name="_Toc422823725">eBusiness and the Network Effect

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This paper was written the Information Management/Infomation Strategy Module of my MBA with the University of Westminster. It is a pretty academic piece that I plan to use as the basis for a more digestable white paper. I think there are some valueble ideas here though so dive in if your interested.
Feel free to email me if you have any questions

go back to the experienceCurve blog

Table of Contents

Introduction

eBusiness Literature review

What is eBusiness

Definitions of eBusiness

What are eBusiness models

Areas undervalued that change the economics of doing eBusiness

Network effects

Literature review

Examples of eBusiness benefiting from network effects

Parallel theories of potential key enablers

Communities

Knowledge management

Conclusion

References

Bibliography

Table of Figures

Figure 1 Relationship Between Elements of eBusiness Framework

Figure 2 Sarnoff Broadcast Network

Figure 3 Metcalfe’s Law

Figure 4 Reed Group Forming Network

Figure 5 Network value gain over time

Figure 6 Amazon: Reviews

Figure 7 Amazon: Customers who bought

Figure 8 Amazon: Lists

Figure 9 Amazon: Guides

Table 1 Business Models on the Web (Rappa, 2001)

Table 2 eBusiness frameworks compared

eBusiness and the network effect

We will elaborate at a later portion of the paper
but initially we’ll define eBusiness as business mediated by the internet
or network related technologies (Gartner, 2000) and we will define network
effect as members of a network having an affect on other members or potential
members of a network (liebowitz and Margolis, 1998).

Doing business on the web is a very recent phenomenon,
and has led to much speculation about “new” economies and “new” rules (Liebowitz,
2002, Shapiro and Varian, 1999). The speed at which companies have been created
and have failed has been unprecedented. What was last year’s boom is this
year’s bust. It is clear for instance that many companies that were going
to rely on on-line advertising, and measured their wealth potential with
eyeballs and hits, have had to look for other sources of revenue.

Companies in this new paradigm have to create businesses
that provide value, make money, scale and are competitive, to achieve those
ends many companies have created new business models and some have even tried
to patent them (priceline.com, Amazon.com).

So we have a proliferation of new business models
and as they are on-line, eBusiness models, the challenge then is to be able
to look at these business models and understand not only how they work but
how they compete.

Some notable business writers have created several
frameworks to help analyze eBusiness but it is seems that some of these
have been written without consideration of some of the realities or oddities
of the internet.

In this paper I will review existing frameworks
for eBusiness models and then introduce areas undervalued in current models
and suggest areas that companies can increase their competitiveness.

eBusiness Literature review

What is eBusiness

What is eBusiness? In this section we shall look
at several definitions of eBusiness, highlight some eBusiness models and
archetypes

Definitions of eBusiness

When representing the internet on a network diagram
it is customary to use a cloud, because it has no edge, it is ever changing
and it has many forms, eBusiness is also hard to define. When we look at
some of the definitions of eBusiness we start to see how broad a topic it
really is and how hard to define it is also.

eBusiness  and e-commerce  are
net related business activities that transform internal and external relationships
to create value and exploit market opportunities driven by new rules of the
connected economy.
(Damanpour,  2001)

This could be a good start although the author
neglects to illuminate the broad statement on what the “new rules of the
connected economy” actually are. The portion of the statement: “eBusiness
and E-Commerce are net related activities that transform internal and external
relationships to create value and exploit market opportunities”, does describe
any eBusiness without being exclusive to a particular type of business,
business model or whether it is a portion of a companies total business.

The Gartner group asserts that the internet or
the web are essential components of eBusiness. Therefore companies must
participate in external business relationships by using computer-to-computer
interactions (transactions, support, marketing, communications, and collaboration)
by either business to business (B2B) or business to consumer (B2C), if it
is to be considered an eBusiness . Gartner also acknowledges that eBusiness
is not a pure state and might be categorized based upon the proportion eBusiness
related activities a company might participate in (Gartner advisory 2000).

eBusiness has also been described as just another
channel as part of the multi channel marketing strategy. We might not call
the gap, banana republic or best buy eBusinesses despite the fact that they
all have .com portions of their business.

For the purpose of this paper then I will use a
the first part of Damanpour’s (2001) defenition:

“eBusiness/E-Commerce
is  any “net” related activity that transforms internal and external
relationships to create value and exploit market opportunities.”
(Damanpour,  2001)

What are eBusiness models

In this section I will discuss the various concept
s of eBusiness models, different revenue models for eBusiness and effect
of network externalities on eBusiness. A business model in the context of
this paper will not be description of the entire social system with all its
relationships and processes. In this paper business model will be a description
of the logic of a business system for creating value underlying the actual
business processes  (Peterovic et al 2001).

eBusiness models/archetypes

eBusiness models are treated in several different
ways in literature. In fact it is quite explicitly stated that there is,
at this time, no single, comprehensive and cogent taxonomy of web (eBusiness)
business models (Rappa, 2001). In that case I will list some of the ways
eBusiness models have been categorized here and attempt to set a common
frame for this discussion, I will then define the subset of eBusiness models
that I will use in the remainder of this paper. The business model concepts
I have listed here are defined in different fashions and from different perspectives.
The first model is defined by markets, the second by revenue model and the
last three concepts are built on the idea of a business model as a generic
framework that is market, revenue and technology agnostic.

Market concept

De, Mathew, Abraham (2001) and Griffith and Palmer
(1999) all describe three broad categories of business model; business to
business (B2B), business to consumer (B2C), and consumer to consumer (C2C).
This particular concept is too broad for out purpose. Looking at our definition
we can see that these descriptions do allude to “who” is having a relationship
with whom but not, as in our definition, how it is transforming that relationship.

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Revenue concept

Rappa (2001) on the other hand has an extensive
list of business models based on revenue models.

Table 1 Business
Models on the Web (Rappa, 2001)

Brokerage	Buy/Sell Fulfillment Market Exchange Business Trading Community Buyer Aggregator Distributor Virtual Mall Metamediary ((Sawhney 1999)(1) Auction Broker Reverse Auction Classifieds Search Agent Bounty Broker Transaction Broker
Advertising	Generalized Portal Personalized Portal Specialized Portal - Also called a "vortal" (i.e., vertical portal). Attention / Incentive Marketing Free Model -Freebies create a high volume site for advertising opportunities. Viability is hardest when based purely on advertising revenue. Opportunity to blend with infomediary model.
Infomediary	Revenue can either come from advertising or from the products that the infomediary is collecting information about.
Merchant (etailing)	Virtual Merchant. Catalog Merchant Click and Mortar Bit Vendor (information products)
Manufacturer	Extending the brand. BMW for instance with bmwfilms.com is brand building through advertainment (a combination of advertising and entertainment).
Affiliate	Financial incentives are offered to affiliated partner sites. banner exchange pay-per-click revenue sharing programs Note: broad patent awarded to Amazon.com
Community	Voluntary Contributor Model Knowledge Networks - or expert sites, really a broker type arrangement or possibly infomediary
Subscription	Users pay for access to the site providing high value-added content.
Utility	A version of subscription Possible venue for micropayments

Source: Rappa, M. Managing the digital enterprise e Business
models on the Web

Most of the models listed here do not fit our definition
of business model; it is an interesting list of revenue models but that is
somewhat limited if used to describe business logic. In my experience many
companies are using several of those revenue models to complete their business
model.

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Generic eBusiness model frameworks

In the analysis of business models several generic
models have emerged as a tool for the development and analysis of eBusiness
models.

These frameworks are different levels of business
model abstraction that enable the comparison and decomposition of most, if
not all eBusiness models (Osterwalder, 2002).

Dubosson et al (2001) use a framework composed
of four perspectives to analyse eBusiness. These are:

• Product innovation
• The products and services a firm offers
  representing the firm’s value proposition to its target audience.
• Customer Relationship
• The value of the relationships (relationship
  capital) that the firm maintains with its customers in order to satisfy
  the customer and generate revenues
• Infrastructure Management
• The technology infrastructure and network
  of partners necessary to create value and maintain relationships.
• Financial Aspects
• Cost and revenue structures

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Figure 1 Relationship Between Elements
of eBusiness Framework

src="EbusinessNetworks/image004.jpg" v:shapes="_x0000_i1026">

Source:Dubosson-Torbay, M. Osterwalder, A. Pigneur,
Y. eBusiness Model Design, Classification and Measurements

Hamel (2000) in his book Leading the Revolution
also uses a four part frame work to describe business models. The Hamel framework
consists of:

• Customer Interface
• Empowering customers providing the
  information needed to make decisions. Possibly value proposition similar
  to the product innovation and customer relationship component of the
  Dubosson et al (2001) et al framework
• Core Strategy
• How does the firm choose to compete,
  what is its product or market scope, what is its basis for differentiation?
• Strategic Resources
• Where does the competitive advantage
  in the firm rest, on which resource does it rely?  A strategic resource
  could be a core competency (know), a strategic asset (own), a core process
  (do)
• Value Network
• Suppliers, partners and coalitions
  that surround the firm complementing and amplifying the firm’s resources.

Hamel also describes bridge components that connect
or intermediate the other components of the framework:

• Configuration
• Intermediates the firm’s core strategy
  and strategic resources
• Customer Benefits
• Intermediates core strategy and customer
  interface
• Company Boundaries
• Intermediates strategic resources and
  value network

Hamel’s (2000) framework is geared toward guiding
strategic choices of management as opposed to the actual evaluation of existing
business models. The lack of examples of how these elements are played out
in real world businesses makes it a theory that is difficult to apply in
an analytic sense but useful for decision making or decision guidance tool
for management.

De, Mathew, Abraham (2001) going beyond the four
segment framework, have developed a framework that seems more pragmatic for
the analysis of eBusiness, the components of their framework are as follows:

• Transaction costs
• Costs incurred by a buyer or seller
  by completing a transaction. This includes intangible and tangible costs
  across the entire customer life cycle. For example a buyer may buy online
  as opposed to going to a store due to the time, travel costs, hassle,
  opportunity costs (Liang and Huang, 1998).
• Switching costs
• Once one is a customer what is the
  cost of switching to another product/service (Shapiro and Varian, 1999)
• Network externalities
• Participants in network affect other
  members of the network without paid compensation and has been used to
  study the success and failures of information products and companies
  (Shapiro and Varian, 1999).
• Versioned products/niche marketing
• Preventing commoditization of products
  and charge premium to consumers
• Infrastructure investment
• Defined by De, Mathew, Abraham (2001)
  as Internet infrastructure and refers to hardware or software
• User experience models
• The processes or steps that a buyer
  moves through to obtain a product (Kim, 1997). The design of these processes,
  in large part determine the transaction costs.
• Revenue models
• De, Mathew, Abraham (2001) identify
  4 basic revenue models; Advertising, retail, banking and information
  harvesting

Summary of business model frameworks

Of all the frameworks presented only the last three
generic  eBusiness  frameworks seemed appropriate to the evaluation
of eBusiness of how eBusiness works and how firms compete in eBusiness.

Interestingly the three generic models shared some
commonalities that may be helpful in deriving competitive advantage for eBusiness.

name="_Tof2">Table 2 eBusiness frameworks compared

Summary	Hamel	Dubosson	De, Mathew, Abraham
Value of Relationship to Customer	Customer Interface	Customer Relationship	User Experience Models, Transaction Costs, Switching costs
Value of Network to Business and Customer	Value Network (business facing)	Infrastructure Management (includes partners)	Network Externalities
Value of Product to Customer	Core Strategy	Product innovation	Version/Niche Market
Infrastructure		Infrastructure Management  (includes IT)	Infrastructure investment
Financial Value to Business		Financial Aspects	Revenue Models
	Strategic Resources

Analysis of these models infers several things:

(the first 3 are not news to most businesses)

1. The product needs to be valuable to the
   customer
2. The business needs to invest in infrastructure
3. The business needs to make money

(the last two though are more interesting)

4. eBusiness needs to create value for the
   customer above and beyond the product
5. The network of partners and customers
   is viewed as valuable

Areas undervalued that
change the economics of doing eBusiness

We will focus on the last two themes derived from
the eBusiness frameworks as they do provided a possible focus for eBusines
beyond the delivery of their existing products. The first theme in the eBusiness
model frameworks was that eBusiness needs to create value above and beyond
the product how to achieve that is maybe alluded to in the second theme,
namely; the most underutilized unexploited theme was that the network of
partners and customers is valuable. Why does that seem underutilized and
unexploited?

To answer that question we look at the focus that
element of the frameworks. All the frameworks talked about the value of the
network, one even called it a value network (Hamel, 2000) but mostly emphasized
the network of partners, only one of the frameworks though included customers
in that network. Even the framework that did include customers in the network
and (De, Mathew, Abraham, 2001) spoke specifically of network externalities
(effects) did so in an unsophisticated, superficial fashion. The De, Mathew,
Abraham (2001) framework stated that network externalities in B2C companies
were very limited and less significant than B2B or C2C, this statement is
inaccurate and limited in its imagination of the value of networks of customers.

Companies that need to provide customers with value
above and beyond the product could try to make their current network of customers
more valuable to other customers and potential customers. If a company can
enable its current network of customers be valuable to customers and potential
customers then the company will actually benefit from a positive network
effect i.e. the size of a companies customer network becomes more valuable
than the sum of its parts.

In the next section we shall review some of the
recent thinking on network effects. We shall also give some examples of companies
that have gained competitive advantage through network externalities and
introduce some key enablers to leverage network effects.

Network effects

Literature review

Network effect

The network effect is the concept that members
of a network affect other members of a network in a positive or negative
fashion.

The difference between network effects and network
externalities really comes down to network ownership or beneficiary of the
networks value. If a network is not owned or there is no beneficiary of changes
in the network value etc. then the term network externality is appropriate,
if there is an owner or beneficiary of the network then it is called the
network effect  (Liebowitz and Margolis,1995 and Katz and Shapiro 1994).

A classic example of the network effect is the
success of Microsoft (Liebowitz and Margolis, 2001). The dominance that Microsoft
enjoys has been encouraged by the fact that more people use Microsoft products.
Once Microsoft had a large amount of users it attracted developers who created
more useful applications that attracted more users. The more users that used
Microsoft then effected peoples decision on what operating system they should
buy, obviously if they used the Microsoft operating system they could communicate
with other people using Microsoft applications and so on. This can be called
the network effect and in addition it is a virtuous loop so it is continually
getting stronger (Arthur, 1996).

Network effects have also been apparent in some
technology standards, like VHS and Betamax, 8 track and cassettes. The VHS
vs. Betamax example is interesting because it illustrated inferior technology
achieving network dominance and pushing out a superior technology.

A network effect can, in many ways, be perceptual,
i.e. a customer can make a decision as to which network to join based upon
their perception of that networks value. Companies also take advantage of
perception of network value, through psychological positioning a company
can actually dissuade possible new entrant from attempting to compete against
them if the new entrant believes the market is locked in (Arthur, 1996).

Positive network effects as discussed in the examples
also exhibit increasing returns, which can then lead to significant competitive
advantage.

One thing that might help temper the positive review
that the network effect is from Arthur (2000), in a paper about the myths
of high tech economy, is myth #1 “All Networks are Subject to Network Effects.” This
will be illustrated in later examples.

The next section will discuss the theory behind
valuation of a network.

Valuation of networks

While talking about network effect it is appropriate
to talk about the valuation of networks. As we have stated, if a network
is more valuable then it is more attractive to potential members and therefore
can benefit from positive network effects.

Three theories have been presented that come from
such people as NBC network pioneers to inventers of important computer standards
like Ethernet. The three theories are from Sarnoff, Metcalfe and Reed, (Reed,
1999)

Sarnoff

The first model to try and quantify the value of
a network was the Sarnoff broadcast model (Reed, 1999) (David Sarnoff was
an NBC broadcast pioneer), the concept being that the value of a network
was the sum of its nodes. Sarnoff’s model is really talking about the value
of a network to advertisers, the more viewers the more value.

name="_Tof3">Figure 2 Sarnoff Broadcast Network

src="EbusinessNetworks/image006.jpg" v:shapes="_x0000_i1027">

Source: That Sneaky Exponential. Reed 1999

A broadcast network is not a model that exhibits
a strong network effect (Arthur, 2000) on the members of the network, it
does exhibit a network effect on the owners potential advertisers though,
i.e. advertisers will be more attracted to a bigger network than a smaller
one with all other variables being equal. From this observation we can surmise
that no matter how big the network, the owner of the network will still have
to try just as hard to get new customers on the network to increase its value
to advertisers.

Metcalfe

Bob Metcalfe, inventor of Ethernet , realized that
the value of a network in which all of the nodes were capable of connecting
with each other became much more valuable than a broadcast network.

It might be helpful to think about the fax machine,
if you have 99 fax machines they are all capable of communicating with one
another and if each of those connections is equally valuable then we can
say the network is worth 99² if then one more fax machine was
added to the network it would be worth 100².

Metcalfe’s law was then a network was as valuable
as the square of its nodes or, where V=value and n=nodes on the network,
V=n² (Reed, 1999). 

name="_Tof4">Figure 3 Metcalfe’s Law

src="EbusinessNetworks/image007.jpg" v:shapes="_x0000_i1028">

Source: That Sneaky Exponential. Reed 1999

Metcalfe’s law was focused on the value of a network,
but as we stated earlier if a network is more valuable and

This is nice guideline but does assume that every
connection in a network is equally valuable; this is not true in most cases.
Metcalfe’s law then is still useful when looking at the value of interconnected
networks and it is clear that an interconnected network is more valuable
than a broadcast network.

We can also state that this network does exhibit
network effect on potential members of the network, therefore, in theory
the owner of the network will not have to try so hard to get more people
on the network because the bigger the network the more attractive it will
be.

Reed

The final proposed model for the valuation of networks
is Reed’s (1999) group forming networks. Reed’s hypothesis is, in simple
terms, that a network of networks (groups) is more valuable than the square
of its nodes. Reed proposes that the value of a network of networks (groups)
becomes an exponential equation and the number of nodes become the exponent.
Reeds equation would therefore read V=2ⁿ

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name="_Tof5">Figure 4 Reed Group Forming Network

src="EbusinessNetworks/image008.jpg" v:shapes="_x0000_i1029">

Source: That Sneaky Exponential. Reed 1999

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name="_Tof6">Figure 5 Network value gain over
time

src="EbusinessNetworks/image010.jpg" v:shapes="_x0000_i1030">

Source: adapted from “That Sneaky Exponential-Beyond
Metcalfe’s Law to the Power of Community building” Reed 1999.

These formulas are supposed to help us see the
power of the network effect but they do not represent reality. Network effects
have many other variables beyond the number of nodes on a network. Other
variables like switching costs, transaction costs, value derived over time
will also influence network effects and increasing returns.

Examples of eBusiness
benefiting from network effects

Aol  vs prodigy

Early on in the history of the internet AOL and
prodigy were online services that provided access to their own content and
then the internet.

 Prodigy had a 60% share of the online service
market in 1993. Two years later, Prodigy had shrunk, and AOL had grown, both
reaching about 28% shares. After two more years, AOL had almost 60% of the
market, and Prodigy’s share was under 10%.

This goes toward proving Arthur’s (2000) myth #1 “All
Networks are Subject to Network Effects.”

Clearly if prodigy had been benefiting from network
effects, 60% of the market would have surely been unassailable, or at least
long standing.

AOL and prodigy basically provided email to others
on the same network and access to content initially. Content is then a broadcast
network and email is a Metcalfe network, so the bigger Metcalfe network would
have been having some positive network effects.

AOL focused on community tools like chat rooms
and because of this when it did start to grow it benefited from Reed’s Law
(Reed, 1999) and established a very strong position.

More research should be done to discover when AOL
started to focus on chat rooms and community focused tools.

AOL was also the first online tool to be launched
for Microsoft DOS (feb. 1991) almost a year before prodigy released a tool
for DOS (Carlson, 2000).

Ebay vs onsale

Ebay and onsale are two eBusinesses that built
a business on the premise of online auctions.

On labor day in 1995, eBay started life as a digital
flea market facilitating buyers and sellers complete transactions between
one another and taking a small percentage in the process.

OnSale, by contrast, built its business buying
and reselling computers, peripherals, and consumer electronics in an auction
format.

Both companies were considered top of their game
in 1997 and were viewed as competitors, especially as OnSale started to create
its own exchange using and eBay type format.

OnSale was a one of the only formidable competitor
to eBay in 1997, OnSale had revenue that exceeded $30 million in the first
6 months of that year (Court, 1997).

Despite OnSale copying eBay’s format only 2 years
after eBay had been formed it found it impossible to compete. Only one of
the companies exist today.

EBay is certainly a great example of a Metcalfe
model and Reed (1999) proposed that it is a Reed group forming network. It
seems on the surface that it is a Metcalf model based upon the fact that  ebay
is linking individual buyers and sellers (or nodes). The augument for eBay
being a Reed network is that people do seem to congregate around the areas
of most interest to them and you may have one seller and 50 potential buyers.

Whether or not it is a Metcalfe or a Reed model
the online auction model is very hard to compete with,  here is some
additional anecdotal evidence to support that based on the recent moves by
yahoo auctions and eBay in Europe and Japan.

Yahoo auctions were first into japan, eBay was
number 2. eBay just recently announced that it was withdrawing from the Japanese
market (Belson, et al, 2001).

EBay was first into Europe, yahoo was number 2.
Yahoo just announced that it was closing yahoo auctions in Europe (Wolverton,
2002).

These are both very well funded valuable companies
and neither of them felt they were making in-roads in those areas that they
were the second entrant into.

Other companies leveraging network effects

Two companies that demonstrate or have perhaps
discovered the power group forming networks are yahoo and Amazon.

yahoo

Looking at Yahoo’s investments in the last few
years it has moved from being a portal, a Sarnoff network, to an aggregator
of services that contribute to building Metcalfe and Reed type networks.
For example:

• Yahoo groups
• Creates an email list with management
  tools with a home page for a group. Certainly a group forming network
• Yahoo Clubs
• Initial group forming network created
  by yahoo now merging into yahoo groups due to the popularity of the email
  list function
• Messenger
• A Metcalf network of instant messenger
  clients
• Personals
• Almost pure Metcalfe
• Auctions
• Another significant Metcalfe
• Classifieds
• Metcalfe
• Games
• Group forming network

Amazon

Amazon is a company that was singled out in De,
Mathew, Abraham’s (2001) eBusiness paper as a company that did not benefit
significantly from network externalities (effects). The fact that this was
written in 2001 might make us wonder when the last time these professors
bought a book on Amazon.

Amazon has several features that are valuable to
consumers and will benefit from positive network effects. These features
are:

Customer Reviews

Freely contributed opinions
from Amazon customers on products that are aggregated as a 5 star rating
when that product is listed in search results etc. A Metcalfe network

name="_Tof7">Figure 6 Amazon: Customer Reviews

src="EbusinessNetworks/image012.jpg" v:shapes="_x0000_i1031">

Source: Amazon.com

Customers that bought this book also bought

What is called collaborative
filtering, Amazon leverages past purchases of customers to help them recommend
relevant titles to someone currently browsing or buying products. This is
again a Metcalfe network and is not reliant on people contributing content.

Figure 7Amazon: Customers who bought

src="EbusinessNetworks/image014.jpg" v:shapes="_x0000_i1032">

Source: Amazon.com

Lists

Amazon has created a feature that allows people
to publish their “top ten” lists. These are topics created by customers grouping
things they like in particular genre or category. Metcalfe

name="_Tof9">Figure 8 Amazon: Lists

src="EbusinessNetworks/image016.jpg" v:shapes="_x0000_i1033">

Source: Amazon.com

Guides

Similar to lists Amazon lets customers create guides,
these again are really just listings of Amazon products that people aggregate
and add there own context too (Seely Brown and Duguid, 2000). Another example
of Metcalfe

name="_Tof10">Figure 9 Amazon: Guides

src="EbusinessNetworks/image018.jpg" v:shapes="_x0000_i1034">

Source: Amazon.com

Auctions

Yes Amazon also has auctions and as proposed, is
either a Metcalfe or a Reed network

These examples are illustrative of very successful
eBusinesses taking advantage of network effects now.

Parallel theories of potential
key enablers

Based upon what we have discovered about different
network effects and the possible benefit to eBusinesses, we will point out
here a couple of theories that support the creation of Reed (1999) type networks
for the benefit of the network owners.

The reason that we have described this section
as parallel theories is because at this time these are separate lines of
study that have not been pulled together yet into a complementary framework,
i.e. the network effect, community development and knowledge management.

Communities

Group forming networks could be one of the keys
to eBusiness success or even as we’ve seen from the examples, dominance.

Several business related books talk about the power
of communities (groups) and how companies can develop them, they are; Net
Gain-Expanding markets through virtual communities (Hagel and Armstrong,
1997); The clue train manafesto (Levine et al, 2000); and The Social Life
of Information (Brown and Duguid, 2000)

The Social Life of information is a book that is
more focused on helping people think differently about the information age.
One major premise being, information becomes far more powerful when merged
with social context.

Net Gain and The Cluetrain Manefesto are quite
specific that the only way to win in eBusiness is to leverage your customers
in such a way that it benefits both you and your customers, the previous
Amazon example is a great example of the theories in these books being put
into practice.

Knowledge management

Knowledge management is a discipline that has been
focused on helping enterprises realize the value of their internal intellectual
capital. Knowledge management spans a spectrum of uses from analytical decision
support systems for quite quantitative data all the way to community collaboration
tools that enable innovation and learning (Binney, 2001).

This internal focus of knowledge management is
very limiting. Knowledge mangement is a process that becomes more valuable
the more people that participate, i.e. it benefits from significant network
effects. Knowledge management as a practice needs to look outside the enterprise
and start looking at ways that knowledge management can benefit the customers
(Davenport, 2001). The enterprise will benefit and so will the customer and
the enterprise will become more valuable over time.

Conclusion

The evidence suggests that eBusiness could develop
a significant competitive advantage by leveraging network effects, and based
on observation the network effect can lead to an almost unassailable position
(eBay vs Yahoo, Japan, Europe).

Much more research though is needed in the area
eBusiness competition. It seems that across these theories of network effects,
community and knowledge management, under the umbrella of eBusiness competition,
there is an opportunity to do some quite meaningful research.

The majority of this paper has focused on existing
literature, qualitative research and anecdotal evidence. Primary research
and some quantities measures would help develop these theories further.

It would also be interesting to find out if Amazon
it pursuing a deliberate network effect strategy or if it is an emergent,
realized strategy (Johnson and Scholes, 1999) that was not part of their
strategic plan.

 

References

Arthur, W.B., Increasing Returns and the New World
of Business, Harvard Business Review, July-August, 1996

Arthur, W.B., Myths and Realities of the High-Tech
Economy, (a talk first given at Credit Suisse First Boston Thought Leader
Forum), September 10, 2000

Binney, D., The knowledge management spectrum -
understanding the KM landscape, Journal of Knowledge Management Vol. 5 .
No. 1 pp. 33-42 2001

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