Chapter 4: Digital Disruption and the Competitive Environment

Digital Platform

two-sided networks with specific members on the two sides: users and developers (e.g., Windows, iOS, Android)

Digital Marketplaces

Communities of buyer and sellers who tract via digital technologies

• Main objectives

  • Exercise control over products and services that can be listed by sellers

  • Function as enables of trust

  • Faciliatate the discovery of products and services by providing resources for sellers

Aggregations

• Orgs that manage an integrated platform and a marketplace (Amazon, apple store)

• By control of marketplace it aggregates customer demand therefore attracting suppliers who want to capture demand

Network Economics

• Value is typically found in scarcity and in IS the more users creates vlaue

  • Ex. The original copy of ig is useless, but the more of your friends that download it and you would see more value for it

• The value in a network is proportional to the # of connected nodes

Types Of Network

• Physical Networks: the nodes of the network are connected by physical links

  • Ex: Railroad network, telephone network

• Virtual Networks: : the connections between network nodes are intangible and invisible. The nodes of a virtual network are typically people rather than devices

  • Ex. IG, App store, Snap

• The value of the network for its members is function of its size, the more nodes the network has the more valuable it is to its members

Positive Feedback

• Positive Feedback: Self-reinforcing mechanism by which the strong gets stronger and the weak gets weaker 

  • Virtuous cycle which benefits the larger firm and a vicious cycle penalizing the smaller one. Therefore the stronger firm gets stronger and continues to grow while the weaker firm gets increasingly weaker

Negative Feedback

• Negative Feedback: Term used to refer to the opposite dynamic. If negative feedback is at play, the stronger gets weaker and the weaker gets stronger

  • Negative feedback typically characterizes economies of scale and takes effect when the dominant firm has reached a significant size 

  • After a certain size, economies of scale no longer reduce unit cost and, due to coordination costs and increasing overhead, further growth is hampered

Network Effects

• Network effects (also called network externalities or demand-side economies of scale) happen when the value of a network increases as more people join.

  • For example, when a new person joins Waze, it helps everyone by making the network more useful.

• These effects can have spillover impacts—they benefit people in the growing network but can hurt those in competing or smaller networks.

Evangelist Effect

• Evangelist effect: The more users the more value for you and the incentive that current members of the network have to spread the word and convince others to join it

  • While the evangelist or viral effect generally co- occurs with the network effect, it serves to speed up users’ adoption

Companies' Benefits of Network Effects

• Traditional economies of scale eventually stop giving advantages, but network effects keep adding value as more users join.

• With strong network effects, one company can eventually dominate the market, pushing others out — a "winner-takes-all" situation.

• Network effects act as a strong barrier to entry, helping the leading company stay ahead of competitors.

How to survive if you are losing

• Become compatible with the dominant player, so you can connect with dominant network and tap into its value

• Find a niche that is different enough from the broader market and big enough to sustain the firm

Tipping Point & Tippy Markets

• Tippy Market: One that is subject to strong positive feedback such that the market will tip in fabour of the firm that is able to reach critical mass and dominate it

• Tipping point: Moment in the evolution of a market where one org or tech reaches crucial mass and goes on to dominate it

Not All Markets Tip

• Does Every Market "Tip"? Not Always

  • Tippy markets have production and distribution costs are low and network effects are strong market tip faster

  • But not all markets are tippy.

• Example: GPS Devices (like Garmin)

  • If you buy a GPS device and I buy one too, we don’t benefit from each other’s usage — we use them separately.

  • So, no strong network effect, and the market doesn’t tip.

  • Unless If GPS devices shared real-time data (like speed and location) to improve route accuracy, then: More users = better directions for everyone Network effects would exist, and the market might become tippy

How To Recognize a Tippy Market

• Strong economies of scale (like lower costs or network effects) help big companies grow faster and dominate.

• Low variety in customer needs means one company can serve everyone well — making it easier for the market to tip.

• But if customers want many different things, the market may stay split into smaller niches, preventing one winner.

Two-sided networks

• Two Sided Networks: Networks that have two types of members, each creating value for the other.

  • Ex: Uber (Need drivers and Riders)

• Value of the network to one type of member depends on the number of members from the other side

Marketplace (Type Of Network)

• Marketplace: Two-sided/multisided networks where demand and offer meet.

  • Success depends on: 

    • the fact that in a two-sided network, each side is waiting for the other one to grow prior to joining the network

    • Deciding which side to monetize and which side to subsidize

Platform (Type of Network)

• Platform: two-sided networks with specific members on the two sides: users and developers (e.g., Windows, iOS, Android)

  • The more applications developers build for the platform, the more attractive the platform becomes to users

  • The more users who join the platform, the more valuable contributing applications to it becomes for the developers

Network Properties

• Network Effect Strength: The strength of positive feedback may vary by network and may vary over time for the same network

• Network Clustering: : The topology of a network (i.e., its “shape”) determines its potential for winner take all dynamics to emerge.

• Disintermediation Risk: Network effects are weaker when participants can easily transact outside of the network (i.e., disintermediate the network owner).

• Multihoming Potential: The technical term used to describe the simultaneous participation of network nodes in multiple competing networks.

Network Economics Implications

• Network Effects, not just networks: Network effects and, more generally, positive feedback create the precondition of winner takes all dynamics

• Threshold of significance: Traditionally, the onset of the tipping point would take some time but particularly for digital products

  • Innovator and first mover is critical in these markets

• Users select a network: traditionally, the onset of the tipping point would take some time but particularly for digital products

• Controlling the network provinces competitive advantage

• The importance of mutual exclusivity: : there are costs associated with being a member of multiple networks. The steeper these costs, the more valuable it is to be able to control and retain ownership of the network

Data and Information

• Data: codified raw facts 

• Information: is defined as data in context. Data become information when they have been given meaning and can therefore be interpreted by individual users or machines

Classic Info Goods

• Products that a customer purchases for the only purpose of gaining access to the information they contain:

  • Ex. Movies, books

• If a product can be turned into digital form (like stored or shared as data), then it’s an information good.

Economic Characteristics of Information

• High Production Costs: The first copy of an information good is very expensive to create in terms of time and money (Ex. Book)

• Negligible replication costs: the second copy could be produced at a fraction of the cost (e.g., Word)

• Info is not the carrier: Movies were carried first on VHS tapes and later on DVDs, now they can be streamed on Netflix

• Negligble distribution costs: Information goods are therefore characterized by high fixed costs and very low marginal costs

• Costs are Sunk: the expenses that the firm has incurred to create its product or service cannot be recuperated  higher risk

• Information has no natural capacity limits: Number of downloads of a song on iTunes

• Not consumed by use: it can be reused multiple times (e.g., a movie in a theater can be shown multiple times)

• Goods are experience goods: products or services that need to be tried (i.e., experienced) before their quality can be assessed

Implications

• Info is customizable: Information goods can often be modified with relative ease

• Info is reusable: : Because information is not consumed by use

• Info is often time valued: The value of information is tied to the user’s ability to employ it

• Info Goods Can Achive High Gross Profit margins: Because of their economic characteristics—high production costs and low replication and distribution—firms that produce successful information goods can enjoy vast profit margins

Information Intensive Goods

• These are products or services where information plays a key role, even if it’s not the main thing the customer is buying.

The Richness and Reach Trade-off

• Richness: The amount of info that can be transmitted, the degree to which the info can be tailored to individual needs and the level of interactivity of the message

• Reach: # of possibl recipients of the message

Process Virtualization Theory

• Helps determine which processes have the potential to be successfully virtualized

• 4 Elements

  • sensory requirements (the need for process participants to be able to experience a range of sensory stimuli in order to engage in the process)

  • relationship requirements (the need for process participants to interact in a social or professional context so as to acquire knowledge or develop trust and friendship)

  • synchronism requirements (the degree to which the activities that make up a process need to occur in real time or with minimal delay)

  • identification and control requirements (the degree to which the process requires the unique identification of all participants and the ability to influence or to exert control over their behavior)

IT Capabilities That Make Physical Processes virtualizable

• Representation: is the capability of IT to effectively simulate actors, objects, their properties and characteristics, and the manner in which users interact with them

• Reach is the capability of IT to overcome both time and space constraints. In essence, it allows the flexible participation of users in processes.

• Monitoring and identification is the capability of IT to authenticate process participants and objects and track their activity

Obstacles to the Change

• New Technology Must Replace All Characteristics of the Old One 

  • old technology goes away only when the new one has replaced all its relevant characteristics

• Retaliation from Incumbents 

  • New entrants can face retaliation in different forms: Legal means, Legislative means, Hybrid offers and Heightened competition

• Human Resistance to Change

  • human inertia

• Attention Challenges

  • A byproduct of the unprecedented availability of information is the increasing difficulty people encounter in keeping up with it

  • People’s time and attention is perhaps the scarcest resource an organization has to deal with. The scarcity of attention leads to slow adoption rates for all but the most revolutionary of innovation

Disruptive Innovation

• Theory of Disruptive Innovations: explains how some types of innovations can blindside managers, with devastating effects on their organizations

  • best understood by first drawing a distinction between sustaining and disruptive technologies.

Disruptive Technologies

• Disruptive technologies: technology offers a different set of attributes than the technology the firm currently uses in its products

  • The performance improvement rate of the technology is higher than the rate of improvement demanded by the market

  • 2 advantages

    • a different set of performance characteristics

    • a high rate of performance improvement on the critical performance dimensions

Implications of Disruptive Technology

• Differential Rates of Improvements

  • a disruptive technology begins with performance that is well below the needs of the firm’s mainstream customers

  • you should estimate whether, in the foreseeable future, the disruptive technology will catch up to market needs on the critical performance dimensions

• Different sets of attributes become relevant 

  • as the disruptive technology closes the gap on the primary performance metrics, the technology’s other characteristics may become a source of positive differentiation

• Listening Closely to Customers Might Spell Trouble

  • will create a bias toward prompt adoption of sustaining technology and a reluctance to buy into disruptive ones