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Platform Economics (2) – Network Dynamics

I thought I'd write some more about some of the basic economic fundamentals of platform business models (links to the other posts in this series are collected at the bottom of this post). 

It's worth delving a bit more into network dynamics and why (perhaps) the shift from more traditional market dynamics and approaches can be hard to grasp for incumbent businesses. For this I'll draw particularly from this Wharton piece by Barry Libert, Megan Beck and Jerry (Yoram) Wind (who in turn are drawing from their book: The Network Imperative). As always, it's worth reading the original, but I'm summarising my take outs here for my own benefit.

To begin with, the authors have defined four key business model types in the modern economy:

Asset Builders: a value proposition based on physical capital (manufacturing, distributing, marketing, selling or leasing physical goods). Example include Exxon, Ford, Walmart, Boeing

Service Providers: a value proposition based on human capital (providing expertise and services to customers). Examples include Accenture, JP Morgan Chase

Technology Creators: a value proposition based on intellectual capital (developing, selling IP such as software, analytics, pharmaceuticals, biotechnology). Examples include Pfizer, Microsoft, Oracle

Network Orchestrators: a value proposition based on network capital (facilitating interaction or transaction between different members of the network, value coming from building relationships, collaboration, sharing advice or reviews). Examples include TripAdvisor, Uber, Airbnb, eBay

In research conducted in 2014, it's been shown that when this framework was applied to the S & P 1500 (which captures a range of company size), there were notable differences in performance, with network orchestrators outperforming the other models across a range of measures including profit, return on assets and sales growth. 


Networks are of-course easier, faster and more cost effective to scale than physical products:

'Not only are many of the most valuable goods in our market — such as ideas, intellectual capital, and access — digitizable, but also our digital networks allow them to proliferate with great ease. The scaling cost is close to zero. When you add the network effect, where each additional participant (or node) in the network increases the value for every other participant, the network drives its own growth.'

The authors advocate for a recalibration of focus and investment to reflect this shift, but also recognise how hard it is for leaders to move on from decades of entrenched industrial age thinking that places greater value on physical assets. They have a nice summation of the key shift from firm-centric to network-centric thinking:

Network-mindsetWhilst network orchestrators still represent a small proportion of publicly traded businesses, networks will proliferate across industries (albeit in different ways), and also blur the boundaries between how we think of different sectors. But the organisational orientation of a platform business is different to a traditional model:

'The companies that have truly built network-orchestrating organizations don’t just do one thing differently; they do everything differently — from leadership to recruiting to production to advertising.'

I've captured this shift before as one from resource control to resource orchestration, from internal optimisation to external interaction, from a focus on customer value to a focus on ecosystem value. I also believe that there is opportunity in creating multiple platform models across the different capabilities of a single organisation, in the same way that Amazon is systematically 'platformising' its different competencies.

This is a big shift. The idea of platform businesses may not be new, but digital technologies have brought a scale and potential comprehensiveness to this the like of which we have never seen. 

Other posts in this series: 

Defining Platform Business Models

The shift from pipeline to platform models

Platform Economics (1) – managing the demand curves on supply and demand side, cross-side and same-side network effects

And there is more in my book of-course.

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