Under traditional business strategy, companies rely on resources under their control to create value. They use unique products to snare initial sales, use those sales to increase volumes to lower prices, and build competitive “moats” to fend off challengers.
But an MIS Quarterly paper by Questrom’s Marshall Van Alstyne, along with Dartmouth’s Geoffrey Parker and Quinnipiac’s Xiaoyue Jiang, suggests that there may be an even more powerful driver of business value in “platform businesses” such as Amazon, Google and Uber. By harnessing the power of external resources to move value creation from inside firms to outside of them, companies scale faster and reap significant rewards. In the case of software operating systems, for example, Apple, Google, and Microsoft rely on large numbers of developers outside their control. The paper, “Platform Ecosystems: How Developers Invert the Firm,” was recently named the MISQ paper of the year.
In platform ecosystems that depend on high numbers of users—think Apple’s app store or Amazon’s Web Services—companies that orchestrate their external networks, rather than rely solely on internal employees, can spur exponentially greater value. Further, it is developers — who can copy, adapt, and reuse code that has been shared publicly — who serve as the linchpin in this type of value creation. Firms move from internal production to external orchestration.
The advantages of this “inverted firm” approach are numerous. Apple, for example, has benefited from more than 2 million apps developed for its iPhone; Amazon reaps rewards from thousands of websites built on its cloud platform. By ceding some control to outsiders, companies benefit from outside innovation. They attract more users; and they create more value.
Developers using shared code play a pivotal role in this value creation in part because of the digital nature of their work. Code typically can be extended and recombined more easily and less expensively than physical goods, making value creation easier and more scalable.
This transformation in value creation has significant implications, says Van Alstyne. “It portends structural changes in the nature of the firm and structural changes in the economy,” he says. “A lot of the things that we traditionally teach in business schools need revision.”
Van Alstyne is quick to note that this approach to value creation has the potential to affect every part of a business, from marketing to operations to human resources. “Instead of a firm doing all its own marketing, consumers can add value through viral marketing,” he says. “Instead of AirBnB incurring operating costs of a hotel stay, ecosystem partners bear those costs. Instead of hiring employees inside the firm, platforms rely on freelancers outside the firm. In each of these instances, the value-creating activity shifts from inside to outside the firm. This shift affects all of the traditional business functions. It also has profound implications for fair division of wealth in society.”
Read the complete paper.
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Marshall is Everett Lord Distinguished Scholar and professor of Information Economics at Questrom School of Business. He is co-author of Platform Revolution (2016), a CEO Reads bestseller, and of the Harvard Business Review bestselling article on “Pipelines, Platforms, and the New Rules of Strategy” (2016), now taught in business schools worldwide. In addition, he holds patents in information processing theory and in spam prevention mechanisms.
Andrei is an Associate Professor of Information Systems at Boston University’s Questrom School of Business. Previously, he was an Associate Professor in the Strategy group at Harvard Business School and in the Technological Innovation, Entrepreneurship and Strategic Management at MIT Sloan. He is a leading expert on platform businesses, having published over 20 articles on various aspects of platform strategy in economics, strategy and management journals.