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Chapter 7

Business Strategy: Innovation, Entrepreneurship, and Platforms

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.

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Learning Objectives

Outline the four-step innovation process from idea to imitation.

Apply strategic management concepts to entrepreneurship and innovation.

Describe the competitive implications of different stages in the industry life cycle.

Derive strategic implications of the crossing-the-chasm framework.

Categorize different types of innovations in the markets-and-technology framework.

Explain why and how platform businesses can outperform pipeline businesses.

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The AFI Strategy Framework

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Innovation Is a Competitive Weapon

Innovation can create and destroy value.

Innovation often comes in waves:

Many firms dominated an early wave of innovation and are challenged by the next wave.

Traditional networks vs. cable providers.

Cable providers vs. streaming content.

Typewriters to PC’s to mobile devices.

“Creative destruction” – Joseph Schumpeter

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Initial innovations are foundational for other rapid innovation.

Disruption video: https://hbr.org/video/2688242135001/the-explainer-disruptive-innovation

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Case Study: Netflix - Disrupter of Cable TV

Founded in 1997 by Reed Hastings with online rentals of DVD’s via the mail, (because Blockbuster pissed him off over $40 in late fees).

1999: moved to unlimited DVD rental for one monthly rate

2000 approached BB to become their online partner, BB declined

2002 Netflix turned profitable, went public

2004 4M subscribers, (BB started online, but lost 75% of market share, Bk by 2010)

2007: Streaming content over the internet,12M subscribers

2010: Not viewed as a threat by TV, “rerun TV”…Hulu

2013: Started streaming online original content: (House of Card, Orange is the New Black, The Crown)

2017: 100M worldwide subscribers, $9B in Revenue, $60B Market Cap, Stock up 4200%

2020: Market Cap $230B, 73M US subscribers, 167M worldwide, (Covid related?)

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Case Study: Netflix - Disrupter of Cable TV

How did they disrupt?

Delivery of content streamed online, bypassing networks/cable, less $$$

Access created “binge watching”, create demand and buzz, older movies/TV shows

Management via algorithms, no “pilots” needed

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Users build movie queues, which allowed future demand.

Personalized recommendation engine allows for “older” content to be requested, lowering demand on new, but providing fresh revenues to other studios, (until everyone else wants into the game).

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Case Study: vs.

Disney enters streaming services with intro price of $6.99/mo, undercutting Netflix, (free for VzW customers).

Removes Disney content from Netflix, (Disney movie library, Marvel, Star Wars, etc…)

Adds 20th Century Fox library, (Simpsons) and own Hulu and ESPN

Disney+ has 60M subscribers and doing well…

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Aug 2020 - Disney stock soared as much as 10% on Wednesday as investors cheered strong growth at Disney Plus last quarter, boosting the entertainment giant's market cap by about $21 billion to $234 billion. Theme parks crashing, but streaming huge. Disney+ has 60M subscribers.

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Cable vs. Streaming, where is the future?

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Small group discussion

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Accelerating Speed of Technological Change

Exhibit 7.1

Source:. Depiction of data from the U.S. Census Bureau, the Consumer Electronics Association, Forbes, and the National Cable and Telecommunications Association.

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This image shows how many years it took for different technological innovations to reach 50 percent of the U.S. population (either through ownership or usage). For example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.

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The Four I’s: Idea, Invention, Innovation, and Imitation

Exhibit 7.2

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Idea, Invention, Innovation and Imitation

Idea:

Abstract concepts or research findings.

Invention:

Transformation of an idea into a product.

The modification and recombination of products.

Innovation:

Commercialization of an invention.

Imitation:

Copying a successful innovation.

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Idea: basic research to discover new knowledge. Wireless technology today was first talked about in WWII with Albert Einstein and actress Heddy Lamar

Invention: Patents are for useful, novel and non-obvious inventions, Intellectual Property

Innovation: this is where entrepreneurs come into play. They bring the products to life. Think Shark Tank. Quirky.

Imitation: If your product is successful, others will copy. (scholarpedia is competitor to Wiki, but strict quality control by scholars), Samsung to Apple.

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What is Innovation?

A Novel and Useful Idea That Is Successfully Implemented

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Entrepreneurs

The process by which change agents undertake economic risk to innovate.

Create new products, processes, and organizations.

Create value for society.

Commercialize ideas and inventions.

Reed Hastings: Netflix.

Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal.

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Reed Hastings – Netflix.

Volunteered in the Peace Corps for 2 years.

Educated at Stanford where he first learned about the entrepreneurial model, net worth is now $1B.

Elon Musk – Tesla Motors, Solar City, SpaceX, PayPal.

An engineer and serial entrepreneur.

Deep passion to solve environmental, social, and economic challenges.

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Strategic and Social Entrepreneurship

Strategic Entrepreneurship:

Pursuit of innovation using strategic tools and concepts.

Combining entrepreneurial actions.

Creating new opportunities.

Exploiting existing opportunities.

Social Entrepreneurship:

The pursuit of social goals while creating profitable businesses.

Evaluate performance by financial, ecological and social contribution metrics.

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Jimmy Wales: goal is to provide knowledge on a very large scale.

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The Industry Lifecycle

Over time:

The number and size of competitors change.

Different types of consumers enter the market.

The supply and demand sides of the market change.

Different competencies are needed for the firm to perform well.

The stages:

Introduction.

Growth.

Shakeout.

Maturity.

Decline.

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Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies

Exhibit 7.4

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Introduction Stage

Core competency: research and development.

Necessary to create a product category that will attract customers.

Can be very capital-intensive (high costs).

Barriers to entry are high.

Strategic objective: market acceptance & future growth.

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The emphasis is on uniqueness and performance in this stage. The initial market size is small, growth is slow, and barriers to entry are high.

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Leveraging Network Effects to Drive Demand: Apple’s iPhone

Network effects: The more people use the product or service, the more the demand

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Increased value creation is positively related to demand, which in turn increases the installed base, meaning the number of people using an iPhone. As the installed base of iPhone users further increases, this incentivizes software developers to write even more apps. Making apps widely available strengthened Apple’s position in the smartphone industry. Based on positive feedback loops, a virtuous cycle emerges where one factor positively reinforces another.

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Growth Stage

Demand increases rapidly.

First-time buyers rush to purchase.

Proof of concept has been demonstrated.

Product / service standards emerge.

A common set of features and design choices.

Can emerge from competition or imposed by government or agencies.

Product innovation:

New / recombined aspects of a product.

Process innovation:

New ways to produce a product.

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Core competencies of focus during this stage are in manufacturing and marketing.

Process innovations are made possible through advances such as the internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.

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Product and Process Innovation throughout an Industry Life Cycle

Exhibit 7.7

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Shakeout Stage

The rate of growth declines.

Firms begin to intensely compete.

Weaker firms forced out.

Industry consolidation.

Only the strongest competitors survive.

Price is an important competitive weapon.

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The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders. Key success factors at this stage are the manufacturing and process engineering capabilities that can be used to drive costs down. The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines.

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Maturity Stage

Only a few large firms remain.

They enjoy economies of scale.

Process innovation has reached a maximum.

Demand: replacement or repeat purchases.

Market has reached maximum size.

Industry growth is zero or negative.

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The domestic airline industry has been in the maturity stage for a long time. The large number of bankruptcies as well as the wave of mega-mergers, such as those of Delta and Northwest, United and Continental, and American Airlines and US Airways, are a consequence of low or zero growth in a mature market characterized by significant excess capacity.

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Decline Stage

Demand falls rapidly.

Innovation efforts cease.

If a breakthrough emerges, it leads to a new industry or resets the life cycle.

Strong pressure on prices.

Four strategic options to pursue:

Exit: bankruptcy / liquidation.

Harvest: reduce further investments.

Maintain: support at a given level.

Consolidate: buy rivals.

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Exit. Some firms are forced to exit the industry by bankruptcy or liquidation.

Harvest. In pursuing a harvest strategy, the firm reduces investments in product support and allocates only a minimum of human and other resources.

Maintain. Philip Morris, on the other hand, is following a maintain strategy with its Marlboro brand, continuing to support marketing efforts at a given level despite the fact that U.S. cigarette consumption has been declining.

Consolidate. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals.

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The Crossing-the-Chasm Framework

Exhibit 7.8

Source: Adapted from G.A. Moore (1991), Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (New York: HarperCollins), 17.

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There is a big gulf or chasm into which companies and their innovations frequently fall. Only companies that recognize these differences and are able to apply the appropriate competencies at each stage of the industry life cycle will have a chance to transition successfully from stage to stage.

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Technology Enthusiasts

Enter the market during the introductory stage.

Smallest market segment, 2.5% of the total market potential.

Have an engineering mind.

Proactively pursue new technology.

Enjoy using beta versions.

Tinker with product imperfections.

Provide free feedback and suggestions.

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A recent example of an innovation that appeals to technology enthusiasts is Google Glass, a mobile computer that is worn like a pair of regular glasses. Instead of a lens, one side displays a small, high-definition computer screen. Google Glass allows the wearer to use the Internet and smartphone-like application. However, the company was never able to close the gap between technology enthusiasts (who rushed to sign up for testing the glasses) and early adopters.

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Early Adopters

Enter the market during the growth stage.

13.5% of the total market potential.

Demand is driven by imagination and creativity.

Ask themselves, “What can this new product do for me or my business?”

To capture these customers:

Directly communicate the product’s potential.

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For instance, early adopters are the people that put down thousands of dollars in deposits to reserve a new Tesla Model S or Model X when first introduced, without having been able to test-drive the vehicle or even seen it other than on the internet. They then often needed to wait a significant amount of time before receiving the new vehicle.

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Early Majority

Enter the market during the shakeout stage.

34% of the total market potential.

Decision criteria, a strong sense of practicality.

“What Can This Do For Me?”

Weigh the benefits and costs carefully.

Rely on endorsements of others.

This group is key to catching the growth wave.

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Fisker Automotive, a California-based designer and manufacturer of premium plug-in hybrid vehicles, fell into the chasm because it was unable to transition to early adopters, let alone the mass market. Between its founding in 2007 and 2012, Fisker sold some 1,800 of its Karma model, a $100K sports car, to technology enthusiasts. It was unable, however, to follow up with a lower-cost model to attract the early adopters into the market. In addition, technology and reliability issues for the Karma could not be overcome. By 2013, Fisker had crashed into a chasm, filing for bankruptcy. The assets of Fisker Automotive were purchased by Wanxiang, a Chinese auto parts maker.

In contrast, Tesla Motors, the maker of all-electric vehicles, and a fierce rival of Fisker at one time, was able to overcome some of the early chasms.

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Late Majority

Enter the market during the maturity stage.

34% of the total market potential.

Not as confident in their ability to master the technology:

Wait until standards have emerged.

Do not like uncertainty.

Represent the majority of the market.

Buy from well-established firms with a strong brand.

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Laggards

Enter the market during the decline stage.

16% of total market potential.

Adopt a new product only if necessary (reluctant).

Generally don’t want new technology.

Typically not pursued as future customers.

Demand is small.

Early and late majority are at this time moving on to different products and services.

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Crossing the Chasm: The Mobile Phone Industry

Exhibit 7.9

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Crossing the Chasm Illustrated

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Dancing man Sasquatch 2009

No voiceover version https://www.youtube.com/watch?v=GA8z7f7a2Pk&t=114s

:55 Tech Enthusiasts

1:15 Early Adopters

1:35 CHASM JUMPED Early Majority

2:00 Late Majority

2:40 Laggards, (some people may never join)

Dancing man - “Crossing the Chasm in Consumer Markets: A Visual Example by Geoffrey Moore” is an engaging and humorous 4 minute video to illustrate the concept of the industry life cycle and crossing the chasm. The video link is here: https://www.youtube.com/watch?v=izP5n1SBEaI

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Types of Innovation: Combining Markets and Technologies

Exhibit 7.11

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Incremental: Established knowledge base with steady improvement of a product or service. Incumbent firms…Examples: Gillette now 6-bladed razors, Intel 386, 486, x86 processors

Radical: Novel methods or materials targeting new markets with new technology. New firms. …Examples: Mass production, (Ford Model T), Genetic engineering

Architectural: Reconfigure known components to create new markets…Example: Canon user-friendly copiers vs. Xerox Pro Svcs , GPS to handheld consumer devices like Garmin

Disruptive: Novel technologies serving existing markets from bottom up. Captures current customers typically with initially lower cost & performance…Examples: Uber, Japanese autos, Digital photography, Dollar shave club. Stealthy and sometimes you need to disrupt yourself,

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Incremental vs. Radical Innovation

Incremental Innovation:

Builds on established knowledge.

Results from steady improvement.

Radical Innovation:

Novel methods & materials.

Entirely new knowledge base or recombination of existing knowledge.

Targets new markets and technology.

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In 1903, entrepreneur King C. Gillette invented and began selling the safety razor with a disposable blade. This radical innovation launched the Gillette Co. (now a brand of Procter & Gamble). To sustain its competitive advantage, Gillette not only made sure that its razors were inexpensive and widely available by introducing the “razor and razor blade” business model, but also continually improved its blades.

In a classic example of a string of incremental innovations, Gillette kept adding an additional blade with each new version of its razor until the number had gone from one to six! Though this innovation strategy seems predictable, it worked. Gillette’s newest razor, the Fusion ProGlide with Flexball technology, a razor handle that features a swiveling ball hinge, costs $11.49 (and $12.59 for a battery-operated one) per razor!

Examples of radical innovation: the iPhone, the Ford Model T, the x-ray machine, the airplane, genetic engineering, and decoding of the human genome.

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Why Incumbent Firms Tend to Focus on Incremental Innovation

Economic Incentives:

They must defend their position.

Organizational Inertia:

They have formalized processes and structures.

Innovation Ecosystem:

They rely on certain suppliers, buyers, complementors.

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Iphone is both radical and now incremental

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Architectural vs. Disruptive Innovation

Architectural Innovation:

Existing technology leveraged into a new market.

Known components, existing technology, used in a novel way.

Disruptive Innovation:

Leverages new technologies in existing markets.

New product / process meets existing customer needs.

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Examples of Disruptive Innovation include digital photography (which has improved over time to result in higher definition pictures, and has largely replaced film photography) and laptops, (which disrupted desktops…although now tablets and large screen phones are disrupting laptops).

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How to Respond to Disruptive Innovation

Continue to innovate to stay ahead of the competition.

Guard against disruptive innovation by protecting the low end of the market.

Disrupt yourself rather than wait for others to disrupt you.

“Reverse innovation”

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Reverse Innovation: An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation. Apple is xlnt at this process. The next thing.

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Pipeline vs. Platform Businesses

Platform Business:

Enables interaction between producers and consumers.

Its overarching purpose is to enable matches among users.

Provides infrastructure and sets governance conditions.

Pipeline Business:

Linear transformation through the value chain.

Research and development, then design, then manufacture, then sell.

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The five most valuable companies globally (Apple, Alphabet, Microsoft, Amazon, and Facebook) all run platform business models.

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Advantages of the Platform Business Model

They scale more efficiently by eliminating gatekeepers.

They unlock new sources of value creation and supply.

They benefit from community feedback.

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New sources of value creation and supply—To grow, traditional competitors such as Marriott or Hilton would need to add additional rooms to their existing stock. To add new hotel room inventory to their chains, they would need to find suitable real estate, develop and build a new hotel, furnish all the rooms, and hire and train staff to run the new hotel. This often takes years, not to mention the multimillion-dollar upfront investments required and the risks involved. In contrast, Airbnb faces no such constraints because it does not own any real estate, nor does it manage any hotels. Just like Marriott or Hilton, however, it uses sophisticated pricing and booking systems to allow guests to find a large variety of rooms pretty much anywhere in the world to suit their needs.

Community feedback: TripAdvisor, a travel website, derives significant value from the large amount of quality reviews (including pictures) by its users of hotels, restaurants, and so on. This enables TripAdvisor to consummate more effective matches between hotels and guests via its website, thus creating more value for all participants.

Network effects: Growing its user base is critical for Netflix to sustain its competitive advantage. Netflix has been hugely successful in attracting new users: As of 2017 it had some 95 million subscribers worldwide. Yet, while providing a large selection of high-quality streaming content is a necessity of the Netflix business model, this element can and has been easily duplicated by others such as Amazon, Hulu, and premium services on Google’s YouTube. To lock in its large installed base of users, however, Netflix has begun producing and distributing original content such as the hugely popular shows House of Cards and Orange Is the New Black. To sustain its competitive advantage going forward, Netflix needs to rely on its core competencies, including its proprietary recommendation engine, data-driven content investments, and network infrastructure management.

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The Players in a Platform Ecosystem

Exhibit 7.13

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From a value chain perspective, producers create or make available a product or service that consumers use. The owner of the platform controls the platform IP address and controls who may participate and in what ways. The providers offer the interfaces for the platform, enabling its accessibility online.

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Netflix Business Model: Leveraging Network Effects to Drive Demand

Network effect: a phenomenon whereby a product or service gains additional value as more people use it.

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As Netflix acquires additional streaming content, it increases the value of its subscription service to customers, resulting in more people signing up. With more customers, Netflix could then afford to provide more and higher-quality content, further increasing the value of the subscription to its users. This created a virtuous cycle that increased the value of a Netflix subscription as more subscribers signed up.

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Uber’s Business Model: Leveraging Network Effects to Increase Demand

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Uber provides incentives for drivers to sign up (such as extending credit so that potential drivers can purchase vehicles) and also charges lower than market rates for its rides. As more and more drivers sign up in each city and thus coverage density rises accordingly, the service becomes more convenient. This drives more demand for its services as more riders choose Uber, which in turn brings in more drivers.

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Uber’s Network Effects with Feedback Loop

Exhibit 7.16

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To entice more drivers to work during this time, Uber has to pay them more. Higher pay will bring more drivers onto the platform. Some users complain about surge pricing, but it allows Uber to match supply and demand in a dynamic fashion. As surge pricing kicks in, fewer people will demand rides, eventually bringing supply and demand back into an equilibrium.

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Breakout Room Exercise

You will be assigned a “problem area” for discussion.

Identify what you see as an issue in that area.

What sort of creative ideas can you come up with to solve that problem?.

Brainstorm within your group and make sure everyone gets an opportunity to share.

Present your solution to the class.

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Group exercise: Transportation, Higher Education, Politics, Foods, Electronic Devices, Social Media

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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

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