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138 Part One Organizations, Management, and the Networked Enterprise

of subscribers in a telephone system or the Internet, the greater the value
to all participants because each user can interact with more people. It is not
much more expensive to operate a television station with 1,000 subscribers
than with 10 million subscribers. The value of a community of people grows
with size, whereas the cost of adding new members is inconsequential.
From this network economics perspective, information technology can be
strategically useful. Internet sites can be used by firms to build communities
of users—like-minded customers who want to share their experiences. This
builds customer loyalty and enjoyment, and builds unique ties to customers.
EBay, the giant online auction site, and iVillage, an online community for
women, are examples. Both businesses are based on networks of millions of
users, and both companies have used the Web and Internet communication
tools to build communities. The more people offering products on eBay, the
more valuable the eBay site is to everyone because more products are listed,
and more competition among suppliers lowers prices. Network economics also
provides strategic benefits to commercial software vendors. The value of their
software and complementary software products increases as more people use
them, and there is a larger installed base to justify continued use of the product
and vendor support.

Virtual Company Model. Another network-based strategy uses the model of
a virtual company to create a competitive business. A virtual company, also
known as a virtual organization, uses networks to link people, assets, and
ideas, enabling it to ally with other companies to create and distribute prod-
ucts and services without being limited by traditional organizational boundar-
ies or physical locations. One company can use the capabilities of another
company without being physically tied to that company. The virtual company
model is useful when a company finds it cheaper to acquire products, services,
or capabilities from an external vendor or when it needs to move quickly to
exploit new market opportunities and lacks the time and resources to respond
on its own.
Fashion companies, such as GUESS, Ann Taylor, Levi Strauss, and Reebok,
enlist Hong Kong-based Li & Fung to manage production and shipment of their
garments. Li & Fung handles product development, raw material sourcing,
production planning, quality assurance, and shipping. Li & Fung does not own
any fabric, factories, or machines, outsourcing all of its work to a network of
more than 15,000 suppliers in 40 countries all over the world. Customers place
orders to Li & Fung over its private extranet. Li & Fung then sends instruc-
tions to appropriate raw material suppliers and factories where the clothing is
produced. The Li & Fung extranet tracks the entire production process for each
order. Working as a virtual company keeps Li & Fung flexible and adaptable so
that it can design and produce the products ordered by its clients in short order
to keep pace with rapidly changing fashion trends.

Business Ecosystems: Keystone and Niche Firms. The Internet and the
emergence of digital firms call for some modification of the industry competi-
tive forces model. The traditional Porter model assumes a relatively static
industry environment; relatively clear-cut industry boundaries; and a relatively
stable set of suppliers, substitutes, and customers, with the focus on industry
players in a market environment. Instead of participating in a single industry,
some of today’s firms are much more aware that they participate in industry
sets—collections of industries that provide related services and products
(see Figure 3.11). Business ecosystem is another term for these loosely
coupled but interdependent networks of suppliers, distributors, outsourcing

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