A Big Strategic Mistake Fast Growing Companies Make

Apr 11 2014, 1:55pm CDT | by

Disclosure: I own EBAY shares

Fast growing companies make a big strategic mistake — treating all customers alike — according to an article Hana Halaburda and Felix Oberholzer published in the April issue of the Harvard Business Review.

They rely heavily on “network effects,” the benefits associated with a larger and larger number of people joining the network. The larger the number of people using a product or service, the more valuable the product or service is to every user.

Network effects arise on the demand side of the market and allow companies to quickly reach a critical mass of consumers—the early majority—and cross the “tipping point.”

The problem is, however, that as networks grow in size, the distribution of benefits across members may be unequal, according to the authors. Some members may benefit a great deal while others very little or not at all. Worse, the network may be fractionalized, divided up in groups that benefit only if the network moves in a certain direction.

This means that a larger network may not necessarily bring higher benefits to each network group. And that may provide an opening to upstarts to grab a piece of the market from early movers who have been building a network in an emerging industry.

That was the case with eBay (NASDAQ:EBAY) and Taobao in China.

“When eBay first entered the Chinese market, e-commerce was in its infancy,” write the authors. “Thanks to strong network effects, eBay’s platform became an increasingly attractive place to buy tech products.”

“Taobao’s Chinese executives recognized that the company couldn’t compete head-on with e-Bay in the existing market. So instead they focused on an emerging segment of online auction customers—people on the hunt for clothing and consumer products. Although eBay had a leading position in terms of overall market share, its share of the new segment—which could come to dominate e-commerce in  China—was far less imposing. What’s more, eBay’s strong position with techies was no help at all in attracting fashion-focused customers, who were more interested in whether other fashionistas used the site.”

The bottom line: Focusing too much on growth can undermine the advantage you strive to achieve. That’s why you should try to better understand the differences across customers who drive your growth.


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