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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Judith Williams who wrote (39043)	2/11/2001 11:08:20 PM
From: joancee	Read Replies (3) \| Respond to of 54805

An economist talks about the networking effect and also the "groove effect". Hope this hasn't already been referenced! strategy-business.com From W. Brian Arthur: >>...In high tech, though, there are two or three characteristics that overturn diminishing returns and give you increasing returns, meaning the more you get ahead, the more advantage you have toward getting further ahead. You can call it positive feedback. No one uses the phrase nowadays of increasing returns to scale -- this is not a scale phenomenon. Increasing returns simply means that whoever gets advantage, gets further advantage. Whoever loses advantage -- think of Apple Computer -- will lose further advantage. Encyclopedia Britannica, T.W.A. 10 years ago, I.B.M. You start to lose advantage, you get in a worse position. You gain advantage, you get in a better position. Why? For three reasons. The first is cost advantage. High-tech products -- things like Microsoft Windows 95 -- are complicated to design and require huge amounts in upfront R&D costs. With Windows 95, that came to $250 million for the first disk. But the second disk costs just a few cents. So does the third. The more you produce in the lifetime of that product, the lower your per unit cost. In other words, the more cost advantage you have, the larger your market gets. Secondly, there are what economists call network effects. That means the bigger a network gets, the more I'm likely to need to join that network. For example, as more people use Java, the downloading language for the Internet, the more likely it is I would have to have Java in my computer to download off the Net. As fewer people use its competitor, ActiveX, it is less and less likely that I would have to have ActiveX. Thirdly, there are what I call groove-in effects tied to customers and consumers. Basically, this means that the more I use a product, the more I'm familiar with that product, the more convenient it gets for me. I use Microsoft Word. There might be a better program out there, but I know all the tricks with Word that I mastered over several years and I am very reluctant to give that up to start over with another product. So these characteristics produce increasing returns. <<