More often than not, networks are powerful in turbocharging the functionality of products and increasing the rate of innovation. However for managers it can be puzzling on how to actually manage those networks.
By Suvi Nenonen.
‘Networks’ or ‘ecosystems’ seem to be the catchall solution to all innovation related ailments these days. Suffering from sluggish sales? Revamp your formerly stand-alone product by turning it into a turnkey solution or connecting it to the Internet of Things! Innovation team failing to deliver anything even remotely innovative? Embrace open innovation and delegate the responsibility to invent new things to your innovation ecosystem!
More often than not, networks are powerful in turbocharging the functionality of products and increasing the rate of innovation. However, networks are leaving managers increasingly puzzled. How do you actually manage networks?
How ‘networked’ is your network?
It appears that in terms of manageability, not all networks are created equal. The presence of network effects – boring as they sound – gives practical clues about how different networks can be managed.
In fact, there are two types of network effects: direct and indirect ones. Direct network effects are at play when the value created to the network members is determined by the number of other members in that particular network. For instance, having the only telephone in the world is probably not going to rock your world – who could you call to? On a similar vein, Facebook’s allure is explained by the fact that all your friends are there too.
Indirect network effects, on the other hand, relate to two-sided networks, such as media (readers and advertisers) or marketplaces (buyers and sellers). Under indirect network effects one group of network members (advertisers, buyers) benefit from the size and quality of the other group of network members (readers, sellers). No point in hanging in TradeMe or eBay if there is nothing to buy, right?
If your network has only limited network effects, then it is likely that everything that you have learned about successfully managing relationships should be applicable.
A new type of management
The presence of strong network effects, on the other hand, indicates that your network is a complex one. And complex networks thrive as they get bigger and weave an increasingly intricate mesh of connections between the members. Unfortunately, traditional management techniques fall short when you are faced with a complex network with millions – or billions – of members, each connected to each other in unforeseeable ways.
However, the failure of managerial tools doesn’t indicate an era without managers – quite the contrary. The managers of complex systems merely have to learn a new set of techniques and skills.
The research in this area is only emerging, but at least the following two approaches show considerable promise in ‘managing’ networks.
Perhaps the most intuitive way of managing a network is to become a gatekeeper: deciding who gets in and who is left outside. Sounds easy, but there is nothing to gate-keep unless your network is so desirable that you have more willing members than you need for your network to reach critical mass.
Many corporate innovation networks are such closed communities, but they tend to win over open networks such as InnoCentive only if the networks attracts the best brains – and the gatekeeper is knowledgeable enough to know who these truly brainy kids really are.
Second, even though it is often impossible to prescribe how the members of the network will behave, we humans (and collections of humans that we call organisations) tend to gravitate towards safe and efficient communities.
So, consider ways to introduce rules or functionalities that increase safety and/or efficiency. Facebook is extremely strict about nudity and child-related content for the former reason. And since most complex networks are notoriously difficult to navigate, companies that can help members in finding the right thing at the right time often become the linchpin operators. So, how could you become the Google of your network?
Associate Professor Suvi Nenonen works at the University of Auckland Business School’s Graduate School of Management and teaches in the MBA programmes. Her research focuses on business model innovation and market innovation.
