Digital Firm Flashcards
What are network effects?
a phenomenon whereby a product or service gains additional value as more people use it
Network effects are also known as :
Metcalfe’s Law or network externalities
When network effects are present, the value of a product or service increases as _________
the number of users grows
more users =
more value
Name a few companies which owe their success to network effects:
Microsoft, Apple, NASDAQ, eBay, Facebook, and Visa
Which firm do you suspect has stronger end-user network effects: Google’s online search tool or Microsoft’s Windows operating system? Why?
The Microsoft Windows operating system would have a stronger end-user network effect. This is because of the higher switching costs.
Is market entry timing important for network effects markets? Explain and offer an example to back up your point.
Yes. Being early allows your firm to start the network effects snowball rolling in your direction. Yahoo beating out Ebay in Japan is a good example of why timing is important for network effects markets. Ebay lost billions in sales because they were just five months late.
What other types of firm are compared with the platform firm?
What is considered to be the core asset of platform companies?
Large consumer base / installed base
. In the Network of Contracts model firms are radically slimming down to the highestvalue added segments of the production chain. How is this process often called?
Nikefication
What happened because of the shareholder revolution?
A shift of power took place from consolidated firm and powerful managers to investors and security analysts
What does the term ‘nikefication’ mean?
This refers to the process of outsourcing production and distribution to other companies.
List a few characteristics that belong to the NOC model?
- evaluating the stock price was the core metric for success
- aggresive outsourcing
- asset stripping
- labour-reducing strategies
Where did the term Nikefication come from>?
Because the company Nike outsources basically everything apart from design and marketing functions
The NOC model centred largely around:
“price-based competition among producers of relatively similar products
In what way do platform firms exercise greater control than monopolies?
because of the way the platform’s data and algorithms “structure the rules and parameters of action” that are available to participants on the platform
In short, today’s platform firms combine features of ________models with new elements.
previous
Rahman and Thelen talk about a power mismatch between strategic capacity of
today’s megacompanies and US jurisdictions. What are they referring to?
Jurisdictional fragmentation in US
The reason for why platform firms have gained colossal success in the US is largely due to :
their ability to exploit the fragmented policy landscape in the United States to expand networks rapidly
Information technologies have an impact on the transaction costs of a firm and
therefore on the organization of the firm. To what type of impact do these technologies
have on the firm?
The transaction costs will decrease. Therefore, firms become less vertically
integrated.
“Today’s smartphones are 1 million times cheaper, 1,000 times more powerful, and are about 100,000 times smaller than the one computer at MIT in 1965.” At which ‘law’ are Moazed and Johnson referring to in this quote in their chapter “Hayek versus the machine”?
Moore’s law
Metcalfe’s Law is an important insight in explaining network effects. Based on this
insight it is possible to calculate the number of network connections. Suppose there are
2 networks (A+B). Network A connects of 17 people and network B connects 15 people.
The two networks are merged into one network of 32 people. What is the total sum of
network connections of networks A + B (before merging) and what is the network value
of the new, merged network?
Sum of network connections of networks A and B = 496; network value of merged network = 992
if your association has 10 users, the value the network provides is:
10 ^2 =100
. What is meant by patient capital?
willingness to make a financial investment in a business with no expectation of
turning a quick profit
Important components of the platform firm business model:
“gig” labour practices
patient capital
market dominance
alliance with consumers
For a platform firm to succeed do all components need to be present?
No, But they represent distinctive components of the new platform business model that is increasingly central in shaping the dynamics of modern capitalism.
What is machine learning
computer algorithms that automatically improve their competence through
“experience” (mostly historical data).
Weaknesses of AI
- Small data sets
- Biased algorithms
- Historical data
Formula:
- Number of connections:
n(n-1)/2
Formula for network value:
n(n-1)
Network Value for LARGE network
N^2
MOORE ‘S LAW
observation that the number of transistors in a dense
integrated circuit doubles about every 18 months/ two years
diffusion gap:
it takes time before productivity prevails in productivity statistics
GPT (general purpose technologies)
Ex : steam engine , electricity and computers
machine learning is a concept that concerns the idea that:
that computer algorithms automatically improve their competence through experience
gig economy
a labour market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.
example of a gig economy
uber (ride -sharing services)
law of diminishing returns
States that if one factor of production is increased
while others remain constant ,the returns will relatively decrease after a certain point.
. Why is it important for digital platforms to generate massive growth?
Because of the low marginal revenues of digital goods
Uber’s network effects are hyperlocal and multi-country. What does this mean?
Demand and supply for Uber services are predominantly city and country specific
According to Gallaugher which factors make a network effect stronger?
- exchange
- staying power (often related to switching costs)
- complementary benefits
example of a two-sided market
food delivery (uber eats)
What does a two-sided market comprise?
Comprises different/multiple categories of users
cross-side exchange benefits:
increase in value for one category of users when the number of the second category of users increases
What does Moore’s law predict?
That every 18 months computing power doubles –> reduces prices of technological devices which are at the core of the digital economy
most technological products are _______ elastic
highly ; because a slight drop in the price increases demand significantly
what are general purpose technologies:
a type of technology that can be applied to every sector of the economy (e.g. computers; internet)
indirect network effects can be of 3 types which are:
- consumption interdependence
- bearing effects
- uncertainty
How does the “digital shift” change a firm’s structure and organization?
How does an increase in size and scope affect the industrial firm?
- they gain economies of scale
- after a certain point, there are decreasing returns to scale
- vertically integrated
Digital firms are _________integrated
horizontally
With size and scope the digital firm becomes :
- horizontally integrated
- platform ecosystems
- network effects
structure and organization of a digital firm:
- bottom up decision making
- fluid structure
- intrinsic rewards
structure and organization of an industrial firm
- hierarchical structure
- bureacratic process
- extrinsic rewards
The emergence of tech giants has highlighted the superiority of __________ business models compared to traditional linear business in markets for digital goods
platform-based
Government organizations are ill-equipped when it comes to dealing with:
platform-based corporations because regulations derive from the pre-digital era
Thanks to the digitalization of firms, which costs are becoming significantly lower?
platform-based businesses
Each platform has a clear ______
core
The core fo
defi
The core fo
defi
define coring:
the set of activities a sponsor can use to identify or design an offering
most platforms like amazon; apple gain most revenue from selling their ______
core
All platform ecosystems have _____ systems
payment
The goal of a platform ecosystem is to become an _________
infrastructure
Define convergence:
the merging of previously distinct media technologies and platforms through digitization and computer networking
the strategy of android is to be :
integrated in almost all devices
Digital ecosystems not only grow in size but also in :
scope (variety)
Envelopment refers to one
platform provider moving into another one’s market
Envelopment is beneficial because thanks to it a platform ______
increases its scope without have to merge , which takes a hefty amount of time and money
Envelopment can at times lead to an _________
acquisition
Boundaries of a digital economy are said to be ________
arbitrary
To create increasing returns:
all the digital services/platforms should be seamlessly integrated
Example of precarious relationship between platforms
Initially Google Maps was pre-installed on Apple mobile devices. Since 2007 Apple has its own map service (2007)
Amazon subsidises the coneumer side market aka Prime to gain more revenue and traction from its other ____
services
NC=
N(N-1)/2
NV=
N(N-1)
Nexus reciprocal relationships (NRR)
Nexus of contracts (NoC)
Shareholder revolution
Patient capital
Permissive landscape
What according to Rahman and Thelen (2019) is the most striking difference in antitrust law?
US law places more emphasis on the customer
First Mover Advantage
The first-mover advantage refers to an advantage gained by a company that first introduces a product or service to the market.
Second Mover Advantage
Second-mover advantage is the competitive edge a company has when it enters the market later than other companies. A second-mover benefits from the first-mover by appealing to its existing customer base and using marketing strategies that have proof of success.
Chicken-egg
Cross-side network effects
It’s easier, for example, to find an overnight accommodation on Airbnb when there are more available houses to choose from. And it becomes easier to rent out your house when more and more users join the site. You can also see this with food delivery services GrubHub and Doordash.
Same-side network effects
Multi-homing
Multi-homing is a method of configuring one computer, called the host, with more than one network connection and IP address
How did Uber solve the chicken-egg problem?
https://thegrowthplaybook.substack.com/p/how-uber-cracked-the-chicken-and
Commodofication refers to the ways platforms
commercialize objects, actions, and ideas
- Selection refers to the automated process (algorithmic) in which users who
with the help of
platforms, determine which topics, objects, and actors are relevant in information and
communication
The bigger these Big Techs through network effects, the more________
infrastructural power they acquire
Features of infrastructure:
- scale and scope
- ubiquity
- criticality of use
Digital colonization occurs in four phases:
Phase 1: provision of data infrastructure services to regulated incumbents;
Phase 2:data capture in the highly regulated industry;
Phase 3: provision of data-driven insights;
Phase 4: design and commercialization of new products and services.
Through the digital revolution, the nature of the form is moving from _____ to ______
(Birkinshaw, 2018)
from large, vertically integrated corporations of industrial era towards specialized firms that link buyers and sellers: digital platforms
According to Williamson (1975) digital technologies lower WHAT?
transaction costs and turn firms into markets/platforms
An example of platform owners imitating complementors:
For example, Netscape, a complementor on Microsoft’s Windows platform, was effectively extinguished by Microsoft’s own offering, Internet Explorer (see, e.g.,
Cusumano & Yoffie, 1998).
or Apple having having offered Google Maps as a popular preinstalled application on its iPhone and iPad
mobile devices since 2007, has built its own replacement map service.
The spillover effect is positive for the large third‐party apps and negative for the _______apps, which suggests that this integration benefits competing third‐party applications with a ______user base but hurts those with a _______ user base
small, third-party; large; small
The spillover effect for complementors depends on:
- how tightly platform owners bundle their own offerings with their platforms
- the degree of differentiation between platform owners’ own offerings and third‐party complements
- the extent to which platform owners preferentially promote their own offerings
List the defense strategies complementors may use to prevent platform owners from entering the product spaces of complementors
- strategically form ties with platforms with intellectual property rights like patents and copyrights
- complementors can reallocate their resources to
avoid direct competition with platform owners
-
Sometimes platform providers may enter the product spaces of_______ by launching
their own products that are similar to those offered by their complementors.
complementors
EG intel only enters complementor product space when they are not _________
satisfied with their products and want to promote innovation by introducing competition
Network clustering is the idea that :
The more a network is fragmented into local clusters—and the more isolated those clusters are from one another—the more vulnerable a business is to challenges
Disintermediation occurs when :
wherein network members bypass a hub and connect
directly, f.ex: a airbnb customer deals with the landlord directly rather than through the airbnb platform
Multi-homing happens when:
users or service providers (network “nodes”)
form ties with multiple platforms (or “hubs”) at the same time (f.ex: joining uber, lyft, bolt, free now all)
When does multi-homing usually occur?
When the cost of adopting an additional platform is
low.
How does playstation disincentivise multi-homing?
High price of consoles and subscription such as ps plus or xbox live decrease the incentive to multihome
When platform owners connect with multiple networks, they can build
important synergies
In a loosely coupled coalition model:
- network providers become the bottleneck between all parts of the value chain and the consumers
- most of the revenue is collected by the network provider and partially distributed to the rest of the value chain
Pagani delves into the shift from content gatekeeper to ___________
customer gatekeeper
Pagani emphasizes that the shift will entail placing more emphasis on value in
- customer access
- modularity
- content access
-orchestrization - common infrastructure
What are the causes of a hub economy?
Moore’s law
computing power doubles every 18 months, keeping prices constant
3 causes of the Hub economy:
- Moore’s law
- connectivity
- positive feedback loops
How can companies reduce the negative effect of a hub economy platform?
- Shaping competition between hubs through strategic investments (like AH with Maestro)
- Become a hub themselves, for example, by integrating IOT into their products
- Multi-homing
A console producer might launch its own game when it sees that complementors are not being ______ enough
innovative
What determines platform owner entry?
- high profit margins on a certain good/service provided on the platform by complementary firms
- they want to encourage innovation of the complementary firms
ambiguous relationship that depends on :
- size of the complementary firm
- industry
- the platform policy
Nascent stage focuses on
developing the IS infrastructure and IS technical skills and here in the nascent stage there are 2 strategies:
- coring strategy
- tipping strategy
In the formative stage they focus on
developing their ecosystem
tipping strategy (quantity strategy) =
attainment of momentum + critical mass
coring strategy (quality strategy)=
developing trust + unique value proposition
During the shareholder revolution what kind of a firm emerged?
a “network of contracts firm” which relied on aggresive outsourcing, asset stripping, and labour-reducing strategies
which factors set platform firms apart from previous models:
- platform firms benefit from “patient” capital
- direct and unmediated link to their users
- network effects
- networked dominance
Nikefication is also referred to as __________
fissuring
A platform exercises power not through mechanisms of ownership and acquisition but through ________
controlling participants on either side of the platform
Which firms were the major seed investors in many tech giants?
Venture Capitalists
The downside of VC and angel investors
They demand high returns
The new model built on several important changes. What are they?
- ## move from impatient to patient investors
a fissured firm operates as a nexus of contracts through :
- extensive networks of francishing, outsourcing, and labour-cost shedding
The platform firm is marked by concentrated ownership and influence among _______
investors
list some of the consequences of the rise of the platform firm:
- the changing nature of work
- the growth of inequality
- the eroding social contract
Many category - dominating organizations owe their success to:
network effects
Products and services subject to network effects get their value from 3 sources:
1- exchange
2- perceived staying power
3-complementary benefits
In one-sided markets users gain benefits from interacting with a ________
similar category of users
In two-sided markets users gain benefits from interacting with a ______
seperate, contemporary class of users
How is competition characterized in an industry dominated by network effects?
- network markets experience early, fierce competiton
- these markets are often winner-take-all or winner-take-most
- the best product or service does not always win
Why does moving early in network markets MATTER>?
Because firms that move early can use that time to establish a lead in users, switching costs, and complementary products that can be difficult for rivals to match
strategies for competing in markets with network effects:
- subsidize product adoption
- leverage viral promotion/marketing
- expanding by redefining the marker so as to bring a new type of user
- form alliances and partneriships
To grow network-based firms should seed the market with _________________
complements
With indirect network effects, the value of the service increases for one user group when what happens?
a new user of a different user group joins the network.
Define indirect network effect:
Effects that an increase in usage of one product or network leads to an increase in the value of a complementary product or network on the other side of the network, which can in turn increase the value of the original.
How does the digital firm change firm structure and organization?
More fluid structures, bottom-up decision making, and intrinsic reward structures
Example of a complementary relationship:
Blu-Ray DVD needs content to actually create value
A market is contestable if a :
competitor could credibly enter and take away business from the incumbent
One way to limit contestability is to:
introduce switching costs to users and customers
What is the first step of the digital colonization process?
provision of data infrastructure services to incumbents
What is the second step of the digital colonization process?
Direct and indirect data capture in the industry
What is the third step of the digital colonization process?
provision of data-driven insights
What is the fourth step of the digital colonization process?
design and commercialization of new products and services
what is the dark side of Moore’s law?
e-waste
an example of endogenous effects can be :
word-of-mouth
endogenous effects occur:
where individual behaviour is influenced by that of the gorup
exogenous effects occur where:
a group operates in the same social context
network goods are usually sold by:
monopolies or oligopolies
Why are network markets highly competitive?
because different firms compete to be the dominant player
the more contestable the market, the greather the _______
incentive for product improvement and the less likely that consumers will be locked into the wrong network
Businesses often take actions to deliberately increase _______ costs
switching
What does NOC stand for?
network of contracts
Which 3 issues were raised with the approach to platform growth and industry entries of digital platforms?
fair competition
data privacy
balance of value creation and value capture
Name the 2 types of activities that BigTech firms engage in to add and capture value in highly regulated industries (Ozalp et al.)
Data-driven insights and new products and services
_________ network effects describe the utility that a user derives from the potential interaction with other users
Option-value
_________ network effects describe the impact that other users might have on the probability of direct contacts to adopt technology (Birke)
Domino
_________ effects are where the group operates in the same social context
Exogenous
What is the industrial era guided by?
Technologies of automation and mass production
In the industrial-digital shift firms’ size shifted from ______ to _______
very small to very large
In the industrial-digital shift firms’ structure shifted from ______ to _______
very unstructured and flat to formal,controlled, and hierarchal
In the industrial-digital shift institutional structures shifted from ______ to _______
relatively absent –> many legal governance structures, ownership of intellectual property, accounting standards, legal rights, and competition policies
The digital era is guided by:
significant improvements in processing power and mobile connectivity,
Changes to a firm’s size and scope that were brought about by the digital era:
-> now digital products have increasing returns to scale
-> relaince on network effects
-> non-rivalrous
-> often co-created by the people using them
-> lower transaction costs
Thanks to the digital era; products started have ______ returns to scale
increasing
How are coordinating activities changing as a result of the digital shift?
Shift from a lot of rules to very little rules –> digital technology allows you to check on your employees anytime, anywhere
Due to the digital revolution large, vertical firms are becoming ______
narrow, horizontally specialized firms that link buyers and sellers through digital platforms
In the pre-industrial era firms were mostly ______
small; dominated businesses were merchants, craftsmen, cooperatives
To make the right decision about pricing, platform providers analyse the following factors:
- ability to capture cross-side network effects
- user sensitivity to price
- user sensitivity to quality
- output costs
- same-side network effects
- users’ brand value
A networked market is likely to be served by a single platform when these 3 conditions are MET:
- multi-homing costs are high for at least one user side
- network effects are positive and strong
- neither side’s users have a strong preference for special features
approaches to deterring threat of envelopment :
- change business model
- find a bigger brother to increas switching costs
- sue
Browman and Ambrosini define value creation as :
the contribution to the utility of the final good or service to end users
Browman and Ambrosini define value capture as:
the difference between revenue and costs retained by a firm
The classic value chain model is called by Pagani the :
closed vertically integrated model
What is the closed vertically integrated model characterized by?
The presence of a limited number of giant components that are strongly connected in a sequential value chain
