Platform Revolution

“[…] technology often needs the support of innovative business design to produce massive reconfiguration of value creation.”

INTRODUCTION

KEY TAKEAWAYS

• one of the most important economic and social developments of our time is the rise of the platform as a business and organizational model
• power of the platform a new business model that uses technology to connect people, organizations, and resources in an interactive ecosystem in which amazing amounts of value can be created and exchanged.
• Platforms are complex, multisided systems that must support large networks of users who play different roles and interact in a wide variety of ways.
• Designers and builders of any complex system often find it difficult to identify a logical starting point.
• A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform's overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.
• The traditional system employed by most businesses is one we describe as a pipeline. By contrast with a platform, a pipeline is a business that employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other. Because of its simple, single-track shape, we may also describe a pipeline business as a linear value chain.
• In this shift, the simple pipeline arrangement is transformed into a complex relationship in which producers, consumers, and the platform itself enter into a variable set of relationships. In the world of platforms. different types of users some of them producers, some of them consumers, and some of them people who may play both roles at various times - connect and conduct interactions with one another using the resources provided by the platform. In the process, they exchange, consume, and sometimes cocreate something of value. Rather than flowing in a straight line from producers to consumers. value may be created, changed, exchanged, and consumed in a variety of ways and places, all made possible by the connections that the platform facilitates. The result is an exchange of value that is made possible by the platform itself.
• Platforms beat pipelines because platforms unlock new sources of value creation and supply. In platform markets, the nature of supply changes. Supply now unlocks spare capacity and harnesses contributions from the community which used to be only a source of demand.
• Platforms beat pipelines by using data-based tools to create community feedback loops. As these platforms gather community signals about the quality of content (in the case of YouTube) or the reputation of service providers (on Airbnb), subsequent market interactions become increasingly efficient. By contrast, traditional pipeline firms rely on mechanisms of control-editors, managers, supervisors-to ensure quality and shape market interactions. These control mechanisms are costly and inefficient to grow to scale.
• Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities.
• Network Effects refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refers to the ability of a large, well-managed platform community to produce significant value for each user of the platform. Negative network effects refers to the possibility that the growth in numbers of a poorly-managed platform community can reduce the value produced for each user.
• Virality can attract people to a network but network effects keep them there! Virality is about attracting people who are off the platform and enticing them to join it, while network effects are about increasing value among people on-platform.
• FOUR KINDS OF NETWORK EFFECTS A two-sided network (i.e., one with both producers and consumers) has four kinds of network effects.
• same-side effects are network effects created by the impact of users from one side of the market on other users from the same side of the market - the effects that consumers have on other consumers and those that producers have on other producers.
• cross-side effects are network effects created by the impact of users from one side of the market on users from the other side of the market-the effects that consumers have on producers and those that producers have on consumers.
• Both same-side effect and cross-side effects can be positive or negative, depending of the design of the system that’s put in place.
• By contrast, most Internet era giants rely on demand-side economies of scale. Firms such as Airbnb, Uber, Dropbox, Threadless, Upwork, Google, and Facebook are not valuable because of their cost structures: the capital they employ, the machinery they run, or the human resources they command. They are valuable because of the communities that participate in their platforms.
• Deloitte published research that sorts companies into four broad categories based on their chief economic activity: asset builders, service providers, technology creators, and network orchestrators. The research suggests that, of the four, network orchestrators are by far the most efficient value creators.
• The management of human resources shifts from employees to crowds. Innovation shifts from in-house R & D to open innovation […] that management of externalities becomes a key leadership skill. Growth comes not from horizontal integration and vertical integration but from functional integration and network orchestration.
• So where do we start in designing a new platform? The best way is to focus on the fundamentals. What exactly does a platform do, and how does it work? In every such exchange, the producer and the consumer exchange three things: information, goods or services, and some form of currency. Thus, attention, fame, influence, reputation, and other intangible forms of value can play the role of "currency" on a platform.
• Thus, the design of every platform should start with the design of the core interaction that it enables between producers and consumers. The core interaction involves three key components: the participants, the value unit, and the filter. All three must be clearly identified and carefully designed to make the core interaction as easy, attractive, and valuable to users as possible.
• The participants. There are fundamentally two participants in any core interaction: the producer, who creates value, and the consumer, who consumes value. A well-designed platform makes it easy for users to move from role to role
• The filter. The value unit is delivered to selected consumers based on filters. A filter is an algorithmic, software-based tool used by the platform to enable the exchange of appropriate value units between users.
• Platforms often expand over time to embrace many kinds of interactions, each involving different participants, value units, and filters. But successful platforms begin with a single core interaction that consistently generates high value for users.
• The crucial role of the value unit. As this description of the core interaction shows, value units play a crucial role in the workings of any platform. Yet, in most cases, platforms don't create value units; instead, they are created by the producers who participate in the platform. Thus, platforms are "information factories" that have no control over inventory. They create the "factory floor" (that is, they build the platform infrastructure within which value units are produced). They can foster a culture of quality control (by taking steps to encourage producers to create value units that are accurate, useful, relevant, and interesting to consumers).
• The core interaction is the why of platform design. The whole purpose of a platform is to make core interactions possible--indeed, to the extent possible, to make them inevitable by making them highly valuable to all participants
• Platforms must perform three key functions in order to encourage high volume of valuable core interactions, which we summarize as pull, facilitate, and match. The platform must pull the producers and consumers to the platform, which enables interactions among them It must facilitate their interactions by providing them with tools and it rules that make it easy for them to connect and that encourage valuable exchanges (while discouraging others). And it must match producers and consumers effectively by using information about each to connect them in ways they will find mutually rewarding.
• Pull. Attracting consumers to platforms presents challenges that pipeline companies don't face. Consequently, the approach to marketing such platforms is likely to seem counterintuitive, especially to business leaders who grew up in the old pipeline-dominated universe. To begin with, platforms need to solve a chicken-or-egg problem that pipeline businesses don't suffer from: users won't come to a plat form unless it has value, and a platform won't have value unless users use it.A second pull challenge revolves around keeping the interest of users who visit or sign up for the platform.
• A feedback loop in a platform may take various forms, all of which serve to create a constant stream of self-reinforcing activity. Effective feedback loops help to swell the network, increase value creation, and enhance network effects. One kind of feedback loop is the single-user feedback loop. This involves an algorithm built into the platform infrastructure that analyzes user activity, draws conclusions about the user's interests, preferences, and needs, and recommends new value units and connections that the user is likely to find valuable. In a multi-user feedback loop, activity from a producer is delivered to relevant consumers, whose activity in turn is fed back to the producer. When effective, this creates a virtuous cycle, encouraging activity on both sides and ultimately strengthening network effects.
• One aspect of facilitating interactions is making it as easy as possible for producers to create and exchange valuable goods and services via the platform. This may involve providing creative tools for collaboration and sharing Lowering barriers to usage in this way encourages interactions and helps expand participation on the platform.
• Match. A successful platform creates efficiencies by matching the right users with one another and ensuring that the most relevant goods and services are exchanged. It accomplishes this by using data about producers, consumers, the value units created, and the goods and services to be exchanged. The more data the platform has to work with-and the better designed the algorithms used to collect, organize, sort, parse, and interpret the data-the more accurate the filters, the more relevant and information exchanged, and the more rewarding the ultimate match between producer and consumer.
• As we've seen, platform design begins with the core interaction. But over time, successful platforms tend to scale by layering new interactions on top of the core interaction.
• When you're launching a new platform-or seeking to enhance and grow an existing platform thoughtful attention to the principles of platform design will maximize your chances of value creation. But as we've seen, platforms cannot be entirely planned, they also emerged.
• In the world of platforms, the Internet no longer acts merely as a distribution channel (a pipeline). It also acts as a creation infrastructure and a coordination mechanism. Platforms are leveraging this new capability to create entirely new business models. In addition, the physical and the digital are rapidly converging, enabling the Internet to connect and coordinate objects in the real world.
• However, technology often needs the support of innovative business design to produce massive reconfiguration of value creation.
• Re-intermediation. During the first stage of Internet-driven disruption, many business commentators predicted that the biggest impact of the new information and communication technologies would be widespread disintermediation the elimination of middlemen, or intermediate layers, from industries, establishing direct connections between producers and consumers. Intermediation by platform businesses is transforming industries, creating new venues where market participants are connected with greater power and efficiency than ever before. In another form of re-intermediation, platforms create a layer of reputational information by leveraging social feedback about producers. Platforms like Yelp, Angie's List, and TripAdvisor have created an entirely new industry based on certifying the quality of product and service providers
• Market aggregation. Platforms are also creating new efficiencies by aggregating unorganized markets. Market aggregation is the process whereby platforms provide centralized markets to serve widely dispersed individuals and organizations. Market aggregation provides information and power to platform users who formerly engaged in interactions in a haphazard fashion, often without access to reliable or up-to-date market data.
• Pipeline businesses like Nike have traditionally scaled in one of two ways. Some expand by owning and integrating a greater length of the value-creation-and-delivery pipeline - for example, by buying upstream suppliers or downstream distributors. This is referred to as vertical integration, Others expand by widening the pipeline to push more value through it. This is horizontal integration. p. 74
• Here's the test: if the firm can use either information or community to add value to what it sells, then there is potential for creating a viable platform
• in the world of platform marketing, pull strategies rather than push strategies are most effective and important. The industrial world of pipelines relies heavily on push. Consumers are accessed through specific marketing and communication channels that the business owns or pays for.
• In this world of abundance-where both products and the messages about them are virtually unlimited people are more distracted, as an endless array of competing options is only a click or a swipe away. Thus, creating awareness alone doesn't drive adoption and usage, and pushing goods and services toward customers is no longer the key to success. Instead, those goods and services must be designed to be so attractive that they naturally pull customers into their orbit. Traditionally, the marketing function was divorced from the product. In network businesses, marketing needs to be baked into the platform
• the need to analyze and respond to your rivals business designs, are significant elements of launch strategy
• 1. The follow-the-rabbit strategy. Use a non-platform demonstration project to model success, thereby attracting both users and producers to a new platform erected on your project's proven infrastructure.
• 2. 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 in your platform.
• 3. The seeding strategy. Create value units that will be relevant to at least one set of potential users. When these users are attracted to the platform, other sets of users who want to engage in interactions with them will follow. In still other cases, seeding is done through simulated (fake"), value units.
• 4. The marquee strategy. Provide incentives to attract members of a key user set onto your platform. In many cases, there's a single group of users who are so important that their participation can make or break the success of the platform.
• 5. 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.
• 6. The producer evangelism strategy: Design your platform to attract producers, who can induce their customers to become users of the platform.
• 7. The big-bang adoption strategy. Use one or more traditional* push marketing strategies to attract a high volume of interest and attention to your platform. This triggers a simultaneous on-boarding effect, creating an almost fully-developed network virtually instantaneously
• 8. 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 is a pull based process based on encouraging users to spread the word about the platform to other potential users. When users themselves encourage others to join the network, the network becomes the driver of its own growth.
• Similarly, four key elements are necessary to begin the process of viral growth for a platform business the sender, the value unit, the external network, and the recipient. Let's consider the viral growth of Instagram:
• The sender. A user on Instagram shares a picture that he has just created. This launches the cycle that will eventually bring in a new user.
• The value unit. On Instagram, the value unit is the picture that the user shares with friends.
• The external network. For Instagram, Facebook serves as a very effective external network, allowing value units (photos) to spread and be exposed to potential users.
• The recipient. Finally, a user from Facebook gets intrigued by the picture and visits Instagram. This user may create her own photo and start the cycle all over again. Now the recipient is acting as the sender.
• Your goal is to design an ecosystem where senders want to transfer value units through an external network to a large number of recipients, ultimately leading many of those recipients to become users of your platform.
• So designing spreadable value units is a crucial step toward virality. A spreadable value unit may be one that helps to start an interaction on an external network, the way Instagram photos create conversations on Facebook among users intrigued by the images
• the inherent value of a platform business lies chiefly in the network effects it creates. But monetizing network effects poses a unique challenge. Network effects make a platform attractive by creating self-reinforcing feedback loops that grow the user base, often with minimal effort or investment by the platform manager. Higher value creation by producers on the platform attracts more consumers, who, in turn, attract more producers and further value creation.
• Most well-designed platforms create far more value than they directly capture. which is why they attract large numbers of users, who are happy to enjoy the benefits of all the "free" value provided by the platform.
• A platform’s goal is not simply to pump up the numbers of participants and interactions. It must also take steps to encourage desirable interactions and discourage undesirable ones.
• the four forms of excess value created by platforms- access to value creation, access to the market, access to tools, and curation. All four culminate in some kind of interaction. In many cases, this interaction involves an exchange of money
• Deciding precisely where the system can afford to create some friction--and how much friction can be tolerated without crippling the growth of network effects--is no easy matter.
• Behind any platform, with responsibility for its structure and operation, are two entities: the firm that manages the platform and directly touches users, and the firm that sponsors the platform and retains legal control over the technology. In many cases, these two entities are one and the same. In general terms, the platform manager organizes and controls producer/consumer interactions, while the platform sponsor controls the overall architecture of the platform, the intellectual property that underlies the platform (such as the software code that controls its operations), and the allocation of other rights.
• The king of coffee had violated three fundamental rules of good governance:
• Always create value for the consumers you serve;
• Don't use your power to change the rules in your favor; and
• Don't take more than a fair share of the wealth,

Governance is the set of rules concerning who gets to participate in an ecosystem, how to divide the value, and how to resolve conflicts.

• Externalities occur when spillover costs or benefits accrue to anyone not involved in a given interaction.
• negative externality
• positive externality

Individuals who benefit from positive externalities aren't likely to complain about them but they are considered problems from a business design standpoint, since they reflect value that is not being fully captured by the platform.

• Monopoly power arises when one supplier in an ecosystem becomes too powerful because of its control of the supply of a widely sought good, and uses this power to demand higher prices or special favors.
• Risk is the possibility that something unexpected and essentially unpredictable may go wrong, turning good interaction into a bad one. Risk is a perennial problem in all markets, not just on platforms.
• These tools, in their varied ways, help to measure the same thing: the efficiency with which value flows through the pipeline. A successful pipeline business is one that produces goods and services with minimal waste of resources and then delivers a large quantity of these goods and services to customers through well-managed marketing, sales, and distribution systems, thereby generating revenues that are more than sufficient to recoup costs and produce profits to reward investors and finance future growth. Pipeline metrics are designed to gauge the efficiency of this value flow from one end of the pipeline to the other.
• Platform managers in search of metrics that reveal the true health of their business need to focus on positive network effects and on the platform activities that drive them. In specific, platform metrics need to measure the rate of interaction success and the factors that contribute to it
• In particular, firms in the startup phase must track the growth of their most important asset: active producers and consumers who are, participating in a large volume of successful interactions! Once the platform has reached critical mass and users are gaining significant value from the platform, the focus of metrics can shift to customer retention and the conversion of active users to paying customers.
• Which user groups are enjoying the greatest value from platform activities? Which user groups may need to be subsidized to ensure their continued participation? What fraction of the value creation unleashed by the platform is occurring on the platform rather than outside it? How much additional value can be created through services such as enhanced curation? Which groups outside the platform might find value in access to specific user groups on the platform? And most important, how can the platform capture and retain a fair share of the value being created on the platform without impeding the continued growth of network effects?
• The metrics that best measure the number and quality of interactions in your ecosystem will change over the life cycle of the platform, and it's critical to identify points at which these transitions occur.
• your metrics meet the 3 A's test' where your metrics are actionable, accessible, and auditable.
• The real question, which you should never lose sight of, is: are people happy enough with the ecosystem to continue participating in it actively?
• Porter's model identifies five forces that affect the strategies position of a particular business: the threat of new entrants to the market, the threat of substitute products or services, the bargaining power of customers, the bargaining power of suppliers, and the intensity of competitive rivalry in the industry. The goal of strategy is to control these five forces in such a way as to build a moat around the business and thereby render it unassailable.
• Advantage is found in industry structures that create a protective moat - one that enables the firm to segment markets, differentiate products, control resources, avoid price wars, and defend its profit margins.
• horizontal integration (in which a firm controls most or all of a specific product or service marketplace) and vertical integration (in which a firm controls an entire value chain, from raw materials to manufacturing to marketing)
• In separate works, Richard D'Aveni and Rita McGrath have argued that, in an age of "hypercompetition" (D'Aveni's term), sustainable advantage is illusory. Technological advances drive shorter and shorter cycle times on everything from "microchips to corn chips, software to soft drinks, and packaged goods to package delivery services."
• In today's hypercompetitive environment enabled by technology, ownership of infrastructure no longer provides a defensible advantage. Instead, flexibility provides the crucial competitive edge, competition is perpetual motion, and advantage is evanescent.
• Denning pointed instead to management guru Peter Druker's dictum that the purpose of business is "to create a customer." According to Denning, in a world where sustainable advantage is an illusion, a company's relationships with customers are its only lasting source of value.
• First, firms that understand how platforms work can now intentionally manipulate network effects to remake markets, not just respond to them. The implicit assumption in traditional business strategy that competition is a zero-sum game is far less applicable in the world of platforms. Actively managing network effects changes the shape of markets rather than taking them as fixed. Second, platforms turn businesses inside out, moving managerial influence from inside to outside the firm's boundaries. Within the ecosystem, the lead firm negotiates dynamic tradeoffs involving competition at three levels: platform against platform, platform against partner, and partner against partner.
• The shifting horizons of managerial influence now make competition less significant for strategists than collaboration and co-creation-or, as scholars Barry J. Nalebuff, Adam M. Brandenburger, and Agus Maulana call it, "co-opetition." The shift from protecting value inside the firm to creating value outside the firm means that the crucial factor is no longer ownership but opportunity, while the chief tool is no longer dictation but persuasion.
• In business, no victory is permanent but on occasion, a particular firm is capable of enjoying a dominant position within its industry for a decade or longer. The four forces that most often characterize winner-take-all markets are supply economies of scale, strong network effects, high multihoming or switching costs, and lack of niche specialization.

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