The competitive dynamics of network-based businesses.

Three distinct usage patterns are uncovered in network customers: one in which all links are valued equally; another in which customers concentrate their use in particular zones; and a third in whichcustomers value only individual links.

Abstract

Telecommunications carriers, transportation companies, and banks are among the many network-based businesses--companies that move people, goods, or information from various points to various other points. Managers have long assumed that customers valued all links in these networks equally. It was thought that banking customers, for example, sought access to all of the branches throughout the network or that shipping customers wanted to be able to send packages everywhere. Intuitively, managers thought that many of their customers' needs were, in reality, narrower, but they had no way of knowing which links were most important. New computing power and robust mapping software now make it possible to understand network customers better. In applying this technology, the authors, both consultants from McKinsey & Company, have uncovered three distinct usage patterns: one in which all links are, indeed, valued equally; another in which customers concentrate their use in particular zones; and a third in which customers value only individual links. Each of these patterns requires a different strategy to direct executives in making the decisions fundamental to managing any network-based business: whether to open or close outlets, whether to connect their network to others, and how to organize business units so that they reflect the network's structure. Those who don't spot the patterns or understand their strategic implications will find themselves on the losing end of the network battle.