(by Geoffrey G Parker, Marshall W Van Alstyne, and Sangeet Paul Choudary)

1. Today

Welcome to the Platform Revolution

Platform: "A business based on enabling value-creating interactions between external producers and consumers. Platform provides open, participative infrastructure for these interactions and sets governance conditions for them. Purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants."

Traditional system: pipeline/linear value chain (single-track, assembly line)

Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers. Until recently, most business were built around products--designed/made at one end of the pipeline and delivered to consumers at the other end. Pipelines rely on inefficient gatekeepers to manage the flow of value from the producer to the consumer; the elimination of gatekeepers allow consumers greater freedom to select products that fit their needs.

Platforms beat pipelines because platforms unlock new sources of value creation and supply.

Platforms beat pipelines by using data-based tools to create community feedback loops.

Platforms invert the firm. Strategy has moved from controlling the unique resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities.

2. Network Effects

The Power of the Platform

(Uber as a "matching"--matching ride-providers to ride-seekers--service)

Network effects: the impact the number of users of a platform has on the value created for each user.

Positive network effects: the ability of a large, well-managed platform community to produce significant value for each user of the platform

Negative network effects: the ability to reduce value for each user

Uber's "virtuous circle" (flowing clockwise)

Lower prices  ---> More demand \
  ^    ^                        \
  |     \                   More drivers
  |     Faster pickups          /
  |              ^             /
  |               \           /
  |                 ----  More geographic
  |               /       coverage/saturation
  |              v
Less driver downtime

(More demand -> More drivers -> More geographic coverage/satuation -> Faster pickups and Less driver downtime -> Lower prices -> More demand....)

Demand economies of scale
20th-century monopolies were created based on supply-side economies of scale, driven by production efficiencies, which reduce unit cost of good/service delivered. 21st-century driven by demand economies of scale, which take advantage of technology improvements on the demand side--efficiencies in social networks, demand aggregation, app development, and other phenomena that make bigger networks more valuable to users. (Metcalfe's Law: The value of a telephone network.)

Two-sided network effects
(The cycle--both sides of the market are engaged.)

Network effects vs other growth-building tools
Price effects are evanescent: they disappear the moment the discounts end or another firm offers a better price. Typically only 1-2% convert.
Brand effects are stickier, but difficult to sustain.
Virality effects attract, but network effects keep people there.

Scaling network effects: Frictionless entry (and other tools)
Effective platforms are able to expand in size quickly and easily, thereby scaling the value that derives from network effects. Netorks that permit frictionless entry are able to grow organically without limits.
Sideswitching: when users of one side of the platform can join the opposite side.

Negative network effects
Growth adds to difficulty of finding matches; offset by curation.
Data-driven network effects

Four kinds of network effects
Two-by-two grid of "same-side/cross-side" and "positive/negative" network effects:
Same-side positive network effects
Same-side negative network effects
Cross-side positive network effects
Cross-side negative network effects

Structural change: Network effects turn firms inside out
Four broad categories of companies:

Asset builders
Service providers
Technology creators (develop/sell intellectural property)
Network orchestrators (develop networks)

In the world of network effects, ecosystems of users are the new source of competitive advantage/market dominance.

3. Architecture

Principles for Designing a Successful Platform

A platform connects producers w/consumers and allows them to exchange value, one of 3 things:

Information
Goods/services
Currency

The core interaction: The Way of Platform Design
3 key components:

Particpants: Producer creates value, consumer consumes it
Value unit: users are provided w/basis for deciding whether they want to proceed to further exchange
Filter: Software-based tool used by the platform to enable the exchange of appropriate value units between users

When designing a platform, your first and most important job is to decide what your core interaction will be, then define the participants, the value units, and the filters to make sure such core interaction is possible.

Platforms don't create value units--they are created by the producers in the platform; thus the platforms are "information factories" that have no control over inventory. They create the 'factory floor'; they can foster a culture of quality control, and they develop filters that are designed to deliver valuable units while blocking others, but they have no control over the production process itself.

Pull, facilitate, match: The How of Platform Design

Pull producers/consumers to the paltform
Facilitate their interactions by providing tools/rules that make it easy for them to connect & enhance
Match producers and consumers effectively by using info about each to connect them in ways they will find mutually rewarding

Pull challenges:

attracting users
keeping the interest of users
tool: feedback loop(s): single-user and multi-user

Behind the core interaction
Successful platforms tend to scale by layering new inteactions on top of the core interaction

by changing the value unit exchanged between existing users
by introducing a new category of users as either producers or consumers
by allowing users to exchange new kinds of value units
by curating membrs of an existing user group to create a new category of users

Applying the end-to-end principle to platform design
End-to-End Principle: in a general-purpose network, application-specific functions out to reside in the end hosts of a network rather than in intermediary nodes. Only the highest-volume, highest-value features that cut across apps should become part of the core platform.

When specific new features are incorporated into the core platform, apps that don't use them appear slow/inefficient; when app-specific features are run by an app itself, UX is cleaner
Platform ecosystem can evolve faster when the core platform is a clean, simple system; stable core restricting variety, but underneath an evolving layer that enables variety

Tower of Modularity
Successful platform must have a modular approach; "designers achieve modularity by partitioning information into visible design rules and hidden design parameters; modularity is beneficial only if the partition is precide, unambiguous, and complete." ... "Fundamental architecture behind all systems is ... the system is partitioned into a set of 'core' components w/low variety and a complementary set of 'peripheral' components w/high variety. The low-variety components consititute the platform. They are the long-lived elements of the system and thus implicitly/explicitly establish the system's interfaces and the rules governing interactions among the parts."

Re-architecting the platform
First step: analyze the degree of modularity already achieved.

Iterative improvement: The Anti-Design principle
Platforms cannot be entirely planned--they also emerge; platforms characterized by activity controlled by the users, not bythe owners/managers. Platform designers should always leave room for serendipitous discoveries, as suers often lead the way to where design should evolve. Close monitoring of user behavior reveals unexpected patterns, some of which may suggest fruitful new ideas for value creation. Best platforms allow for user quirks & are open enough to gradually incorporate such quirks.

4. Disruption

How Platforms Conquer and Transform Traditional Industries

Platform concept is not new--farmer's markets, stock markets, etc. What's new is digital technology enabling reach.

Capsule history of digitial disruption
Stage 1: Efficient pipelines are inefficient pipelines
Stage 2: Platforms eat pipelines
In the world of platforms, the internet no longer acts merely as a distribution channel; it also acts as a creation infrstructure & coordination mechanism

Impacts of platform distribution on value creation, value consumption, and quality control
Reconfiguring value creation to tape new supply sources
Reconfiguring value consumption by enabling new forms of consumer behavior
Reconfiguring quality control through community-driven curation

Structural impacts of platform disruption
De-linking assets from value
Re-intermediation
Market aggregation

The incumbents fight back: Pipelines becoming platforms
They'll need to ask questions:

Which processes that we curently manage in-house can be delegated to outside partners, whether suppliers or consumers?
How can we empower outside partners to create products/services that will generate new forms of value for our existing customers?
Are there way swe can network w/current competitors to produce valuable new services for customers?
How can the value of the goods & services we currently provide be enhanced through new data streams, interpersonal connection, and curation tools?

5. Launch: Chicken or Egg?

Eight Ways to Launch a Successful Platform

The heart of platform marketing: Designing for growth

Pull strategies are most effective/important over push; goods/services must be designed to be so attractive they naturally pull customers into their orbit

The incumbents' advantage: Reality or illusion?
Large enterprises have advantages, which can lead to complacency

Platform launch strategies

The Follow-the-Rabbit Strategy. Use a non-platform demonstration project to model success, probably attracting both users and producers to a new platform erected on your project's proven infrastructure. How to overcome the chicken/egg problem:
- Staging value creation: The platform managers arrange for the creation of value units that will attract one or more sets of users and demonstrate the potential benefits of participating in the platform.
- Designing the paltform to attract one set of users: platform is designed to provide tools, products, services, or other benefits that will attract one set of users--consumers or producers. The existence of a critical mass of users on one side of a marketplace attracts users on the other side, leading to a positive feedback loop.
- Simultanous on-boarding: platform creates conditions such that value units can be created that are relevant to users even when the network size is too small. It then strives to stimulate a burst of activity that will simultanously attract both consumers and producers in sufficient numbers to create larger numbers of value units and value-producing interactions so that network effects begin to kick in.
The Piggyback Strategy. Connect with an existing user base from a different platform and stage the creation of value units in order to recruit those users to participate.
The Seeding Strategy. Create value units that will be relevant to at least one set of potential users. When those users are attracted to the platform, other sets of users who want to engage in interactions with them will follow. In many cases, the platform company takes the task of value creation upon itself by acting as the first producer. In addition to jump-starting the platform, the platform owner can define kind and quality of value units they want to see.
The Marquee Strategy. Provide incentives to attract members of a key user set onto your platform. A variation of this is to choose to purchase a marquee participant in order to obtain exclusive access to the seeds it produces.
The Single-Side Strategy. Create a business around products or services that benefit a single set of users; later, convert the business into a platform business by attracting a second set of users who want to engage in interactions with the first set.
The Producer Evangelism Strategy. Design your platform to attract producers, who can induce their customers to become users of the platform. Platforms that provide businesses w/tools for customer relationship management can often solve the chicken/egg problem by attracting one set of users (producers) who then take on the task of bringing along the other set (consumers) from their own customer base. The platform helps the producers cater to their existing set of consumers, and over time, the producers benefit from data-driven cross-pollination as other consumers on the network become interested.
The Big-Bang Adoption Strategy. Use one or more traditional push marketing strategies to attract a high volume of interest and attention to your platofrm. This triggers a simultaneous on-boarding effect.
The Micromarket Strategy. Start by targeting a tiny market that comprises members who are already engaging in interactions. This enables the platform to provide the effective matchmaking characteristic of a large market even in the earliest stages of growth.

Viral growth: The user-to-user launch mechanism

Four key elements:

The sender: getting senders to spread value untis is not the same as word-of-mouth; word of mouth happens when users like your platform so much, they can't stop talking about it. When users become senders and spread value units, they aren't talking about your platform--they are spreading their own creations, and indirectly generating awareness of/interest in your platform. Users do this to get social feedback (fun, fame, fulfillment, fortune, etc); avoid discouraging the spread of value units
The value unit: The fundamental unit of virality, but not all value units are spreadable. Design value units to be spreadable as a crucial step.
The recipient: Platform managers have no control over them.
The external network: External networks often impose restrictions.

6. Monetization

Capturing the Value Created by Network Effects

7. Openness

Defining What Platform Users and Partners Can and Cannot Do

8. Governance

Policies to Increase Value and Enhance Growth

9. Metrics

How Platform Managers Can Measure What Really Matters

10. Strategy

How Platforms Change Competition

11. Policy

How Platforms Should (and Should Not) Be Regulated

12. Tomorrow

The Future of the Platform Revolution

Tags: reading books architecture

Last modified 07 October 2024

Platform Revolution

How networked markets are transforming the economy and how to make them work for you.