How E-Businesses Use Network Economics to Achieve a Competitive Advantage

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Table of Contents

Introduction
How Facebook Utilizes Network Economic to Realize Competitive Edge
Literature Review
Conceptual Framework
Discussion
Conclusion
References

Introduction

The rapid development of information communication technology in recent decades led to the emergence of network economics. It is a set of concepts and tools that enable e-businesses to utilize internet-centered information technologies to conduct trade internally and externally (Asadollahi & Rafieian, 2019). In this paper, I will address the question of the impact of network economics on e-business’ competitive advantage using Facebook as a case study. I will explore the network effect that is achieved through various concepts, analyzing increasing returns of scale, critical mass, positive feedback, and network externalities. The identified case study was chosen since network economics employed by Facebook has influenced its competitive advantage and boosted its market share after the interest of users reduced.

This essay begins with a discussion of the ways Facebook used the opportunity of increasing returns of scale as it was the major strategy applied by the company. Furthermore, the literature review is provided to understand current achievements and gaps that exist in the field of e-business and network economics. The conceptual framework section presents the ways in which the theoretical concepts can be used to advance companies’ competitive advantages based on the network effects. The subsequent discussion section clarifies the application of the network economics theory to Facebook, and lessons learned are provided in the conclusion.

How Facebook Utilizes Network Economic to Realize Competitive Edge

Facebook’s initial growth was unprecedented, reaching out to one-seventh of the world populace. Lately, Facebook has become less popular among adolescent consumers, and older adults become the platform’s dominant users. Teenagers found it to become an outdated and non-engaging communication channel. The mobile applications posed significant competition to Facebook since they promoted dynamic real-time messaging. In this connection, to restore its popularity among adolescents, Facebook applied network economics, namely, it focused on the level of network diffusion. The company understood that teenagers are largely led by trends on social media and that media remains demanded when it has a great number of users, which compose a critical mass concept. Facebook introduced a strategy of communicating with as many users as possible by attracting their attention through integrating new messaging options and buying other popular social media.

Considering the niche mobile platform applications gaining familiarity among the teen consumers, Facebook made a move to acquire Instagram for $1billion and Snapchat, a common photo-sharing application among adolescents (Srikant, 2014). These decisions were guided by the assumption that the rate of complementarities makes a direct impact on network effects. The approach was to enable the company to stay ahead of the competitors by increasing the number of users among adolescents. Furthermore, to attract young consumers, it launched novel features to develop a unique mobile Facebook experience. The company’s challenges were to include the adolescents’ active engagement and increase its promotion income without alienating its consumers. Consequently, Facebook recorded a surge in revenue and improved its competitive edge.

Literature Review

Available research contributes to understanding the concept of network economics in terms of e-businesses to realize a competitive edge. The first idea discussed in the academic literature refers to the statement that the value of a product depends on how many people are already using it (Knieps, 2016). The spread of smartphones can be considered a vivid example. Even though a perfect smartphone is offered by a company to the market, if it tries to sell it to a person living in a city where no one has similar products, the whole enterprise would fail.

Nobody needs a mobile phone just to have it, but people need it to communicate with other phone owners. Shim et al. (2019) provide another example of the competition between the mobile instant messenger (MIM) and Joyn messenger by the Korean Mobile Network Operators (MNOs). In this case, the key answer to why Korean users continue to mainly use MIMs is that the Joyn application itself is not needed by anyone. The important issue is that it allows users to contact others, who already have traditional instant messaging accounts (Shim et al., 2019). The likelihood that all of them would immediately switch to a new platform, such as Joyn, Skype, or any other application, is low.

The scholars argue that information technologies influenced organizations’ competitive edges, thus transforming the face of e-business (Filser et al., 2021). The business network combines the abilities of numerous companies to generate and offer products and services, for which there is demand in the market (Filser et al., 2021). This approach is termed the business network-based value development. The scholars further employed the network economics concept to illustrate the conditions under which trade networks occur and sustain their value-creation events. Namely, the value of the network increases with the availability of various kinds of additional services (Shapiro et al., 1998). The more complimentary services the network users receive, the more loyal they are likely to be. A significant point is that with the growth of these services, customers’ attachment to the network raises as well (Shapiro et al., 1998). It should be clarified that these same additional services should be complementary products, which can create barriers to the disruption of the e-business. In addition, the value of the network increases with each new user, which is critical for understanding how the networking effect works.

In many cases, one or two companies dictate the rules in developed networked markets. Probably, the best example is Microsoft with its Windows operating system, which powers over 90% of all computers in the world (Bramoullé et al., 2016). Initially, there were many competitors; now, there are only a few, and MS positions are almost inviolable due to the fact that people will not leave this system for a rather trivial reason. Namely, there are no guarantees that their programs and files will work on another operating system. Another characteristic feature of network economics in the area of e-commerce is that the network effect creates different barriers to leaving the network (Kauffman et al., 2010). It is due to the fact that it is based on the interaction of network participants. For example, even if Instagram users are not quite happy with the content of the network lately, this does not mean that they will leave the resource because there are a lot of like-minded people. To leave it, they will have to give up not only an information resource but interaction with many contacts.

However, network effects sometimes cause problems. One of the most famous examples of network effects is the history of Microsoft Word. Bill Gates’ corporation managed to become an office standard largely due to the fact that the doc file format that was initially used in Word was proprietary (Bresnahan, 2001). The application was more advanced than similar solutions from competitors. In addition, MS had another strong product in the form of Dos and then Windows, so the company already had some advantage over its competitors. Gates naturally took advantage of it, and Word began to slowly fill offices around the world. Later, it turned out that other companies began to buy this product so that there would be no problems when transferring and receiving files from partners (Bresnahan, 2001). The strength of this competitive advantage began to grow with each new user. This is consistent with Cheah et al. (2018), who states that innovative companies operating in industries with high turbulence are more likely to build sustainable competitive advantages.

In the networked e-market, the most difficult stage for a product is the initial stage. E-business needs its first users, who will become the basis for future success. Therefore, companies have to spend substantial funds to engage users in the network at the stage of its formation. The main gap is the under-researched nature of network economics since little is known about its development and associated challenges. Kauffman et al. (2010) stress that a lack of clear strategies and problem-solving methods limits the implementation of network economics principles into practice. The reviewed studies illustrate the need to add innovations to the e-commerce platforms and implement the network economics theory by e-business companies (Kauffman et al., 2010). Therefore, network-centered value development is considered to be efficient for organizations in establishing a competitive advantage despite the existence of turbulent and fluctuating market conditions (Vinberg & Henrikson, 2017). Future studies should be focused on the detailed analysis of the examples of using network economics in e-business, which would allow finding more gaps and designing relevant strategies.

Conceptual Framework

The key goal of using network economics in digital business is generating value to customers, thus remaining successful among competitors. Compared to a traditional approach that prioritizes optimizing products, network economics implies designing products in a way that would be attractive to target customers (Vinberg & Henrikson, 2017). By increasing returns to scale, companies can acquire a greater number of customers since if many people use a certain platform, others would also value it. In this context, companies face the challenge of raising a critical mass that refers to a particular level of network diffusion (Knieps, 2016). Bauer and Latzer (2016) suggest that critical mass and increase in returns to scale are useful to implement positive feedback. It helps in understanding the strengths to be advanced and failures to avoid. Considering that e-business is a knowledge-generated industry, the use of positive feedback is critical to be aware of recent trends among users to respond to them timely.

According to Bauer and Latzer (2016), positive feedback is a vital concept and dynamic process, through which companies improve their competitive advantage. Positive feedback results in a significantly large pool of consumers who influence the increased development of a platform (Bauer & Latzer, 2016). Therefore, organizations should not focus on designing innovative technologies but concentrate on realizing engagement by attracting a substantial number of users (Tzavlopoulos et al., 2019). For instance, in the case of a positive externality, Android and iOS produce a free value for innovators. The iOS and Android platforms have a large number of consumers, so when developers create a new application, they achieve the value of the pool of consumers that already exists in the marketplace.

However, on the negative externality, PCs are prone to more viruses than Macs since the software virus developers usually target the platform with a large consumer base (Pagani & Pardo, 2017). The increases in consumer base influence the investment in substitute products, thus making it difficult to switch to new technology. Consequently, e-business companies can succeed in the digital economy by developing the critical mass and using the complementarities. They should ensure that their achievements are backed by their technology infrastructure. Zhou and Li (2018) consider critical mass as an opportunity to attract more customers, while the main disadvantage is that too many users can cause congestion by slowing the platform operation and reducing users’ benefits.

Additionally, the lock-in concept illustrates how a consumer that intends to change platforms should make an investment that usually costs more than the value produced by switching to the new website. Companies make it difficult for users to migrate to new platforms by designing complementarities. They usually realize this by developing channel dependencies that entrap individuals in the utilization of the technology, thus making migration problematic (Janaćković et al., 2016). The creation of the digital economy is therefore determined by activities and resolutions and is not structured to add value to the customers but increase dependencies to ensure a significant client base is sustained.

Discussion

In his article, Srikant (2014) explores Facebook’s e-business activities that have not been beneficial to the consumers over time. The shifting in preference exhibited by the users saw them opt for other trendier platforms of niche mobile phone apps which developed as a new virtual playground for the group of consumers. The users argued that Facebook lost its attractiveness since the company did not invest in diversity and consumer experience. Srikant (2014) states that while this e-business was emerging as a public entity in the business industry, competitors who offered niche services have penetrated the marketplace. Numerous previous studies concluded that the shift of the millennial market to other trendier e-business platforms would affect the profitability and productivity of e-commerce companies (Srikant, 2014; Turban et al., 2017).

The Facebook case study clearly shows that this digital business understands and uses networking effects. For example, even if Instagram and WhatsApp entered the market, it was unlikely that all Facebook customers would follow these new projects only. Facebook already had a huge user base of many million people, and the goal was to research the market and recognize the options offered by competitors (Bauer & Latzer, 2016). For adolescents switching to other social media platforms, it was important that their friends are already there, but not only that these services provide a lot of additional opportunities. Facebook, which would have to start almost from scratch, had great chance to gain the attention of its younger users again. Accordingly, Facebook initiated several strategical decisions and succeeded in an attempt to engage this target population.

The network economics theory entails a company focusing on establishing dominance. For instance, Facebook’s acquisition of WhatsApp is an example of a phenomenon that is influenced by the network economics theory. Furthermore, the acquisition of Instagram has boosted the organization’s competitive edge. The teenage users who shifted from Facebook to Instagram with the assumption that the Facebook platform had become boring were retained by the company (Filser et al., 2021). The move saw the company increase its dominance in the social media industry over other players, such as LinkedIn and Twitter. In addition, the large and developed pool of customers of Facebook promoted positive feedback from other companies that offered their complementary products to cooperate.

Despite some social network websites, such as Twitter and LinkedIn surviving in parallel, Facebook’s acquisition of WhatsApp presents a significant challenge to them. The Twitter and LinkedIn websites are associated with short-form messages, unlike WhatsApp, which allows long messages (Janaćković et al., 2016). The move by Facebook will lead to the company attracting users from the other platforms who prefer to enjoy long message services. Facebook is expected to stage buyouts of more businesses similar to WhatsApp. The approach will make this platform achieve a monopoly in the social media sector, thus boosting its competitive advantage and market share.

Conclusion

To conclude, this paper aimed to examine the impact of network economics on advancing Facebook’s competitive advantage by analyzing the available literature, case study, and theoretical implications. It was discovered that network economics implies that the greater number of users a digital business has, the more interesting it becomes for people to join since the benefit of the network is parallel to the sum of consumers. The case of Facebook allowed clarifying that it successfully used the networking effects to improve its competitive advantage. Namely, the company designed its acquisition and complementary product implementation strategies based on increasing returns to scale critical mass re-gaining, and positive feedback. Nevertheless, both the literature and Facebook case show that network economics is an emerging field of research, which is the key limitation of this paper, and more studies are necessary to address the gaps. Future studies should explore the links between various elements of network economics, integrating theory and practice so that e-businesses would better understand innovative ways to strengthen their competitive advantages.

References

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