By Cesar Buenadicha, Galia Nurko and Miguel Aldaz*
Businesses are one of the key pieces that build a society’s ecosystem and, as such, are increasingly being called to take on more purpose-driven projects that address society’s most pressing problems.
In the last two decades, a new transformative toolset, one that provides innovative solutions an avenue to scale rapidly, entered the market— digital technology. These technologies have already revolutionized how we work, engage with government, manage our finances, store our information, communicate with friends, choose where or how to spend our money, and think about solving problems. But, without doubt, their most attractive quality is the opportunity they create to scale ideas quickly, in mass, and in comparison to onerous legacy infrastructures, with little capital.
So how do today’s digital technologies scale so quickly?
They scale through what is often referred to as a ‘network effect.’ A network effect is the effect that one user of a good or service has on the value of that product or service for other users, meaning that the value of a product or service is dependent on the number of others using it. A network effect can take multiple forms, but two are particularly illustrative. The first is a direct network effect, where increased usage by one user immediately increases the value of the product for others. Think of telephone companies. As more people purchased phone lines the more beneficial it became to own a telephone, because the number of people who could be reached through the technology, multiplied. Facebook and LinkedIn services use a similar model.
Clipped from Dartmouth College Professor Geoff Parker’s presentation on Platform Revolution-Ch 02 Network Effect: Power of the Platform
The second form is a two-way network effect, where the increase in usage by one set of users increases the value of a complementary product to a separate group of users and vice versa through a cyclical pattern. Uber is a good example. As the number of Uber riders increase, it becomes more valuable for drivers to hit the road, making the service more accessible for riders and increasing its usefulness, which in turn increases the value for drivers, and so on. Other popular examples of this model include Amazon.com or AirBnB.
Through network effects, companies can grow and scale at an exponential pace. In effect, they are a power law, meaning they are highly exponential in terms of value creation and have the potential to create win-win outcomes for businesses and stakeholders alike. Successful examples of these types of enterprises already exist, such as Biko and The Food Assembly, which work to tackle environmental degradation and support local economic growth through digital platforms.
Therefore, our upcoming test—and great opportunity—as companies, social entrepreneurs, environmental champions or international development professionals committed to addressing society’s most pressing problems, is how to design initiatives that harness network effects for the benefit of all our stakeholders.
To paraphrase a powerful figure, may the network effect be with you!
*About the authors
Cesar Buenadicha
César is a Lead Specialist at the Inter-American Development Bank (IDB) in Washington, DC (Multilateral Investment Fund unit). In his work at the IDB, he has led a variety of programs in digital innovation, sharing economy, crowdfunding, social entrepreneurship and inclusive business in countries throughout Latin American. He holds a PhD in Economics (UNED, Spain) with the dissertation entitled "Scalability Analysis in the identification and design of Development Projects"; in addition, he holds professional advanced degrees in Law and Economics from the University of Comillas (ICADE E-3, Spain). Before joining the IDB, he worked for ten years in Honduras, El Salvador and Bolivia in microenterprise development and employment programs through Spanish and Dutch National Development Agencies. Prior to entering the development field, César worked as a lawyer in the private sector for Clifford Chance Law Firm.
Galia Nurko
Galia Nurko is graduate student at Georgetown University, pursuing an M.S. in Foreign Service with a focus on international development and emerging technologies. Previously, she worked as a graduate policy fellow at the Information Technology and Innovation Foundation, conducted research on post-conflict societies, and served as Director of Media Relations at the Embassy of Israel to the United States. Galia holds a B.A. in history from The Ohio State University and is fluent in English, Spanish and Hebrew.
Miguel Aldaz
Miguel Aldaz started his career at the Aragonese Municipalities Association (Spain) with responsibilities that included SME competitiveness and economic diversification. Once at the Inter-American Development Bank (IDB)’s Multilateral Investment Fund (MIF), he was heavily involved in developing the entrepreneurial ecosystem and venture capital industry in Latin America and the Caribbean. His last assignment at the MIF was to lead its Innovation team that piloted and mainstreamed new thematic areas such as inclusive business models and social entrepreneurship. In 2009, Mr. Aldaz assumed the position of Lead Partnerships Officer at the Office of Outreach and Partnerships, the IDB’s single window that brings together public and private sector organizations. There, he focusses on linking large corporations’ sustainability and innovation agendas with the IDB’s mandate with the ultimate objective of achieving the 2030 Agenda for Sustainable Development.