4. Economies of scale Incumbent firm's fixed cost/unit New entrant's firm's fixed cost/unit

5. How economies of scale create a barrier to entry Source; http://www.wikinvest.com/images/d/d5/CYCLEOFFIXEDCOSTS.jpg

11. Incumbency advantages accrue at each stage in the value creation process R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant

12. What is: “network effect”? “First mover advantage”?

13. Network Era Is Being Driven by the Interaction of Three 'Laws' more computing power More-valuable networks more communication bandwidth Moore’s Law Metcalfe’s Law Gilder’s Law Source: Prof. N. Venkatraman, Boston University Moore’s Law Metcalfe’s Law Gilder’s Law

14. Demand Side Increasing Returns Network Effect Network Effects occur when the benefits of a product increase to each user as the number of users increases. An example of network effects is telephone service. The more people who use them the more valuable they are to each user. The Web is an example with even more rapidly increasing DSIR than telephones or fax machines. Industries with Demand Side Increasing Returns have the characteristics of “winner takes all”. Many of the Web based industry exhibit this characteristic, example: eBay and more recently the social networking sites such as Facebook. Source: www.wikipedia.com

15. Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows

19. Strategies for competing in markets with DSIR http://web2.socialcomputingmagazine.com/ Strategies in the Web 2.0 world

21. Mnemonic 6 Incumbency advantages accrue at each stage in the value chain R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant

22. Mnemonic 7 Demand Side Increasing Returns: Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows