Tribune co-written with Nicolas Chanut

 

Until the Internet boom of the 2000s, the vast majority of new products or services was guided by the underlying idea that what is needed is to increase the amount of choice available to the consumer. The digital revolution takes this principle to the next level: it exponentially increases the information we have access to, the number of products we can buy, or people with whom we can be in contact.

However, the human brain is not adapted to cope with this multitude of potential choices, and psychologists have been studying for many years the “heuristics of judgment”, that is to say, the multitude of cognitive shortcuts that our brain uses (un)consciously to simplify decisions and to filter possible choices.

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Platform strategies, which are one of the five characteristics of Open Organizations, are ultimately just the way these cognitive mechanisms translate to the world of organizations. They allow us to filter the possibilities and to simplify our choices, on the Internet or elsewhere. They offer the possibility of combining completeness and relevance of choice, quantity, and quality.

Of the five characteristics of Open Organizations that we identified, the platform strategy is probably the one that attracted the most attention – we especially recommend the excellent Platform Revolution by Paul Choudary and co-authors, as well as Platform Strategy by Laure and Benoît Reillier. In this article, we focus on the key attributes of platforms, while showing how everything is related to the quantity/quality matrix and explaining how this relates to Open Organizations.

 

Definition and source of added value on platforms

 

Platform typology: marketplace, two-sided, development infrastructure 

Many typologies have been proposed to classify the different types of platform. At Presans, we distinguish three types of platforms.

  • The “marketplaces” platforms, the best known of which are probably Amazon Market Place, Ebay, AirBnb or Uber. These platforms create a relationship between a buyer and a seller, in cases where supply and demand would be difficult to connect without the intervention of the platform, which charges for the service.
  • Double-sided business model platforms are those that offer different services to different types of customers, which remain interdependent on each other. For example, Google provides a free search engine and provides advertising space to advertisers, which depends on the activity of the search engine. More generally, most social networks and Internet communities are also double-sided business model platforms: Facebook or Youtube offer a free service with high added value to its users and monetizes their data by selling advertising space.
  • The “development infrastructure” platforms, the best known of which are Apple’s AppStore, Google’s Android OS, and Amazon Web Services. Apple provides developers with a standardized development environment that allows them to innovate instead of Apple and gain direct access to millions of potential users. Outside the digital sector, we can also mention GE’s Predix platform, the first industrial AppStore.

 

A source of added value for platforms: network effects

The platforms build all of their value propositions on the same fundamental principle, which differs from traditional businesses. Platforms take advantage of network effects, which are described in the Platform Revolution as the impact of the number of users of a platform on the value created for each user. Unlike a traditional business, which sells its product to a customer A or B almost independently (disregarding congestion effects), the value offered by Twitter to Donald Trump depends directly on the number of users that he can reach. These network effects can appear within the same type of user (I appreciate all the more Facebook that I can find all my friends), or between different types of users: Uber drivers are more likely to use this platform as customers are numerous, and vice versa.

 

How can the challenges specific to platforms be met?

 

Universality and scalability are the two advantages of platforms over traditional companies

This source of value, radically different from that proposed by traditional companies, is at the origin of the two strengths of platforms.

 

Universality

First, this source of value is incredibly general, which is why all sectors of the economy can potentially be disrupted by new platforms. Any sector where the friction between supply and demand is important becomes the prey of a “marketplace” platform: housing / hotels (Airbnb, Booking), transport (Uber, but also Edream aggregators, Opodo, and others, Blablacar, etc.), dating (Tinder and others), medical appointments (Doctolib), soon probably the legal professions (lawyers, notaries.)

Similarly, all large technology companies, which already have an ecosystem of suppliers and customers, are or are in the process of building “development infrastructure” platforms to open their innovation while setting standards that protect their market power: GE with Predix, Airbus, soon the car manufacturers, etc.

 

Scalability

This second source of value implies a cost structure totally different from that of traditional firms. Once the initial infrastructure is created (the platform), the cost of the service delivered to one more user is extremely low, making the service much more “scalable” and therefore dangerous for traditional businesses. Once the site launched, call centers set up, the cost for Airbnb of 1000 additional users is relatively low. To increase platform revenue, the challenge is to attract users, not the unit cost they represent.

 

How can challenges specific to platforms be met?

Depending on network effects for the value proposition of platforms is also the source of two weaknesses, which must be recognized.

 

The difficulty of reaching critical mass

First, platforms need a critical minimum mass of users, which makes the beginnings particularly difficult. Laure and Benoît Reillier spend twice as much time explaining how to achieve this critical mass as the time they spend explaining how to deal with the difficulties platforms may encounter after having passed this stage. This difficulty of reaching a critical mass is an “egg vs hen” type problem. To attract users, Doctolib needs to offer them the most comprehensive doctor base so that they can make an appointment near their home or at their usual doctor’s office. However, there must be a lot of active users for practitioners to agree to register and pay the subscription to Doctolib.

To overcome this problem, we can draw inspiration from the successful methods used by  historic platforms, all of which have displayed ingenuity:

  • Niche market: Facebook initially focused on a niche market (students from Ivy League universities), before gradually expanding
  • Captive audience: Twitter took advantage of a captive audience (participants of the South by Southwest festival) to suddenly get its first thousand users
  • Key Opinion Leader: Instagram pays key opinion leader to attract all their audience on the social network
  • Use the other side of the market: Airbnb recruits renters from satisfied tenants
  • Solve a problem: OpenTable (English equivalent of the Fork) focuses on the most difficult type of user to attract – restaurateurs – and offers them an innovative solution to solve their problems
  • Sponsorship offers: all platforms strongly encourage their users to sponsor new users (either by making the process very easy or by offering financial benefits).

Presans feedback: Presans’ platform is, on the one hand, made up of industrial companies needing talent and experts for decision support or complex technical problem solving, and on the other side, high-level experts. To attract business customers, you need experts and to attract experts, you need companies that need them. How to prime the pump? Starting from the observation that there are about 15 million experts in the world and that the majority of these experts leave digital traces on the web (scientific publications, etc.), we decided to develop software that detects and analyzes these traces to generate an automatic mapping of these experts.

 

The absolutely fundamental role of trust and its impact on quality control

The high-profile Airbnb housing cases ransacked by users who came to party there is an extreme case of negative experience following interactions on the platforms, but we can add many others: non-existent housing in reality, unwanted meetings on dating apps, products not matching the description on eBay …

Platforms are very aware that trust is absolutely fundamental to the sustainability of their business model for three reasons. First, because economic interactions – the revenue source of the platforms – depend directly on the trust agents have in each other. Secondly, because behavioral economics and psychology teach us that we tend to overestimate the probability that a negative event (such as a product that does not conform to the description) will happen to us personally. Finally, because the consequences of the vicious circle generated by a mediatized negative case can be catastrophic.

The trust that needs to be built is all the more problematic for platforms that have difficulty controlling quality throughout their value chain. Thus, marketplaces such as Amazon or eBay can only indirectly control the quality of products transiting on their platform. Nevertheless, a user who feels aggrieved is holding them responsible, which can have a devastating effect. In the same vein, platforms often have difficulties anticipating the magnitude of certain network effects. All indications are that if WhatsApp had become paid, a number of users would have stopped using it.
One of the biggest challenges of already established platforms is therefore to minimize these negative experiences and to improve the quality of interactions. For this, a big toolbox is available:

  • User recommendation systems
  • Very strict content moderation systems
  • Impeccable customer service, and a generous return policy if necessary
  • Increasing the price of the platform, so that only highly motivated users or high-value suppliers remain

A next step will likely be to use the emerging blockchain-based “smart contracts” technology to further secure user experiences.

Presans feedback: The Presans platform allows companies to access the best talents and best experts to reduce the risk associated with certain choices (technological examples) and accelerate the resolution of complex problems. The notion of trust is therefore paramount. We have theorized the notion of trust in demand. That is to say, we have tried to theorize the way to create trust between the companies and experts we mobilize on demand. Without going into details, we have added to the digital platform a human link, which we call the Fellows. The Fellow is a senior person who knows both the industrial world of our customers and the world of expertise. These Fellows act as a conduit between business and experts and contribute significantly to trust-based relationships.

 

What consequences for Open Organizations?

From this more precise characterization of platform companies, what lessons can be drawn for Open Organizations, as they rise across the economy of the 21st century? We see two such consequences.

 

Integration of platform strategies and traditional strategies

First, not all Open Organizations are (or will be) platforms, but each Open Organization is part of one or more platforms, and that’s why it’s important to know the principles. Some organizations are open to multi-homing, that is, marketing their services on multiple platforms at once. The most successful Open Organizations are those whose platform strategies form an important but not a complete part of their business. For example, Amazon is probably the current company whose interaction between platform (Amazon Market Place, Amazon Web Services) and traditional business (logistics and distribution) is the most advanced (even if this “traditional” logistics part is not that traditional…)

 

Renovated corporate governance

The growing importance of platforms resonates with the centrality of business ecosystems. These ecosystems are small economies in their own right, where different types of users of the platforms, and other less traditional stakeholders (geographical communities, public authorities, etc.), are increasingly taken into account and wield increasing power. This bodes well for a renewal of corporate governance, based on a combination of the roles of traditional managers and that of politicians, and in which inspiring mission and functionality are key features.