Tagarchief: Network effects

Critical success factors to dethrone the dominant market leader in a market with network effects

Together with my classmate (Chris Ritzen) we wrote a paper that should be interesting for challengers that like to dethrone the marketleader in a market that is driven by networkeffects. There are not so many cases in which internet companies succeed to dethrone a market leader that has the “first mover” advantage and the advantage of network effects. Examples of companies that are by far marketleader because of the network effects are: Facebook, LinkedIn, Amazon and eBay.

We analysed how coalitions/partnerships can be used by a challenging firm to dethrone those market leaders based on 5 articles published in ‘A’-rated scientific journals. The bibliograpy of these articles can be found at the bottom of this blog

Based on the analysis of the 5 articles we were able to define the critical succes factors to succesfully dethrone the dominant market leader. The critical succes factors can be found in the synthesized conceptual model and are further down in this blog explained.

Synthesized conceptual model:

Incompatible and radical innovation
Incompatible and radical innovation is part of a successful strategy, because a challenger positions itself radicaly different than the current dominant market leader. The current dominant market leader is adding already significant value to the client due to the product attributes and the size of the network. Customers face significant switching costs and for the challenger it is therefore important that they  significantly add more value to the customer with a new competing product, letting the current added value from the networkeffect become less relevant to the customer. If a company offers a comparable product with similar values, the customer will not be interested enough to switch the network. The new product should be really innovative and different compared to the product of the dominant market leader and if it is incompatible with his product, then the customer is forced to choose between the products.
Intellectual property protection
Protecting intellectual property is part of the successful strategy, because as a challenger you can delay the reaction of the competition. In essence, technology is easy to imitate. Intellectual property protections prevents direct imitation by the competition and specially the dominant market leader. Building a network takes time and requires a lot of subsidizing for the first customers. Winning this time by protecting the intellectual property contributes to its success.

Proprietary platform
A proprietary platform is part of the successful strategy, because a shared platform is sensitive to free-riders. Incompatible and radical innovation also requires significant investments (besides R&D also subsidizing the first clients), which forces the challenger to be able to profit from the whole payoff without another company sharing in the payoff. Proprietary platforms also make it possible to take sole advantage of the intellectual property rights, which results in delaying the reaction of the competition.

Repeated partners which improve standardization efforts
A multitude of (horizontal) partners significantly improves the chance that the technology or service can be chosen as the market standard. Within this supplychain, exchanging knowledge is one of the major factors that strengthen the quality of the technology or service. In addition there are of course also partners that enforce winning the market. Talking about partnerships in this regard we mean partnerships in the supplychain which help to create a “bandwagon” effect. These are partnerships that right away increase the network. A good example of partnership in the supply chain (bandwagon) is the victory of VHS on Sony’s Betamax. Despite the fact that the quality of Sony’s Betamax was much better than the quality of VHS, Betamax didn’t become the industry standard. The main reason for that lies in the simple fact that the ‘porn industry’ had decided to publish its films on VHS. In the end, the question has always been whether there actually existed a partnership between VHS and the porn industry.

Aggresive and complex repertoire of actions
Aggressiveness and a complex repertoire of actions are part of the successful strategy, because the dominant market leader should have no time to anticipate or even to respond. Through this strategy the challenger keeps delaying the competition and therefore they will stay one step ahead of the dominant market leader. Often the dominant market leader is not able to make the necessary change, because they are defending their current Competitive Advantages. In combination with intellectual property protection it will be very tough for the dominant market leader to stay into competition.


King of the hill: Dethroning the industry leader (Ken G. Smith, Walter J. Ferrier and Cuitis M. Giimm; Academy olf Management Executive. 2001, Vol, 15, No. 2);

Managing Proprietary and Shared Platforms (Thomas R. Eisenmann; California Management Review Vol. 50, No. 4 Summer 2008);

The Art of Standards Wars (Carl Shapiro, Hal R. Varian; California Management Review Vol 41, No.2 Winter 1999);

Competing through innovation in network markets: Strategies for challengers (Willow A. Sheremata; Academy of Management Review 2004, Vol. 29, No. 3, 359–377. );

Network patterns and competitive advantage before the emergence of a dominant design (Pek-Hooi Soh; Strategic Management Journal Strat. Mgmt. J., 31: 438–461 (2010));

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Geplaatst door op 24 juni 2010 in Academisch


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