You are the CTO of a large engineering company (such as say, GE). Your COO comes up to you says that he has identified two sources of Network Effects in the company. He wants you tell him if his understanding of Network effects is correct.
Statement 1: The first source of Network Effects in our company has to do with hiring new engineers. As we hire more engineers, my HR team networks more with new recruits and they learn more about what qualities we are looking for and which engineering schools are a best fit with our needs. Thus they are quicker to process applications and short list candidates. Thus they become more productive as we hire more engineers.
Statement 2: The second source of Network Effects is in the new offshore oil exploration platform that we are manufacturing. The greater the number of units we manufacture, the lower is the average unit cost of production and therefore we can sell at a lower price. The lower the price, higher the number of units that we can sell and thus we can manufacture even more units at an even lower unit cost.
After listening to these two statements, which of the following responses will you offer to the COO. Only one of the following responses is correct. Identify that response.
a. Statement 2 alone is an example of Network Effects.
b. Statement 1 alone is an example of Network Effects.
c. Neither Statement 1 nor Statement 2 is an example of Network Effect.
d. Statement 1 would be a good example of Network Effects if we were a software company. But we are a heavy engineering company and therefore it is not an example of Network Effects.
e. Statement 2 would be a good example of Network effects if we were a software company. But we are a heavy engineering company and therefore it is not an example of Network Effects.