Something very interesting is happening in the world of business. Thanks to digital technology, not only are businesses becoming more efficient but their whole identity. What a business actually is looks like it’s changing forever.
We used to think of companies as being entities that made something and sold it on to consumers. A chocolate factory, for instance, takes cocoa beans in at one end and spits out candy bars at the other. The production process is a pipeline.
But when you look at how many of the world’s top businesses are organised today, that old input-output model seems like it might be a thing of the past. What is striking is that all of the world’s top five most valuable businesses are tech companies which rely on networks for their value. In other words, they are a “platforms” for millions of users around the world to interact, buy products and share ideas.
eBay is perhaps the best example of a platform in action. The marketplace used to be something that just emerged when buyers and sellers came together. But online, you need the actual algorithms and software to make it happen. eBay is just that – a digital version of a market stall you might find on Main street. It provides tools which allow the buyers and sellers of goods to carry out transactions, taking a cut for itself.
We see similar setups in many other industries too. There are platforms to help businesses cut down on colocation costs by matching buyers of data center colocation with reputable hosts. There are platforms to help match holiday makers with people who want to rent out rooms in their homes. And some platforms match up people who want to drive cars to people who want to get lifts. Platforms are everywhere.
Are platforms the future?
Recently, a pair of MIT economists, Andrew McAfee and Erik Brynjolfsson wrote a book in which they argued that platforms were indeed the future. With ever-increasing digital connectivity, we no longer need companies to solve information problems, such as how much labor and capital to dedicate to a particular productive activity. With the wisdom of the crowd interacting on platforms, those decisions can now be made collectively and the work distributed widely and inexpensively.
The economists also point out that this is something that businesses should be very interested in. Platform companies ultimately tend to be winner-take-all businesses, gobbling up almost the entire market for themselves. This is what happened with Android, thanks to its enormous network of app developers. And it’s what’s going on with Uber, despite serious problems with the way the company is managed. Strangely, it seems that platform-based companies can get away with business practices that would sink regular businesses, because of the inherent advantages that platform business models have.
For these reasons, today’s top entrepreneurs should be looking for new ways to facilitate networks. Areas ripe for new innovation are in places like education and health care, traditionally dominated by sclerotic government departments. These industries could benefit tremendously from networking, especially by connecting specialist service providers with patients and students.
