PROJECT REPORT

SUMMER SCHOOL POLAND

A REPORT ON
DOING BUSINESS IN DIGITAL ECONOMY

Submitted by:

Under the Guidance of:

Tania Khanna

PhD Mikolaj Klimczak

JKBS/AICTE/PGDM2015-17/53

Professor

PGDM (2015-16)

Summer School Poland

JK Business School

Wroclaw

Gurugram

02 July 16 July 2016

DOING BUSINESS IN DIGITAL

ECONOMY
DIGITAL ECONOMY
The term Digital Economy refers to an economy that is based on digital technologies. The digital economy is also
sometimes called the Internet Economy, the New Economy, or Web Economy. Increasingly, the digital economy is
intertwined with the traditional economy making a clear delineation harder.
The ongoing transformation from a traditional economy to an economy that is based on digital technologies can be
extremely disruptive. Popular examples of disruptive digital companies includeairbnb in hospitality, Spotify in
music, Dropbox in digital storage, Netflix in video on demand and Uberin the taxi industry.
he digital economy is classified into resources (data), infrastructure (carriers, data centres and hosters), services
(IaaS, PaaS, and SaaS), and customers (roles, industries and things).
eLearning as a digital activity in the Education sector and eCommerce as a connected activity within Trade. Similarly,
online media and entertainment is a digital activity within consumer and 3d printing within production. Similarly, the
Internet of Things (IoT) connects devices, cars, smart meters and other things within industries.
Programmable interfaces (API) connect resources, infrastructure, services and customers. Digital partner
ecosystems offer new routes to market.

How the Digital Economy Is Reinventing The

Business World
Is your industry undergoing a significant digital transformation? If so, youre not alone. Multiple organizations and
entire industries are being forced to re-invent the way they do business, as new competitors come in from left field to
disrupt the status quo.
According to the new SAP eBook, The Digital Economy: Reinventing the Business World, companies that dont
adjust to the growing networked economy risk becoming irrelevant in their industry.
Digital technology and the Internet of Things (IoT) are transforming the business world at an astonishing rate. This is
creating immense opportunities for companies who are quick to adopt digital innovations, but its also causing
industry disruption and creating challenges for businesses that are slow to react.
Business leaders who see new competitors move into their traditional markets are driven to make their companies
more agile in order to respond. The Digital Economy eBook has useful insights and tips to help business leaders
move beyond the digital enterprise, and become successful in the expanding digital economy.

Three pillars of the digital economy

The eBook takes an in-depth look at three pillars of the digital economy:
1.
2.
3.

Real-time business: The pace of business is accelerating quickly and its elevating the expectations of
everyone involved, from the supplier right to the end customer.
Business innovation: As organizations strive to do business in real time, innovative products, processes, and
business models develop. This creates a need for change internally and externally, and makes collaboration
vital.
Business agility: What businesses need to do to stay current, responsive, and agile.

Network effect

In economics and business, a network effect (also called network externality or demand-side economies of
scale) is the effect that one user of a good or service influences the value of this good for other

user.
Network effect is usually associated with positive effects, but it can also have a
negative nature. The classic example is the telephone. The more people who own telephones, the more
valuable the telephone is to each owner. This creates a positive externality because a user may purchase a
telephone without intending to create value for other users, but does so in any case. Online social networks work in
the same way, with sites like Twitter and Facebook becoming more attractive as more users join. Negative network
externalities can also occur, where more users make a product less valuable, but are more commonly referred to as
"congestion" (as in traffic congestion or network congestion).

Types of network effects

There are many ways to classify networks effects. One popular segmentation views network effects as being of four
kinds:

Two-sided network effects:It occurs in the case of two-sided markets (where the broker is engaged
in associating parties to the transaction). Change in number of users on either side changes the value(utility)
good on the other side of the market. On two-sided markets there may also be present direct network effects.
An example is developers choosing to code for an operating system with many users, with users choosing to
adopt an operating system with many developers.

Direct network effects: Change in the numbers of users of some goods leads directly to the change
of value (utility) of this good for users belonging to the same group. For example, telephone systems, fax
machines, and social networks all imply direct contact among users. In two-sided networks, a direct network
effect is called a same-side network effect. An example is online gamers who benefit from participation of other
gamers as distinct from how they benefit from game developers.

Indirect network effects: Change in numbers of users of a some group leads indirectly to change of
the value (utility) of this goods for users belonging to the same group. This is done by complimentary goods
whose value (utility) changes, which can contribute to changes in the value of the first good. Examples of
complementary goods include software (such as an Office suite for operating systems) and DVDs (for DVD
players). This is why Windows and Linux might compete not just for users, but for software developers.[9] This is
more accurately called a cross-side network effect in order to distinguish network benefits that cross distinct
markets.[10]

Local network effects: Change in the total number of users does not lead to changes in the value of
goods for all users. The value changes due to the number of users in a certain subset of the overall user group.
For example, a good displays local network effects when rather than being influenced by an increase in the size
of a product's user base in general, each consumer is influenced directly by the decisions of only a typically
small subset of other consumers, for instance those he or she is "connected" to via an underlying social or
business network. Instant messaging is an example of a product that displays local network effects.

Negative network effects

Negative network effects, in the mathematical sense, are those that have the opposite effect on stability compared
to normal (positive) network effects. Just like positive network effects cause positive feedback loops
and exponential growth, negative network effects create negative feedback and exponential decay. In nature,
negative network effects are the forces that pull towards equilibrium, are responsible for stability, and are the physical
limitations preventing states from reaching infinity.

Congestion occurs when the efficiency of a network decreases as more people use it, and this reduces the
value to people already using it. Traffic congestion that overloads the freeway and network congestion over
limited bandwidth both display negative network externalities.

Braess' paradox occurs when the following counterintuitive phenomenon: removing edges from a selfish
routing network can decrease the latency incurred by all of the traffic at equilibrium.

The effects and problems

One network and multiple networks the problem of social optimum as well as lock-in.
Herding behavior decision making on the basis of beliefs about the decisions of other users, not the real
decisions- leads to self fulfilling prophecies in terms of network size.
The problem of the critical point (critical mass)
Difficult to distinguish from economies of scale and scope.

Factor influencing the network effect

Interoperability
Interoperability has the effect of making the network bigger and thus increases the external value of the network
increasing appear to consumers. Interoperability achieves this primarily by increasing potential connections and
secondarily by attracting new participants to the network. Other benefits of interoperability include reduced
uncertainty, reduced lock-in, commoditization and competition based on price.[1]:229
Interoperability can be achieve through standardization or other cooperation. Companies involved in fostering
interoperability face a tension between cooperating with their competitors to grow the potential market for products
and competing for market share.[1]:227

Open versus closed standards

In communication and information technologies, open standards and interfaces are often developed through the
participation of multiple companies and are usually perceived to provide mutual benefit. But, in cases in which the
relevant communication protocols or interfaces are closed standards the network effect can give the company
controlling those standards monopoly power. The Microsoft corporation is widely seen by computer professionals as
maintaining its monopoly through these means. One observed method Microsoft uses to put the network effect to its
advantage is called Embrace, extend and extinguish
Mirabilis is an Israeli start-up which pioneered instant messaging (IM) and was bought by America Online. By
giving away their ICQ product for free and preventing interoperability between their client software and other
products, they were able to temporarily dominate the market for instant messaging. Because of the network effect,
new IM users gained much more value by choosing to use the Mirabilis system (and join its large network of users)
than they would using a competing system. As was typical for that era, the company never made any attempt to
generate profits from their dominant position before selling the company.

Lock-in (decision-making)
Lock-in means that a particular technology or product is dominant, not because its inherent cost is low or
performance is good, but because it enjoys the benefits of increasing returns to scale. As a result, decision makers
are greatly influenced by the dominance (large market share) of a product rather than by their preferences for its
inherent properties. The wider system can therefore not easily escape the dominant entity. Increasing returns to scale
can be due to a range of demand- and supply-side factors, including positive information and network externalities,
economies of scale in production, learning effects and infrastructure availability. The result of lock-in is that decisionmakers feel forced to choose for the dominant product, even if their intrinsic preference for it might be low. A famous
early example of technical lock-in is the QWERTY keyboard.[1] The most famous (simple) model to illustrate pathdependence potentially giving rise to lock-in was developed by Arthur (1989).[2]
In deciding about technologies or products decision-makers can become committed to the project before the formal
decision to build was taken. The formation of commitment is not necessarily bad, but when commitment turns into
lock-in, it has by definition a negative influence on the project performance. Lock-in can occur at the decision-making
level or at the project level. There are possibilities to avoid lock-in when decision-makers can be made aware of this
phenomenon. However, lock-in can also be used intentionally, in which case, it is much more difficult to prevent and
hence manage cost overruns.

What is The Lock In Effect?

The Lock In Effect is a term, which is typically used to explain a practice, where a company makes it extremely hard
for their customers to leave them, even if the customer wants to.
A couple of lock in examples:

UK banks are notorious for making it far more difficult to move to another bank, than it needs to be. Bill
payments are often missed and a process that should take minutes electronically, can drag on for weeks or
more. You feel locked in, because the pain and frustration of moving banks is so high.

If your company is set up to use a certain software package, which all your employees have mastered, it
makes it a lot harder to drop that software when a better alternative appears. The cost of buying the new
software, the time and cost required to retrain everyone and the potential for lost data, makes you feel locked
in.

Switching Costs: 6 Ways To

Lock Customers Into Your
Ecosystem
A great product isnt enough to bring a flock of customers to your door. You must design a superior
business model to attract and retain customers into your ecosystem. Switching costs have enabled industry
leaders such as Adobe, Salesforce, Microsoft or Rolls Royce to lock customers in and outcompete other
players.
Switching costs are one of the seven business model mechanics you can use to design superior business models
Switching costs help lower customer acquisition costs and thrive on recurring revenues from customers. They can
also protect you from your competition. There are plenty of ways to embed them in your business model. If you look
closely at companies like Adobe, Salesforce, Google, or Rolls Royce, you'll see that their dominance is no mere
coincidence. Customers stay because they are locked into their ecosystems through high switching costs.

Let's take a look at 6 different 'traps' that companies have used to lock customers in through switching costs:

1. Base Product & Consumable trap: Nespresso, Gillette, HP, Kodak

For this trap, companies lure customers into their ecosystem with a base product and then milk profits from
'consumables' that customers are forced to buy. Nespresso coffee machines (base product) are sold at cost and

available at major retailers so anyone can buy them. But the highly-profitable coffee pods are only sold through
Nespressos owned sales channels, allowing them to absorb juicy margins. There was no way to buy pods from
another manufacturer until 2011 because Nespresso owned exclusive rights to produce them. That's how consumers
got locked in. Companies that have used the base product & consumable trap include Gillette (razors & blades),
Kodak (cameras and film), Hewlett-Packard (printers and cartridges).

2. Data trap: Apple, Google Android, Spotify

The Data trap consists encourages customers to create or purchase content and apps that are exclusively hosted on
a platform. These platforms can be websites, software or devices. But, leaving one platform for another forces
customers to let go of data or activity that can't be migrated to another app. For example, smartphone marketplaces
like the AppStore or the Google PlayStore host content & apps that cant be transferred elsewhere. Android or Apple
users will have to give up their purchased music tracks, apps or movies if they want to switch to a competitor. Spotify,
a music software company, threatened Apple and Googles music revenues and switching costs by offering a vast
catalogue of songs on an app that can be downloaded from major smartphone marketplaces. But if you switch from
Spotify to another music app, youll lose your playlists. Another example of 'data trap'!
3. Learning Curve Trap: Adobe, Salesforce, Box
Customers can be discouraged when they have to start over and learn how to use a new product. The learning
curve trap is centered around offering a great value proposition thats only accessible to those willing to train to know
how to use it. Salesforce and Adobe use the learning curve trap to get customers hooked to their products--some
users get so good at using their software that they become certified experts. They dont feel like switching to
something else unless they experience a very strong pain with their existing product. A similar example would be the
file synchronisation app Box for companies. It becomes so hard to rebuild an infrastructure for file sharing and
synchronisation from scratch that companies prefer to stay with Box. It gets hard to switch to a different solution
because it would mean losing a skill that you acquired in order to use the tool.
4. Industry standards trap: Microsoft, Adobe
Sometimes, you are forced to do things because everyone else does it a certain way. That's another way companies
lock customers in. They position themselves as leaders by public acceptance. Their product, or one of their product
features, has become the standard in an industry, which makes it very difficult to use something else. Microsoft
Offices Word software is one of them. The .doc format, distinctive to Word documents, has been the industry
standard since Microsofts early entrance on the word processing software market. Switching costs are high because
it is nearly impossible to work with a word processing software that doesnt create or accept .doc files today. The .pdf
format is another widely accepted file format around the world and has enabled Adobe to create switching costs the
same way.
5. Servitization Trap: Rolls Royce, Hilti
If your competitor uses the servitization trap, youre not just competing against their product, but against an entire
experience they offer. In this approach, a company can bundle their products with complementary services provided
only to their customers. Rolls Royce creates such switching costs in their power by the hour offer. In essence,
power by the hour consists of leasing jet engines, maintenance and repair services for a flat fee. The real gamechanger is that Rolls Royce only charges airlines for the time they use the engine. This experience is outstanding for
airlines because it relieves them from the huge pain of losing money when defective engines block planes from flying.
By bundling its highly profitable services with its first-class engines into one integrated offer, Rolls Royce make it
harder for airlines to switch to a competitor. Another great example is Hilti who uses the 'servitization trap' to provide
the best and latest constructions tools to its clients, which in turn can fend off competition from low-cost
manufacturers.
6. Exit trap: Verizon, AT&T
The exit trap forces customers to use a product for a certain period of time specified in a contract. If the customer
wants to exit the contract, he/she has to pay early termination fees. This strategy is commonly used to dissuade
customers from switching to a competitor before their contract ends. Telecom operators such as AT&T or Verizon can
charge up to $350 in early termination fees. Companies like T-Mobile are trying to threaten this business model by
offering to cover early termination fees if customers switch to their offers.

Pricing strategies in digital economy

Cost of producing the information Cost of material production drops (eg. CDs) Cost of distribution drops as well.
The General problem of cost of digital goods is called first copy cost. Information is costly in production, but cheap
in reproduction.
Cost of digital goods in the language of economics

High fixed and sunk costs

Low Variable costs

Generally, it leads to some serious economies of scale. In detail it is important to look at each of such cost separately.
Fixed cost in the production of digital goods: Majority of fixed cost are also sunk.
Variable costs in the production of digital goods: Cost of production of the next unit does not grow with an
increase of production. Marginal cost is decreasing or constant. Low variable cost help with the marketing strategies.
Markets for digital goods: They cannot and will not look like markets for goods in traditional economy.
When one or more companies incur the costs which are then sunk, competition forces push prices towards marginal
cost. Therefore so msny goods are available without payment in the digital economy and companies try to develop
new business models, different from traditions ones.

Structure of markets for digital goods:

Market with dominant company

Market with differentiated product.

Other market structures are not stable and long-lasting.

TWO STRATEGIES1.
2.

Gain cost advantage.

Differentiate product.

They are classic recommendations, which can be addressed with new means.

Cost Leadership

If the company is able to sell more than others, its average costs will be the lowest.
To sell more, you need to lower the price, and average revenue is bound to drop.
Two companies cannot win such price competition.
Sales expertise, marketing skills and control over distribution channels matter.

Unlike traditional marketing goods, average costs of production of digital goods are reduced by increasing
the sales.

Application of Digital economy principles by

OYO ROOMS:
The Product
OYO provides standard comfortable rooms with all facilities at
affordable rates.
Users can either download the OYO app in their phone or
simply login to www.oyorooms.com to book their nearest OYO
room.
They use technology to link all its functions and provide the
customer a seamless awesome experience.
Budget range of hotel rooms is from $16 to $66.
Provides all basic amnities like WiFi, Complimentry breakfast,
Clean linen, Acs, Cable TV, Hygeinic washrooms.
OYO provides standard comfortable rooms with all facilities at
affordable rates.
Users can either download the OYO app in their phone or
simply login to www.oyorooms.com to book their nearest OYO
room.
They use technology to link all its functions and provide the
customer a seamless awesome experience.
Budget range of hotel rooms is from $16 to $66.
Provides all basic amnities like WiFi, Complimentry breakfast,
Clean linen, Acs, Cable TV, Hygeinic washrooms.
OYO provides standard comfortable rooms with all facilities at
affordable rates.
Users can either download the OYO app in their phone or
simply login to www.oyorooms.com to book their nearest OYO
room.

 They use technology to link all its functions and provide the
customer a seamless awesome experience.
Budget range of hotel rooms is from $16 to $66.
Provides all basic amnities like WiFi, Complimentry breakfast,
Clean linen, Acs, Cable TV, Hygeinic washrooms.
OYO provides standard comfortable rooms with all facilities at
affordable rates.
Users can either download the OYO app in their phone or
simply login to www.oyorooms.com to book their nearest OYO
room.
They use technology to link all its functions and provide the
customer a seamless awesome experience.
Budget range of hotel rooms is from $16 to $66.
Provides all basic amnities like WiFi, Complimentry breakfast,
Clean linen, Acs, Cable TV, Hygeinic washrooms.
OYO provides standard comfortable rooms with all facilities at
affordable rates.
Users can either download the OYO app in their phone or
simply login to www.oyorooms.com to book their nearest OYO
room.
They use technology to link all its functions and provide the
customer a seamless awesome experience.
Budget range of hotel rooms is from $16 to $66.
Provides all basic amnities like WiFi, Complimentry breakfast,
Clean linen, Acs, Cable TV, Hygeinic washrooms.
Business Model
Contacts hotel owners and asks them to partner with them
OYO team audits the hotels to make necessary changes for
standardization of hotels.

 Shares the details of the partnership agreement with hotel

owners.
Audits hotels every few days to assure customers of quality
standards.
Stays away from hotel management, just focuses on the
expansion of hotel chain and lets the hotel owners manage the
Hotels.
OYO Rooms always has an underlying factor of being budgeted.

Network Effect
Direct network effect:
With large chain of properties, OYO capitalizes on network
effect.
Large chain of hotels in metro cities make it very convinent for
travellers to stay at OYO and stick to the brand.
Customers come to OYO because they have a large room
inventory so they get to choose the most appropriate room.
Satisfied customers bring in more customers and OYO benefits
from Word of Mouth
Two-sided network effect:
The more they expand on the hotels side, the more customers
would stick to their platform resulting in more hotels willing to
join their platform.
Customers would come to OYO because they have room
inventory and hotels would sign up on OYO platform because
they have more customers.
OYO use this network effect to their advantage and keeping
the competition in check

Lock-in Effect

 Oyo has a great lock-in effect on its Hotel Owners as well as on

its customers.
Effect on HOTEL OWNERS:
Hotel owners cannot attract as much customers own their own
as the OYO logo on their hotels attracts.
OYO gives them twice as much business as they do on their
own so theyre locked in with OYO due to huge switching cost
and unavailability of strong OYO competitors.
Effect on Customers:
The logo of OYO builds a sense of trust amongst its customers
because of its standardized quality services.
Therefore, customers are locked in with OYO rooms as they are
assured of the standards which OYO provides in all its hotels.
So customers travelling to new places prefer OYO rooms
instead of trying new unknown hotels.

Versioning
Versioning is not applicable on OYO room hotels.
Certain standardization has been set across all its hotels by
OYO rooms.
Due to such standardization there is no different versions of
OYO rooms available.
Although there are bigger and smallers rooms available
according to the needs of the customers but even the bigger
rooms have the same facilities and standards.

Revenue Generation
OYO simply connects the guest (customer) with the hotels by
listing hotels on their website and mobile applications.
They earn revenue through a percentage of commissions from
their partnered budget hotels.

 They work out a deal with the hotels with a minimum order
guarantee per month and are able to provide discounted rates
and deals to the customers to attract them.