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Network Effect

“In economics and business, a network effect (also called network externality or demand-side economies of scale) is the effect that one user of goods or service has on the value of that product to other people” (Wikipedia).

In the next five years, the accumulated impact of three decades of exponential improvements in technology will force organizations to radically transform and totally reinvent how they do business. What is driving this revolution and how to prepare?

Metcalfe’s Law was originally used to explain the value of increasing the number of users who were using compatible communication devices. It was only later that Metcalfe’s Law was applied to the Internet. Metcalfe’s Law, however, has always been about the value of a network growing proportionally with the square of the number of users of the system.

Metcalfe's Law is expressed in two general ways:

  1. The number of possible cross-connections in a network grows as the square of the number of computers in the network increases.
  2. The community value of a network grows as the square of the number of its users increase.

Metcalfe's Law is often cited as an explanation for the rapid growth of the Internet (or perhaps more especially for the World Wide Web on the Internet). Together, with Moore's Law about the rate at which computer power is accelerating, Metcalfe's Law can be used to explain the rising wave of information technology that we are riding into the 21st century.

Digital disruption has created a window of opportunity for a digital platform connecting users, alliances and strategic partners for a multi-sided feedback loop between users and the platform itself, increasing value for each of these groups. The MonarchFx Alliance network that has been created allows Alliance members to reduce their costs and to delight their customers with shorter delivery times due the Network Effect of multi-tenant automated fulfillment centers and high density final delivery.

In the center is a platform or tool, where its partners connect to expand capacity and provide value, and fundamentally compete successfully in a disruptive manner, across industries gaining a competitive advantage by leveraging the power of dynamic information flow and transactions. The collective capabilities of the partners creates a barrier to entry, but more importantly the economies of scale create cost benefits for the members for profit improvement and the creation of a communication center for the exchange of analytical data that is exclusive to its’ members.

Consumer demand for low-cost/no-cost, quick fulfillment and on-time performance is increasing. Meeting that demand is forcing significant change and costs associated with shipping and leveraging high cost networks to meet that demand. “All channel” inventory visibility is a challenge that is driving retailers to investment in technology that is critical for sustainability and scale. As volumes by channel increase, fulfillment data is crucial to optimizing the allocation of inventory efficiently and profitably to meet customer expectations, and to achieve smarter inventory placement and higher profits. The Order Lifecycle encompasses every aspect of multi-channel from the moment a customer places an order to how it is picked, shipped, paid for and delivered.

Improving inventory visibility and optimizing the logistics of fulfillment are largely science and technology based disciplines. More subjective is the process of sales attribution of planning by channel to meet expected demand. Many retailers have tackled this issue top-down creating a cross-functional collaborative committee charged with reconciling long standing channel issues to resolve inventory alignment and planning. This has driven the need for change management as the majority of retailers were driven to multi- channel sales, due to market share lost to consumers whose fulfillment perceptions and expectations were influenced by online retailers.

It is this issue that has created the need for a customer centric platform to leverage sales and market scale to connect with their strategic partners and alliances to deliver and ship direct to customer and/or store, at a lower cost and with improved delivery to meet expected purchase requirements.

Many organizations have come to realize that they cannot build an on-premise cloud-based commerce platform and solution for the evolving networked world impacted by a number of pivotal market shifts:

  • From an Omni-Channel view to a Customer Centric Uni-Channel View.
  • From a single-enterprise to multi-enterprise system.
  • From an on-premise solution to the cloud.
  • From a siloed to a multi-functional organization.
  • From selected to comprehensive distribution points.
  • From a single entry point, to multiple locations.
  • The need to focus on core business expertise leveraging functionality and proficiency in outsourced resources that are not in conflict with confidentiality and proprietary information: the secret sauce of the business enterprise.

Digital disruption accelerates competing ideas that are devastating to any company operating under the rules of the prior century.

How will digital disruption impact customers? There are five key factors that need to be considered:

  • Pace of Innovation: Technology disruptions occur at increasingly faster intervals.
  • Increased Competition: Cannot keep up with pace of change.
  • Personalized Interactions: Big data analytics enable faster customer response: to keep up organizations need to focus on customer interaction not supply chain facilities.
  • Speed of Interactions: Digital communication equates with speed and equates the need to fulfill and service that customer in real-time with end-to-end visibility.
  • Integration: In order to take advantage of lower costs there is a need to integrate current systems to a platform that has inventory visibility and reaction time to drive business value and customer experience. Being able to see how inventory is segmented by channel in real-time can provide improved delivery at reduced time and cost.

The high growth rates of many digital companies can be maximized using a platform model to create an ecosystem of partners and customers generating a “Network Effect” that enables a seamless logistics network across multiple locations to drive sales efficiency at a shared lowered cost. This platform becomes more valuable as more companies use it driving the economies of scale.

Supply Side: Increasing scale. Leads to lower cost per unit of output - cost per unit decreases as fixed costs are spread out over more units.

Demand Side: Economies of scale or “Network Effect” is a function of users, so scale leads to lower costs for users, improved communication, visibility, flexibility and agility. As the Network Effect gets stronger users have a higher barrier to exit.

The MonarchFx Alliance solution offers B2B and B2C organizations, with a vision and shared objectives to bundle services for logistics that satisfy and exceed customer expectations, improve margins and gain market share.