and Competing Without DSC340 Mike Pangburn Agenda Understand meaning of network effects positive network externalities 1sided and 2sided examples I mplications for competition Discuss competing ID: 639654
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Slide1
Leveraging Network Effects and Competing Without
DSC340
Mike
PangburnSlide2
AgendaUnderstand meaning of network effects (“positive network externalities”)1-sided and 2-sided examplesImplications for competitionDiscuss competing
without
network-effects advantage
Need for superior operations, not superior technology
Need for superior
use
of
information
Consider case of
ZaraSlide3
Network effectsWhen 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.
Gallaugher
As a manager, it’s critically important to recognize when a product
does exhibit network effects
Network EffectsSlide4
More users = More valueWhere does that value come from?ExchangeInteract with others. The value isn’t typically $.
Switching costs
Save ($ or time) by sticking with initial choice
Are your customers “barnacles” or “butterflies?”
Complementary products
Associated products that developSlide5
“Exchange” examples?Telephone / Skype / faxLocal “exchange value” example(s)?Slide6
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 Gates
Local “
switching cost
”
example(s
)?Slide7
Switching costs recapThe core “switching cost”
idea
isn’t
that customers have already invested $ in some past product/service
A past/irrecoverable investment is sometimes referred to as a
sunk cost, which we should, as rational decision makers, ignore
The core
switching
cost
idea
is
that moving to the new product or service will imply some
new investment
in time or $.Slide8
Complementary products??
Example: iPod related products
90 brands selling some 280 models of iPod speakers systems
34 auto manufacturers now trumpet their cars as being iPod-ready
Each enhances the value of choosing an iPod over a rival like the Microsoft Zune.
Local (UofO / Eugene) “
complementary products
”
example(s
)?Slide9
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 specsSlide10
Want to compete against an incumbent firm? …High hurdle to clear!Slide11
Facing an incumbent enjoying networking effectsSubsidize 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 * 100,000,000
Counterexample: Bing!
Move
early
If you don’t? Consider that eBay waited 5 months after Yahoo! to start auctions in Japan… never recovered in that market
Redefine the marketLook for “
blue ocean
” (W. Chan Kim and Renée
Mauborgne
)
Example: Nintendo’s
Wii
strategy
Encourage complementary products
Example:
Facebook’s
fbFund
: up to $250,000 funding per firm writing appsSlide12
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 product
The strategic role of IT is not limited to tech products with network effects
IT
as product
versus
IT as enabler
The latter applies even for non-tech products
Zara provides a powerful example of leveraging IT as strategic enablerSlide13
AgendaUnderstand meaning of network effects (“positive network externalities”)1-sided and 2-sided examples
I
mplications for competition
Discuss competing
without
network-effects advantageNeed for superior operations, not superior technology
Need for superior
use
of
information
Consider
case of
ZaraSlide14
Consider ZaraWhat?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 focusSlide15
Network effects and ZaraFor 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 negative
When a product exhibits negative network externalities, the resulting challenge for a firm a severe
What product-line management strategy would you recommend to a manager facing that challenge?Slide16
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 shopperSlide17
Consider this tension (challenge)Accounting ruleInventory
= an asset
Retailing adage
“Inventory equals death”Slide18
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.”Slide19
Technology ≠ Effective ProcessesJust Ask Prada Contrast with Prada’s “Manhattan project” to create the ultimate fashion storePDAs would let staff check inventory immediately
glass dressing room foot pedals would allow customers to turn walls opaque, into a combination mirror and heads-up display
dressing room
computer would recommend matching accessories
How did it turn out?Slide20
Technology ≠ Effective ProcessesAn 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
.Slide21
Zara, the new Dell?Dell was the low-inventory, short lead-time, high product variety competition-killer of the 90’s Dell is facing more heat now from its competitors.Is Zara “the new Dell”?How do they differ?