Class 5 book report
Information Rules, written by Shapiro and Varian, highlights the competitive business strategies critical to succeeding in the new economy. They reflect that although technologies may have changed, to rest assured that the economic principles of network economies, lock-in, and pricing are durable even in the new economy. Whereas the traditional economy was driven by economies of scale and products, the new economy is driven by economies of networks and information. The main difference lies in the speed and magnitude in which changes occur. This key principle of the network economy is positive feedback.
Essentially, the strong become stronger and the weak become weaker. Because of the virtuous cycle developed by positive feedback and infinite value of demand side network economies, greater emphasis must be placed on drawing up customer adoption and lock-in strategies in order to maintain a competitive advantage in a winner-take-all-network market. Depending on the level of installed base, adoption strategies can vary from free to trial offers to establish a consumer base. Mature companies with established customer bases can leverage their bases by bundling the new product/service at an incremental cost.
Once a critical mass has been obtained, it is essential to consider lock-in strategies in order to retain the customer base. Shapiro and Varian present two lock-in frameworks, evolution and revolution. Evolution lock-in offers consumers a friction-less migration path to a new technology. Typically, the technology offers an incremental value to the customer running on the existing networks and interfaces. In this manner, customer-switching costs to the new technology are lowered while still maintaining high switching-cost to another technology. Revolution lock-in strategy comes in the form of performance breakthroughs. Andy Grove refers to the 10X rule of thumb, in which a product must be at least ten times better in order to start a revolution. The goal is to ignite positive feedback either by dominating and controlling the market with an advanced network product or generating critical mass on a network using an open standard.
Lastly, pricing information and its related services are no different than the products. Businesses still need to differentiate their information and services from their competitors. However, instead of mass marketing and sample survey methods, the resources in which to achieve the difference have become more focused. Internet technologies, in the form of clickstreams and log files, have created more accessible and inexpensive methods in which to conduct market research and direct marketing. The data can be used to narrow the target segment, determine the customers product and pricing preferences and apply customize the product for that particular segment.
The network economy provides businesses new tools in which to increase the value of their customers. However, businesses need to consider demand side economics and the strength of positive feedback in determining their future business strategies.