Network Chain
A year ago, when I wrote “Special Network Vehicle: Creation Spaces-Based Network Effects” and sent it to James Currier to thank him for being a source of inspiration, I was expecting no more than a digital clap. Generously, he replied with the following;
The tweet felt too good, and it leveraged my passion for finding and pushing the boundaries in the network effect’s domain. However, no one warned me that James and his colleagues at NFX already pushed all the visible boundaries. James almost covered everything you might want to know about network effects (the past, present, and future). You can see by yourself;
After that, I kept looking for a single un-pushed boundary with no luck, until I met Ben Thompson (virtually via Stratechery). Thanks to Ben (one of my latest superheroes ‘Venom’), I started to solidify my understanding of the network effects from a value chain perspective.
It was an enlightening moment when Ben explained how platforms integrate other network effects into their value chains. For example, Google was not buying the superiority of YouTube’s value proposition. Google was integrating and internalizing YouTube’s network effects. Check the below links, but I must warn you Ben’s thinking will capture your brain.
- The Value Chain Constraint (from the weekly update — free version)
- Exponent Podcast: Valuing Value Chain
Still, something was missing. The un-pushed boundary that I found was not complete until I came across a new magical treasure: a masterpiece called Unlocking the Customer Value Chain by Prof. Thales Teixeira (the latest superhero ‘Dr. Strange’). Do yourself a favor, and buy this book.
Now that we introduced the two most recent superheroes, let’s jump into the core of this post.
I do believe that it is time to dive deep into the network effects, to reach the core: understand the network effects as value creation chains and not merely a strategic moat or defensibility mass destruction effect.
I must start by thanking Sangeet Paul Choudary. His recent few tweets helped me to replace almost 500 words with the below two tweets, which will place you at the heart of this post. Thank you, Sangeet.
Following the above tweets, I would like to introduce a new term: “Network Chain.” Let us unpack the thinking behind it.
Thanks to Michael Porter’s Value Chain framework, we know that to run a profitable and scalable business, you must build a robust value chain. A tightly integrated value chain can repeatedly generate the desired value proposition. For example, Twitter’s value chain is continuously allowing us to know what is happening in the world and offers a glimpse into what people are currently thinking.
But if you notice, it seems that Sangeet is referring to the existence of another mysterious value creation mechanism on top of the supply chain: a value creation mechanism in the core of the network effects. You can call it the invisible chain for now, but by the end of this post, you might prefer to call it the Network Chain.
So why it is invisible? One apparent reason can be traced to the overly simplistic definition derived from the industrial age: a definition that hasn’t evolved (at least from a business viewpoint) during the transition to the post-industrial age.
Ironically, the true potentials of the network effects are compressed by its generic definition. The network effect is not phenomena. It is a living thing, our collective behavior (i.e., Hosts, Guests, Tweeters, Readers, Drivers, Riders, Video Creators, Viewers, etc.). The intersections of such collective behavior are unimaginably rich. But it is not reflected in the definition, so we must do something.
As an example (thanks to Twitter), I gained from following John Hagel, a spectrum of high-quality values. None of them is part of Twitter’s core value proposition.
New Thinking — Twitter’s network chain reduced the thinking gap between the most influential business thinkers (who we admire and follow) and us, by getting exposed to instant and continuous flows of knowledge.
Humbleness — observing how John interacts with us (his followers), nurtured a sense of humbleness and generosity (i.e., being humble in my quest towards seeking new knowledge and generous with my time with others.
In order to systematically excavate such invisible values that get produced on top of the value chain, we need to bring justice to the network effect by gravely understanding its network chain.
The term Network Chain might get misunderstood if it is taken out of context. Accordingly, it will be advantageous if we unify our understanding of the context (i.e., unifying our understanding of what is a platform).
A Platform is an “economic architecture” that governs the:
- Aggregation and match-making of the right supply and demand (i.e., governing interaction enablement)
- Gravitation and mobilization of the right resources (i.e., governing interaction enrichment)
- Creation, curation and consumption of the right values (i.e., governing interaction facilitation)
- Assignment and enforcement of the right authority and responsibility (i.e., governing the rules of engagement)
The above definition was greatly inspired by a term coined by Sangeet: “enabling interactions.” This is how I understood it:
Using a step-by-step approach, let us use Instagram as an example to explore the above.
First, let’s condense the platform’s definition into the Instagram app.
The first lesson in building a platform-based business model is to understand this point: An app without the right business model and value chain is nothing but a digital ghost house on Apple’s App Store or Google’s Play store. To bring life into the above adorable app, you need to install the engine: a value chain that is capable to efficiently produce the desired value propositions (posting and viewing filtered pictures).
As you can see, the value chain concerns addressing a job to be done. For example, as a producer of value, WHAT do you want from Instagram? To allow you to upload your filtered pictures. Accordingly, Instagram built its value chain to enable this job to be done.
Now, imagine that we are in the year 2012 and someone told you that this company is for sale with a $50,000,000 USD valuation. Do you think any investment bank will be interested in such an offer? You are correct. No. That cost for such a company with such a value chain will never reach investment banks’ boardrooms. So, how can you justify Facebook paying $1,000,000,000 USD to acquire it? It’s easy. Facebook was acquiring Instagram’s network chain, to integrate it with its network and value chains.
When both chains intertwine, your wish will become a command. The value chain repeatably allows you to achieve WHAT you want (posting your best self), and the network chain will take care of WHY you want to post your best self. Value chains are constrained by the gravity of economics, whereas the network chain gravitates participants’ behaviors.
Accelerated growth can result from a network effect, but the prolonged exponential growth is a derivative of the integration between the network chain and value chain.
Such integration cannot take place in a vacuum. The network chain must feed (e.g., data) the value chain and the value chain must support (e.g., features) the network chain. The value chain must continually learn from the network chain.
Value can be amplified when both the network chain and the value chain achieve a high level of integration with the end users (both the producers of value and consumers of value).
If you are running a platform business or you are in the process of doing so, you must:
1- Tightly integrate your network chain with your value chain, and
2- Tightly integrate your chains with your end users, in a balanced way.
The above illustration is politely whispering to you — prophesying the end of commoditizing the supply-side and controlling the demand-side.
Almost every enthusiastic wannabe entrepreneur with a platform idea is hovering around such an innocent, opportunistic view: extract data, mesmerize attentions, commoditize supply, and control demand. Become the next Zuckerberg.
To those, I sincerely want to say that the party is over. If you believe that data and attention are the new currency, then you need to accept the fact that Google, Facebook, Amazon, Apple, Alibaba, etc. are the new Federal Reserves and Central Banks. They control the attention reserve requirement ratio and data interest rates.
A lot of people missed the real estate boom, the bull market that followed the financial crisis, and the Bitcoin madness. I am sorry to tell you that you just missed the easy exponential growth that yielded from such platform-based businesses. The future of platform-based businesses will be based on righteousness. The righteousness that I am talking about derives from a state of economic equilibrium. Savvy users on both sides (supply and demand), along with more stringent rules and regulation, will underpin any future growth. Each party will pay (monetary value, attention, tokens, services, etc.) in proportion to the value that they are getting.
This means building your platform-based business on progressive fundamentals. Your value propositions and your growth ideology must evolve along with your network chain.
Thanks to the above superheroes, I managed to translate the above dimensions into a workable tool called “Network Chain.” This tool consists of two main parts: “know your network chain” and “network chain due-diligence.” The first part (the center) is to stress-test your network chain, and the second part (the sides) is to back-test and simulate the integration between the network chain and the value chains.
The core objective of the network chain is to understand your network effects and to capitalize on the richness of you network effect to prolong your exponential growth. Whenever you want to add value to your participants, avoid the below path on the left.
Such sequential movement is wrong — fundamentally, technically, conceptually, and behaviorally. You cannot add an icon on your app, thinking that you will own people’s attention and capitalize it within the network effect. Such an approach worked a decade ago, but not anymore. The way to strengthen your network effect (look at the right side above) is to enhance the level of integrations between the network chain and the value chain. Accordingly, you should move inwardly from multiple directions.
Now let us bring the network chain concept with the evolution of value proposition and growth ideology. In Infinity Jobs, I introduced the value proposition canvas, advocating that value propositions must evolve with time. In Platfornomous, I introduced the longevity growth concept, promoting that your growth framework must expand in a balanced way (i.e., a platform must give balanced attention to the ecosystem, producers of value and consumers of value). Both tools evolve within three layers, and in parallel, the network chain must evolve with them.
So, let us experience how we integrate the network chain with the value chain and the end users within each layer.
First Layer
Everyone knows that Twitter is facing an issue with its active monthly users. Apparently, Twitter’s network effect reached the maturity stage (showing symptoms of decline stage). The network chain way of thinking taught us that when we have an issue with our network effect, we must fix it by looking inwardly.
Example One: Twitter — Minor Change.
Twitter can focus on “Nodes & Links.” Almost all of social media has central and marginal nodes with a varying degree of strength in the linkage. So, how can Twitter help their marginal nodes to gain some weight? What if Twitter introduces a trophy badge? It would be like the endorsement feature on LinkedIn, but smarter.
My weight on Twitter as well as other social media is anemic (marginal node), and maybe the above imaginary trophy badge can help me in gaining some weight. Let’s see how?
Do you remember the Tweet that I received from James at the beginning of this post? What if I could mark this tweet along with other tweets received from other respected tweeters and place them under my trophy badge? Unlike the standalone endorsement’s feature on LinkedIn, such a social trophy is part of Twitter’s core value proposition — since that the tweet represent what the tweeters is thinking in real time. In addition, such tweets reflect an instant reaction to an event that is taking place right now with a reference to the original action. This gives other tweeters a clearer picture of the context of appraisal (i.e., the kind words from John, Lisa, James, and Simone in the below example).
Such a trophy badge will stand as a derivative of our social as well as professional behavior. It will internalize our external achievements. Moreover, such trophy badges will act as a curation mechanism (i.e., social magnate that gravitates like-minded people).
How can a minor change affect other elements of the network chain? If I have a few tweets within my trophy badge from a reputable business and thought leaders, my switching cost will increase dramatically, and my multi-homing behavior will diminish significantly, which means spending more time on Twitter.
Example Two: Twitter — Major Change.
Jack Dorsey declared a war on MAU’s stagnation. It was time to bring some real change.
On the connectivity dimension, Jack wants to add a new connectivity type: “Many-to-Many.” John Hagel’s creation spaces theory inspires this type of connectivity. The many-to-many will lead to a new feature on Twitter called “Twitter Nest.” It’s a smaller version of a think tank. Twitter Nest is a think nest, a virtual space (or creation space) that allows users to implant an idea with the finest of like-minded people. Every think nest has:
- An identified number (between 5 and 15) of key participants,
- Shared vision, and
- Agreed upon agenda and pre-identified completion date.
Imagine if the below superheroes join their thinking toward leveraging the limitation within the current definition of the network effects, as we discussed above.
Unlike the first example (trophy badge), this change is enormous. For such changes, you must work on the edge. As John keeps reminding us, never underestimate your immune system. Unfortunately, if you are running a platform, you must realize that you are dealing with two immune systems: one within your value chain and the other within your network chain.
The experimentation on the selected edge must be stress-tested and back-tested within the whole network chain, and then the proper functionality must be simulated within the value chain to the end users.
1- Stress-test the idea, starting from the connectivity dimension to see how it will affect (positively/negatively) the other functionalities.
2- The many-to-many connectivity will have a direct positive impact on clustering (i.e., enabling the emergence of infinite clusters between different people with shared visions).
3- Such a chain effect will strengthen the network’s social fabric: highly homogenous clusters with internal engagement.
4- This will enrich the network’s density by allowing the participant to join their social map toward the same objectives.
5- Multi-homing risk will diminish. (If you are part of an active creation space, it is challenging to move all participants to another platform.)
6- Such overlaps between participants’ social maps within the creation spaces will make the switching cost very high.
7- The shared visions and goals among each cluster will amplify reputation and trust between the participants — thus strengthening the +same-side network effect, which will leverage the value between the +cross-side network effect.
Once the stress testing is over, you must integrate the network chain with the value chain. In other words, the new feature/interface must be mapped to the changes within the network chain.
For example, the supply side must experience no friction in the process — i.e., how to create such think nest, how to find the best fit (members of the creation space), how they invite each other, how they remind each other, how they will communicate with each other, etc. At the same time, the demand side should effortlessly be notified about the existence of creation spaces that best suite their interests. Allow them to engage with the member of the think nest, suggest relevant candidates to join such creation spaces, and to evaluate the results of such creation spaces.
Can you imagine the ripple effect of this imaginary “Twitter nest?” It would enabling likeminded people to join their thinking, knowledge, and resources toward shared visions, as well as allow the entire world to witness the results and maybe even enrich it with our collective wisdom.
Second Layer
The second layer, in a nutshell, is not about your value proposition. It is about your participants’ experiences — how to enhance the experiences on both ends (supply side and demand side).
Here I would like to revisit the industrial age’s business school’s library to borrow and rephrase a few concepts. Like any value chain, the network chain can integrate horizontally as well as vertically. But before jumping into another imaginary example, let’s define these terms first:
Horizontal Network Chain Integration (“HNCI”) Is a competitive strategy that aims at leveraging defensibility and exponential growth by acquiring a network chain that operates at the same level of the network chain, in the same or different ecosystem. The HNCI aims at enabling the integration between same types of network effects by increasing the synergies between their building blocks (e.g., directionality, density, connectivity, etc.).
Vertical Network Chain Integration (“VNCI”) Is a competitive strategy that aims at leveraging defensibility and exponential growth by acquiring a network chain that operates at a different level of the network chain in the same or different ecosystem. The VNCI aims at enabling integration between different types of network effects by increasing the synergies between their building blocks (e.g., directionality, density, connectivity, etc.).
Both types of integration (horizontal and vertical) can either be forward in nature (strengthening or differentiating the demand side), or backward (strengthening or differentiating the supply side).
Now let us explore a brief example.
Within the first layer, we saw how Twitter tried to enhance its value proposition. Here the aim is to enhance our (tweeters) experiences. The second layer is all about understanding your platform’s participants within deeper contexts. You should shape a new context for your participants.
To do so, Twitter must examine its network chain and the possibility of integration with other network chains.
Once again, I will use a personal example. I document my passion with platform thinking on Medium. The hard work takes place on Medium, but the social and professional interactions take place on Twitter. In other words, Medium’s value chain is poorly integrated into its network chain “come for the tool, leave the network.” Therefore, Medium’s fruit gets consumed on Twitter.
Unfortunately, the same limitation is taking place on Twitter. In the recent months, I have been approached by amazing people (on Twitter) to further discuss some of my writings in the platform’s domain. The initial engagement takes place via Twitter’s DM (a huge fraction in engagement), and then we depart to another platform to deepen the level of our engagement.
It is true that the above is a personal example, but you can use your imagination to explore similar patterns with different jobs to be done.
Twitter can create new context by joining several jobs to be done, to enhance our experiences, and by finding compatible network chains. Note that holistic stress-test, back-test, and simulation must take place on network chains level, before proceeding with any merger or acquisition.
Third Layer
At this layer, the objective is to enrich the totality of our experiences (users of the platform). This means platform-based businesses must share the upside as well as the downside. In other words, a platform may not be involved with an adjacent experience, yet it chose to collaborate with another platform to enhance the overall experiences of their existing users (either on the demand or supply side).
The above illustration is taken from my previous post “Platfornomous,” in which I elaborated on this point.
Once again, I would like to introduce a few new terminologies:
Network Chain Collaboration (“NCC”)
The beauty of the network chain collaboration is that it will leave both the value chains, as well as the network chains, intact. Network chain collaboration enables a new form of portability and interoperability: we can call it network effects portability and interoperability.
Horizontal Network Chain Collaboration (“HNCC”) is a competitive strategy that aims at exponentially enriching and leveraging the available resources to the participants of two or more platforms that operate in the same ecosystem by linking their network chains. The HNCC aims at enabling the collaboration between the same types of network effects by increasing the synergies between their building blocks (e.g., directionality, density, connectivity, etc.).
Vertical Network Chain Collaboration (“VNCC”) is a competitive strategy that aims at exponentially enriching and leveraging the available resources to the participants of two or more platforms that operate in different ecosystem by linking their network chains. The VNCC aims at enabling the collaboration between different types of network effects by increasing the synergies between their building blocks (e.g., directionality, density, connectivity, etc.)
Both types of collaboration (horizontal and vertical) can be:
- Forward Collaboration — a collaboration that aims at enriching the totality of user experiences “demand side” by harmonizing the relevant dimensions of two or more network chains
- Backward Collaboration — a collaboration that aims at leveraging the potential of a new creation, leveraging the summation of available resources to the supply side.
In one of my previous posts, I elaborated on the merit of collaboration between Amazon and Twitter. To me, Amazon can help me in finding and buying the book I want, while Twitter, on the other hand, can allow me to communicate with the author of the book. Twitter takes us directly to the source, to the core.
So, if Amazon wants to enhance the experience of its users (book purchasers), they can collaborate with Twitter to bridge the gap between authors and readers in a vibrant social context. Network chain collaboration can unlock new demand and new supply, as well as create new markets.
But how we can achieve collaboration? Thanks to Prof. Thales, his decoupling theory ignited my curiosity to think of collaboration as a process of de-linking and re-linking the characteristics of different network chains.
In his book Prof. Thales mentioned three waves of digital disruption:
1- Unbundling (at the product level)
2- Disintermediation (within the supply chain)
3- Decoupling (customers activities)
Humbly, I would like to draw attention to the possibility of the emergence of a fourth wave, which is collaborative in its core “De/Re-linking.”
If incumbents lost customers via disruptive innovation as theorized by Prof. Clayton, and lost customers’ activity via decoupling as theorized by Prof. Thales, then I would like to argue that platforms can win participants via De/Re-linking by leveraging the totality of their experiences.
The building blocks underlying the above argument is that unlike the disruptive innovation which looks at the supply side, and the decoupling which looks at the demand side, the de/re-linking looks at the collective behavior of both sides by reexamining their interaction (in real-time) within the network chain.
In summary, I can say that the growth in the network chain proliferates incommensurately to the level of integrations with the platform’s value chain, other value chains, as well as to the degree of collaboration with other network chains.
As per James advise, I will keep pushing this boundary. Your feedback will be highly appreciated. See you soon.
You are most welcome to connect via https://twitter.com/KhalidiAlmadani or https://www.linkedin.com/in/khalid-al-madani-2009a1160/
