bdsm-ch10 path dependence
DESCRIPTION
This powerpoint is used in Business Dynamics and System Modeling Class taught by Pard Teekasap at Southern New Hampshire UniversityTRANSCRIPT
Business Dynamics and System Modelingy y gChapter 10: Path Dependence and
db kPositive Feedback
Pard TeekasapPard TeekasapSouthern New Hampshire University
OutlineOutline
1. Path Dependence2. VHS VS BetaMax2. VHS VS BetaMax3. Positive Feedback of Corporate Growth4. Positive Feedback and Economic Growth5 Modeling Path Dependence and Standard5. Modeling Path Dependence and Standard
Formation
Path DependencyPath Dependency
A pattern of behavior in which small, random events early in the history of a system y y ydetermine the ultimate end state, even when all end states are equally likely at theall end states are equally likely at the beginning
fE.g. the clockwise movement of the clock, VHS Vs BetaMax, QWERTY Vs Dvorak keyboard
Stable Vs Unstable EquilibriumStable Vs Unstable Equilibrium
P*
P*
Position of Equilibrium Position of EquilibriumP iti+Position of
Ball (P)qPosition
(P*)
+
+
B
Ball (P) Position(P*)
+
+
R
Discrepancy(P - P*)
Force onBall
+-
BDiscrepancy
(P - P*)Force on
Ball
-R
- +
Black & White Stone: Polya ProcessBlack & White Stone: Polya ProcessBlack Stones+
BlackProportion ofBl k St
R
Black StonesAdded per
Period+
StonesBlack Stones
-+
B
TotalNumber of
Stones
+
+
StonesAdded per
PeriodRandom
Draw
White
+
P ti f
+-
B
Stones
R White StonesAdded per
P i d
+
Proportion ofWhite Stones
Period+
Result from 10 runsResult from 10 runs
1.0
0.8
Ston
es
0.6
f Bla
ck S
0 2
0.4
port
ion
o
0.0
0.2
Prop
0 50 100 150 200Time (periods)
The Diffusion of VCRs in USThe Diffusion of VCRs in US100
Sales of VCRs and Prerecorded Tapes in the US
8
12
50
75
(mill
ion/
year
)
Tape Sales (m
VCR Sales(left scale)
0
4
0
25
VCR
Sal
es illion/year)
Prerecorded Tape Sales(right scale)
80
100Fraction of US Households with at least One VCR
s0 01975 1980 1985 1990 1995
40
60
ent o
f Hou
seho
lds
Average Price of VCRs
0
20
1975 1980 1985 1990 1995
Perc
e
1500
2000
2500
it
500
1000$/U
ni
01975 1980 1985 1990 1995
Share of BetaMax Vs VHSShare of BetaMax Vs VHS12
US Sales of VCRs by Format
8
12
Total VCR Sales
VHS
on U
nits
/Yea
r
0
4
1975 1980 1985 1990 1995
BetaMill
io
60
80
100US Sales of Prerecorded Tapes by Format
e Sa
les
ar)
Total
20
40
60
Prer
ecor
ded
Tape
(mill
ion/
yea
VHS
B t100
Market Share of VHS Format VCRs and Tapes
01975 1980 1985 1990 1995
Beta
60
80
Shar
e (%
)
VHS Share ofSales VHS Share of
Tape Sales
0
20
40
1975 1980 1985 1990 1995
Mar
ket S
VHS Share ofCumulative Sales
1975 1980 1985 1990 1995
BetaMax Vs VHSBetaMax Vs VHS
• 1975; Sony introduced BetaMax• 18 months later; VHS was introduced18 months later; VHS was introduced• 1988; Sony abandon BetaMax• Based on your idea, which factors affect the results of the competition?p
• Draw a CLD to explain the dominance of VHS i th h VCR k tin the home VCR market
Positive Feedback of the Corporate Growth
• There are many feedback loops for the corporate growthp g
• The following diagrams present loops in a highly simplified format without consideringhighly simplified format without considering the competitors and omitting many negative ffeedbacks
Product AwarenessProduct Awareness
• Customers become aware of firm’s products throughg– AdvertisingDirect sale– Direct sale
– Word of mouth– Media attention
Advertising and Direct SalesAdvertising and Direct Sales
Word of Mouth and MediaWord of Mouth and Media
Unit Development CostUnit Development Cost
Sales+
Expected Fixed Costs of
+
+p
Market SizeFixed Costs of
Development andProduction
-
IndustryDemand
MarketShare R11R10
+ +
Unit FixedCosts
+
Demand fromSpreading
Share fromSpreading
Unit CostsProduct
++
SpreadingFixed Costs
SpreadingFixed Costs
ProductAttractiveness Price
+-
Unit VariableCosts+
Production CostProduction Cost
Network and Compatibility EffectNetwork and Compatibility Effect
Product DifferentiationProduct DifferentiationPrice
+
Sales
+
+ +R20
+Revenue
Price PremiumEffect
IndustryDemand
MarketShare R18
+ + ProductDifferentiation
Price Premiumf S i Investment in
+
R19
ProductDifferentiation(Total Demand
ProductAttractiveness
Differentiation(Share Effect)
for SuperiorTechnology Product
Features+
Effect)
ProductFeatures:
+ +
• Functionality• Suitability to Customer Needs• Quality and Reliability• Service and Support• Other Attributes
New Product DevelopmentNew Product DevelopmentPrice
++
Revenue+
++
Sales+ +R22 +
R21
N U
ProductDevelopment
Price Premiumfor Uniqueness
IndustryDemand
New Uses,New Needs
Price Premium for
DevelopmentCapabilityand Effort
New
Price Premium forUnique New
Products ++
NewProducts+
Market PowerMarket Power
+
I d t
Sales+ + + +
IndustryDemand
MarketShare R23
+ +
MarketPower OverSuppliers
MarketPower Over
LaborPower over
R24
Power over
MarketPower overCustomers
R25
Power over
UnitCosts
ProductAttractiveness
Suppliers-
-
Workers Customers
CostsPrice
+-
-
Mergers and AcquisitionsMergers and Acquisitions
Sales+ Financial
Resources
+
IndustryDemand
MarketSh
+
Acquisition ofAcquisition of
+ +
Demand Share
Product
R26+ +
Suppliers andCustomers
Acquisition ofRivalsR27
MonopolyPower
VerticalIntegration +Product
Attractiveness
- Market Power overSuppliers, Workers,
+Economiesof Scale
UnitCosts
Price+
pp , ,Customers-
-
Workforce QualityWorkforce Quality
Sales+ +
Sales
+Revenue
++
IndustryDemand
MarketShare R28
+ +
Profit GrowthRateR29
CareerWage
+
Wages andBenefits
ProductAttractiveness
+ + Growthg
Premium
P i d C+
+
BenefitsAttractiveness
Quality ofWorkforce
+
Perceived CareerOpportunities
+
+
+
Cost of CapitalCost of Capital+
RecentRevenue
+
Sales+
+Profit
Revenue+
+
Revenue
- RecentGrowth Rate
+ -R33
G thIndustryDemand Market
Share
Expected
R31++ Effect of Cost
+
Growth RateGrowthPremium
ExpectedFuture
EarningsProduct
Attractiveness
R30
Effect of CostReductionon Profit
Effect of CostReductionon Sales
+
+
+
Cost ofCapital
Price UnitCosts
Stock Price
-
+
-
pCosts ++R32
Effect of CostReduction on
Investment
Investments inInnovation,Quality, and
Differentiation-
Golden RuleGolden RuleBusinessSuccess
+Success
R34
The Golden Rule +The Golden RuleFavorable
Rules of the Organizational Sizeand InfluenceGame and Influence
+
MotivationMotivation
Level of+ Achievement+
StretchFactor+ +R35
B -
DesiredAchievement
StretchObjectives
Motivation,Effort,
Investment
Performance Shortfall(Gap betweenAspiration andA hi t) +Achievement)
++
Synergy between loopsSynergy between loops
• All the loops work together• However, not all positive feedbacks that driveHowever, not all positive feedbacks that drive corporate growth are compatible with one anotheranother
Positive Feedback and EconomicGrowth
• Specialization and productivity• Adam Smith stated that as a process is divided pinto a larger number of routinized operation, productivity grows because specialization enablesproductivity grows because specialization enables people to learn fasterK E th h t t i h• Krugman: Even though two countries have identical resources, they should produce only one hi d d b i li i bthing and trade because specialization boosts productivity, hence total output increases
Economy Lock In to Inferior Technologies?
f d i d i f d• If a dominant determinant of product attractiveness is compatibility and the availability f l t d fi i ht bof complementary goods, a firm might become
the market leader even though its technology is inferiorinferior
• The likelihood of locking into an inferiorh l i i h h h f htechnology increases with the strength of the
positive loops that confer advantage to the k t l d i d d t f th tt ib t fmarket leader independent of the attributes of
the technology
How to reset the lock inHow to reset the lock in
• It happens when the system in which the standard is dominant becomes obsolete or is itself overthrown
• The mass extinction event removed all the• The mass extinction event removed all the market share so the selection of new thing is
fonce again strongly influenced by random events
Model Structure for Path DependenceModel Structure for Path Dependence
Effect of the sensitivity of attractiveness
1.00
ess)
0.75
ensi
onle
0.50
hare
(dim
s = 1 Share = A /(A +A )0.25
Mar
ket S
h
s = 2s = 1
s = 4s = 8
Share1 A1/(A1+A2) A1 = EXP(s*Installed Base 1/Threshold) A2 = EXP(s*1)
0.000.0 0.5 1.0 1.5 2.0
M
Installed Base of Product i
s = 20
Threshold for Compatibility Effects(dimensionless)
Simulation of the installed baseSimulation of the installed base1 001.00
0.75
, Firm
1
0.50
et S
hare
0.25
Mar
ke
0.00-1 0 1 2 3 4 5 6 7 8 9 10
YYears
Evolution of the distribution of market share 0.50
t = 0
10.50 00
t = 2
10.50 00
t = 4
10.50 00
t = 6
10.50 00
t = 8
10.50 00
00 1
Market Share,Firm 1
t = 10
Hypothetical phase plotHypothetical phase plot1
UnstableEquilibrium
t 1
StableEquilibrium
ionl
ess)
e Pr
oduc
t (d
imen
srk
et S
hare
Stable
Mar
StableEquilibrium
00 1
I t ll d B f P d t 1Installed Base of Product 1Total Installed Base
(dimensionless)
Phase plot at different installed based of product 2
1.00
0 751 0.75
Prod
uct
onle
ss)
0.50
et S
hare
di
men
sio B2 = 0.1
B2 = 0.5
0.25
Mar
ke (d 2
B2 = 1
0.000.00 0.25 0.50 0.75 1.00
B2 = 2
Installed Base of Product 1Total Installed Base
(dimensionless)
Policy ImplicationPolicy Implication
h d f d d• When a new product is first introduced to a market where no prior standards have been established, the network effect is likely to be quite week. Market share will be determined primarily by other product attributes
• As the installed base grows and the network geffects become stronger, the chance that a late entrant can overcome the advantage oflate entrant can overcome the advantage of the first mover declines rapidly