Four Ways to Check a Company’s Vulnerability to Disruption
https://citywireselector.com/news/four-ways-to-check-a-companys-vulnerability-to-disruption/a1173604?ref=citywire_global_latest_news_list
In this article, Benstead summarizes the four ways that investors can assess if a company is resilient or vulnerable to disruption. The four ways that Benstead said can be used to measure the company’s vulnerability included: 1) edge vs core, 2) network effect, 3) capital and 4) distribution network. The edge versus core argument says that the company will be harder to disrupt if it is at the core of the ecosystem, rather than the edge. For example, a company that produces phone chips, like Taiwan Semiconductors (TSMC), is at the core of the phone manufacturing industry because many phone manufacturing companies go to them to get their chips produced. Additionally, there are few companies that do the same work as TSMC. Network effects judge the company’s vulnerability as well because it measures how positive of an effect each additional user is. Furthermore, according to Benstead, the network effect is the process of the company becoming more valuable with the addition of new users. Social media websites, like Facebook have high network effect. The site means nothing when there are few users on it but when everyone you know is a user, it makes it more valuable to also use the site. Capital refers to the company’s financial stability to be able to enter markets and compete with the other companies on the market. Having access to capital allows for activities like negotiating cheaper prices from suppliers, which can benefit the company overall by saving money. Lastly, the distribution network is the connection between the supplier and consumer. This means that there is an adequate way to ensure that consumers actually have access to the company’s products/service.
In class, we learned about network effects. Network effects, or direct-benefit effects, refers to the explicit benefit incurred as the user when you align your behavior with the behavior of others. In this case, it is both the users benefit, but the article refers to network effects benefiting the company from disruption. For example, by having a large number of users for your business, it measures the public’s opinion toward the service/product as well as the stability. It can show that the company is susceptible to temporary disruptions, like bad publicity. For a company as popular and successful as Facebook, it can handle bad publicity and still be successful because of its network effects. Network effects can be determined by the user’s intrinsic interest and the number of other people using the good. In the case of Facebook, I think the number of other people using the website determines the network effects. The larger the user population, the more the person is willing to use the service as well.