In this post, Gonzalo Cuatrecasas, the professor of Global MBA in Digital Business and expert of collaborative models, addresses the Network Effects and how it impacts all businesses.
The collaborative and sharing economy is revolutionizing the post-industrial market place. This business model, which brings together different individuals to share, sell or recommend goods and services, has always been present in our lives, but it is the scalability and global reach of the Internet, which is making the collaborative and sharing economy a transforming event.
Network Effects - the key to the collaborative and sharing economy
The Network Effects occur when a product or service gains additional value as more people use it. This phenomenon is key to the proliferation of sharing and collaborative models, empowered by the global reach of the internet. By definition, the Network Effect is a two-way street. The more distributed the network is, the more reach it will have.
All digital companies, such as PayPal, Microsoft, Facebook, Uber, Twitter, and Salesforce, rely on the Network Effects as the tool to defend their digital-market positions and build it into their business model from the very start.
According to a four-year study from Medium, Network Effects have accounted for 70% of the value created by tech companies. Medium also classifies the Network Effects in 13 types as depicted by their Network Effects Map.
Classifying the Network Effects
For this blog, related to collaborative models, there is a more simple way to classify the Network Effects in three easy types as depicted below:
- Direct network effects occur when the value to the user of a product or service increases exponentially with the number of other users using the same product or service.
- A two-sided network effect takes place in the marketplace platform business: enough supply means more demand, which leads to more supply.
- Indirect network effects come into play when the value of your product or service increases due to complementary products or services that add to your platform/business.
Challenges for the Network Effect
The hardest part to overcome at the beginning is attracting enough users so that the network effect takes hold. The amount of users required for significant network effects – where the value produced by the network exceeds the value of the product itself – is called the critical mass. Attaining critical mass is vital for the good or service to offer utility to its users.
Other challenges on the road of harnessing the Network Effects are network congestion and pollution. In some situations, more network usage or greater network size can actually decrease the value of the network, leading to negative network effects. It’s up to providers of goods and services that use a network effect to make sure that the capacity can be increased sufficiently to accommodate all users.
Despite the challenges, we believe that thinking about the power of the Network Effects in your Digital Transformation projects is the key to the success of your business and therefore, it should be part of your digital strategy.
Technologies, advanced materials, and augmented reality complete the physical-digital-physical cycle. Industry leaders have the opportunity to develop improved operational strategies and achieve key business objectives, empowered by enabling technologies that can be deployed at various points in the manufacturing value chain. In the following video, we can see the digital enablers of Industry 4.0.
Take a step further to the networking effect with Digital Transformation!