Chapter 4 The Changing Competitive Environment What You Will Learn in This Chapter This chapter focuses on the revolutionary changes that have occurred in the global economy since the advent of the commercial Internet in the mid- 1990s. The networked world is widely different from the prenetworked one because networks have peculiar economic characteristics. Moreover, in the presence of pervasive networks, the amount of data and information that can be generated and transferred in real time is dramatically increasing. The successful firm, and the successful manager, must be able to design and implement strategies to take advantage of, rather than suffer from, these changes. The concepts and examples discussed in this chapter will help you do so. In this chapter, you will become well versed in the language of network economics, information economics, and disruptive technologies. Specifically, this chapter will 1. Discuss the basic principles of network economics, including the sources of value in networks, and define physical and virtual networks. You will also learn to apply these concepts to strategy and managerial decision making. 2. Explain the concepts and vocabulary of network economics, including positive feedback, network externalities, and tippy markets. You will be able to recognize when network effects occur and what makes a market tip, as well as what market will not tip toward a dominant player. 3. Clarify the basic principles of information economics and the role that information plays in the modern competitive environment. You will be able to understand the concepts and vocabulary of information economics, including the ability to define classic information goods and information-intensive goods. 4. Explain how the advent of pervasive networks has enabled information to break the constraints imposed by traditional 5. Assess the likelihood for an activity to be performed without the physical interaction among the involved participants and objects, or in other words, the chances a process may become virtual." You will be able to discuss the drivers of this virtualization and account for the technological factors enabling and limiting it. 6. Distinguish between disruptive and sustaining technologies. You will be able to identify each kind and draw implications for decision making in organizations faced with the emergence of disruptive technologies. MINICASE: Airbnb and the Ghost of Start-Ups Past "You always had an entrepreneurial streak," you tell yourself with a chuckle as you reflect over a hot cappuccino at your favorite coffee shop. With an undergraduate degree in computer engineering and a soon-to-be-granted master of management degree, a startup sounds like a perfect way to jump back into the real world. While the global crisis during the last few years has put the squeeze on venture funding, recent successes showed that good ideas still get attention. Snap Inc. raised an astonishing $1.8 billion from heavy hitters like Sequoia Capital and General Atlantic just one year before going public. The now "textbook case" Airbnb, after totally disrupting an industry, in 8 years was able to raise $4.4 billion and be valued 10 times more. And you cannot forget that Groupon received a buyout offer of $6 billion from Google after a little more than two years in operation ... and turned it down! As you ponder the issue, you reflect on lessons from tech ventures of the past. One that you know quite well is eBay, having been an avid buyer and a successful seller as a teen and having followed the company over the years. In fact, you remember an interesting article from back in 2004 drawing a parallel between eBay Inc. and Amazon.com. At the time, the two firms were respectively 60th and 66th in Business Week's Top 100 Brands and were considered the poster-children of eCommerce, having helped create the category: "EBay and Amazon.com, the Internet's top two eCommerce sites, are taking opposite approaches to growth. EBay raised its prices this month for the fourth year in a row, while Amazon renewed its pledge to keep cutting prices even if it means lower profits." You recall Meg Whitman, at the time eBay's chief executive officer (CEO), saying"The eBay marketplace is a powerhouse. [...] We continue to enjoy ever-bigger, ever-faster cycles of success, fueled by the unlimited opportunity of our huge addressable market." At the time, eBay was reaching the peak of its financial achievement and growth. You recall the same article quoting Amazon's founder and CEO, Jeff Bezos: "We will, for years and years and years, consistently give back the gains we get in lower operating costs to our customers in the form of lower prices." You also recall the numbers quoted in the article: "eBay's gross profit marginits revenue minus the cost of saleswas 82 percent. That's after subtracting the cost of running its website, customer support and payment processing operations. And eBay's bottom-line profit stood at 22 percent of its revenue after subtracting all other expenses, including the hefty $172 million that eBay forked over for marketing and sales expenses. Amazon's gross profit for the same quarter, by contrast, was 22 percent, and its bottom-line profit was under 4 percent." Was Groupon applying some of eBay's lessons? Was Alibaba? As you ponder your next move, you cannot help but think that replicating eBay's early and sustained success is predicated on understanding these dynamics. Discussion Questions 1. Reflect on what you have read and your knowledge of the impact of new technology on the competitive landscape and ask yourself, Why would Amazon and eBay act so differently? 2. What would you say are the key lessons you should draw from the eBay versus Amazon experience? 3. Would you argue that Airbnb, Groupon, or Alibaba are indeed applying some of the same lessons