The Platform vs The Industrial Firm
I’ve been reading a lot lately about Platforms as I’m working on the upcoming release of Platform Design Toolkit 2.0 (see current version http://goo.gl/zRZUpn). A few weeks ago I stumbled upon one key post from Albert Wenger of Union Square Ventures; it took me to read it four times before actually gaining a significant insight and a post that helped a lot in the process was this recent reflection by Rawn Shah, based on a preliminary awesome work by James Currier.
As awesomely explained by Albert:
There are two fundamental problems to organizing economic activity: motivation (getting people to expend effort, companies to allocate resources to an activity) and coordination (arranging activities so that they fit together, such as making sure a part needed for production arrives on time). It turns out that there is a tradeoff between the two and the degree of tradeoff is influenced by the available information technology. […]
To see the tradeoff just consider what happens inside a firm. The firm pays employees a fixed salary. As a baseline that salary is the same, independent of what specific task the employee works on. That allows the firm to highly coordinate the activities of employees. […]
A competitive market is the opposite extreme. Each party gets to keep the additional gains arising from effort so motivation is maximized. (ed: competition) … In markets then we see devices such as long term contracts as a way to bring back some degree of coordination.
Now the beauty of the advance in information technologies (ed: Platforms) is that they shift out the tradeoff frontier (or envelope): it is now possible to achieve more motivation and more coordination than was possible before.“
What makes the Platform mode of Production competitive with the Industrial mode of production?
So what makes today’s platforms competitive with the industrial model?
Technological advancements: enabling tools of pervasive connectivity such as smartphones, IoT devices or GPS trackers plus new language and interactions tools, such as apps and web platforms.
This collision makes the network — as made of a number of producers (prosumers, professionals or partners) interacting in a coordinated way through what we call a platform (essentially made of shared tools and common “transaction” experiences and storefronts) — competitive with traditional companies that organize the production industrially wise.
Is therefore possible today, in a unique organizational context — the platform now becoming an alternative to the industrial firm — to achieve the maximum (or an high level) of two key factors: motivation and coordination.
Motivation favors the emergence of the “better” (competition): the best ones build the reputation that makes them stand out in a context that is common to all.
Coordination on the other hand is no more an expression of the siloed management bureaucracy but of the ability of the platform creator and designer: how much can the platform leverage on the motivations of participants to create a common experience? How much can the designer create a recognizable brand linked with the platform flagship experiences?
We saw this evolution happen first in markets where the need for coordination is still limited and the transaction is very simple (such as hospitality with Airbnb or transportation with Uber) but the platform model is now landing on EVERY DAMN MARKET, thanks to technology pervasivity and, even more, thanks to design.
To know more about Platform Design Toolkit 2.0 see: https://medium.com/@meedabyte/the-platform-design-toolkit-2-0-39079c458414
It follows an illustration about why platforms win:
here’s a PDF link.