How Power Is Shifting From Corporations To Platforms

It was largely during the 20th century that corporations rose to power. Private enterprises— usually run by a cadre of professional managers rather than by entrepreneurs— came to rival the reach and influence of governments, controlling massive resources that were not bound by traditional borders.

Today, however, that dominance is on the wane.  Consider the case of Ford. During the recent financial crisis, the company lobbied hard for the government to bail out its rivals.   It wasn’t an act of altruism, but survival.  If GM and Chrysler went down, so would the supplier networks upon which Ford depended.

In a connected world, the most important resources are no longer what you own, but what you can access and the line between competition and codependence is beginning to blur. That changes the game entirely.  Successful enterprises can no longer prosper merely by deploying assets efficiently, but must effectively manage and deepen connections.

Death At Digital Speed

The word “disruption” has become a cliche in business circles lately.  However, like most cliches, there is a strong fact pattern that underlies it.  Since 1960, the average lifespan of a company on the S&P 500 has fallen from more than 60 years to less than 20.  As of 2011, only 13% of the original Fortune 500 companies still existed.

Yet despite the carnage, there’s no evidence that today’s managers are any less competent than in previous generations (certainly, today’s CEOs are better educated and more handsomely paid).  The problem, as I pointed out in a previous post about Blockbuster, isn’t so much incompetent management of operations, but a significant change in platforms.

In Blockbuster’s case, while management clearly saw the threat posed by digital technology, the firm was encumbered by its existing platform of retail stores, along with the people, processes and systems that came with it.  In a similar vein, Border’s wasn’t beaten out by another bookstore, but by Amazon, which earns 40% of its revenues from 3rd party sellers.

Another interesting example is Wal-Mart, which built a powerful logistics platform over a period of decades.  In this case, however, their choice in platforms works equally well with both physical and virtual storefronts.

The Rise Of Ecosystems

Sun Microsystems co-founder Bill Joy once said that, “No matter who you are, most of the smartest people work for someone else.”  Now known as Joy’s Law, the principle has expanded far beyond managing talent.  Today, firms are finding that they are often better off tapping into ecosystems than owning resources outright.

These ecosystems tend to function as open platforms rather than closed, proprietary networks.  An iPhone, for example, wouldn’t be nearly as valuable without the millions of apps available for it.  In much the same way, new cloud infrastructure services like Microsoft Azure and Amazon Web Services allow you to connect to hundreds of applications.

Notice the difference.  In the old corporate economy, transactions went one way.  Firms would manage a value chain in order to deliver a superior product at a lower cost.  Yet today, transactions are multi-sided.  Firms not only need to court customers, but also others that will enhance their platform.

As I noted in an earlier post, today the cloud is bursting out into just about every facet of life imaginable.  Xero in accounting, Kareo in healthcare, Tidemark in ERP software, IBM’s Watson in cognitive computing, Wink in smart homes, the list goes on.  In a networked world the best way to become a dominant player is to become an indispensable partner.

Strategy In A Networked World

When corporations ruled, strategy was driven by acquiring assets and building capabilities. A firm could dominate through larger marketing budgets, better negotiating power with customers and suppliers and greater access to talent.  However, in a platform driven environment, enterprises must widen and deepen connections.

Let’s return to Blockbuster and Border’s.  Both were highly efficient operators with ample resources and massive negotiating power.  Yet none of that helped them.  In fact, their vested interests in the retail platform, including leases, employees, franchisees (in Blockbuster’s case) and supplier relationships hindered their ability to migrate to the new platform.

An e-commerce business is not merely an online merchandiser with an alternative infrastructure.  New platforms require new skills and new perspectives.  Netflix and Amazon won not because they were necessarily better or smarter, but because they were unencumbered and therefore more able to build the skills that suited the new ecosystem.

An enterprise is no longer so much a collection of resources and capabilities as it is a set of platforms.

The Triumph Of The Commons

A long standing dilemma in economics is known as the tragedy of the commons.  Self interest, historically, tends to degrade community resources through over-utilization. However, in an economy driven by platforms rather than bureaucracies, just the opposite happens.

Traditional retailers, for example, cannot compete with the size and sophistication of  Amazon’s platform.  Through the Bloomreach platform, however, they can each benefit from analytics derived from common data, just as we all can find things easier on Google because of the millions of other people’s searches that train its algorithms.

In much the same way, technology companies are learning to put as much effort into their software development kits (SDK’s) and application programming interfaces (API’s) as they do into their products.  Today, a product without connections is a product without capabilities.

In a connected world, power no longer emanates from the top of the heap, but the center of the network.

– Greg