Business Information Technology- Assignment
AJ-773
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Information Systems: A Manager’s Guide to Harnessing Technology V 3.0
By John Gallaugher
Chapter 7
Understanding Network Effects: Strategies for Competing in a Platform-Centric, Winner-Take-All World
Learning Objectives
Define network effects.
Recognize products and services that are subject to network effects.
Understand the factors that add value to products and services subject to network effects.
Identify the three primary sources of value for network effects.
Recognize factors that contribute to the staying power and complementary benefits of a product or service subject to network effects.
Understand how firms like Microsoft and Apple each benefit from strong network effects.
Network effects
Also referred to as network externalities or Metcalfe’s Law.
Most products are not subject to network effects.
Presence of network effects influences the choice of one product or service over another.
the value of a product or service increases as its number of users expands
The origins of value
Products and services subject to network effects foster exchange, which creates value.
Staying power: Long-term viability of a product or service.
Bolstered by networks with greater numbers of users.
Switching costs: incurred when moving from one product to another.
Directly related to staying power.
Strengthen the value of network effects as a strategic asset.
Increases with the higher friction available to prevent users from migrating to a rival.
Total cost of ownership (TCO): Economic measure of the full cost of owning a product.
The origins of value
Complementary benefits: Products or services that add additional value to the primary product or service that makes up a network.
Platforms: Allow for the development and integration of software products and other complementary goods.
Value-adding sources work together to reinforce one another to make the network effect even stronger.
Each add-on of an iOS product enhances the value of choosing it over a rival.
Learning objectives
Recognize and distinguish between one-sided and two-sided markets.
Understand same-side and cross-side exchange benefits.
One-sided market, two-sided market
| ONE-SIDED MARKET | TWO-SIDED MARKET |
| Market that derives most of its value from a single class of users. Same-side exchange benefits: Benefits derived by interaction among members of a single class of participant. | Network markets comprised of two distinct categories of participant. Both need to deliver value for the network to function. Cross-side exchange benefit: An increase in the number of users on one side of the market, creating a rise in the other side. |
Learning Objectives
Understand how competition in markets where network effects are present differ from competition in traditional markets.
Understand the reasons why it is so difficult for late-moving, incompatible rivals to compete in markets where a dominant, proprietary standard is present.
How Are These Markets Different?
Network markets experience early, fierce competition.
Caused by positive-feedback loop inherent in network effects.
Firms are aggressive in the early stages because once a leader becomes clear, new adopters begin to favor the leading product over rivals.
Tips the market in favor of one dominant firm or standard.
Markets exhibit monopolistic tendencies.
One firm dominates all rivals.
Monopoly: Market where there are many buyers but only one dominant seller.
Oligopoly: Market dominated by a small number of powerful sellers.
Learning objectives
Plot strategies for competing in markets where network effects are present, both from the perspective of the incumbent firm and the new market entrant.
Give examples of how firms have leveraged these strategies to compete effectively.
Competing in Markets with Network Effects
Move early (Yahoo! Auctions in Japan).
Subsidize product adoption (PayPal).
Leverage viral promotion (Skype, Facebook feeds, Uber).
Expand by redefining the market to bring in new categories of users or through convergence (iPhone).
Convergence: When two or more markets, once considered distinctly separate, begin to offer similar features and capabilities.
Envelopment: When one market attempts to conquer a new market by making it a subset, component, or feature of its primary offering.
Form alliances and partnerships (NYCE vs. Citibank)
Competing in Markets with Network Effects
Establish distribution channels (Java with Netscape, Microsoft bundling Media Player with Windows)
Seed the market with complements (Blu-ray, Nintendo)
Encourage the development of complementary goods (Facebook fbFund)
Maintain backward compatibility (Apple’s Mac OS X Rosetta translation software for PowerPC to Intel)
Backward compatibility: Ability to use complementary products developed for a prior generation of technology.
Adaptor: Product that allows a firm to use the complementary products, data, or user base of another product or service.
Competing in Markets with Network Effects
Rivals: maintain compatibility with larger networks (Apple’s move to Intel)
Incumbents: close off rival access and constantly innovate (Apple’s efforts to block access to its own systems)
Large, established firms : make preannouncements (Microsoft)
The Osborne Effect: Firm experiencing a sharp and detrimental drop in the sales of current offerings due to its preannouncement of forthcoming products
Congestion effects: Increasing numbers of users to lower the value of a product or service
