Background Note | HBS Case Collection | May 2011

Scale Effects, Network Effects, and Investment Strategy

by Willy Shih

Abstract

This technical note discusses scale economies, and direct and indirect network effects in the context of building better business models. Some of the great business disasters of the dot.com bubble were companies that scaled their infrastructure without working through the scaling effects. This note also discusses multi-sided platforms, the skewing of business models reflecting a mispricing to get one side on board, and suggests the importance of testing in establishing viable business models.

Keywords: Business Model; Investment; Price; Crisis Management; Network Effects; Multi-Sided Platforms; Strategy;

Citation:

Shih, Willy. "Scale Effects, Network Effects, and Investment Strategy." Harvard Business School Background Note 611-082, May 2011.