138  Return on Invested Capital with putting the movie on DVD or streaming it. But overall, costs do not rise as customer numbers increase. In this case, it is the access to unique re- sources—namely, media content—that holds off competitors from capturing similar scale economies. Most IT-based or IT-enabled businesses offer some form of scalability, especially given recent developments in cloud-based computing. But what counts is whether all critical elements of a business system are scalable. Take, for example, online food delivery businesses. These businesses can easily scale up in terms of number of registered restaurants, customers, and orders, but they still incur incremental costs for each individual order delivery, if only for transportation. Such costs still mount with the number of clients, which presents some limits on scalability and reduction of costs to serve as the busi- ness grows. Network Economies Some scalable businesses models provide extraordinarily high returns on cap- ital because they exhibit network economies that lead to increasing returns to scale. As the business gains customers and grows, the cost of offering the products decreases, and their value to customers increases. The eBay example we related at the beginning of this chapter illustrates this. Other examples are online lodging and travel platforms such as Airbnb and Booking.com. These models feature scalable products where the marginal cost of additional trans- actions is minimal. In addition, with scale, these platform services also be- come more valuable to both end customers and lodging providers. As a result, Airbnb and Booking.com can realize competitive advantages both in price and in cost and capital efficiencies. Such sources of competitive advantage become even more powerful when customers face high switching costs. Consider a company like Microsoft. Its Office software benefits from scalable operations on the cost side because it can supply online products and services at extremely low marginal cost. Office has also become more valuable as the customer base has expanded over time. Microsoft has been able to lock in customers who want to easily exchange documents with other Office users and who are not keen to spend time and effort switching to alternative software. Some social-media business models, such as Facebook’s, offer similar customer lock-in combined with increasing returns on scale. Although many new digital business models for social media, digi- tal marketplaces, and e-commerce like to claim such increasing returns to scale, they occur in rare circumstances only. Economists Carl Shapiro and Hal Varian popularized this concept in their 1998 book Information Rules.4 4 C. Shapiro and H. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1998). Sustaining Return on Invested Capital  139 The management implication of this insight was that in a business with in- creasing returns, it is important to get big faster than anyone else. Shapiro and Varian also explained the rare conditions under which it is possible to increase returns to scale. Sadly, executives who ignored that part of the book and pursued “network effects” faced disaster. For example, many U.S. electric-power producers tried to get big fast by buying up everything they could. Most collapsed, because there are no increasing returns from scaling electric-power production. Perhaps more important, such scale effects lead to superior lasting returns only if a company can prevent competitors from achieving similar scale. Sustaining Return on Invested Capital The longer a company can sustain a high ROIC, the more value management will create. In a perfectly competitive economy, ROIC higher than the cost of capital get competed away. Whether a company can sustain a given level of ROIC depends on the length of the life cycles of its businesses and products, the length of time its competitive advantages can persist, and its potential for renewing businesses and products. Length of Product Life Cycle The longer the life cycle of a company’s businesses and products, the better its chances of sustaining its ROIC. To illustrate, while the products of companies such as Coca-Cola or Mars may not seem as exciting as the latest flashy elec- tronics items, culturally entrenched, branded soft drinks and snacks are likely to have a market for far longer than many new gadgets. Similarly, a unique resource (like palladium-rich nickel ore) can be a durable source of advantage if it is related to a long product life cycle but will be less so if it isn’t (this ap- pears to be the case for lignite and coal today). A business model that locks customers into a product with a short life cycle is far less valuable than one that locks customers in for a long time. Once users of Microsoft’s Windows have become well versed in the plat- form, they are unlikely to switch to a new competitor. Even Linux, a low- cost alternative to Windows, has struggled to gain market share as system administrators and end users remain wary of learning a new way of com- puting. Microsoft’s success in extending the life cycle of Windows has been a huge source of value to the company. Contrast this with a company like BlackBerry, which had an impressive customer base until the life cycle of its early smartphones was cut short by the introduction of the iPhone and other next-generation devices.