while working for
a large New York
health system, so
she moved to One
Medical, a
venture-backed
practice, where
she gets to spend
more time with
her patients.

55

• “…We’re evolving the retail clinic concept,” said Dr.

Troyen A. Brennan, the chief medical officer for CVS.

• The company hopes its proposed merger with

Aetna will allow it to transform its current clinics,
where a nurse practitioner might offer a flu shot,
into a place where patients can have their
conditions monitored. “It requires new and
different work by the nurse practitioners,” he said…”

56

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 12/5/2021

Who is ‘Dating’ Now?

•Aetna & CVS
•Apple recently decided to open up its own
clinics to treat employees.
•Amazon, JP Morgan and Berkshire Hathaway
decided to join forces to develop some sort
of health care strategy for their employees
•Walmart & Humana

57

Similarly, the concentration continues with an

increasing number of hospital merger deals

58

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 12/5/2021

Same at the Insurance Carriers Market

(Watch the trend from 2014….)

59

Managerial Summary (I):

Competitive Mindset is Destructive
•Critical Dashboard Decision Information:
–Capacity (ours, competition)
–Achieved market prices
–Demand curve
–Future plans
•Information Signaling about Capacity is Critical
in any Competitive Market

60

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 12/5/2021

Managerial Summary (II):

Competitive strategic-interdependencies
1. Without information about competitors’
future decisions, it is very hard to determine
our optimal capacity
2. Information signaling can mitigate uncertainty
and improve aggregate performance
3. Maximizing market share is not the same as
maximizing profit
4. Better to avoid price wars than to outperform
competitors
5. Competitors can and will react to attempts to
steal business

61

Midterm Logistics
• 8:30am section will take the exam from 9 – 10:15am this Friday, December 10th
• 10:20am section will take the exam from 10:35 – 11:50am this Friday, December 10th
• Will be an open-book, open-note online exam on Blackboard
• Unless you have permission to be remote on Friday, you are expected to be in the classroom
• If you are a remote student, you are expected to be on Zoom with your video on until you have submitted your exam
• The exam will be mostly multiple choice and short answer
– The questions will be in random order and you will not be able to go back
– Most people will not have time pressure, so you should take your time with each question, give your best answer, and go to the next question
– Make sure you are half done halfway through the exam
• Everyone should be logged until zoom because I will answer questions through chat
– In class students should not join audio and have video off
– Students with permission to be remote, should have video on
• You should not need to use Microsoft Access or any database during the exam
• You should not use Microsoft Access or any database during the exam
• You should read Chapter 4 from the text on Zara
– I will not discuss the reading before the exam in class or in private

• Questions?

• Will stick around in case anyone has questions on Amazon’s Best assignment
– Recall that the 2nd part of the recording from last week’s lab is me doing the Amazon’s Best exercises

62

31