Presentation on theme: "Leveraging Network Effects and Competing Without"— Presentation transcript:
1 Leveraging Network Effects and Competing Without DSC340Mike Pangburn
2 AgendaUnderstand meaning of network effects (“positive network externalities”)1-sided and 2-sided examplesImplications for competitionDiscuss competing without network-effects advantageNeed for superior operations, not superior technologyNeed for superior use of informationConsider case of Zara
3 Network Effects Network effects When network effects are present, the value of a product or service increases as the number of users growsMost products aren’t subject to network effects“you probably don’t care if someone wears the same socks, uses the same pancake syrup, or buys the same trash bags as you” -- J. GallaugherAs a manager, it’s critically important to recognize when a product does exhibit network effects
4 More users = More value Where does that value come from? Exchange Interact with others. The value isn’t typically $.Switching costsSave ($ or time) by sticking with initial choiceAre your customers “barnacles” or “butterflies?”Complementary productsAssociated products that develop
6 Switching costs example “It is this switching cost that has given our customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy vision at times, and many other difficulties…. it would be so much work to move over that they hope we just improve Windows rather than force them to move…. without this … we would have been dead a long time ago.”Comments from a Microsoft General Manager in a memo to Bill GatesLocal “switching cost” example(s)?
7 Switching costs recapThe core “switching cost” idea isn’t that customers have already invested $ in some past product/serviceA past/irrecoverable investment is sometimes referred to as a sunk cost, which we should, as rational decision makers, ignoreThe core switching cost idea is that moving to the new product or service will imply some new investment in time or $.
8 Complementary products Example: iPod related products90 brands selling some 280 models of iPod speakers systems34 auto manufacturers now trumpet their cars as being iPod-readyEach enhances the value of choosing an iPod over a rival like the Microsoft Zune.Local (UofO / Eugene) “complementary products” example(s)???
9 How do network effects change competition? Network markets experience early, fierce competition.Often winner-take-all environments.Examples:Apple -- controls over 75% of digital music sales.Football?Best product or service doesn’t win.Example: Xbox 360 was earlier than Playstation 3, gained early success due to inferior specs
10 Want to compete against an incumbent firm? …High hurdle to clear!
11 Facing an incumbent enjoying networking effects Subsidize new adoptionsExample: PayPal gave $15 off $30 to each new customer to promote its service. eBay was less generous but then ended up later buying PayPal for $15 * 100,000,000Counterexample: Bing!Move earlyIf you don’t? Consider that eBay waited 5 months after Yahoo! to start auctions in Japan… never recovered in that marketRedefine the marketLook for “blue ocean” (W. Chan Kim and Renée Mauborgne)Example: Nintendo’s Wii strategyEncourage complementary productsExample: Facebook’s fbFund: up to $250,000 funding per firm writing apps
12 Network effects and ITSavvy managers look for ways to design-in network effectsE.g., FacebookExchange value, Switching cost, Complementary productsThus, Information Technology can establish competitive advantage via network effects with your firm’s productThe strategic role of IT is not limited to tech products with network effectsIT as product versus IT as enablerThe latter applies even for non-tech productsZara provides a powerful example of leveraging IT as strategic enabler
13 AgendaUnderstand meaning of network effects (“positive network externalities”)1-sided and 2-sided examplesImplications for competitionDiscuss competing without network-effects advantageNeed for superior operations, not superior technologyNeed for superior use of informationConsider case of Zara
14 Consider Zara What? Where? Who? Most successful apparel company on the planetWhere?Based in the ship-building town of La Coruña, SpainWho?Founded by Amancio Ortega, the world's 3rd richest man with assets worth more than $50 billionNot much of a marketeer, has more a product/process focus
15 Network effects and Zara For the type of products that Zara sells, why might network effects not be very strong?Generally speaking, network effects (“network externalities”) can be either positive or negativeWhen a product exhibits negative network externalities, the resulting challenge for a firm a severeWhat product-line management strategy would you recommend to a manager facing that challenge?
16 Core aspect of Zara’s strategy “If you see something and don’t buy it, you can forget about coming back for it because it will be gone.”-- 20-something Zara shopper
17 Consider this tension (challenge) Accounting ruleInventory = an assetRetailing adage “Inventory equals death”
18 Use of technologyAs a manager, your focus should not be on having better technologyFocus on having better information and processes, with minimal technology costsZara is information/process focused, not tech focused“Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zara’s IT expenditure is less than one-fourth the fashion industry average.”
19 Technology ≠ Effective Processes Just Ask Prada Contrast with Prada’s “Manhattan project” to create the ultimate fashion storePDAs would let staff check inventory immediatelyglass dressing room foot pedals would allow customers to turn walls opaque, into a combination mirror and heads- up displaydressing room computer would recommend matching accessoriesHow did it turn out?
20 Technology ≠ Effective Processes An information system (IS) is much more than just hardware and software.An IS also includes data used or created by the system, as well as the procedures and the people who interact with the systemSuccessful information systems (IS) must integrate these 5 critically-important components: hardware, software, data, procedures, and people.
21 Zara, the new Dell?Dell was the low-inventory, short lead-time, high product variety competition-killer of the 90’sDell is facing more heat now from its competitors.Is Zara “the new Dell”?How do they differ?
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