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The Importance of the Online Network: LinkedIn’s Strategic Position and Power

LinkedIn

A corporate strategy article by Thunderbird students Leah Burdick, Ilan Fehler, Nicholas Kincaid, Peter Klein and David Ryan

More so than traditional businesses, online businesses have the distinct advantage of acquiring more information about their customers. The more that is known about online users’ habits, needs and preferences, the greater the value that is derived from that relationship, as the businesses are better able to cater to the needs of those online users. An online network, a system of users, is enhanced not only by the relationship the business has with the user but also by the relationships that the users have with one other. Take the telephone for example. If you were one of the first three people to own one, you could only call the other two. Fortunately, today millions of people have access to telephones and anyone of them could theoretically call any other one. Therefore, a network of users derives greater value through the network’s size and ubiquity — the larger the network, the greater the value to both businesses and consumers.

The primary benefit of pursuing a “Blue Ocean” strategy is getting a massive head start over potential competitors, and online, the “Blue Ocean” strategy is first developing a critical mass of users. By recognizing that the key to attracting new members is “first mover advantage” — identifying a unique user need and establishing a platform that fills that need, companies can position themselves for continued exponential membership growth, which leads to sustained profitability. While the barriers to entry of creating a website may be low, the barrier to entry of creating an enormous massive network of loyal and repeat users is much higher. When the size of a network hits a critical mass, additional revenue generators, such as subscription fees and advertising can be introduced. Once a critical mass is achieved, services can be refined and improved upon so that the cost of switching to a rival or substitute is counterproductive or inconvenient for the user. These points are epitomized in the success story of the world’s largest online professional network, LinkedIn.

LinkedIn: The Professional Network
With more than 135 million members in over 200 countries, and growing at an estimated rate of two users per second, LinkedIn’s network is the source of their immense “Blue Ocean” competitive advantage. Purposely foregoing profitability during their first four years in a concerted effort to establish their network, LinkedIn’s professional network displaced market share from the original job-board websites, such as Monster.com and Careerbuilder.com. Monster was one of the worst performing stocks of 2011 according to Yahoo Finance, the year in which LinkedIn had its initial public offering valued at $8.9 billion.

According to Mikolaj Jan Piskorski of the Harvard Business School, the success behind professional networks like LinkedIn is that they provide a way for people to participate passively in the job market while also having the excuse of using the system to enhance current job performance. Where most Monster.com users would log in and post their resumes only while actively searching job openings, LinkedIn’s network of professionals log on repeatedly to read the status updates of their peers, connect to more users, and to update their profiles as they gain work or educational experience.

Competition: Direct
While creating a business online is easy, competing with an established network of millions is not. A company that attempted to directly compete with LinkedIn in the professional network space was Visible Path. Founded in 2007, Visible Path received early press attention but ultimately did not gain sufficient network prowess to remain viable. The site lasted a few years and is now defunct.

LinkedIn’s main competitors in the professional social networking industry are established country-specific sites such as Germany’s 10 million-member Xing.com. Another professional network player is France’s 40-million-member Viadeo.com, which has subsidiary websites servicing China and Asia. While Xing and Viadeo have established networks, LinkedIn is growing at a faster rate than either of those companies in their home countries because users want to network with professionals on a global scale. In this case, the global network is proving more attractive to users.

Competition: Indirect
A professional network allows users to maintain professional ties and easily establish new ones. LinkedIn, for instance, has over 1 million unique groups on specialized subjects that users can join to collaborate and establish new contacts. A purely social network such as Facebook, LinkedIn’s greatest threat, functions primarily as a means for users to socialize and keep in touch. LinkedIn’s users, who average five years older than those on Facebook, prefer to keep their personal and professional lives separate. Industry analysts at 360i, a prominent digital agency specializing in social media, believe that Facebook will never replace LinkedIn because the two are polar opposites in terms of their “raison d’être.”

Facebook, with its larger network of 800 million users (as of July 2011), has attempted to develop job search applications and functionality to rival LinkedIn; however, they have yet to have a noticeable impact on LinkedIn’s operations. Another recent attempt to enter into the social and professional network space was Google+. Although Google has a user based to rival that of Facebook, the Google+ network has yet to gain a foothold in the “Red Ocean,” now crowded social media space.

The Business Model
LinkedIn generates profits from three sources: 1) advertising, 2) premium subscription fees, and 3) the licensing of its proprietary tools to recruiters. Individual career seekers can purchase a premium membership to LinkedIn, allowing, among other things, their individual profiles to show up more frequently in recruiter searches. Today, most recruiters actively use LinkedIn, and many have paid for premium subscriptions. The licensed Corporate Recruiting Solutions tool gives recruiters access to individuals’ profiles and allows them to search for talent using keywords in talent profiles, enabling recruiters to find very specialized talent for jobs they are seeking to fill. Recruiters can mine LinkedIn’s rich database of professionals and also use tools to promote jobs to countless people within minutes. For companies, LinkedIn has created targeted advertisement-placement technology to place company job advertisements next to relevant professional profiles. It also charges companies to post job vacancies to its job boards and to create enhanced company profile pages. The competitive advantage derived from the strength of 135 million members, has enabled them provide more value to advertisers, users, and corporate recruiters alike and accordingly to charge a premium for that value.

The Network of the Future
As the most popular social networks approach maximum adoption levels, their future for continued expansion is to create ecosystems of other applications that leverage their existing power networks and attract new users. A successful example of this is Zynga, Facebook’s gaming application provider. Zynga has a contract with Facebook to provide popular online games such as Farmville, Cafe World, Zynga Pokers and others exclusively on Facebook’s platform. This arrangement demonstrates Facebook’s supplier power to dictate that Zynga only provide its games via their platform.

LinkedIn is adopting this same strategy within the professional realm. Despite the reputation for tightly guarding its code, on June 30, 2011, LinkedIn laid the foundation for developing an ecosystem with the creation of LinkedIn Groups API. The recent launch of LinkedIn Groups API marked the company’s new willingness to allow outside developers to embed functionality from Groups into other applications.
Lastly, LinkedIn envisions the future of job hunting as a resume obsolete world. Already some companies encourage job applicants to submit their LinkedIn profiles in lieu of their professional resumes. By utilizing LinkedIn’s new API, several career-related services have begun to intertwine their service offerings with LinkedIn. It’s only a matter of time before any career-oriented product or service worth its weight will have to partner with LinkedIn.

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