Hi! Welcome to this lecture. Today we are going to talk about network effects and standards
and to some extent about modularity in product architectures. So, so far we have talked about
an innovation for itself, like the characteristics of an innovation and how likely is it to spread
because of these characteristics and so forth. But of course, the truth is, sometimes it
does not only depend on the one innovation itself, but also how many others use or depend
on this innovation. And this is where network effects come into play. So we are going to
devote this lecture to the topic of network effects and of course the whole topic of platform
economies and multi-sided markets builds upon this, but unfortunately we won't cover that as
part of this lecture. Okay, so we are first we are going to clarify what are network effects,
perhaps give some examples, talk about what are direct network effects, indirect network effects,
are network effects always positive or not, and then move on to standards and I will show
how these two topics basically are related to each other and then move on to modularity and
I'll show you how these belong together. So let's get started, academics love definitions. So let's
define things first. So we have network effects and we have network externalities and to be honest,
most people use these interchangeably, the media uses it interchangeably and even some
researchers use use it interchangeably. But if we are strict and we are strict, then we can
actually make a differentiation between a network effect and a network externality. Network effect
basically means that the value of a good or a service depends on how many others use that service
or product. So this is a network effect. Think, if you want to think of an example of the phone
network, which is okay useful if you have two people on the phone network, but if everybody is
connected to the phone network through mobile or fixed line, then the phone network or the phone
that I have is much more useful and I can drive a higher utility from it. That is a network effect.
By the way, the first phone book in Berlin contained 99 numbers and the Berlin people called it the
book of 99 fools because they thought how useful is that these 99 people know each other anyway and
can talk to each other. So not much value in having a phone network of 99 people. We have been Berlin.
Okay, so network externalities. First, let's clarify what is an externality. Externality is a term that
comes from economics. And externality is always when a third actor is somehow impacted by a
transaction between two other actors. So a transaction between two actors, whenever a third
actor that's not part of that direct transaction is impacted. And we know natural externalities,
for example, if a buyer and a seller produce goods and the seller pollutes in the environment,
then all everybody else living in that area is negatively impacted by the environmental damage
being done, despite not being part of the original transaction. So that is an example of network
externality. There's many other examples but and the distinction between a network effect and a
network externality. So network effect is kind of encompassing network externality. So it's it's
broader. And we speak strictly speaking only of a network externality, if the agents the customer
and the actors in that network actually benefit from the purchase by a future customer. So if
actually their value really goes up in the sense that they internalize some of that value. We'll
talk about this a little later when you talk about value creation and value capture. But think on
that. So if the value of the network itself grows by having more people on there, then it could be
that simply the platform owner captures that added value by being able to raise prices, for example,
and the agents, the customers basically don't benefit. Okay, I hope you have understood the
distinction between the network effect and network externality. Network effect is encompassing,
every externality is also in effect, but not the other way around. We speak strictly speaking of
network externalities, when the agents, the customers itself derive internalize some of
that additional value and benefit from that. How big is such a network effect or how it's now.
Basically, I want to show you kind of a nice rule of thumb that has been that Robert Metcalf has
come up with. And Robert Metcalf is one of the inventors of the internet. And this has come to
be or has been named Metcalf's law. He said if and this is for telecommunications networks like
internet cards that are put into people's computers. So if you double the amount of network cards, so
you connect the twice as many people, the cost will go up by the factor of two. But the number
of connections possible between those added nodes is growing much, much faster. It's growing
exponentially. No, it's actually not growing exponentially. It's proportional to the square
of its users. Because if you look at the formula on the slide, which you might recognize from high
school, this is the number of possible connections between n nodes. So and this is proportional to n
squared. So while the cost only goes up linearly, the benefits, the added connections goes up by the
square of of its users. So that is kind of one rule of thumb that shows how network can become
more and more valuable or becomes valuable faster than the cost go up. I hope I made myself clear
there. One thing that I would like to stress though is that network effects are real value
added. So they increase the value that I can derive from my phone, for example, they are not the same
as economies of scale, economies of scale also have something to do with the size of a network. For
example, if you build up a mobile phone operate a mobile phone operator that builds up its
infrastructure will be able to offer that cheaper, the more people join in because of economies of
scale. But this is not the same as network effects on a theoretically. Network effects are value
added economies of scales are costs saved. Okay, so we have given talked about what network effects
are. Think about more examples that of products or services that have now are exhibit network
effects. Think about that for a while. Okay, what have you come up with? Perhaps and probably
because the name network gives a hint social networks, Facebook. Everybody hates Facebook
that I know. And everybody, nearly everybody that I know uses Facebook, because it's so useful.
Why is it so useful? Because everybody is on Facebook. The bigger the network is,
the more people have joined and actively use Facebook, the more useful it can be for me as
a user. That is certainly an example of network effects. Basically, all instant messengers fall
into the same category, just like the phone network. The more people use WhatsApp, the more
valuable WhatsApp becomes. And the more am I punished because I'm not a WhatsApp user.
Example of that, we had the same basically back then with ICQ, Jabber, WhatsApp,
email, fax machines, all these communication networks basically. Everything where you
exchange data as well. So think Microsoft Office. Winword becomes more useful, the more people use
Winword because the people are able to exchange their files. And because of this,
I can be pretty sure that somebody else or hopefully somebody else can open the files
that I send them. I experienced that as a user of LibreOffice on a daily basis, because I'm
forced to use Microsoft Office more than I would like to use. But we don't only have to talk about
networks and software. Basically, auction platforms. All kinds of auction platforms
that bring together sellers and buyers exhibit network effects. The bigger such an auction
platform is, the more liquidity is on the market, the more offers you have, the better a market
price can be established. That's why eBay is able to charge more fees than other auction platforms.
That is why lots of stock exchanges, or a few stock exchanges, are so big. And we have many
small ones, because it's more useful or kind of they become available if they are big and
true market price is being established on these stock exchanges.
But there's also physical examples. So think of the railway, the width between railway tracks.
These used to be different in Europe and parts of Spain and in part are Spain and Portugal.
So Spain and Portugal had a little wider tracks. And so whenever you wanted to go from Frankfurt
to Lisbon by train, you had to change trains at the border and that caused some friction.
We would benefit, or all train users would benefit from other countries also adopting the
same technical standards. Of course, they could then travel without interruption and changing
trains from Frankfurt to Lisbon. Actually, since 1992, all the high speed railway tracks
have been adopted on the European standard rather than the Iberian Gorg.
We had the same thing with the width of the railways in the US, for example, where the north
used to have a different railway width than the south of the US and it took basically a civil war
to settle that. We'll have more examples of railways a bit later. Think about
electric plugs, where I would benefit if I could put in my hair dryer in every other
when I travel in any other electric outlet. But unfortunately, other countries like to have their
own electric systems. So I don't benefit from them joining basically the same technical standard.
And whenever you travel to Switzerland or the UK or the US, you will have to travel with a bunch
of adapters. Other examples are Blu-ray players. There was a standard war at some time between
HD, DVD and Blu-ray, which is the successor of the DVD. Well, basically, the more Blu-ray
players and the more Blu-ray discs are out there, the more I can benefit from my Blu-ray player that
is, for example, in my Sony PlayStation, because then I have a wider offering of movies that I can
watch. Okay, enough examples. I think you get the point. And especially in the platform economy,
think Uber, think Airbnb. I'm pretty sure you can come up with a whole bunch of other products
and services that exhibit network effects. So if we think about business models, then we can say
that network effects create additional value, right? So there's additional value creation,
there's the change, the value that we get out of these products and services has changed.
And if we think about who captures that added value, well, in case of network effects,
that's partially by the consumer, that's the externality, and partially captured by the provider
and owner. As I said, eBay is in the comfortable position to charge a higher fee than other auction
platforms. That is where value capture happens. Okay, let's think about other ways on how we can
distinguish network effects. We have direct network effects. They are also called the same side effects,
because in a two-sided market where you bring together different groups of customers,
then this affects the same group of customers. So the same group of actors. Think email. If I
have an email account, I can send and receive emails to everybody else with an email account.
We have the same group of customers. This is a direct network effect that I have.
Or even on auction platforms, there are direct effects. Because if I'm interested in, let's say,
e-scooters, I benefit from a healthy demand of e-scooters on eBay. Of course, there will then
also be a healthy supply of e-scooters on that platform. So I benefit if others on the same side
basically, if that is a large group. There's also indirect network effects. And these indirect
network effects are called cross-side effects. So when you bring together different customer groups
on one market or one platform, then the other group of customers benefits or has a changed
utility if the one side changes. So the buyer side on eBay is positive or has an increased
utility if there's more sellers on eBay. So adding more sellers to eBay gives benefit to customers
because they have a wider offering. Or if you think about job market platforms,
that job seekers benefit a lot from more job offer or more employers that offer jobs on that
online platform. So that's an example of indirect network effects.
Okay, we can even be more fine grained and distinguish network effects in a different way.
I just want to do that. Network effects can work on a global base. So it doesn't matter
where these people are that adopt a certain value or a certain product or service. So just
the global amount that matters. If I want to buy something on eBay, as long as they ship
with a reasonable shipping cost, I don't care where people are. So I don't really care where
the seller of the e-scooter sits. In Germany, for example, I just I'm happy if there's many
sellers of e-scooters on eBay. So that's global, kind of the global amount of users of a product
matters. But in some cases for some products and services, network effects are much more focused on
my peers on the 20, 30, or 100 people that I interact with daily or let's even some 200
let's be generous 200 people. So the amount of my peers counts, but I don't really care what the
rest does or which systems the rest does. And it does not give any additional utility if these are
these other people use something. Think Skype. I benefit from other people that have also Skype
installed that I interact with. But I couldn't care less if people in countries that I don't
know anybody in use Skype or WhatsApp or any any other system to talk. So in this case, I'm only
interested or I only benefit if my direct environment my direct kind of the people I interact
using that. Okay, so I think you get the point between what's global network effect and local
network effect. And I think you can also come up with examples for both types basically.
So network effects exist, we have seen a lot of examples of products and services that exhibit
network effects. What's the consequence if we have products or services with network effects?
Because with increasing size, there's increasing value created, there's increasing value added,
that means there's what economists call increasing returns to scale. The bigger you are,
the bigger the benefits will be. And that means the situation or industries and products
where we have network effects often end up in a monopoly situation because the biggest offeror
can offer has the biggest value added, the biggest value created, the largest value created,
and thereby, everybody moves towards that. That is why Facebook is basically unbeatable
at the moment as a social network. But it's also why eBay can afford to or is kind of one of the
big platforms. Although we see in the case of Amazon, for example, that it does not mean that
it always ends up with a monopoly, but this tends to be the case. Think Microsoft and
and Vinvert as a quasi monopoly because of network effects. So the logic behind that is,
if there's a value created and value added through the network effect by using WhatsApp, I benefit
from this value added. I internalize the value because I can communicate with half of the world.
That then there's switching costs if I want to move away from WhatsApp and use any other cool
instant messenger that is perhaps not so centralized, not so not so has better privacy,
protection, whatever. So there's switching cost. There's exit barriers. It's there's really
moving away from Facebook moving away from WhatsApp. I have there's exit barriers. So there's
a certain vendor login. People are locked into Microsoft and Vinvert. People are locked into
Facebook and Facebook has the power to kind of because it owns the network effects basically.
So that is why economists often say in industries that have network effects, we often need some kind
of regulation that guarantees a fair playing field because otherwise we will end up with
a monopoly just because there are network effects. By the way, nice example of network effects
isn't the keyboard, the computer keyboard. Do you know why the keys are arranged in the way they are?
It's a fun anecdote. And well, let me briefly tell you. So if you remember mechanical typewriters,
and if you hit keys on mechanical typewriters, you might remember that then the things go
and hit the paper. And whenever you typed two keys that are close to each other, then these things
would get stuck and the typewriter would jam. So the keyboard layout was designed in such a fashion
that you had hardly ever to type keys that are next to each other on the keyboard,
which from an ergonomic perspective is the worst thing that you can do because you don't want your
fingers to travel far when typing. But because of the mechanical restrictions and constraints,
the keyboard layout was created in a way. So you have to move your fingers a lot by purpose. So
doesn't jam. That made a lot of sense from a technical perspective, as long as we had
mechanical typewriters. So now, it would be sensible to have a more ergonomic keyboard
layout. And actually, there exists such a more ergonomic keyboard layouts, Google DualShock
keyboard layout, if you're interested in that. But we don't move over. Why not?
Because of network effects. We benefit from keyboards, keyboard layouts,
being similar across devices, because then we don't have to relearn how to type on a new device.
And believe me, I tried the DualShock layout, and I moved back after three days because you basically
have to relearn typing. And that is horrible work. And as soon as you move over to the next device
or gadget, and the keyboard layout is back to normal, you're kind of you're totally confused.
So the keyboard layout is an example of a lock in where we are locked in to an old standard,
because of that. I talk often about network effects. So in media and also in research,
there's other terms that signal us that there are similar things going on. So whenever we have a
product with a bandwagon effect, where people jump on the bandwagon, we can be pretty sure there's
some network effects at play. Or when we talk about the critical mass of some platform,
for example, can be pretty sure there's some network effects at play.
So the keyboard shows us how difficult it can be to move away from some suboptimal standard
because of network effects. The electrical system ripping out all electrical plugs and
exchanging them for the same electrical plugs would be quite a lot of effort and basically
impossible, right? But on the other hand, changing from one service to another might not be so
difficult in some cases. So depending on the product or service, it the lock in effect can
be really, really strong. Think about ripping out all railway tracks in Portugal next play
exchanging them for different width. That would be an enormous undertaking. But think about Groupon,
which provides coupons and if many people buy a certain thing. So it's in prime example of
network effects at play. I benefit if other people also buy that product because I get a coupon or
a bait. Changing from Groupon to another product or service is basically no problem. Then there's
no real lock in effect. So Groupon hasn't been doing as well as they hope they would be doing.
So that's an example of where the lock in effect is so weak that the switching costs are so low
that customers can easily switch from one to the other. Another nice example of network effects
at play due to history is the electricity of railways because the pioneers of the railway
systems. So the UK, Germany, Norway, Austria and Switzerland basically, they were the pioneers of
electrification of railway systems and they use 16 to a third hertz alternating current for the
rail trains while all other countries on the world basically use the 50 hertz
alternating electric current. And 50 hertz is much more common 16 to a third hertz.
That's an artifact of history and basically it makes it more difficult for international
traveling because you need motors and trains that can cope with both types of alternating current.
But exchanging the electricity system of a railway in a country that's basically not possible anymore.
Actually I'm only aware of a single case where a real big undertaking to rectify such a
lock in effect has been conducted and that is driving in Sweden. Did you know that until
1967 the Swedes were driving on the left hand side of the road? But it turned out if all the
other countries around you drive on the right hand side and you have to drive on the left hand side
well you are missing out lots of utility and there's probably lots of accidents happening
if all the Norwegians and Danes and Finns cause accidents in Sweden and the other way around.
So in 1967 Sweden decided overnight in a specific night yesterday we are left hand driving,
tomorrow we are right hand driving country and change that within a single night.
You can imagine that this is quite an undertaking and even in 1967 when there
were less cars on the road it would basically be impossible to do that today.
More examples of how big network effects can be. Just look at the valuation that Facebook has
because this is basically network effects at play and if you look at how much value a single
user on Facebook has you can see that basically network effects can be pretty high. If you look
at the market valuation of Facebook it's around 680 billion US dollar in 2020 and Daimler at the
same time has a market capitalization of 44 billion US dollar. So this shows you less than
a tenth of Facebook this shows you how valuable network effects can be. Let's move on a little.
So far we have always talked about network effects being something positive and network
effects creating values and being kind of something good. In fact there's also negative
externalities that can be negative network effects as well. The example that I gave you earlier with
pollution being an externality is already a case an example of network and network externalities
at play. So whenever resources are limited they can cause negative network effects.
Think of rush hour on a street. At a certain point each car that is additionally on the road
causes a decreased utility that you can derive from your car because you are stuck
in a stop-and-go traffic situation you can't go anywhere not to speak of the environmental damage.
So if there's limited resources each kind of added car in this case will decrease the
limit the utility that you can get. But there's also an exclusion value for something which we
call club or luxury goods. So think of your Rolex which cost a million US dollar perhaps.
So I benefit if some people wear this Rolex so if some famous celebrities wear that Rolex
that is good. But you don't want everybody to wear the same Rolex net you bought because then
well where would be the status value in having one if everybody had one. So every
normal user that also buys this Rolex decreases the value that you can derive from your Rolex
in terms of status. Network effects can be positive and they can be negative. Actually
both could be happening. Think again of the road. A road where no car goes will probably not even
have street lighting and not be cleaned in winter from snow and ice. So very limited value. If some
cars go on that road well there will be street lights installed and the roads will be cleared
in the winter from snow. So I have some benefit and some utility from other cars also going on
that road. But at some point the negative part take over because of rush hour and stop and go
traffic and the limited resources. So both can be happening. In the case where network externalities
are negative there's something that we call Pigovian Texas which is after a call after the
economist Arthur Cecil Pigou who introduced these or kind of theorized about these and he said
in the case where externalities exist in some cases the self-interest of two parties will decrease the
national or markets fail and this will decrease the national welfare.
Because if two people pollute the rivers because of their transaction and everybody else
will die from hunger because they can't fish or die from pollution because they have to eat
polluted fish then this will can cause more damage than value is being created and perhaps
it's no coincidence that this was created in kind of 1920s in London when the chimney
smoke in London was really really bad and kind of all these things. So Pigou said there's two
possible solutions around that to avoid these negative externalities being pushed on people
and first is regulation. So by forbidding to sell kind of bad food or forbidding to
deceptive activities all that regulation that is one way. The other is and this is Pigouvian Texas
to add taxes or bounties on these transactions between two people that cause negative externalities
on others and that is prime example is the CO2 tax for example on pollution.
Okay so this is how negative aspects of network externalities could be addressed.
We have talked about how the effects of a product or service with network effects
can lead to monopolies and can lead to vendor login. We are stuck with Microsoft and Windward.
We are stuck with Facebook and their social network. We are stuck with eBay and their auction platform.
So in this case vendors have lots of powers. What's one way a solution to kind of take the
vendor login away? Well you can introduce standards that a product has to adhere to
and if the standard is not based on a single vendor product but an industry standard
then not a single vendor has the power to kind of reap the benefits of the network effects.
Think of the phone network which is regulated in a way so that all firms can join it and not only
the few important firms. So that's why we have why we can buy phones from various vendors and
they will still work and that's why we can buy the phone access and our phone contracts from
mobile phone contracts from various firms and they will also work and will be able to access
the same network. This is an industry standard regulated and governed by the ITU the International
Telecommunication Union. So standards can overcome that and but then it's interesting for
firms to control these standards basically and reap these benefits that come through network effects.
So let's talk about standards and industry standards for a while that help overcome
vendor lock-ins and basically push competition on a standard level rather than a vendor level.
Standard is a rather vague concept and in a way it's a set of technical specifications
that could be formal or it could be tacit so it could could also be simply the way things work.
And we distinguish between two types it's the JURATH standards and that's these documents
that you see from the ICO the DIN which specifies how a screw has to look like the ITU which
specifies how a phone needs to work so that it can access the phone network etc etc etc
but it can also be a de facto standard which is for example winvert is the de facto standard
of word processors um or yes so so that so um it's interesting for firms to control standards
because then they can reap the largest part of the benefit and that is not something new that's not
something in the in the age of um iphone versus android that's not not not just from the age of
lift versus uber that standard wars have been existing for quite a while. One of my favorite
examples is in the 1880s when electricity was being introduced there were two competing standards
and both fought for kind of being the dominant or dominant one one was um George Westinghouse
who said like um alternating current all right this is um the future and this is what people
should use and then we had this little guy called edison and edison said no direct current direct
current is this is what people should be using so there was a big fight between westinghouse and
edison uh in which electric system should be kind of uh installed and become the de facto standard
and edison was really really into that so um he patented the electric chair and made sure that
it used alternating current to electrocute people because nanny could say like you can kill people
with alternating current and he said it's uh he called it twisting house these people so um also
edison uh killed electrocuted elephants in public demonstrations with alternating current to show how
dangerous alternating current is well we know from history that in this case edison lost and
westinghouse won and that is why we have alternating current coming out of the electric plugs in our
houses nowadays so what are the reasons why somebody would win a standard war there's lots
of research on that and the answer is not very clear because cases are complicated there's
multitude of reasons so one research has identified a couple of success factors and i want to present
them to you with take them with a grain of salt because if you can check these things that does
not mean that you will win a standard war it will not mean that your standard will succeed because
there's many things at play but nonetheless i think it's interesting to see well if you already
have a user base right if you have control over an installed user base you have better chances of
pushing your standard so i told you about the blu-ray versus hd dvd fight playstation so our sony
was a proponent of blu-ray and they simply decided well we put a blu-ray player in every
playstation out there and by having that user base they sneaked in a standard and created critical
mass and that's one of the big reasons why blu-ray won out so if you have an all installed user base
that you can rely on you have better chances as if you're a startup that basically has no users
yet you should make sure that you own the intellectual property rights we've been there
so if you don't have that well others will sue you into ground no surprise there
in the case of physical products you should be able to manufacture them
so that does seem to make sense another famous and very very old standard wall which is the vhs
video cassette system versus the betamax video cassette system which has been going on in the
19 early 1980s has shown that you don't necessarily need to manufacture things yourself
but if you license out the rights to your standard to others who can manufacture things
that can also be a winning argument if you have strength and compliments so if you're apple and
you can combine and interlock your itunes with your ipads and your your imx then of course that
could help push your standard brand name and reputation yes absolutely and industry
collaboration if you don't go alone but actually have an industry consortium for example where
big shots cooperate that also helps i think many of these are pretty intuitively yes we can
understand them but again take them with a grain of salt this is not an automatic way to to win
the standard where the first mover actually provides an advantage is heavily disputed and
it's not always in the case google is not the first internet search engine amazon is not the
first online bookseller so just because you're the first on the market does not necessarily mean
you will be the winning de facto standard
standards can also be closed but on a firm level basically amazon kindle uses amazon android but
basically it's an amazon ecosystem and basically only amazon that's a rather close standard windows
is a rather close standard you play their game and license nearby their stuff or you don't play
there's but then there's a couple of open standards which basically are not relying
on a single vendor which can be used by everybody so these are then the industry standards
where kind of less of a vendor login can happen so moving from close to open standards
is something where we can avoid the vendor login because it's a vendor neutral standard so everybody
can compete based on the same standard and where network externalities do not happen on the level
of a single product but on the level of the technology basically so network externalities
though are not based on who are based sales for mobile phones but on basically how the
mobile phone network as a whole is being doing the network effects and externalities are based on
the whole industries across vendors and licensing fees in open standards are
lacking or reasonable though so the keyword there being free and reasonable free reasonable and
non-discriminatory licensing fees so everybody can license the stuff and it's not too expensive
if that happens competition will happen on a quality on competence base i can select the best
vendor and not the one vendor that happens to have the vendor login because it's the owner
of the product or service that has the network effects so for customers open standards are
something that is good and gives a lot of power to customers whether that's good for industry
depends on whether you are such a vendor that who owns a vendor login or not okay also and that
might not be so so important reaching the critical mass and that is needed to kind of successfully
spread a standard might be different depending on whether you have an open or close standard
but let's not go there in any deeper so far we have talked about standards and how standards
overcome vendor login and basically enable move power to customers and enable competition on a
competence based and these standards can apply to a whole product but they can also apply to a
single component within your product and you have a standard part or component in your product
so when you build a laptop you buy a wi-fi component that you kind of simply click into your
laptop that would be an example of a standard product applying to a component or part of your
product the laptop so if we have a modular and we will explain what modular is in a second
if you have a modular product architecture based on standards that means we can take existing
standard components and plug them together basically we are system integrators and then
create value through that and we can develop rather quickly because we can rely on standards
that adhere to technical specifications and be hopefully pretty sure that another thing works
so if you are a maker of android phones you basically combine existing components
see a system on a chip CPUs storage mechanisms by Qualcomm and other companies that provide these
things you put them together and you sell the whole thing as an android phone even cars or
airline manufacturers if you think about Porsche only manufacturers are 15% of the value of a
Porsche itself the remaining 85% are sourced components from suppliers according made according
to specification for most probably but still are sourced as components and Porsche is basically
good at integrating all these components and selling this stuff so let's talk about product
architecture and modularity so what's a modular architecture and what does modularity allow
and I hope you you see how we got to modularity because or to kind of bridge the whole thing
network effects can lead to vendor lock-ins standards can overcome vendor lock-ins because
they move the competition from a vendor base to an standard base to an industry level and
standard components can apply to a whole product or to a component of a product and when they apply
to a component of the product then my product architecture will determine if I can put together
modular components in a modular fashion and develop quickly develop a product
so product architecture is actually something that we have talked about when we looked at the
Henderson and Clark matrix because there we talked exactly about how our components
linked with each other and thereby we already had there are we implicitly a use made use of the fact
that a product consists out of components that somehow interact and this is exactly
what we are talking about now when we so say product architectures means or describes how
functions are mapped onto technical artifacts so and if these components are or if we have a very
modular architecture then that means we can simply put in standardized components we can put in an
electric motor or a petrol-based motor in our car we have standard or we can put a new
wi-fi card in our laptop and whenever some better wi-fi standard emerges we can simply take out the
wi-fi card and plug in a better wi-fi card which has been called economies of substitution I can
put take out a module and put in a better module without having to pay the whole price for a new
laptop if you think about Henderson Clark again this would be clear case of modular innovation
you take out one component plug in a better component without changing how that component
interacts with the rest of the system right so this economies of substitution is related to
Henderson Clark and the modular innovation there I know we are getting a little off topic now
but I would like to explain what a modular product architecture is using a simple example
because I know that this we you're not any might not be engineers and that kind of a modular
product architecture is not something that's super intuitive so let me give you some some
example which hopefully makes net a bit clear I'm aware of the fact that this is kind of perhaps
a not super core of what you might be interested in so how do a function map on an technical
artifact helps to explain product architecture let me give you an example and I give you an example
of a car trailer a car trailer has certain functions so the car trailer is net a dashed
box here and it has to fulfill certain functions these certain functions are written in the boxes
it needs to minimize the air drag so it needs to be kind of aerodynamic needs to connect to the
vehicle needs to transfer the loads on the trailer to the road etc etc you get these these boxes it's
it connects with the environment as well that we have the vehicle the road the cargo and so and so
these are the functions that we can say a trailer needs to fulfill
and then we can map these functions to the components of a trailer say which function
is being fulfilled by or implemented by which technical component and then the case of a simple
car trailer let's take this one if you say oh then we need to protect the cargo from the weather
well that's the box on top of that trailer that protects the cargo from the weather in this case
one function one functional element is mapping to one physical component one artifact
if that isn't the case we talk of a modular product architecture we have clear responsibilities
for example if we need better of different car weather protection we need to exchange the box
and the box only and we don't have lots of side effects hopefully because car weather protection
is being done by the box and the box only yes you see the example is a little simplified
but i hope you get the point so economies of substitution would be possible in in such such
a way i can uh exchange simple components for better better components without kind of causing
lots of problem that is a modular product architecture the opposite of a modular product
architecture is called an integral product architecture and you see an example of an
integral product architecture in the car trailer on the on that slide and it looks a bit different
it fulfills the same purposes the same functions are being fulfilled but they are not being
fulfilled by a single component with a clear responsibility but by a couple of things take
that nose piece in in in the in the front it it's used to connect to the vehicle at the same time
it's the thing that minimizes the air drag that provides the aerodynamic part and it's also
supporting the cargo load at the same time so if you exchange the nose piece three functions
will be affected and you will have to see about interactions between your in the elements in in
your power so what is better an integral or a modular architecture might have guessed the
right answer is it depends and there's not a clear answer there's an advantage of an integral
architecture because it enables very efficient designs but if you want to exchange or modify
this thing well you might run into into trouble of course it's more complex there's more interactions
with other parts and it's more difficult to basically improve single aspects of the whole thing
so this is a modular architecture where you can put in standard components that fulfill
standard functionality defined functionality and an integral architecture where it's really hard to
put in a standard component because that standard component has to fulfill multiple functions and
these functions interact with other parts in in your product architecture so we see the advantages
and disadvantages of modular versus integral architectures to conclude that little excursion
into a modularity there's not only a single type of modularity but actually three different types
of modularity slot bus and sectional modularity and just because i like that example so much i
want to show that to you the slot architecture is when we have a single part in in a single
slot basically and it can exchange the box for a better weather box but i cannot add a second box
for example we have a bus architecture when we have a common technical infrastructure onto which
all parts can be latched so in this case it's this railway trail on the on the top in the bottom of
the trailer and all the parts are basically screwed on that bus on that common technical
infrastructure a pc has a has lots of things which are basically bus infrastructure
and we can have a sectional modular design and sectional modular designs are being used
to can be extended in basically infinitely by adding more modules in a defined way so if i
need a longer trailer or if i need two more wheels i can add more sections to this product
architecture which is also modular i realized this was a bit of an excursion into product architecture
but still i think it it's interesting and part of the whole big picture so we have been talking
about network effects we have been what our network effects what our network externalities
we have talked about examples we have this differentiated between direct and indirect
effects we have talked about positive and negative we have talked about global and local
negative in a network effects then we have more talked about the consequences of network effects
which are often a trend towards a monopoly on vendor lock-in because of the exit barriers
and vendor lock-ins can be overcome by standards industry standards so not kind of the microsoft
winvert type type of standard but by industry standards ideally open standards that can be
used by everybody on the market which kind of move shift power to customers then we have talked
about how the product architecture can be built upon standard components and how that works if we
have a modular product architecture you don't need to learn the names or types of modular product
architectures but i think it's interesting to see how that can can exist okay so all this is of
course very important when it comes to the platform economy which basically exhibits strong
network effects and if you think about Airbnb, Uber, instant messaging or many other digital
platforms you can immediately see where the network effects are coming from and now you
can define them theoretically thanks and goodbye
hello welcome
people are a different example um the costs no actually stop it
so this is
it