The 6th Force — Network Power
Market dynamics are changing in our increasingly networked world
Overview of the 5 forces
In a previous post I laid out the traditional Market 5 Forces model that Michael Porter made famous with his study of competitive strategy. In my work I have felt there are missing elements to the 5 Forces model to capture the realities of networked businesses, which increasingly is becoming every business. This trend is similar and driven in part to the fact that every business is a digital business, which Accenture correctly coined a few years ago.
Michael Porter did provide a revision to his model a few years ago that added complementary products as a 6th force. This model though has not caught on broadly. Complementary products captures some of the elements of a networked world, but misses the power of a network that sometimes can be a complementary product, but often times is more about amplifying power across other factors.
What is missing?
Network strength.
In today’s market a critical success factor is the network you build around your company and how you enable customers, suppliers, and partners to engage together using your company as the glue. If you have a competitor with strong network strength it will be very difficult to enter the market (see Microsoft Bing’s $6bn write down to try and beat Google). If you see a market that is not yet locked up, but a network play is available then that is extremely attractive, but will require good execution and pace (hello OODA loop).
Here is a good article from NfX on various network effects listed in the graphic below and a slideshare from A16Z that talk about the various types of network effects that exist.
A few years ago there was a great post by Techcrunch that talked about the shift from social networks to market networks. One of the critical elements in either network is the connections that exists between various parties in the ecosystem. Angellist is a great example of this given that you have a network made up of a variety of stakeholders around a startup that are required to make it successful. In the traditional 5 forces model you’d look at each group individually to understand their buyer / supplier power. In a Network Strength model you look at the connection between each of the individuals.
At Porch it is not uncommon that we have a partner that is a competitor, supplier and buyer. In the traditional “5 Forces” model each of these interactions would be evaluated independently. Though as we look forward I believe that you need a system view of competitive strategy.
- Partners provide the complementary products and services to enhance the value proposition
- Customers provide user generated content in the form of reviews and behavioral data that strengthen our product
- Suppliers provide content to strengthen their profile on the site to increase their conversion rate, that in turn strengthens our position in Google
- Google is a great example of a competitor that is also a partner — we work with Google in many ways through SEO, SEM and partnerships
- Lowe’s is another example of a multi-dimensional partner that adds immensely to our network strength. They are an investor, supplier of materials and services, buyer of services, competitor in some service categories.
How do you measure network strength?
For each factor in the 5 forces model there are a few key attributes. Network Power is no different and I propose that the most important are the following with examples to prove / disprove my hypothesis:
1. Company / Product is stronger as it gets bigger:
Social networks are the clearest example on this. Take LinkedIn which grew through memberships. As LinkedIn started to get broader adoption the numbers grew exponentially as the utility of the product became much stronger.
2. Strength and Extent of Connections
Another company that has created extreme Network Power is Google who has 80% share of the US market. As the dominant search engine almost every company designs their online presence around Google search algorithms. There are over 4.5bn pages online competing for attention. To get attention companies work with other companies to reference links and with Google to crawl their site to score it. The number of links within a page and with other sites is a critical factor that drives up a company’s site in Google. This has spawned an industry of consultants and products to help companies figure out the black box that is search ranking. This creates even more connections both through the online interactions, but offline through individuals working together to create a tighter web.
3. Accelerated growth:
Network models go through an accelerated growth period due to non-linear growth associated with networks. You can see this through engagement metrics of the product. For Airbnb this was the number of guests, LinkedIn was # of users and Zuora was # of transactions processed.
Airbnb saw explosive network effect growth after they started to get enough liquidity in their market. The graph below shows how they created
Zuora, which is a SaaS product for managing subscription payments, recently filed their S1 to IPO. The rise of subscription products is largely drive by network effects, thus as the supplier to these businesses their model should reflect some of the results. As reflected in the below you can clearly see the results of the network effect in their growth rates, especially on the right where the growth rates are continuing to increase.
The Failures
The above examples make it seem easy enough to just create network power and strive in your industry. For each of the above examples there is a graveyard of companies that were not able to achieve network power, including MySpace, BlackBerry, TBD. I want to go into more detail on another couple examples that have been heavily documented around the computer to smartphone era.
Apple’s struggles with the desktop era
The first story is how Apple who was an early leader in personal computing failed to be the market leader. The key drivers that propelled Windows ahead of Apple are the following:
- IBM had a strong relationship with corporations and despite the name being Personal Computers, the vast majority of computers sold were into the enterprise
- The cost for developers to build apps for both Windows and Mac was nearly 2x the cost to build just for Windows, though only unlocked marginally more market share
- Windows was available from more companies that fueled competition and drove down computer prices
- Developers went after the most number of users and created more Windows apps, which in turn created more competition and lowered prices of apps which increased usefulness of the computer
Apple was lagging within five years after the first Mac was released and ten years in the war was won by Windows with nearly 90% share of new shipments. This lock in remained in place until the internet and arguably until Google was launched.
Microsoft’s failed attempt at mobile
Microsoft in the early 2000’s was the market leader in computing with ~90% of computers using Windows. As mobile phones started to take off in the late 90’s and early 2000’s Microsoft was one of the early companies to have a smartphone operating system. Microsoft was in position to control the next wave of computing with their market share increasing to 40% in 2007. After the iPhone was launched in June 2007 this all changed and especially the announcement of the iPhone app store in March 2008.
The growth of Windows Mobile had largely been through their operating system and they had not locked up any network power.
The second round of punches came when Google launched Android in 2008 with a different business model that made Android free to license for manufacturers vs. having to pay Microsoft a licensing fee.
The keys to the failure for Microsoft were:
- There was minimal differentiation in the operating system to justify Microsoft over Apple or Android phones
- They didn’t get into the application game until too late and faced the same challenge that Apple had previously with developers not having capacity to develop for Apple, Android and Microsoft
- The licensing model for Windows failed against Android’s free version.
Ultimately both examples above show that Network Power was critical. Apple and Microsoft both failed to create pathways to integrate the networks around their business to create strong ecosystems. This is the second sign I identified above around the strength of the network connections.
In Closing
The above is the start of synthesizing my frameworks around network power and will be something I use more frequently as I look at the power of a solution and how it helps to create network effects. To recap the three signs that a company has network power I called out above are:
- Product gets stronger as more users are added
(examples the telephone, LinkedIn, Facebook) - Strength and extent of network connections
(e.g. Google’s search algorithm impact on linking strategies) - Acceleration in the growth curve
(vs. traditional model where growth rates come down y/y)
Clearly companies that have access and are able to leverage network effects have proven to be highly successful. It is also clearly not a simple and straightforward path to being the next LinkedIn, Google, Facebook or Airbnb. Though if you realize the market environment you operate within and the network around your business you will be more likely to build a strategy that integrates the network and creates the basis for network power.
