Digital Firm_Week 2_Kriti PDF

Feng Zhu and Iansiti M: Q. What determines the strength or weaknesses of a network? The strength or weaknesses of a network are determined by several key factors: 1.​ Network Effects: ​ Same-side (direct) network effects: The value increases within the same group. For instance,...

Feng Zhu and Iansiti M: Q. What determines the strength or weaknesses of a network? The strength or weaknesses of a network are determined by several key factors: 1.​ Network Effects: ​ Same-side (direct) network effects: The value increases within the same group. For instance, the more friends a user has on Facebook, the more likely they are to attract additional friends. ​ Cross-side (indirect) network effects: The value for one group increases as another group joins. For example, more drivers on Uber attract more riders and vice versa. ​ The strength of network effects can vary dramatically, shaping both value creation and capture. Strong network effects ensure that value rises sharply with the number of participants. 2.​ Clustering: ​ The degree to which a network is fragmented into local clusters can determine its vulnerability to competition. A highly fragmented network, like Uber's ride-sharing service where local clusters such as drivers and riders in specific cities matter, faces more localized competition. ​ Conversely, less fragmented networks, like Airbnb which operates as one large cluster of hosts and travelers, are harder for competitors to penetrate on a global scale. 3.​ Risk of Disintermediation: ​ When users or providers bypass the platform to connect directly, it weakens the network. Keeping participants dependent on the platform for connections is crucial. 4.​ Vulnerability to Multi-Homing: ​ Multi-homing, where users or providers use multiple competing platforms, can dilute loyalty and increase competition. Strategies to reduce multi-homing include exclusive contracts and loyalty incentives. 5.​ Network Bridging: ​ The ability to connect different networks can strengthen a network. For example, platforms like Alibaba that integrate payment systems with e-commerce sites create synergies that enhance user value and defensibility. A platform's ability to manage these factors effectively determines the strength and sustainability of its network. Iansiti M and Lakhani: Q. What are the causes of a hub economy? 1.​ Network Effects: ​ Explanation: Network effects (Metcalfe's law) state that the value of a network increases with the number of users. Hub firms leverage large user bases to create positive feedback loops, attracting even more users and partners to their platforms. ​ Example: Facebook, which becomes more valuable as more people join the platform, thereby attracting more advertisers and third-party developers.  2.​ Economies of Scale: ​ Explanation: Hub firms benefit from economies of scale where the cost per unit of service decreases as the scale of operation increases. This makes it difficult for smaller players to compete. ​ Example: Amazon uses its vast logistics network to offer faster delivery and lower prices than many traditional retailers. 3.​ Data Aggregation: ​ Explanation: Hub firms collect and analyze large amounts of data from their users, which they can then use to optimize their services and create new products. ​ Example: Google's use of search data to improve its advertising algorithms, providing more targeted ads that generate higher revenue. 4.​ Control of Competitive Bottlenecks: ​ Explanation: Hub firms control crucial points in various digital ecosystems that other companies must navigate to reach their consumers. ​ Example: Google’s dominance in mobile with its Android operating system, which controls access to billions of users globally. 5.​ Adjacent Market Expansion: ​ Explanation: Hub firms use their established network-based assets to enter and disrupt adjacent industries by re-architecting these industries from product-driven to network-driven models. ​ Example: Google’s automotive strategy involves leveraging its existing data and technological capabilities to transform the car industry rather than just creating better cars. Q. How can companies reduce the negative effect of a hub economy platform? 1.​ Multihoming: ​ Explanation: Companies can support multiple platforms to avoid dependency on a single hub or dominant player. This strategy helps preserve competition and mitigate the monopolistic power of a single firm. ​ Example: Retailers using multiple payment systems like Apple Pay, Google Wallet, and Samsung Pay. 2.​ Becoming a Hub: ​ Explanation: Traditional firms can invest in digital transformations to become hubs themselves, leveraging their unique assets and capabilities to create new revenue streams and protect against existing hub firms. ​ Example: GE developing the Predix platform to lead in the Industrial Internet of Things (IoT). 3.​ Support and Formation of Multiple Hubs: ​ Explanation: Firms can invest in and support the development of new or less established hubs to foster a competitive environment. ​ Example: Deutsche Telekom partnering with Microsoft Azure to provide cloud services, thus creating a competitive alternative to Amazon Web Services. 4.​ Open Source and Collective Action: ​ Explanation: Collective efforts and open-source projects can challenge the dominance of hub firms by providing decentralized alternatives that foster innovation and competitive balance.  ​ Example: The Linux operating system, supported by companies like IBM and HP, which offers an alternative to Microsoft's Windows. 5.​ Ethical Responsibilities and Value Sharing: ​ Explanation: Hub firms need to adopt strategies that include value sharing alongside value creation and capture. This involves ethical behavior and ensuring that their practices support the broader economic ecosystem and society. ​ Example: Facebook hiring staff to address fake news and Google's YouTube working with NGOs to mitigate extremist content. Zhu F. Friends or Foes Q. What determines platform owner entry? Platform-owner entry is determined by several factors, including: 1.​ Motivations and Growth Potential: Platform owners are primarily motivated by the potential for growth. They tend to enter markets where the potential for significant growth and value capture exists (Zhu & Liu, 2018; Gawer & Cusumano, 2002; Jiang, Jerath, & Srinivasan, 2011). 2.​ Platform-Specific Investments: The required investments by complementors in building devices or products that integrate with the platform significantly influence entry decisions. Higher investments typically deter platform owners from entering these markets directly (Zhu & Liu, 2018). 3.​ Need for Quality Control and Market Dominance: Platform owners may enter markets to exert better control over product quality, minimize counterfeiting, or meet consumer privacy concerns, as seen in Google's introduction of its flashlight app and JD's self-offered products (Zhu & Sun, 2018). 4.​ Competitive Dynamics: The level of competition and the strategies adopted by competitors can also drive platform-owner entry. Aggressive competition to gain market dominance can lead to acquisitions or exclusive contracts with complementors (Lee, 2013; Hagiu & Wright, 2015). Q. What are platform complementors? Platform complementors are independent businesses or entities that develop products or services that enhance or build upon the functionalities of the main platform. Examples include software developers creating apps for a mobile operating system, or hardware manufacturers producing devices compatible with a software platform. These complementors add value to the platform by providing complementary products that attract and retain platform users (Huang et al., 2013; Zhu, 2019). Q. What explains the ambiguous relationships between platform owner and complementors? The ambiguous relationships between platform owners and complementors can be attributed to several factors: 1.​ Competing Interests: Platform owners often enter complementors' markets to capture value, which positions them as direct competitors. This can lead to tensions, as seen in cases such as Netscape and Meerkat (Cusumano & Yoffie, 1998; Zhu, 2019).  2.​ Impact on Innovation and Investment: The potential for platform owners to enter and compete can either discourage or incentivize complementors' innovation. Complementors may reduce innovation efforts if they perceive a high risk of direct competition (Wen & Zhu, 2018; Wu & Zhu, 2018). 3.​ Defense Mechanisms: Complementors adopt various strategies to mitigate negative impacts, like forming strategic ties, leveraging intellectual property rights, or reallocating resources to avoid direct competition (Huang et al., 2013; Katila et al., 2008; Cennamo et al., 2018). 4.​ Differing Short-term and Long-term Effects: Short-term benefits to consumers from platform-owner entry might not translate into long-term advantages if it disincentivizes complementors, leading to reduced product variety (Li & Agarwal, 2017; Zhu, 2019). The multifaceted and dynamic nature of these relationships means that tensions between capturing value and fostering innovation continuously shape the interactions between platform owners and complementors, contributing to their inherent ambiguity.