Capability building is now the most important consideration when making decisions as to how any organization should be structured. This is particularly true for platform companies.Why? The answer has to do with how platform companies create value when compared to product counterparts. Product companies create value primarily by making their products incrementally better. Take the iPod, for instance: it started as a simple mp3 player, and then made incremental improvements to its appearance, its size, its storage capabilities, and its media display functionality. It will most likely continue on this trajectory, making sustaining innovations, or incremental improvements, to its existing product line. Now contrast this with a platform company like Google. Google relies on incremental innovations to a certain extent — its algorithm is periodically altered in an attempt to improve search results, and Gmail seems to be forever expanding its storage capacity. More important to Google from a competitive standpoint, though, is it’s ability to create entirely new capabilities — for instance, Google Video and Google Base. These initiatives required a wide array of new capabilities to be established. To structure a company for new capabilities as opposed to incremental innovations, the value chain must completely atomized. In other words, there can be no long value chains where each employee is a rung in a ladder, with all the value ultimately flowing to the top. Such hierarchical organizations are essentially immobile by design; they are not capable of creating new capabilities because everyone in the vertical hierarchy is participating in a way that only serves the existing value chain. This is great for incremental innovations, as such a structure essentially institutionalizes the process of adding more value to existing value chains. It is not so effective, though, for creating new value chains. At this point, Google is the poster child for the platform company, with its bottom-up innovation style and its emphasis on group-oriented decision making and individual creativity. By giving its employees freedom to work on their own projects, it has set the stage for many value chains to be created; in other words, it has put in place an engine for building capabilities. As companies embrace platform business models to a greater extent, this strategy will be taken even further, with organizations being structured in much the way that open source communities are: no real bosses and independent members working in a decentralized environment dictated more by coordination than by hierarchies.
The final article in the series will look at the seismic consequences of this shift in organizations, and how it will ultimately bring about the demise of corporations and nations.
via Kid Mercury’s Blog by Kid Mercury on 05/16/07