# 6 A Strategy for Each Swimlane: Where to Invest in Network Effects

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Jun 28, 20233 min read

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# 6 A Strategy for Each Swimlane: Where to Invest in Network Effects

In the ever-evolving landscape of technology and innovation, it's crucial for companies to stay ahead of the curve and invest in the right areas to capture the most value. Two key factors that can drive immense value creation are personalization and network effects. Let's explore how these factors play a role in shaping successful strategies for companies.

Netflix, the popular streaming service, understood the importance of personalization early on. They realized that the more movies a member rated, the more personalized their movie choices would become. By analyzing data about each movie and leveraging matching algorithms, Netflix could connect members with personalized recommendations. It took time for Netflix to prove that personalization improved retention, but steady improvements in proxy metrics signaled that they were on the right track. This example highlights the power of personalization in enhancing user experience and driving customer loyalty.

On the other hand, hardware platforms often kick off waves of value creation, but it's the applications built on top of them that capture the majority of the value. Take companies like Apple, Microsoft, and Amazon as examples. While they were ahead of the curve when new hardware platforms arrived, the financial value created by these innovations did not stay within the hardware companies. Instead, it was the applications that ran on these platforms that captured the most value.

These applications, known as Platform Applications, are the key to unlocking markets and driving innovation. They are the software that runs on top of new tech platforms, and they capture the most valuable needs first. In each hardware cycle, there is a unique type of Main Application that is 10 times more valuable than a standard Main Application. These Main Applications become platforms themselves, creating their own ecosystem of value creation. The magic behind Platform Applications lies in their ability to leverage network effects.

Network effects are what allow Platform Applications to grow rapidly and become dominant. When more users join a platform, the value of the platform increases for all users. This creates a positive feedback loop, attracting more users and further increasing the value. Facebook and Google are prime examples of dominant Platform Applications that have harnessed the power of network effects. They are the guards at the gate, dominating not only the Internet platform but also the smartphone platform.

So, what can companies learn from these insights? Firstly, it's important to look for remaining Platform Applications or Main Applications on mobile or the Internet. These are areas where there is still untapped potential for value creation. Secondly, companies should pursue core innovation in laggard verticals such as enterprise, financial services, healthcare, and government. These vertical markets often lag behind in terms of innovation and present opportunities for disruption. Lastly, it's essential to keep an eye on emerging hardware platforms. Multiple new platforms are emerging simultaneously, and finding Platform Applications on these platforms can lead to tremendous growth.

In conclusion, both personalization and network effects are crucial factors to consider when developing strategies for success. Companies that prioritize personalization and leverage network effects through Platform Applications have the potential to capture significant value. By understanding the power of these factors and implementing actionable steps, companies can stay ahead of the curve and thrive in the ever-changing tech landscape.

Actionable advice:

  • 1. Invest in personalization: Focus on providing a highly personalized experience to your customers. By understanding their preferences and tailoring your offerings to their needs, you can enhance customer loyalty and retention.
  • 2. Identify untapped markets: Look for laggard verticals where innovation has not yet caught up. These markets present opportunities for disruption and value creation.
  • 3. Embrace emerging hardware platforms: Keep an eye on new hardware platforms and identify potential Platform Applications that can leverage network effects. By being an early adopter on these platforms, you can capture significant value.

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