Consumer habits are formed, which are difficult for new entrants to change
Consumer demand forces retailers to carry the brand limiting access to shelf space for new entrants. Creating a barrier to entry.
New entrants have to spend more on advertising to induce trial to cause consumers to switch and incent retailers to carry their product.
Incumbency advantages accrue at each stage in the value creation process R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant
What is: “network effect”? “First mover advantage”?
Network Era Is Being Driven by the Interaction of Three 'Laws' more computing power More-valuable networks more communication bandwidth Moore’s Law Metcalfe’s Law Gilder’s Law Source: Prof. N. Venkatraman, Boston University Moore’s Law Metcalfe’s Law Gilder’s Law
Demand Side Increasing Returns Network Effect Network Effects occur when the benefits of a product increase to each user as the number of users increases. An example of network effects is telephone service. The more people who use them the more valuable they are to each user. The Web is an example with even more rapidly increasing DSIR than telephones or fax machines. Industries with Demand Side Increasing Returns have the characteristics of “winner takes all”. Many of the Web based industry exhibit this characteristic, example: eBay and more recently the social networking sites such as Facebook. Source: www.wikipedia.com
Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows
Competing in markets with DSIR
Installed base and tipping point
Bandwagons may emerge
Early adopters jump start the process
Intermediate adopters (fence sitters) are key and difficult to attract
Source: Strategic Management; Saloner, Shepard and Podolny; Wiley
Strategies for competing in markets with DSIR http://web2.socialcomputingmagazine.com/ Strategies in the Web 2.0 world
Types of Incumbency advantage
Cumulative Investment advantage
Consumer Loyalty advantage
Switching cost advantage
Demand Side Increasing return advantage
Mnemonic 6 Incumbency advantages accrue at each stage in the value chain R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant
Mnemonic 7 Demand Side Increasing Returns: Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows