INFO SYSTEMS QUIZ 3 REVIEW CH 6 7 Network Effect Occur when the value of a product or service increases as its number of users grows Also known as Network Externalities or Metcalfe s Law More users more value When present Network Effects are among the most important reasons you will pick one product or service over another Most important reason why you would want to pick up a blackberry over an iphone Examples 1 Bill Gates leveraged network effects to turn Windows and Office into virtual monopolies and in the process became the wealthiest man in America 2 Mark Zuckerberg of Facebook 3 Pierre Omidiyar of eBay 4 Caterina Fake and Stewart Butterfield of Flickr 5 Kevin Rose of Digg 6 Evan Williams and Biz Stone of Twitter 7 Chris DeWolfe and Tom Anderson the MySpace guys 8 Traders that buy and sell stock over the NASDAQ 9 The Wikipedia article you re referencing has had prior readers 10 Standards including Blu ray DVD WiFi and Bluetooth 11 The folks who bought HD DVD players sure were bummed when the rest of the world declared Blu ray the winner Resembles Life Cycle of a Product Number of Users Values From Network Effect Comes from three sources 1 Exchange 2 Staying Power 3 Complementary Benefits Exchange Every product or service subject to network effects fosters some kind of exchange Information Systems and Technology Anything you can represent in the ones and zeros of a data stream Movies Music Money Video games Computer Programs Fully Digitized Product can be sent and received over the internet Staying Power Networks with greater numbers of users suggest a stronger staying power The Long Term Viability of a product or service will not disappear over night Particularly important for consumers of technology products Switching cost The cost a consumer incurs when moving from one product to another Can involve Actual money spent e g buying a new product Data loss etc Investments in time Can strengthen the value of network effects as a strategic asset Higher staying power higher switching cost Staying Power vs Fear Directly related to switching costs the cost a consumer incurs when moving from Fear of being stranded in an unsupported product or service one product to another The higher the value of the user s overall investment the more they re likely to consider the staying power of any offering before choosing to adopt it The more a user has invested in a product the less likely they are to leave Example Consider that when someone buys a personal computer and makes a choice of Windows Mac OS or Linux their investment over time usually greatly exceeds the initial price paid for the operating system One invests in 1 learning how to use a system 2 buying and installing software 3 entering preferences 4 time 5 Data entry 6 creating files If a product isn t supported anymore much of this investment is lost Reinforcing value adding sources 1 Users exchanging information attract more users 2 More users attract firms offering complementary products 3 Larger your network more difficult for rivals to challenge your leadership position 4 Network Dominance results Total Cost of Ownership TCO An economic measure of the full cost of owning a product Typically computing hardware and or software and or people TCO includes Direct costs e g Purchase price Indirect costs o Training o Support o Maintenance Complimentary Benefits Products or services Add additional value to the primary product or service that makes up a network Might include How to books Software add ons Labor Compared to rivals More books on auctioning for eBay More virtual storefronts in Second Life More accountants that know Excel Technological Leapfrogging Competing by offering a new technology that is so superior to existing offerings Value of new technology overcomes total resistance that older technologies might enjoy Exchange Switching cost Complementary benefits Strategies for Competing in Markets with Network Effects Move early Yahoo Auctions in Japan Subsidize product adoption PayPal Leverage viral promotion Skype Facebook feeds Expand by redefining the market to bring in new categories of users Nintendo Wii or through convergence iPhone Alliances and partnerships NYCE vs Citibank Distribution channels Java with Netscape Microsoft bundling Media Player with Windows HARDWARE SOFTWARE CH 9 10 Infrastructure Components IT infrastructure provides platform for supporting all information systems in the business Computer hardware Computer software Data management technology o Organizes manages and processes business data concerned with inventory customers and vendors Networking and telecommunications technology An industry with an estimated 1 trillion in the US 2010 Add the Service Consultancy segment of 800 billion CONNECTION BETWEEN THE FIRM IT INFRASTRUCTURE CAPABILITIES The services a firm is capable of providing to its customers suppliers and employees are a direct function of its IT infrastructure Ideally this infrastructure should support the firm s business and information systems strategy New information technologies have a powerful impact on business and IT strategies as well as the services that can be provided to customers The point here is to illustrate the centrality of IT infrastructure and services to the achievement of firm success Ultimately what the firm delivers to customers its quality is a direct function of the power of its infrastructure For instance Amazon is routinely sited as the most popular online shopping site and receives high praise from customers for the quality of its service and speed of execution There is a reason for this Amazon has one of the world s largest computing infrastructures numbering several hundred thousand processors to provide these services Technology Drivers of infrastructure evolution Moore s law and microprocessing power o Computing power doubles every 18 months o Nanotechnology Shrinks size of transistors to size comparable to size of a virus Law of Mass Digital Storage o The amount of data being stored each year doubles The world produces as much as 5 exabytes of unique information per year Metcalfe s Law and network economics o Value or power of a network grows exponentially as a function of the number of network members o As network members increase more people want to use it demand for network access increases o What are the sources of Network Economics Declining communication costs and the Internet o An estimated 2 billion people worldwide have Internet access as of June
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