Companies in the social networking industry base their core competitive strategy on the participation and contributions of third parties, such as customers and application developers, according to a study by Pamplin College of Business professors Devi Gnyawali and Patrick Fan.
Gnyawali, an associate professor of management, and Fan, an associate professor of accounting and information systems, said their research on the distinctive strategies used by social media businesses and their impact is the first systematic empirical study of its kind.
The professors, along with doctoral student James Penner, have written an article about their work for a special “digital systems and competition” issue of Information Systems Research, one of the top journals in the field. The researchers said their findings should help managers develop appropriate strategies.
“A better understanding of the nature of competition and implications of competitive actions will allow managers to think in nuanced ways about how to successfully compete in this rapidly changing industry,” the researchers wrote.
Unlike traditional industries that build walls to protect advantages, Gynawali and Fan said digital media firms, and particularly social networking companies, employ a variety of actions with third-party developers and other outside parties to “co-create value.” Gynawali and Fan said social media firms do this in order to attract, retain, and satisfy their own users or customers and improve their companies’ performance.
The researchers examined competition in the social networking industry from two strategic perspectives: how firms “create perceived and real benefits for their users by engaging other parties as partners and contributors,” and the number and complexity of competitive moves.
Social networking firms create value, Gnyawali said, by leveraging the knowledge and expertise of third-party developers to develop applications that will help “entice, engage, and delight users.” They also create value by collaborating with other companies to develop and pursue new products, markets, and uses for existing applications and services.
Firms that adopt a complex strategy make it more difficult for their competitors to understand the intent and consequences of the various actions, the researchers argue.
“Moreover, because each type of action requires commitment of different types of resources, rivals find it very difficult to match a firm’s complex actions — which provides a window of advantage to the firm,” they write.
For instance, the researchers noted the rise of Facebook over MySpace in recent years. When it first debuted, MySpace grew tremendously — more than 300 percent in pageviews from November 2005 to November 2006 — as it expanded its music, photo, and video capabilities.
However, its growth has since slowed, while Facebook took competitive moves on multiple fronts: being more inclusive in membership, being the first to open the platform to allow co-development with third-party vendors, actively pursuing alliances, and continuously creating and improving services.
Social networking firms have changed the way people communicate and socialize with each other, the professors noted.
Departing from traditional computer-based communication systems for e-mail and online forums, companies such as Facebook, MySpace, LinkedIn, and Twitter use Web-based software to connect users with friends, family members, business partners, and others through several formats. These include text chat, video, file sharing, and blogging, in addition to mail and discussion groups.
Gnyawali specializes in studying how firms compete, collaborate, and create competitive advantage. Fan is a specialist in data mining, business intelligence, and social computing. The pair said they decided to focus on the social networking industry because of its unusual characteristics, the widespread popularity of its services, and its “explosive growth” over the past three years, which has made it “one of the most dynamic segments of the Web 2.0 industry.”
Gnyawali said that a 2008 Morgan Stanley report showed that six of the top 10 Internet sites were social. None had appeared on a similar 2005 list. The report also showed that Facebook and YouTube had more page views than Google or Yahoo.
The need for more scholarship on firms in the digital industry, which use the Internet and information technology to provide goods and services, was another reason for conducting the study. Fan said information systems scholars have examined the strategic roles information systems and information technology play in a firm, but “few scholars have systematically and holistically examined the digital industry’s competition dynamics.”
Gynawali said management scholars have extensively studied competition dynamics, but their research has focused on publicly traded companies in traditional industries.
“Thus, while newer forms of industries are emerging, and digital technologies are becoming very critical in these industries, we don’t know the ways in which firms in such emerging digital industries compete,” he said. “Our research addresses this critical issue.”
Nathan Latka, a rising junior majoring in finance from Leesburg, Va., shares the lessons he's learned while establishing social-media businesses.
According to the research conducted by Gnyawali and Fan, social networking sites have several distinct features:
Ongoing development and release of products and services: In traditional industries, new product development and testing often takes a significant amount of time and resources. Social networking firms engage in continuous development of new products and services and release them continuously through their websites.
Strong network effect: The more users a social networking firm has, the more resources will be created and shared, and the more benefits and value will be offered to its members. In addition, as their services are largely free, these firms look for revenue primarily from online advertising, which also benefits from a large user base.
Extensive value co-creation with vendors and users: Social networking firms depend heavily on their own members to create content — by posting content to their profiles, sharing information with friends, and engaging in other interactions. Applications created by third-party developers are valuable strategic assets for the firm, the researchers said, because they help enrich customers’ experiences and, in so doing, retain users.
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