In markets with network effects, the value that users gain from platforms depends on the number of other users of the same type who join the same platform (direct network effects) or the number of users of a different type that join (cross-group network effects). Examples include social networks like Facebook or Google+, payment systems like PayPal or Visa, videogame systems like PlayStation 3 and Xbox 360, smartphone platforms like Apple's iPhone or Google's Android, etc. Users typically rely on the media, market reports, or word of mouth to form expectations about the total number of other users that join a given platform. However, most of the time these users are unable to calculate the effect of platforms' prices on adoption by other users. In other words, they do not take price into account when forming expectations. To analyze platform profits, Andrei Hagiu and Hanna Hałaburda model different degrees of user sophistication in forming price expectations in markets with network effects. They show that firms have different preferences regarding the average sophistication of their user base depending on market structure.
Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation in open systems is made possible by the modularity of the underlying product or process. Carliss Y. Baldwin and Joachim Henkel provide a systematic analysis of value appropriation in closed and open modular systems, with implications for managers. Modular systems are made up of components that are highly interdependent within sub-blocks, called modules, and largely independent across those sub-blocks. Despite the technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. The paper argues that strategies for capturing value in an open, modular system must be formulated at the module level. But modularity is not a single strategy: it is rather a large set of strategic options and related tactics that can be deployed in different ways depending on the interplay of countervailing forces.
Business success in one geographic location doesn't necessarily follow a company to a new setting. Professor Juan Alcácer discusses the importance of taking a long-term strategic view.
Published in 2011
In a new book, Understanding Michael Porter: The Essential Guide to Competition and Strategy, Joan Magretta distills Porter's core concepts and frameworks into a concise guide for business practitioners. In this excerpt, Porter discusses common strategy mistakes.
Harvard Business School professor Julio J. Rotemberg looks at what makes people decide to contribute to a charity. He focuses on two psychological factors: that people feel better about themselves when other people agree with them, and that people tend to be more charitable to other like-minded people.
Because of an organ shortage, hundreds or even thousands of people miss out on needed organ transplants each year. Business researchers at Harvard and MIT are rethinking how kidney transplants are allocated to give patients longer lives. An interview with professor Nikolaos Trichakis.
Running a financial organization, never easy to begin with, has quickly become one of the most difficult leadership challenges that an executive can undertake, requiring mastery of talent management, change management, and ethics. An interview with Professor Boris Groysberg, who teaches a new HBS Executive Education program on the subject with Professor Paul M. Healy.
Research in multi-sided platforms (MSPs) studies how payment networks bring together cardholders and retailers, shopping malls bring together shoppers and retailers, and video game systems bring together gamers and game developers. Andrei Hagiu and Julian Wright propose a new definition of MSPs that aims to capture what makes eBay, shopping malls, Yellow Pages directories, and dating websites different from "regular" firms such as a bakery or car dealership, as well as how to characterize less clear-cut examples. They also discuss the economic trade-offs that determine where organizations choose to place themselves on the continuum between MSPs and resellers, or between MSPs and input suppliers.
Insurance "reinsurers" underwrite much of the catastrophic risk insurance taken out to protect against huge disasters natural and man-made. Problem is, says Professor Kenneth A. Froot, reinsurers themselves are in danger of failing from a major catastrophic event.
Many well-known platforms regulate access and transactions even though excluded users would be willing to pay the "price of admission." For example, Apple routinely excludes certain application developers from its highly popular iPhone store, and videogame console manufacturers such as Microsoft, Sony, and Nintendo restrict access to a select set of game developers. Exclusion is oftentimes a necessary strategic instrument, which allows platforms to trade off the quantity versus the "quality" of users. Andrei Hagiu's paper builds a simple strategic model that formalizes the choices of possible exclusion policies and discusses the potential gains and losses of exclusion.
Two-sided platforms face a challenging coordination problem that consists of attracting both buyers and sellers. Participation by both depends on their expectations of participation on the other side of the market. To improve such coordination, many platforms provide "first-party content," such as games (e.g. Microsoft's Halo on Xbox), objective search results (Google and Bing) or, in the case of Amazon and eBay, product information and payment systems. First-party content makes participation more attractive to one side (typically, users), independently of the presence of sellers. Importantly, first-party content may be either a complement or a substitute for third-party sellers' products. For instance, Halo is a substitute for games provided by Electronic Arts on the Xbox; on the other hand, the Xbox Live online playing system is a complement. Similarly, Amazon's shipping services complements its third-party sellers' offerings, but the products Amazon sells under its own name compete with them. Professors Hagiu and Spulber examine the incentives that two-sided platforms have to invest in first-party content in order to coordinate adoption by both sides. The authors show that the incentives for firms to use first-party content depend crucially on the nature of buyers' and sellers' expectations and the relationship between first-party content and third-party seller participation (complements or substitutes).
Associate Professors Lauren H. Cohen and Christopher J. Malloy study how social connections affect important decisions and, ultimately, how those connections help shape the economy. Their research shows that it's possible to make better stock picks simply by knowing whether two industry players went to the same college or university. What's more, knowing whether two congressional members share an alma mater can help predict the outcome of pending legislation on the Senate floor.
After the outbreak of World War 1, management of political risk became a central concern for firms, especially those operating internationally. These risks were on many levels, from expropriation to exchange controls and other economic policies. German firms, which had flourished during the second industrial revolution of the late nineteenth century, and enthusiastically expanded internationally, found themselves especially exposed to such risks. Focusing on one such firm, Beiersdorf, a German-based pharmaceutical and skin care company (and, during the Nazi years, a so-called Jewish business), the authors examine corporate strategies of political risk management during the twentieth century, especially the volatile years of Nazi Germany. The history of Beiersdorf highlights areas of managerial discretion. Faced by the worst of all worlds, the firm survived and was able, albeit at great cost, to rebuild its business.
Why might firms make operational decisions that purposefully do not maximize expected profits? This model looks at the question by developing scenarios using the example of inventory management in the face of an external investor. The research was conducted by Vishal Gaur of Cornell University, Richard Lai of the University of Pennsylvania, and Ananth Raman and William Schmidt of Harvard Business School.
Summing Up Jim Heskett's readers ponder the question of whether the virtues of adaptability in a chaotic world undermine an organization's ability to commit.
In marketing, the use of the customer lifetime value (CLV) metric encourages a focus on long-term customer relationships over short-term sales. This paper examines a situation in which a European bank introduced CLV data to its customer-facing employees, while still maintaining the incentives linked to short-term profitability; the goal was to discover whether and how these employees would modify their mortgage sales decisions. Research was conducted by Pablo Casas-Arce of Universitat Pompeu Fabra, and F. Asís Martínez-Jerez and V.G. Narayanan of Harvard Business School.
Economists love menus, which can be used to help understand people's choices. For example, do we prefer more choices (larger menu) or fewer (shorter menu)? But the menu itself has to be pre-selected. Research by David Goldreich (Rotman School of Management, University of Toronto) and Hanna Halaburda (Harvard Business School) focuses on the menu setter's decisions about what to include, and how large a menu to construct in the context of 401(k) plan choices.
How do you transform a 123-year-old cultural icon and prepare it for the digital world? Slowly, as a new case on the National Geographic Society by professor David Garvin demonstrates.
If time is money, as the old adage goes, then a CEO's schedule is especially important to a firm's financial success. This raises a fair question: What do CEOs do all day? To that end, researchers followed the activities of 94 CEOs in Italy over the course of a pre-specified week, enlisting the CEOs' personal assistants to track their bosses' activities with time-use diaries. Research was conducted by Raffaella Sadun of Harvard Business School, Luigi Guiso of the European University Institute, and Oriana Bandiera and Andrea Prat of the London School of Economics.
As kidney exchange moves from local networks to a national level, a new set of problems arises. One central issue, for example, is how individual hospitals can be motivated to participate. This paper by Itai Ashlagi (Sloan School of Management, MIT) and Alvin E. Roth (Harvard Business School) provides a theoretical framework to study and overcome the kinds of problems that can be anticipated.
