MANAGING NETWORK EFFECTS IN HIGH TECH MARKETS

Jean-Philippe Bonardi, Richard Ivey School of BusinessUniversity of Western Ontario, and Rodolphe Durand, EM-Lyon

1/01/2005
(Original Publish Date: 2003)

Many high-tech markets are characterized by network effects, situations where consumers make their decision not simply based on the core product, but also on the quality and availability of its complements. These network effects enable the creation of a technological standard, which can lead to a strong competitive position for the core product manufacturer. There is no guarantee, however, that this position can be sustained over time. Managers must therefore focus on further developments of the core product relative and/or its complements. We argue here that the best way to stimulate further developments is to reposition the core product in order to strengthen network effects. A three-phase framework can determine how to make an investment in the future generation of a product for which complements are crucial. First, we provide a matrix to evaluate whether the existing technology presents some untapped potential in terms of network effects; second, we analyze how to reposition the core product; third, we suggest some accompanying measures to efficiently manage this repositioning.