(by Geoffrey G Parker, Marshall W Van Alstyne, and Sangeet Paul Choudary)
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.
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:
In the world of network effects, ecosystems of users are the new source of competitive advantage/market dominance.
Principles for Designing a Successful Platform
A platform connects producers w/consumers and allows them to exchange value, one of 3 things:
The core interaction: The Way of Platform Design
3 key components:
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
Behind the core interaction
Successful platforms tend to scale by layering new inteactions on top of the core interaction
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.
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.
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
The incumbents fight back: Pipelines becoming platforms
They'll need to ask questions:
Eight Ways to Launch a Successful Platform
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
Four key elements:
Capturing the Value Created by Network Effects
Defining What Platform Users and Partners Can and Cannot Do
Policies to Increase Value and Enhance Growth
How Platform Managers Can Measure What Really Matters
How Platforms Change Competition
How Platforms Should (and Should Not) Be Regulated
The Future of the Platform Revolution
Last modified 06 April 2022