Monday, 24 October 2016

Network Effects (Digital Strategy)

As technology tends to grow, managers face a lot of questions. Having a strong digital strategy in a highly competitive environment is an integral component to ride against the wave of digital disruption.

But before we think about planning a strategy, it is important to understand the dynamics of why most startups/ businesses fail and why some win. The answer is - Connections. Innovation in products do matter, no doubt. But most importantly, the underlying connection between the products and its users or other products is the reason why they become successful and sustainable.

A very good example of how “network effects” plays an important role in growth is looking at Whatsapp - An instant messaging platform. The reason why Whatsapp is successful, even though there are a lot of IM platforms in the market is because it benefits from the Network Effects. One prefers whatsapp because their friends use whatsapp and as the number of users grow, more users are willing to use this platform.

Innovative businesses like Amazon have realised the potential of Network Effects and have shifted their focus from product creation/ manufacturing to providing a Platform to create a connection between the customers and suppliers.

The main reason why most customers prefer Amazon for purchasing products online than other platforms is because customers get variety and choices from a large pool of suppliers. The same is with the suppliers because a large amount of traffic turns up on the Amazon platform. This network continues to grow. Again, the connections help the business benefit from the Network Effects.

So many services online are for now for free such as - Google Docs. Yet, the businesses still make a lot of money. The answer is again - Connections. Creating a storage and file sharing platform, several products such as Google Docs, Sheets, Forms, Photos and others share the same Google cloud storage drive accessible under one single E-mail ID.

This gave Google a competitive advantage and is the reason why customers using Google Drive are less likely to shift to other cloud storage platforms like Dropbox. And platforms benefit from the Network Effects.

The reason of why Android platform has always been successful than Mac OS/IOS or other OS is simply because of the network effects. As customers chose the android platform, they drew developers to build more apps.

And as the number of developers increased leading to the increase in the number of apps on the platform, it drew more and more customers to choose the android platform. Unlike Mac OS/ IOS or windows OS, Android provided more choices and varieties of apps to its users and the developers got the benefit of spreading the fixed costs associated with the app and reach a large number of customers. It benefitted both.

Again, the Network Effects played an important role in growth, cost reduction and profits.  

Ms. Smriti Dua
Assistant Professor
Dept. of Management Studies

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