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Platform Organizations

Information technology is enabling a new form of more horizontal organization that can harness the efforts of large networks of people through web based platforms such as eBay, Uber, Youtube, or the App store

Information technology is enabling a new form of more horizontal organization that can harness the efforts of large networks of people through web-based platforms such as eBay, Uber or Youtube

Platform organizations are a new form of open organization that harnesses the reduction in transition costs enabled by IT to build web-based platforms where people can exchange goods and services in a two-sided market, thus breaking down the divide between producer and consumer to create ecosystems where value is co-created and exchanged by prosumers.1 With the rise of information technology open, IT platforms are becoming a standard approach for managing complex organizations that are more like ecosystems than the traditional industrial age closed, mechanical form of organization we are used to. These platforms are two-­sided markets that work to facilitate the exchange of value, accessing whole new value sources by creating a more complex form of user generated organization.
Complex systems are fundamentally open systems, that is to say, that they have such a high level of connection and exchange with their environment that we can no longer define and manage them in terms of a well­defined boundary, where things are either a part of the organization or not. This is of course how we traditionally think of organizations, as being fixed, relatively static and well bounded, like a football team we can say exactly who is part of the organization and who is not and everyone typically has a fixed well defined role within that organization, like a government that ascribes positions to each of its members in its different departments.
Now think of a metropolitan area, metro areas are complex organizations, they have no well­defined boundaries. They are open systems, people, goods and services are continuously flowing in and out, what makes this an organization at all is not the boundary condition but instead the dense network of interactions and interdependence, everyone is interconnected and interdependent in effecting the overall state to the system.
Complex organizations are dynamic networks, people join and leave as they need, think about Facebook’s social network or people sharing files on the internet, it happens in a swarm­like fashion with people coupling and decoupling from the organization in a dynamic fashion. In these open organizations we do not have control over the components in the system, like international political organizations, they don’t get to tell countries what to do, the capacity to act and make decisions resides on the local level, but members of this kind of organization have come together because they perceive their joint interdependence in effecting some outcome that none can achieve in isolation. An example might be countries coming together to try and solve climate change.
Thus the emphasis in on attracting the members into the organization and creating the conditions that will result in coordination. These organizations may have a centralized component to them that helps to facilitate the organization, if we think about an organization like the OECD or the Linux foundation both have a centralized component that works as a facilitator, coordinating between members, but the vast majority of members are not part of this formal organization they are autonomous and only partly associated with it.

Platforms

The App Store is a classical example of a platform, harnessing the productive capacities of hundreds of thousands of developers to become one of a number of highly successful business built on the platform model

The App Store is a classical example of a platform, harnessing the productive capacities of over 13 million app developers to become one of a number of highly successful business built on the platform model

It is only really in the past decade or two that we have seen the true rise and coherent formalization of this open model to organizations and it is now called a platform organization. The term platform has become very popular over the past decade or so, every second business coming out of Silicon Valley is calling themselves a platform now, and this is not surprising because the platform model has proven highly successful. Many of the superstar businesses that have shot to the top of market capitalization like Google, Amazon, and Apple are essentially platform organizations. So let’s talk about what we mean by this term platform organization.
A platform is something that supports something else, a platform organization is then an organization that supports the interaction or exchange between two or more other parties. So here we can already see the difference between the closed form of organization that sits above the members organizing them and this open organization on which the members are supported. A classical example of this platform model would be Uber the car sharing company that operates as the supporting platform for connecting people with cars to people who need mobility.
In economics, this is called a two­sided market, where the central role of the platform is in connecting different parties together and facilitating exchange. Multi­sided platforms exist because there is a need for an intermediary in order to match both parties on the platform in an efficient way. Indeed, this intermediary will minimize the overall cost, for instance, by avoiding duplication, or by minimizing transaction costs. This intermediary will make possible exchanges that would not occur without them and create value for both sides. Platforms, by playing an intermediary role, produce certain value for both parties that are interconnected through it, and therefore those sides may both be seen as customers of the platform, unlike in the traditional seller­buyer dichotomy.

Enabling Context

These open platforms typically do not employ or really have much control over the users of the system, they simply provide the enabling context for the exchange to take place. The platform typically provides the tools and protocols through which members interact, there are typically low barriers to entry or no barriers at all, it is an open organization people can join or leave when they want. Open platform organizations have been around for a long time, more traditional examples would include credit card providers like Visa, that facility the interaction between cardholders and merchants, another example would be job recruitment agencies or accommodation agencies.
The current rise of platforms is largely due to the reduction in interaction costs that makes it vastly easier to set them up, and gain participants due to the arrival of the ultimate open platform of our age, the internet. Thus many of these new open systems of organization are based on the internet, but that is not to say they stay on the internet. The first in this wave of new platform organizations were fully internet based, like Napster, social networks, Wikipedia etc. But increasingly we see open IT­enabled platforms that organize significant amounts of physical assets, such as Airbnb, being the largest accommodation service in the world, or Uber being the largest taxi service, and increasingly these open platform organizations are affecting all industries, such as new platforms built on smart power grid technology, materials exchange platforms or food platforms.

Characteristics

Platforms are two sided markets that create value by facilitating the organization and exchange of products and services between prosumers

Platforms are two-sided markets that create value by facilitating the organization and exchange of products and services between prosumers

This open platform model has a number of advantages over closed forms of organization. Firstly they are highly scalable, rather than becoming unwieldy with greater numbers of participants, they become only more capable and valuable. With closed systems of organization the larger you scale them the more levels of bureaucracy you need to maintain and the farther removed the centralized authority becomes from the actual operations of the organization. Large centralized, closed organizations of this kind can thus become very cumbersome. In contrary platforms are designed for scale, because they do not deliver the end product or service themselves they can maintain a very limited amount of assets even when they scale, for example, some online platforms have reached a million users with only a handful of employees and a small budget. Platforms have the capacity to scale to a truly global level with Facebook’s over one and a half billion users being a good example.
Platform organizations are typically built on the long tail, they leverage the reduction in transaction costs that Information technology has enabled to tap into the vast amount of unused resources of the end user that were previously not accessible within the centralized model because of high coordination costs. In such a way networked platform organizations have the capacity to create new markets and tap into underutilized resources and capabilities. They aggregate a large number of small and often non­professional resources, providing a unified interface for the end user to access them. In such a way they are able to bypass traditional centralized incumbents creating whole new value streams out of underutilized resources, such as available car space or available accommodation space or excess food.
In the past, sellers have been limited by the economics of production and distribution to a “push­based approach,” meaning that they simply made an efficiently large batch size of their product and hoisted it onto the marketplace. This means a number of things, that they needed significant capital expenditure up front, that they had to leverage economies of scale to be able to compete and then they had to convince customers to buy in mass or else they would not be able to get the unit price low enough. Platforms avoid most of this which makes them much more agile organizations. Often the product being sold already exists, all that the platform is creating is the connections to enable exchange thus there are limited overhead costs, no great need for forecast planning and products can be sold in small units, that can enable a more personalized experience, which is difficult to achieve within a centralized model setup for batch processing.
Finally, platforms often work to enable the exchange of new value forms, such as social capital, natural capital or cultural capital. Our traditional business organization really just sold products and tried to make money. Although many of these platforms are strongly commercially oriented, because they are connecting people to people they often have a strong social dimension, they often enable more than just commercial transactions, but also build in social capabilities that add extra value to the system. The bureaucratic organization is designed to be impersonal, one size fits all, and this has many advantages but it largely excludes or ignores the value of social capital. These platforms have the technology and capabilities to easily include and enable the exchange of social capital, that adds an extra dimension to them often making them more engaging.

Cite this article as: Joss Colchester, "Platform Organizations," in Complexity Academy, October 6, 2016, http://complexityacademy.io/platform-organizations/.
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