The contribution revolution: Why do people contribute?

There are many ways how people can contribute and help companies build their ecosystem.

• Shoppers on Amazon automatically contribute to a recommendation system by making purchases, rating items, sellers and by leaving comments and sharing experiences. Today, information will decide about your competitive advantage, so it is important to design your business to benefit from collecting data of users' actions by product.
• Del.icio.us allows users to organize their bookmarks and create from that a web index that they use for suggestions to other, similar users. In this case, practical solution is driving number of contributions - users get reasonable immediate reward - they getting their bookmarks organized.
• Users of Google+, Facebook and Twitter can benefit from interacting with others, being part of a community. Social reward is the driver behind most of the interactions. It took Facebook and Twitter, 4 and 5 years respectively to reach 100M active users globally, and Google+ crossed this milestone in just a year. This only shows the power behind social interaction. 
• Reputation is another strong contribution driver. Desire for public recognition is widely use by Wikipedia. They proofed that millions people working together can produce high quality articles and entries. 
• YouTube leverages self expression desire and it is on fire at the moment. 800M people are watching 4B hours a month on YouTube. Every minute there is over 72 hrs of video uploaded.
• Last but not least, altruism can also be a driver of contribution. People want the truth to be heard. If they get exceptional service in a good restaurant - they want to reward it by sharing their experience on Yelp! and recommend it to other people.  

Crowdsourcing, attention and productivity

There is a very interesting article by Huberman, Romeo and Wu (2009) exploring possible reasons why do people contribute and upload their videos on YouTube without any payment. It is said that people who behave rational would free ride on the production of others. Huberman et al. suggest that for contributors, videos are private goods – and the payment is attention.

A 2007 survey by McKinsey found that content creators’ desire for fame was their primary motivation for uploading videos. Other motivations cited were the desire to help others and to have fun. In terms of profiting from their videos, some users were open to the idea of compensation sharing, but that was not a primary driver.

Users of YouTube are contributors; they contribute and get attention and public recognition as a reward. As a result the productivity of the contributors depends on the number of views and/or downloads (the attention). The more views contributors received in one period, the more videos they uploaded during the following period. On the other hand lack of attention may lead to decrease in the number of the uploads.

What should YouTube do? Should they pay people for uploading their videos on their platform? In my opinion, the idea of monetary compensation, as suggested by the study of McKinsey, should not be followed by YouTube. According to Vohs, Mead and Goode (2008) the concept of money changes personal and interpersonal behavior (you can read more here: Impact of activating the concept money). People can start behaving like under monetary market rules, i.e. the individuals’ level of effort is influenced by the amount of compensation. Monetary markets are highly sensitive to the magnitude of compensation, whereas social markets are not. Under social market conditions, the effort is shaped by altruism and the amount of compensation is irrelevant.

Source: Cook, Scott. "The contribution revolution: Letting volunteers build your business." Harvard Business Review 86.10 (2008): 60-69.
Huberman, Bernardo A., Daniel M. Romero, and Fang Wu. "Crowdsourcing, attention and productivity." Journal of Information Science 35.6 (2009): 758-765.Vohs, Kathleen D., Nicole L. Mead, and Miranda R. Goode. "Merely activating the concept of money changes personal and interpersonal behavior." Current Directions in Psychological Science 17.3 (2008): 208-212.

The Economics of Technology Sharing

In this post I will try to answer the question why programmers invest their own time in OS projects? What motivates them to contribute and what is in it for commercial companies?

Literature provides us with 6 possible reasons:

• Improve performance in paid work (e.g. system administrators looking for solutions for their companies) 
• Intrinsic pleasure (e.g. cool project) 
• Future job offers, shares in commercial open source based companies 
• Ego gratification from peer recognition 
• The promise of higher future earnings 
• Intellectual curiosity 

Signaling 

Other very important reason for investing programmers’ time in open source projects is signaling, i.e. proving high level of competence. Why this is important in OS? Because the ability to signal a high level of competence can be higher in an OS project. 

• Outsiders can see the contribution of each individual 
• The programmer takes full responsibility for a subproject 
• More knowledge can be transferred to new environments, because many elements of the source code shared across OS projects 

Let’s have a look at the Apache Project.

Instead of central leader they have a series of committees to resolve open issues. There are five levels of rank within the Apache Software Foundation (ASF): 

• Developer 
• Committer 
• Project management committee member 
• ASF member 
• ASF board member 

Advancement is made in recognition of an individual’s commitment and contribution to an Apache project. Empirical study (Hann et al 2004) showed that: 

• Sheer volume of contribution have little impact on salary 
• Moving into higher rank resulted in 14-29% increase 

Commercial Firms

Commercial firms may interact with open source projects in a number of ways:

• Benefit from complementary markets 
• Benefit from learning 
• Benefit from good public relations 
• Compete directly with open source providers 

Example: IBM and HP released codes to open source communities

Why?

Bait and hook: if the released code will be used more widely, profits in the complementary segment will grow (e.g. from consulting services)

Other very important reason is that many small developers are uncomfortable doing business with large firms, that may compete in the developers segment and reduce price in order to raise demand for the broad software platform.

By contrast, when a large firm makes its platform available on an open source basis, the small firm need no longer fear being squeezed.

However, we don’t know if the corporation will keep all source code in the public domain? Or if it will highlight important contributions adequately?

In this case important licensing plays important role.

Open source licenses

Permissive license

users retain the ability to use the code as they want. Common in projects with strong appeal to the community of contributors

Restrictive license 

common in projects geared for end users who are unlikely to appreciate the coding (e.g. computer games)

Quality

There is no consensus if open source software is superior to “off-the-shelf” commercial software. Advocates of OS code’s higher quality stress that:

• Users can enhance quality 
• Users can customize it to meet particular needs 
• There is a superior development process: 
• Workers in commercial firms may not report errors of fellow employees – however OS programmers do not have incentive to collude, and their project is more peer reviewed 
• Security flaws are more easily identified because many people are involved 

Counter arguments:

• The openness of the code allows hackers to figure out its weaknesses 
• Poorer documentation (due to the incentives structure) 
• Poorer user interface 

Public policy

Governments around the world encourage the development and use of open source projects. However, the impact on social welfare is not conclusive:

• OS projects have access to a larger talent pool 
• On the other hand: free riding problem 

According to static point of view, any potential user has access therefore OS increase social welfare.

Dynamic view states that developers may lack incentives to introduce new products therefore OS reduce social welfare.

Bibliography: Lerner, Josh, and Jean Tirole. The economics of technology sharing: Open source and beyond. No. w10956. National Bureau of Economic Research, 2004.

How do imitations erode the benefits of first movers?

As we discussed in post Is it always better to be first in Internet space? first movers can benefits from:

• experience/learning curve effects: reduce manufacturing costs 
• secure supply of raw materials if scarce resources 
• establish preferential shelf space, distribution channels and product segment 
• create buyer awareness and high switching costs as entry barrier to imitators 

However, Lee et al (2000) researched that first mover advantages were completely eroded by early and late imitations. Even more interesting is that even late imitation had significant influence on first mover stock market performance.

Early and fast movers achieve greater gains than the late and slow companies. However, they often suffer from new product imitations. Sometimes a fast second move can produce superior results.

Early imitations can be a profitable alternative to moving first, because:

• imitator learns from the first mover’s experience, they can reduce the risk or avoid the mistakes 
• avoid pricing mistakes 
• limit risk exposure and cut developing costs by reverse engineering 

The faster a firm introduces a new product, the higher the abnormal returns; first & second movers will (on the average) report higher abnormal return than late movers.

At a tie of new product imitations, the abnormal returns will be negative for the first movers; the faster a firm imitates, the greater the negative abnormal returns for the first mover (or the less durable the first mover advantages)

Summing up, there are two important implications for the companies:

(1) the faster & earlier a firm introduces a new product, the greater the shareholder wealth effect
(2) imitations impact negatively first movers, even late imitations

Source: Lee, Smith, Grimm & Schomburg (2000): Timing, Order and Durability of New Product Advantages with Imitation, Strategic Management Journal, 21, 1, pp. 23-30.

Is it always better to be first in Internet space?

Remember the post Who is afraid of a bid bad wolf? It presented a hypothesis that the first mover doesn't always perform better. In some cases it is actually the second mover or the imitator who is winning over the market share.

As you will learn in this post, leaders are more likely to experience loss of market share when (relative to industry challengers) they are less competitively aggressive, carry out simpler repertoires of actions and carry out competitive actions slowly.

Market share leadership comes together with being more profitable that the competitors. Main reasons for that are economies of scale, market power, first mover & reputation advantages. You can read more about the in posts: Prawo rosnących przychodów (in Polish) and How do firm characteristics and behavior affect i18n?

Another important thing you need to remember is the market dynamics. According to Schumpeter dynamic market process by which market leaders & challengers are in an incessant race to get or to keep ahead of one another is the reason why companies and industries experience creative destruction. It is all about challenging the market status quo.

According to Ferrier et al (1999) leaders that carry out more competitive actions than challengers will have a lower rate of market share gap erosion and a lower rate of dethronement. They define total competitive activity as the total number of new competitive moves the firm carried out in given year.

Leaders are more likely to lose market share when they are

– less aggressive,
– carry out simpler repertoire,
– carry out competitive actions more slowly,

with relation to their competitors. Higher the industry rivalry or aggressiveness of one of the companies in the market increases higher the likelihood of market share gains. In Schumpeter's sense, competitive dynamics among market leaders affects their market position.

Managerial implications

What can we learn from the research that Ferrier and his colleagues did over 10 years ago? First of all companies need to try to understand and predict the move of rivals. Secondly, they should take more actions and undertake them more quickly than competitors. Finally, carry out a broader range of actions to confuse your rivals. 

These simple things that every company is capable of doing can increase their changes of gaining more market share (or reduce the risk of market share erosion or dethronement).

Bibliography: Ferrier, Smith and Grimm (1999): The Role of Competitive Action in Market Share Erosion and Industry Dethronement: a Study of Industry Leaders and Challengers, Academy of Management Journal, 42, 4, pp. 372-388.

How do firm characteristics and behavior affect i18n?

"Internet firms are born global" (Kotha et al, 2001)

There are four main factors that affect the i18n of the Internet company:

(1) Reputation (intangible asset): number of media articles

(2) Website traffic (intangible asset): unique monthly users

(3) Level of competitive activity: new products and features

(4) Level of cooperative activity: partnering agreements

In 2001 Kotha, Rindova and Rorhaerrnel researched that these 4 factors are positively related to the degree of i18n (number of foreign domain websites).

Who’s affraid of a big bad wolf? Introduction to Internet competition

Radical innovations create economic growth in the long term while some of the well established firms decline. In Internet world no leadership position is secure or sustainable.

Schumpeter & the Austrian school described the innovation as a process of creative destruction. Innovation is a dynamic market process by which firms engage in a race to get ahead of one another. Creative destruction imply that:

• innovative actions undermine the competitive advantage of established competitors 
• firms commit resources to develop new products, new technologies and distribution channels 
• the success of these innovations provokes competitive responses from existing firms and new entrants 

Competitive Actions

Are the primary mechanism that the firms deploy to establish and protect their advantage, as well as erode the advantage of competitors

Competitive action can be defined as all action that are taken in the pursuit of discovered profit opportunity

As a rule, a leader that carry out more actions will exploit more opportunities and, hence, close the potential for challengers. Firms undertaking more competitive actions have superior performance. Continous innovation may be more important to competitive advantage than protection of assets.

Competition

Internet market is always in disequilibrium. Large firms are swept into a turbulent competitive rivalry that creates winners and losers. We can observe an inevitable destruction of the competitive status quo through new competitive moves by rivals. They can embrace innovation or immitation. Either or, the leaders will lose to more aggresive rivals if they not undertake any aggressive actions of their own.

Hypercompetition

According to D’Aveni hypercompetition results from the dynamics of strategic maneuvering amongst competitors. It can easily be observed in a fast-paced industries. In hypercompetitive environment all advantages are temporary and no industry position is secure. Competitors can easily copy an advantage from the other firms; it simply becomes the cost and risk of doing business.

Firm performance is an outcome of a continous series of competitive actions. Speed allows companies to disrupt the status quo, because it creates new advantages before competitors are able to preempt these moves. Speed is negatively correlated with complexity, thus there is a danger of simplicity. Simple actions become predictable and can be easily immitated.

Successful firms ”hit” competitors from several different directions at once. Market-leader choosing a complacent strategy may lose its position, being vulnerable to more aggressive challengers.

Competitive Dynamics

The interplay of actions and response and their implications on firms’ performance is defined as competitive dynamics

Firm aggressiveness is the outcome of three factors:

• Timing/speed 
• Frequency 
• Range/complexity 

Timing of action

A company that is first to introduce a new product/service, or first to enter a market, may gain competitive advantage. The advantage may be derived from:

• Monopolistic profits 
• Technological leadership 
• Establishment of brand loyalty 
• Establishment of buyers’ switching costs 
• Economies of scale 
• Learning and experience 

The durability of such advantages is largely determined by the speed of imitation by the competitors. According to Lee et al (2000), "the faster a firm introduces a product, relatively to its rivals, the greater is the impact on shareholders’ wealth". However these advantages can be completely eroded by the sum effect of early and late imitations. Ferrier et al (1999) says that the "industry leaders were more likely to maintain their market share by acting fast against challenges". Challengers who act faster than leaders tend to gain market share.

What about the second mover?

In some cases it is actually the second mover or the imitator who has a better performance. The reason for that is the learning from the first mover mistakes and the ability to create a better product/service through reverse engineering or other methods.

It is very important to note that though the theory stresses the importance of quick reaction/imitation, it is undeceive regarding the benefits of being a pioneer.

Number of actions

Firms take actions in the pursuit of profits and untapped market opportunities. Generally, firms taking more actions are expected to exploit more opportunities and have better performance.

According to Ferrier et al (1999) "market-share leaders were more likely to be dethroned by challengers or to lose market share when they are less competitively aggressive". We expect aggressive firms, those carrying out more competitive actions than rivals, to have better performance than their competitors.

Competitive repertoire

To gain advantage, firms should constantly develop new types of actions. Firms carrying out a broader variety of actions are expected to perform better because they will be perceived as more capable and may be less predictable. On the other hand, a simple repertoire of actions may be too predictable and may erode a firm’s competitive position.

As Ferrier et al (1999) has found in his research "market leaders using a narrower set of actions (relatively to their challengers) experienced market share erosion and dethronement".

Voluntary sharing of intangible assets in ICT markets: a new challenge for regulators

ICT regulators need to tackle a phenomenon of sharing intangible assets by companies in a dominant market position. It requires a new approach, a synthesis of two contradicting trends: top-down extortion by the state, targeted primarily to the companies with significant market power (essential facility), as well as bottom-up voluntary sharing of the assets (long term strategy of standard recognition and related network effect).

Top-down state regulations

State regulations are directed primarily to the companies with significant market power. These firms need to share its information and knowledge in situations where their absence makes it difficult or impossible for  other companies to conduct their business (essential facility). The business world has seen many attempts to force companies to share their confidential know-how.

Let's take for example a case IBM vs. Compaq, Digital and Intergraph who wanted IBM to share with them its know-how. The court ruled that cooperation should not interfere with intellectual and industrial property that IBM has developed on its own and which led to leading position in this field. However, this view has subsequently evolved towards wider desirability and acceptability on forced sharing of confidential knowledge (such as Microsoft sharing its proprietary source-code).

Sieci strategiczne

Jeszcze kilka lat temu w obszarze zarządzania strategicznego firmy były postrzegane jako autonomiczne jednostki konkurujące o zasoby i wiedze. Jednakże, sieć powiązań i relacji każdej firmy wpływa znacząco na jej działania i wyniki. Według Gulati, Nohria i Zaheer (2000) istnieje pięć kluczowych obszarów, które można rozpatrywać z punktu znaczenia sieci strategicznych. Są to (1) struktura sektora, (2) pozycjonowanie w sektorze, (3) niekopiowalne zasoby i umiejętności firmy, (4) koszty zawierania umów i koordynacji, oraz (5) ograniczenia i korzyści sieci dynamicznych.

Sieci strategiczne można zdefiniować jako zestaw relacji pomiędzy dostawcami, klientami, konkurentami oraz innymi jednostkami organizacyjnymi. Do sieci strategicznych zaliczamy alianse strategiczne, joint ventures, długofalowe relacje pomiędzy kupującymi/sprzedającymi oraz inne, podobne powiązania.

Położenia firmy w sieci strategicznej jest bardzo istotne, ponieważ wpływa na intesywność konkurowania w danej branży. Konkurencja będzie większa wśród firm o podobnej sile i pozycji w sieci. Na jej intensywność będą również wpływać powiązania pomiędzy innymi firmami. Gdy firmy mają ze sobą powiązania ich konkurencyjność względem siebie będzie mniejsza.

Konkuperacja (ang. Co-opetition)

Firmy często tracą ich przewagę konkurencyjną przy okazji gwałtownych zmian technologicznych, które sprawiają, że ich zdolności stają się przestarzałe. Pytanie jednak brzmi, co staje się z przewagą konkurecyjną firm na skutek zmiany zdolności wewnętrznych jej partnerów i konkurentów (konkuperantów – dostawców, klientów, itp.) spowodowanej zmianą technologiczną? Ich sukces może wpływać na firmy, z którymi muszą współpracować i konkurować. Afuah (2000) w swojej pracy przedstawia jaki wpływ na firmy ma zmiana zdolności jej konkuperantów wywowała zmianą technologiczną. Dowodzi on, że wyniki firmy po zmianie technologicznej spadają proporcjonalnie do stopnia dezauktualizacji zdolności konkuperantów wywołanej zmianą technologiczną.

A new ecology of competition

"For most companies today, the only truly sustainable advantage comes from out-innovating the competition" 

-- James F. Moore

Moore (1993) suggests to perceive a firm as part of a business ecosystem that crosses a variety of industries.

Successful businesses are those that are innovating heavily. Yet this innovation is not created in a vacuum. Firms co-evolve capabilities around an innovation. They work cooperatively and competitively.

Every business ecosystem develops in four distinct stages:

1. Birth of Business Ecosystem 
2. Expansion 
3. Leadership 
4. Self-renewal or death 

How do firms achieve and sustain competitive advantage?

That was and still is the fundamental question of strategic management. It is even more important in the times of rapid technological change.

Dynamic capabilities approach
Teece, Pisano & Shuen (1997) have created a framework that explains how companies can achieve and sustain their competitive advantage. According to this framework - a dynamic capabilities approach - the wealth creation in regimes of rapid technological change depends on improving internal technological, organizational and managerial processes inside the firm. 

Firms can improve that by: 

• identifying new opportunities and organizing effectively and efficiently to embrace them
• exploiting firm specific competences to address changing environments

Knowledge of the firm

According to Kogut and Zander (1992) firms exist because they create conditions under which individuals integrate their specialized knowledge. These conditions allow the mechanisms for both transferring and creating knowledge to work and to create social communities that can transform individual and social expertise into economically useful products and services. What firms do better than markets is sharing and transferring of the knowledge of individuals and groups within an organization.

Why do firms exist? Theory Overview

In the contemporary business literaure you can find 4 main approached to the fundamental question: Why do firms exist? Below, I've put together an overview of main views that put pinpoint different market's and firm's characterisitcs and capabilities.

The Market Power Approach

According to this approach firm should exist in the industries with high overall profitability. Porter's Five Forces Model is the best example of the market power approach. It determines the competitive intensity and therefore attractiveness of a market. It is worth noting that the overall industry attractiveness doesn’t imply that every firm in the industry will have the same returns.