Network Effects And Dsir

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  • Network Effects And Dsir

    1. 1. What is: “network effect”? “First mover advantage”?
    2. 2. 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
    3. 3. 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
    4. 4. Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows
    5. 7. Competing in markets with DSIR <ul><li>Installed base and tipping point </li></ul><ul><li>Switching costs </li></ul><ul><li>Expectations matter </li></ul><ul><li>Bandwagons may emerge </li></ul><ul><li>Early adopters jump start the process </li></ul><ul><li>Intermediate adopters (fence sitters) are key and difficult to attract </li></ul>Source: Strategic Management; Saloner, Shepard and Podolny; Wiley
    6. 8. Strategies for competing in markets with DSIR http://web2.socialcomputingmagazine.com/ Strategies in the Web 2.0 world

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