Coevolving Innovations

… in Business Organizations and Information Technologies

The term “platform” is now popular in a variety of contexts.  What do “platforms” mean, and what research might guide our appreciation?

Let’s outline some questions:

  • A. What came before the rise of platforms?
  • B. What types of platforms are there?
  • C. Why take a platform approach?
  • D. How do platforms manifest?
  • E. Why might a platform not be viable?
  • F. How are digital and non-digital platforms different?
  • G. What don’t researchers know about digital platforms?
  • H. What are the economic consequences of the platform economy?

The articles cited below are not exhaustive, but they may give a sense of the ballpark.

A. What came before the rise of platforms?

The industrial age was typified by descriptions of “supply chains” and “value chains”, which otherwise may be called “pipelines”. Marshall Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary write:

… platforms differ from the conventional “pipeline” businesses that have dominated industry for decades. Pipeline businesses create value by controlling a linear series of activities — the classic value-chain model. Inputs at one end of the chain (say, materials from suppliers) undergo a series of steps that transform them into an output that’s worth more: the finished product. [….]

The move from pipeline to platform involves three key shifts:

1. From resource control to resource orchestration. The resource-based view of competition holds that firms gain advantage by controlling scarce and valuable — ideally, inimitable — assets. In a pipeline world, those include tangible assets such as mines and real estate and intangible assets like intellectual property. With platforms, the assets that are hard to copy are the community and the resources its members own and contribute, be they rooms or cars or ideas and information. In other words, the network of producers and consumers is the chief asset.

2. From internal optimization to external interaction. Pipeline firms organize their internal labor and resources to create value by optimizing an entire chain of product activities, from materials sourcing to sales and service. Platforms create value by facilitating interactions between external producers and consumers. Because of this external orientation, they often shed even variable costs of production. The emphasis shifts from dictating processes to persuading participants, and ecosystem governance becomes an essential skill.

3. From a focus on customer value to a focus on ecosystem value. Pipelines seek to maximize the lifetime value of individual customers of products and services, who, in effect, sit at the end of a linear process. By contrast, platforms seek to maximize the total value of an expanding ecosystem in a circular, iterative, feedback-driven process. Sometimes that requires subsidizing one type of consumer in order to attract another type.

These three shifts make clear that competition is more complicated and dynamic in a platform world. The competitive forces described by Michael Porter (the threat of new entrants and substitute products or services, the bargaining power of customers and suppliers, and the intensity of competitive rivalry) still apply. But on platforms these forces behave differently, and new factors come into play. To manage them, executives must pay close attention to the interactions on the platform, participants’ access, and new performance metrics.  [Van Alstyne, Parker, Choudary (2016), pp  56-57]

The rise of Internet enabled the boundaries between information systems to become transparent or translucent, improving fluidity.

B. What types of platforms are there?

Five streams of research on platforms are characterized, and a meta-logic of architectural leverage is proposed (on four streams) to understand platform evolution in a 2014 article by Llewellyn D W ThomasErkko Autio and David Gann.  [The original Table 1 had four columns, to which I’ve appended a fifth stream described in the article body text.  I’ve also truncated off some of the lower rows].

… we have focused on the contexts in which the term is used, and collated the different variants under a coherent theoretical logic.

Table 1 Overview of Platform Streams (expanded and excerpted)
Stream
Organizational
Product family
Market intermediary
Platform ecosystem
General technology
Platform variants
Platform organization; platform investment; platform technology
Product platform; internal platform; supply chain platform
Multisided platform; two-sided platform
Industry platform; technology platform
Cumulative investments in generations of dominant designs
Construct
Dynamic capability
Product family
Multisided market
Platform ecosystem
Enablement and constraint of future innovation
Description
Platform as organizational capabilities that enable superior performance
Platform as the stable center of a platform family leading to derivative products
Platform as an intermediary between two or more market participants
Platform as a system or architecture that supports a collection of complementary assets
Platform as tangible R&D inputs to the macro-economy
Level of analysis
Firm
Product
Industry
System/industry
Nations
Core discipline
Corporate strategy
Product development
Industrial economics
Technology strategy
Kuhnian scientific paradigms
Key concepts
Core competencies; real options; dynamic capabilities
Product family; architecture; modularity; commonality
Network externalities; standards; multisided markets
Network externalities; innovation; standards; modularity
Government policy; geographic clusters
Value creation
Flexibility; superior adaptation
Flexibility; costs savings; innovation
Market efficiency; pricing structure; market power
Flexibility; cost savings; innovation; externalities; innovation; learning; market power
Public resources to be shared within jurisdiction
Value appropriation
Not applicable
Ownership; architectural control
Ownership; institutional mechanisms
Architectural control; ownership of critical elements; legitimacy
Non-appropriable cross-country differences in economic growth or productivity
Empirical examples
Consulting; outsourcing; computing; biotechnology
Automotive; machine tools; consumer electronics; fast moving consumer goods
Online auctions; price comparison; credit cards; telecoms; online advertising
Information technology; Internet
Government research institutes

The four streams in our focus are organizational platforms, product family platforms, market intermediary platforms, and platform ecosystems.

For the organizational platform stream, the platform is a structure that stores an organization’s resources and capabilities.  [….]

For the product family stream, the platform enables a product family and supports effective development of product variants to address different market niches. [….]

For the market intermediary stream, the platform enables a marketplace (typically, electronic), creating market efficiencies in two-sided markets. [….]

For the platform ecosystem stream, the platform is a set of shared core technologies and technology standards underlying an organizational field that support value co-creation through specialization and complementary offerings. [….]

There is also a fifth stream, which we call the general technology stream, … where generations of technology are subsequently built on dominant designs.  [….]   General technology platforms are not sources of competitive advantage to be appropriated by a firm, but public resources to be shared through government research institutes.   […..] We do not develop this stream further, as it does not speak directly to the common notion of platforms as products, processes, and services within management [Llewellyn, Autio, Gann (2014) pp. 48-50]

The (iv) platform ecosystem stream incorporates ideas from the (i) organizational platform stream, (ii) product family stream, and (iii) market intermediary stream.

… a platform ecosystem is typically more complex than either a product family or a multisided market, as it incorporates concepts from both product family and multisided market streams, such as those of modularity and market facilitation. [Llewellyn, Autio, Gann (2014) p. 53]

There are alternative ways of categorizing platforms, but the above research illustrates breadth.

C. Why take a platform approach?

Platforms of all types are theorized to have two logics:  a logic of leverage; and a logic of architectural openness.

Leverage

The concept of leverage, in the sense of exercising an influence that is disproportionate to one’s size, constitutes an important commonality across the four streams of platform research in management.  [….] At its most basic, leverage refers to a process of generating an impact that is disproportionately larger than the input required. [….]

In platform contexts, leverage is achieved through developing shared assets, designs, and standards that can be recombined, thereby facilitating coordination and governance within and between firms sharing a given platform. [….]

  • Production leverage is based on the (re)use of a collection of assets and the interfaces and standards that enable sharing these to drive economies of both scale and scope. This type of leverage is strongly present in the product family and platform ecosystem streams. [….]
  • Innovation leverage is similarly based on the (re)use of a collection of assets and the interfaces and standards that enable sharing. However, instead of sharing to achieve economies of scale and scope, the goal is to drive economies of innovation and complementarity and hence facilitate the creation of new goods and services ….
  • Transaction leverage, in contrast, is based on the manipulation of the market pricing mechanism and market access, which drives transaction efficiency and reduces search costs in the exchange of goods and services …

To summarize, three types of leverage can be observed in platform contexts. Production and innovation leverage are both based on the use of shared assets and the related interfaces and standards that enable sharing. Production leverage is driven by economies of scale and scope, and is illustrated by the product family stream. Innovation leverage is driven by economies of innovation and complementarity, and is illustrated by both the organizational and the product family streams. Transaction leverage is driven by economies of transaction and search and is illustrated by the market  intermediary stream. The platform ecosystem stream exhibits all three leverage logics, as the sources of leverage derive broadly from the multi-faceted nature of the coordination among platform participants ….

Architectural Openness

Conceptually, all platforms exhibit architectural features, in that they consist of a set of low-variety elements surrounded by more numerous high-variety elements …

Architectures in platform contexts exhibit varying levels of openness to participation by parties other than the platform owner. The importance of platform openness in market intermediary and platform ecosystem contexts has been well documented by scholars …. Here, openness relates to the notion of visibility in modularity theory … and is best seen as analogous to the vertical strategy ….

  • A closed — or firm-internal — platform architecture has no third-party involvement. A platform becomes architecturally closed when restrictions have been placed on participation in its development, commercialization, and use ….
  • A many-to-one architecture occurs where the supply side of the platform has been opened to third-party participants. A platform can be semi-open architecturally when restrictions have been relaxed on the supply side of the platform ….
  • A many-to-many architecture occurs where both the supply and demand sides of the platform have been opened to third-party participants. There are no restrictions on participation in development, commercialization, and use for either side of the platform ….

To summarize, the architectures of a platform system typically exhibit firm-internal, many-to-one, and many-to-many configurations. Firm-internal architectures are those that reside within the focal firm’s boundaries and are most often observed in the organizational and the product family streams of literature. Many-to-one architectures are those where the industry value chain has been partially disaggregated with an open supply side, and such architectures are often observed within the product family stream. Many-to-many architectures are those where the industry value chain has been disaggregated, and both production- and consumption- side participants are free to participate. Many-to-many architectures are exhibited by both the market intermediary and the platform ecosystem streams.  [Llewellyn, Autio, Gann (2014) p. 54-58, editorial paragraphing added]

While organizing for economies (of scale, scope or speed) is foundational for human endeavours, openness to participation has only recently risen through social networks with global reach.

D. How do platforms manifest?

With the foundational (i) logic of leverage, and (ii) logic of architectural openness, organizations can have disproportionate impacts on (a) production (economies of scale, economies of scope); (b) innovation (economies of innovation, economies of complementarity), and (c) transaction (economies of transaction, economies of search).

Architectural Leverage

Combined, the logics of leverage and architectural openness suggest a meta-logic of architectural leverage. This meta-logic is echoed in “platform thinking,” or the process of identifying and exploiting a shared rationale and structure in a firm’s activities and offerings to achieve leveraged growth …. Figure 2 illustrates architectural leverage and the types of platforms and other phenomena that can be described by the meta-logic of architectural leverage. [Llewellyn, Autio, Gann (2014) pp. 54-58]

Platform-as-Ecosystem in the center of Production Logic, Innovation Logic

Figure 2: Model of Architectural Leverage (Thomas, Autio, Gann (2014))

The combination of production leverage with architectural openness leads to the identification of three types of Production architectural leverage.  Production architectural leverage is based on the use of a relatively stable collection of production assets and resources, shared through interfaces and standards. These assets drive economies of scale and scope, resulting in an output that is greater than the effort expended.

  • Internal platforms are those that are architecturally firm-internal and leverage shared assets and interfaces within the firm to
    achieve reduced development and manufacturing costs.  [….]
  • Supply chain production platforms have a many-to-one architecture and leverage shared ordering platforms and system interfaces to achieve an output greater than the inputs required. [….]
  • Keiretsu-type systems have a many-to-many architecture and leverage shared product specifi cations and marketplaces. To date these have not
    been explicitly considered within platform contexts ….

By combining innovation leverage with architectural openness, three types of innovation architectural leverage can be identified. Also based on a relatively stable collection of production assets and resources that are shared through interfaces and standards, innovation architectural leverage drives economies of innovation and complementarity that in turn lead to an innovation output that is greater than the effort expended.

  • Platform investments are firm-internal and involve the leverage of shared resources and capabilities that enable operational flexibility and diversification ….
  • Innovation-oriented supply chains have a many- to-one architecture where the standards and interfaces on the shared assets are opened up to third parties ….
  • R&D consortia and open innovation have a many-to-many architecture, where open standards and interfaces are leveraged to drive the development of new products and services by reaching out across multiple entity boundaries ….

The combination of transaction leverage with architectural openness leads to three types of transactional architectural leverage. Transactional architectural leverage is based on the use of the market pricing mechanism and market access to drive economies of transaction and search. This in turn leads to superior performance for the level of input.

  • Internal marketplaces are firm-internal marketplaces where a shared pricing mechanism is leveraged to achieve more efficient pricing. [….]
  • Supply chain marketplaces have a many-to-one architecture and leverage shared ordering platforms to reduce the cost of search and transactions. [….]
  • Multisided markets have a many-to-many architecture and leverage a shared trading platform to create and appropriate value from both sides of
    the market. [….]

Finally platform ecosystems, at the center of the diagram, represent a multi-logic architectural leverage, in that they combine production, innovation, and transactional architectural leverage into a many-to-many architecture. Platform ecosystems leverage production, innovation, and transaction logics based on an open system, through which they create and appropriate value. This type of architectural leverage, also called industry platforms, includes examples such as Intel and Cisco (Cusumano & Gawer, 2002; Gawer & Cusumano, 2008) [Llewellyn, Autio, Gann (2014) p. 54-58, editorial paragraphing added].

The theory of the firm developed in the late 20th century guided the development of multinational enterprises.  Theories for platforms have a shorter history of data to analyze.

E.  Why might a platform not be viable?

Establishing a platform might see a “failure to launch”, or defections that make the proposition non-viable.  The success or failure of a platform can be related to network effects.  David S. Evans and Richard Schmalensee write:

In the case of direct network effects, the basic problem is that the level of participation on the platform affects the quality of the product it offers to
participants, and if quality is too low, participation falls, which reduces quality further, and participation declines toward zero.

In the case of indirect network effects …, participation by each customer group affects the quality of the product experienced by the other group, and, though the dynamics are more complicated, participation levels below critical mass will set off a similar downward spiral.

Whether this is a chicken-and-egg or a chicken-or-egg problem depends on whether participation adjusts more rapidly downward toward equilibrium or upward.  [Evans and Schmalensee (2010), p.22]

Multi-sided platforms are complicated to analyze, and may face pressures from a variety of competitors.

F. How are digital and non-digital platforms different?

Both digital and non-digital platforms bring together multiple user groups, with network effectsMark de Reuver, Carsten Sørensen, and Rahul C. Basole write:

Increasing adoption levels can trigger positive feedback cycles that further increase the usefulness of the technology ….

Typically, network externalities … are direct if the value of the platform depends on the number of users in the same user group, i.e. the value of the product increases by others buying, connecting or using the same platform or services provided via the platform. [….]

Externalities are indirect when the value of the platforms depends on the number of users in a different user group. For instance, video game consoles become more valuable for consumers if there are more developers creating games for that console. Indirect network effects may also be negative, as illustrated in the context of advertising, where more advertisers on a search engine platform decrease its value for searchers of independent advice [de Reuver, Sørensen, Basole (2018) p. 125, editorial paragraphing added].

While non-digital platforms may be modularized by an overarching design hierarchy, digital platform are not limited by physicality.

Digital technologies imply homogenisation of data, editability, reprogrammability, distributedness and self-referentiality.  Such characteristics of digitality can lead to multiple inheritance in distributed settings, meaning there is no single owner that owns the platform core and dictates its design hierarchy.

Furthermore, when combining the modularity of physical goods with the layered architecture of software, the resulting architectures are loosely coupled through standardised interfaces, leading to products open for new meanings after manufacture …. [de Reuver, Sørensen, Basole (2018) p. 126]

As digital platforms evolve, the efforts of community members advancing functionality rubs against collective legacy.

… the recombinability of digitised elements through digital convergence, and the associated generativity, raises paradoxical relationships of change and control ….  The paradox of change implies the need for digital platforms to simultaneously remain stable to form a solid foundation for further enrolment, and yet to be sufficiently flexible in order to support seemingly unbounded growth ….. The paradox of control presents the opposing logic of digital platforms simultaneously being governed by centralised and distributed control. de Reuver, Sørensen, Basole (2018) p. 126]

Digital platforms are more porous in their definition of boundaries, both technically (e.g. APIs and SDKs), and organizationally (e.g. participation and licensings).

G. What don’t researchers know about digital platforms?

With digital platforms a relatively new phenomenon, humility raises some questions for researcher to further investigate. Martin Kenney and John Zysman write:

Are digital platforms here to stay? 
[….]  From a technical perspective, the open standards applied in the Internet domain reduce the need for platforms. If components can interact based on open and common standards, there is no need to harness complexity through a platform. However, at the same time, platform providers like Google, Facebook, Amazon and eBay are carving up the Internet into de facto closed domains. So while open standards enable open interactions without intermediating platforms, they also facilitate creating de facto monopolies through those digital platforms.  […]

How should digital platforms be designed? 
Understanding of what causes a (digital) platform to succeed while others fail is still lacking. Prior studies have predominantly focused on success stories. Studying the conditions in which some platforms thrive and grow while others fail is of value to both research and practice. Decomposing these conditions into a spectrum from ‘‘necessary’’ to ‘‘nice-to- have’’ can accelerate platform design.  […]  There are many examples of accidental digital platforms …. Do products and services (or perhaps applications) evolve into platforms as ‘‘accidental results’’ or can they be consciously designed? [….]

How do digital platforms transform industries?
The emergence of platform thinking and the resulting ‘‘platform economy’’ demands research into the transformative and disruptive impact of digital platforms on organisations and their business models and the business environment as a whole ….

How can data-driven approaches inform digital platforms research?
[….]   Today, we have a wide spectrum of data available through numerous open and socially curated data sources …  When studying ecosystems, how can researchers differentiate all the activities and distinguish between true signal and noise? Moreover, how can researchers effectively manage the intense velocity and scale at which data on platforms and ecosystem is generated? And how can researchers develop computational capabilities and insights that allow greater understanding of changes in the ecosystem and the resulting impact on ecosystem players?  [….]

How should researchers develop theory for digital platforms?  
[…] The units of analysis chosen must allow for the theoretical treatment of the fundamental characteristics of digital platform characteristics and innovation arrangements. This can lead to the develop ment of new insights informing the deeper theoretical inquiry into digital innovation. Doing so will allow digital platform research to establish new theoretical categories rather than exclusively adopt existing categories ….
Platform sustainability is one important further research agenda. […]

How do digital platforms affect everyday life?  
Digital platforms can support new and flexible means for inter-organisational relations through a variety of distributed boundary resources facilitating highly distributed and automated coordination of activities at arm’s length. [….]
The platform debate should also seek to address the broader issue of how digital platform innovation directly relates to issues of societal and global interest. One such issue is the possibilities for direct influence on and societal regulation of digital platforms, which in turn may play a critical role in civil society. [….] [de Reuver, Sørensen, Basole (2018) pp. 130-135]

At this early stage, more research is inductive theory-building, rather than deductive categorization.

H. What are the economic consequences of the platform economy?

While disruption by newly-emerging platforms makes headlines, researchers are still at the stage for formulating the right questions to ask.

How is value created? The platform economy comprises a distinctly new set of economic relations that depend on the Internet, computation, and data. The ecosystem created by each platform is a source of value and sets the terms by which users can participate.

Who captures the value? Indeed, what is the distribution of risks and rewards for the platform users? There are a variety of mechanisms with various implications for gains distribution. Some platforms allow the owner to “tax” all transactions, whereas others monetize their services through advertising. [….]

Who owns or controls the platform? The answer varies by platform, and the differences are important.  [….]

How is work packaged and value created, and what percentage of work is now organized in these radically new ways? What happens to the organizational forms of work? [….]  Many are now concerned that rather than creating a new source of productivity we are legitimating a new form of putting out.  [….]  [Kenney Zysman (2016), pp. 66-67]

We can influence platforms not only through our individual choices (i.e. participation or membership), but also collectively (i.e. government policy).

This brief digest summarizes some of the current research into platforms.  A major finding is that we’re closer to the beginning of our appreciation of this new form, than toward the end.

References

de Reuver, Mark, Carsten Sørensen, and Rahul C. Basole. 2018. “The Digital Platform: A Research Agenda.” Journal of Information Technology 33 (2): 124–135. https://doi.org/10.1057/s41265-016-0033-3.  Alternate search from https://scholar.google.com/scholar?cluster=2506932677533501089

Evans, David S., and Richard Schmalensee. 2010. “Failure to Launch: Critical Mass in Platform Businesses.” Review of Network Economics 9 (4). https://doi.org/10.2202/1446-9022.1256.  Alternate search from https://scholar.google.com/scholar?cluster=15242488527425023780

Kenney, Martin, and John Zysman. 2016. “The Rise of the Platform Economy.” Issues in Science and Technology 32 (3): 61. https://issues.org/the-rise-of-the-platform-economy/. Alternate search from https://scholar.google.com/scholar?cluster=1205698931358821389

Thomas, Llewellyn DW, Erkko Autio, and David M. Gann. 2014. “Architectural Leverage: Putting Platforms in Context.” Academy of Management Perspectives 28 (2): 198–219. https://doi.org/10.5465/amp.2011.0105. Alternate search from https://scholar.google.com/scholar?cluster=6159779374074080923

Van Alstyne, Marshall W., Geoffrey G. Parker, and Sangeet Paul Choudary. 2016. “Pipelines, Platforms, and the New Rules of Strategy.” Harvard Business Review 94 (4): 54–62. https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy.  Alternate search from https://scholar.google.com/scholar?cluster=5324638085888223202

November 7th, 2018

Posted In: design, economics, governance, systems, technologies

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