Mercalfe’s Law

HW1

1. Mercalfe’s Law

1. What are Metcalfe’s law and network effects?

According to Metcalfe’s law, the value of network increases with the number of already connected users. More users there are in your network increase the number of possible interconnections, and each user brings value to the existing community.

The main effect of this law is the network effect which means the value of a product, service or technology is an increasing function which variable is the number of other users who use it.

1. Provide one example for both direct network effects and for indirect network effects, respectively

Direct network effect: Wechat

Since the Tencent Group (Facebook, Instagram, Whatsapp included) has the largest community of users as an internet social network in the China, people value and use this social network and messaging app rather than others (Line, Whatsaap). Because of this, it is observed a formation of a natural monopoly where the new users all choose to go to the largest platform because of the community effect.

Indirect network effect: Android

Android, which is the leading operating system for smartphones with around 80% market share. We can say that Android has now the larger installed base. Because of its installed base, developers prefer to write software applications on Android OS. Due to the bigger number of applications available, more buyer choose Android has their smartphone operating system.

1. Click2Procure

1. If you were the manager of a Siemens local business unit, what might be some of the disadvantages of using the Click2procure system for your unit? How did Siemens solve this issue?

The main disadvantages are:

• Favourite local suppliers might not be part of the central purchasing list.
• Local units would have to give up their own purchasing process and forms and comply with the new processes.
• Local units would also lose the ability to negotiate most favoured terms.
• As a manager, there could also be a loss of negotiation power due to the centralization of this power in the hands of a few specialized buyers.

The solution found by Siemens was joint planning by a steering committee consisting of purchasing managers from the business groups.

1. If you were a manager of a manufacturing firm considering joining Click2procure, what are some of the concerns you might have about tightly integrating Click2procure with your back-end legacy ERP systems?

The main concerns I would have would be:

• The costs of integration, that means when or if I would break even on the investment if I integrated Click2Procure
• The costs of switching from one system to the other.

1. What are recommendations would you make to your senior management on how to address your concerns?

I would recommend the following actions:

• Do an estimation of all costs
• Do an pro and cons analysis
• Estimate the additional revenues as a result

1. Interactive Session: Technology

1. How is software adding value to automakers’ products?

It adds value because it improves the customer experience.

1. How are the automakers benefiting from software-enhanced cars? How are customers benefiting?

Automakers:

• Increase of sales
• Collect and aggregate data on user experience and quality problems
• Increase of car safety and reliability
• Improve brand image

Customers:

• Improve customer experience
• Auto piloted cars can reduce the number of road accidents thus increasing safety
• Less traffic by more efficient driving

1. What value chain activities are involved in enhancing cars with software?

Inbound logistic: Production of the car and design of the software system

Outbound logistic: Distribution of the car and software / Marketing of the cars and software

Additional services: Customer support, software maintenance/update

1. How much of a competitive advantage is software providing for automakers? Explain your answer

Since pursuing ever more sophisticated software solutions is an industry trend and is not only confined to one or two carmakers, it is actually not a competitive advantage to be following the trend but rather a survival matter because if companies don’t follow the trend they risk lagging behind and getting hurt on sales because of that. It could provide a competitive advantage if one software is more reliable than those of the competition or if a company pioneers the introductions of a new functionality.