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March 7 - April 24, 2017
A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and sets governance conditions for them. 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.
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.
Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers.
Unsurprisingly, developing such an alternate certification is among the primary goals of platform education firms such as Coursera.
Platforms beat pipelines because platforms unlock new sources of value creation and supply.
Whereas the leanest traditional businesses ran on just-in-time inventory, new organizational platforms run on not-even-mine inventory.
Thus, platforms disrupt the traditional competitive landscape by exposing new supply to the market.
Platforms beat pipelines by using data-based tools to create community feedback loops.
Platforms invert the firm. Because the bulk of a platform’s value is created by its community of users, the platform business must shift its focus from internal activities to external activities. In the process, the firm inverts—it turns inside out, with functions from marketing to information technology to operations to strategy all increasingly centering on people, resources, and functions that exist outside the business, complementing or replacing those that exist inside a traditional business.
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.
Demand economies of scale are driven by efficiencies in social networks, demand aggregation, app development, and other phenomena that make bigger networks more valuable to their users.
Demand economies of scale are the fundamental source of positive network effects, and thus the chief drivers of economic value in today’s world.
network effects depend on the size of the network.12 So one important corollary is that effective platforms are able to expand in size quickly and easily, thereby scaling the value that derives from network effects.
Frictionless entry is the ability of users to quickly and easily join a platform and begin participating in the value creation that the platform facilitates. Frictionless entry is a key factor in enabling a platform to grow rapidly.
In some cases, the growth of a platform can be facilitated by an effect we call side switching. This occurs when users of one side of the platform join the opposite side—for example, when those who consume goods or services begin to produce goods and services for others to consume. On some platforms, users engage in side switching easily and repeatedly.
Uber, for example, recruits new drivers from among its rider pool, just as Airbnb recruits new hosts from among its guest pool. A scalable business model, frictionless entry, and side switching all serve to lubricate network effects.
where network effects are present, the focus of organizational attention must shift from inside to outside. The firm inverts; it turns inside out. The management of human resources shifts from employees to crowds.
In the world of network effects, ecosystems of users are the new source of competitive advantage and market dominance.
every platform interaction starts with the exchange of information.
Notice that, in every case, the exchange of information takes place through the platform itself. In fact, this is one of the fundamental characteristics of a platform business.
Platforms are designed one interaction at a time. 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 is the single most important form of activity that takes place on a platform—the exchange of value that attracts most users to the platform in the first place. 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 fundamental purpose of the platform is to
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One nuance of platform design is recognizing that the same user may play a different role in differing interactions. The same person may be both a host and a guest on Airbnb, although he or she will typically perform only one of those roles in a particular interaction. On YouTube, users may upload videos as well as view them. 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. A well-designed filter ensures that platform users receive only value units that are relevant and valuable to them; a poorly-designed filter (or no filter at all) means users may be flooded with units they find irrelevant and valueless, which may drive them to abandon the platform.
Participants + Value Unit + Filter → Core Interaction
When designing a platform, your first and most important job is to decide what your core interaction will be, and then to define the participants, the value units, and the filters to make such core interactions possible.
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).
Platforms must perform three key functions in order to encourage a 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 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.
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.
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.
As part of the design process, platform companies need to develop an explicit data acquisition strategy. Users vary greatly in their willingness to share data and their readiness to respond to data-driven activity recommendations. Some platforms use incentives to encourage participants to provide data about themselves; others leverage game elements to gather data from users. LinkedIn famously used a progress bar to encourage users to progressively submit more information about themselves, thereby completing their personal data profiles.
Successful platforms create mutually rewarding matches on a consistent basis. As such, continual improvement of data acquisition and analysis methods is an important challenge for any organization seeking to build
Andrew Chapin of Uber’s driver operations group came up with the idea of having Uber act as a middleman to guarantee car loans for its drivers, deducting repayments from driver revenue and sending them directly to the lenders. Finance companies like the program because loans backed by Uber’s massive corporate cash flow are almost risk-free, and local auto dealers are happy with the additional inventory turnover.5
However, avoiding innovation altogether is no solution. A platform that fails to evolve by adding desirable new features is likely to be abandoned by users who discover a competing platform with more to offer. Instead, a way must be found to strike a balance, changing the core platform only slowly while allowing positive adaptations at the periphery.
This concept is the equivalent, for a platform business, of a long-established computer networking idea known as the end-to-end principle. Originally formulated in 1981 by J. H. Saltzer, D. P. Reed, and D. D. Clark, the end-to-end principle states that, in a general-purpose network, application-specific functions ought to reside in the end hosts of a network rather than in intermediary nodes.6 In other words, activities that are not central to the workings of the network but valuable only to particular users should be located at the edges of the network rather than at its heart.
when specific new features are incorporated into the core platform rather than attached to the periphery, applications that do not use those features will appear slow and inefficient. By contrast, when application-specific features are run by the app itself rather than by the core platform, the user experience will be much cleaner.
a platform ecosystem can evolve faster when the core platform is a clean, simple system rather than a
tangle of numerous ...
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We argue that the fundamental architecture behind all platforms is essentially the same: namely, the system is partitioned into a set of “core” components with low variety and a complementary set of “peripheral” components with high variety. The low-variety components constitute the platform.
But as we’ve seen, platforms cannot be entirely planned; they also emerge. Remember that one of the key characteristics that distinguishes a platform from a traditional business is that most of the activity is controlled by users, not by the owners or managers of the platform. It’s inevitable that participants will
use the platform in ways you never anticipated or planned.
Platform designers should always leave room for serendipitous discoveries, as users often lead the way to where the design should evolve. Close monitoring of user behavior on the platform is almost certain to reveal unexpected patterns—some of which may suggest fruitful new areas for value creation. The best platforms allow room for user quirks, and they are open enough to gradually incorporate such quirks into the design of the platform.
efficient pipelines ate inefficient pipelines.
Upwork is gradually evolving from a marketplace for talent into an infrastructure that allows entire organizations to be built in the cloud,
As the platform nurtures quality, it develops the reliability needed to attract a wide array of customers. Mainstream competitors, often quite suddenly, find themselves competing with an unfamiliar upstart—one that is poised to grow much faster than they can.
The answer: you de-link ownership of the physical asset
from the value it creates.
When multiple products and services connect and interact using data, pipelines can start behaving like platforms, producing new forms of value and encouraging users to engage in more interactions.
