Building a stronger business through network effects & collaboration
Network effects are becoming increasingly important for businesses; especially those involved in technology, as by understanding them you can not only build better products but also a better business.
A network effect occurs when a product or service becomes more valuable to its users as more people use it. For example, when people first started using telephones they had little value as there were very few other people who you could call. As the number of people who had telephones increased, then so did the number of people with whom you could communicate – this making telephones more valuable to those who had them. More recent examples of this include communication and social media applications such as Skype, Facebook, Linked-In etcetera.
Telephones, of course, don’t perform better as you add more of them to a network. But people and institutions do. And that’s where the concept of network effects gets more interesting – when you apply it to how people might perform better.
Example: World of Warcraft
The online role-playing game World of Warcraft (WoW) provides an intriguing example. Performance in the game is measured by experience points, which are awarded to players as they successfully address progressively more difficult challenges. It takes roughly 150 hours of accumulated game play to earn the first 2 million experience points but players on average are able to earn another 8 million experience points in the next 150 hours of accumulated game play. Even though within the game, experience points become more difficult to acquire as you advance, World of Warcraft players are improving their performance four times faster as they continue to play the game.
How? Most improve their performance by leveraging a broad set of discussion forums, wikis, databases, and instructional videos that exist outside the game. Here the players share experiences, tell stories, celebrate (and analyze) prodigious in-game achievements, and explore innovative approaches to addressing the challenges at hand. This “knowledge economy” is impressively wide and deep.
The more players participate and interact with WoW’s knowledge economy, the more valuable its resources become, and the faster players increase their rate of performance improvement. Said more generally, the more participants – and interactions between those participants – you add to a carefully designed and nurtured environment, the more the rate of performance improvement goes up. This is the “collaboration curve.”
Collaboration curves hold the potential to mobilize larger and more diverse groups of participants to innovate and create new value – they could be users of your offerings, or people from different groups who can contribute (for example employees, suppliers, customers, competitors, regulators etcetera). In so doing this can help you improve your level of performance. This is already seen in the development of open source software, product development through crowd-sourcing, new product launches through crowd-funding etcetera.
So look at how you can create and leverage network effects for your product offerings, and in doing so create collaborative effects by connecting and leveraging different people, groups and stakeholders around your offerings. In doing this you generate greater levels of experience, better networks, greater engagement, and develop more knowledge – all of which can be used to create value and realize the profit.
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