Chapter 3 of 'Platform Revolution' discusses the architectural and design principles crucial for creating successful platforms that effectively facilitate exchanges of information, goods, and services. It emphasizes the importance of defining core interactions, understanding value units, and designing for both user engagement and serendipity. Additionally, the chapter outlines how platforms disrupt traditional value chains and offers guidelines for optimizing platform operations.

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Questrom School of
Business
Chapter 3
Architecture & Design
Platform Revolution: Making Networked Markets Work for You
with Sangeet Choudary
Platform Thinking Labs
@sanguit
Geoffrey Parker
Dartmouth College
@g2parker
Marshall Van Alstyne
Boston University
@InfoEcon

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Platform Revolution:
Chapter 3 – Architecture & Design
1. Introduction: Welcome to Platform World
2. Network Effects: The Power of the Platform
3. Architecture: Basic Principles for Designing Successful Platforms
4. Disruption: How Platforms Conquer &Transform Traditional Industries
5. Launch: Chicken or Egg? 8 Ways To Launch Successful Platforms
6. Monetization: Capturing the Value Created by Network Effects
7. Openness: Defining What Platform Users/Partners Can &Cannot Do
8. Governance: Policies That Increase Value and Enhance Growth
9. Metrics: How Platform Managers Can Measure What Really Matters
10. Strategy: How Platforms Change Competition
11. Policy: How Platforms Should (and Should Not) Be Regulated
12. Future: Industries Facing Imminent Change
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PLATFORMS REMAKE THE TRADITIONAL
VALUE CHAIN

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VALUE CREATION INSIDE VERSUS OUTSIDE
STEP 1 STEP 2 STEP 3 STEP … STEP N
Unit of
Value
Traditional value chain (pipeline) business
PRODUCER CONSUMERS

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Unit of
Value
1. Producer owns the pipe
2. Producer adds value, controls the process
3. Value flow is linear
PRODUCER CONSUMERS
VALUE CREATION INSIDE THE PIPE

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DEMAND
PLATFORM
SUPPLY
1. Producer role distinct from platform
2. Platform curates, controls movement
3. Value flow is network matching
VALUE CREATION INSIDE VERSUS OUTSIDE

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Dell
Coca Cola
Apple
Samsung
Airbnb
Uber
BUSINESS MODELS CAN OVERLAP
Platforms Scale More than Pipes

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Tom Goodwin, Sr. VP of Strategy Havas Media
``In 2015, Uber, the world’s largest taxi company
owns no vehicles, Facebook the world’s most
popular media owner creates no content,
Alibaba the most valuable retailer has no
inventory, and Airbnb the world’s largest hotelier
owns no real estate.’’

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Identify spare capacity, scale across boundaries
Source: http://tomslee.net/airbnb-data, 2015
FOUNDED IN 2008, AIRBNB OPERATES AT GLOBAL SCALE
1M+ listings, 34,000 cities, 180 countries
Paris 40,000 listings Berlin 8,105 listings Sydney 5,692 listings

10. * Includes HQ, other rooftops, retail outlets, manufacturing
plants, service shops, etc.
EXAMPLE
COMPANIES
PLATFORM
ECOSYSTEM
HIERARCHAL ORGANIZATION +
PHYSICAL ASSETS*
ASSET HEAVY
Daimler
Johnson Controls
GE
ASSET LIGHT
Google
Uber
Airbnb
STRUCTURE PLATFORM
MIXED
Apple
Amazon
HP
Samsung
Enterprisetype
Source: P. Evans, CGE; CB Insights, Capital IQ, 2015
PLATFORMS EXIST ON TOP OF ASSET HEAVY INDUSTRIES
Google Play
Uber app
Airbnb app
App store
App store
SDN App Store
Samsung Apps
Moovel
Panopix
Predix
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SO HOW DO YOU DESIGN A PLATFORM?
LET’S START WITH 3 PRINCIPLES OF PIPE DESIGN…

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1. Define the value unit
2. Design the process that adds value and delivers this unit to the customer
3. Design the pipe (value chain) that controls and optimizes this process
Unit of
Value
VALUE CREATION INSIDE THE PIPE

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MOVING TO 3 PRINCIPLES OF
PLATFORM DESIGN…

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1. DEFINE THE VALUE UNIT
Exchanged: ride, stay, video, news, tweet, design, auction item
VALUE CREATION OUTSIDE THE PIPE
VALUE
UNIT

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STAYS TWEETS VIDEOS PROJECTS SERVICES
VALUE CREATION OUTSIDE THE PIPE

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2. DESIGN THE INTERACTION AROUND THE VALUE UNIT
Creation, Curation, Consumption
VALUE CREATION OUTSIDE THE PIPE
PRODUCER CONSUMERSVALUE
UNIT

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3. Design the platform that enables this interaction
PLATFORM
PRODUCER CONSUMERS
VALUE CREATION OUTSIDE THE PIPE
COMPLETE EXCHANGE INCLUDES INFORMATION, GOODS / SERVICES, AND CURRENCY

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The fallacy: Platforms are in the business of
BUILDING FUNCTIONALITY

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Instead… the goal is
ENABLING INTERACTIONS

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How do we optimize the
platform value chain?

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Design the architecture to support a network, tools and data.
PLATFORM
NETWORK
DATA
TOOLS
OPTIMIZING THE PLATFORM
PRODUCER CONSUMERS

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1. Design the network to get both roles on board
NETWORK
PRODUCER CONSUMERS
OPTIMIZING THE PLATFORM

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2. Provide them tools to interact and exchange value
TOOLS
PRODUCER CONSUMERS
OPTIMIZING THE PLATFORM

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3. Use data to make the best match
Data
OPTIMIZING THE PLATFORM

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What’s inside and what’s outside the Platform?

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Put high frequency usage, low variety components in the core platform (network).
Put low frequency usage, high variety components at the app layer (ends), even if low level.
Implementing any function incurs some resource penalty regardless of whether the function is used or
not. Putting this function in the network distributes these penalties among all clients, regardless of
whether they use that function or not. Saltzer, Reed & Clark (1981)
END TO END PRINCIPLE ALSO FACILITATES NETWORK GROWTH

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This deep principle of network architecture also applies to business architecture.
Mac OS X broke from Mac OS 9. Apps incompatible but
emulator helped OS 9 users.
Respecting end-to-end principle vastly improved
efficiency & upgrades
Vista tried to do all things for all users.
Compatible back to DOS. Critics dubbed it
“goatware” because it ate everything.
Did NOT respect end-to-end principle. XP
discontinued in 2008 but had 12% market share
to Vista 2% in 2015
END TO END PRINCIPLE ALSO FACILITATES NETWORK GROWTH

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Social media / web
Job search / work
E-commerce
Tools / cloud / big data
Payments
API Clusters
Messaging services
Source: Rahul Basole and Peter Evans, with data
from ProgrammableWeb, Center for Global
Enterprise, 2015
Walmart
Amazon
Companies
Enterprise / storage
Points represent APIs. Links represent
mashups or recombinations of API
calls
AMAZON APIS LET OTHERS BUILD ON THEIR SYSTEMS VS WALMART
Walmart
Amazon SNS
Alexa Web Inform
Amazon
Marketplace
Amazon
SimpleDB
Amazon Product
Advertising
Amazon
CloudWatch
Amazon
Redshift
Amazon SC2
Amazon S3
Amazon Mechanical
TurkAmazon RDS
Amazon DynamoDB Amazon Queue Service
Amazon
Flexible

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Logistics & supply chain squeezing have limits. External value add is much less limited.
WALMART VS AMAZON GROWTH OVER 10 YEARS: 12% VS 1516%

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TAKEAWAYS FROM CHAPTER THREE
A platform remakes the pipeline value chain, adding value creation outside the firm.
A platform is fundamentally an infrastructure designed to facilitate three kinds of exchange: information, goods / services, and
currency.
The design of a platform should begin with its core interaction—one kind of interaction that is at the heart of the platform’s value-
creation mission.
Three key elements define the core interaction: the participants, the value unit, and the filter. The value unit is the most crucial, and
often the most difficult to control.
In order to make the core interaction easy and even inevitable, a platform must perform three crucial functions: pull, facilitate, and
match. All three are essential, and each has its special challenges.
As a platform grows, it often finds ways to expand beyond the core interaction. New kinds of interactions may be layered on top of
the core interaction, often attracting new participants in the process.
The end-to-end principle means putting high volume low variety functions in the platform, and putting low volume high variety
functions in the apps.
It’s important to design a platform to make valuable interactions easy for large numbers of users. But it’s also important to leave
room for serendipity and the unexpected, since users themselves will find new ways to create value on the platform.

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Platform Revolution:
Chapter 4 – Disruption
1. Introduction: Welcome to Platform World
2. Network Effects: The Power of the Platform
3. Architecture: Basic Principles for Designing Successful Platforms
4. Disruption: How Platforms Conquer &Transform Traditional Industries
5. Launch: Chicken or Egg? 8 Ways To Launch Successful Platforms
6. Monetization: Capturing the Value Created by Network Effects
7. Openness: Defining What Platform Users/Partners Can &Cannot Do
8. Governance: Policies That Increase Value and Enhance Growth
9. Metrics: How Platform Managers Can Measure What Really Matters
10. Strategy: How Platforms Change Competition
11. Policy: How Platforms Should (and Should Not) Be Regulated
12. Future: Industries Facing Imminent Change
(click to order on Amazon)2016 Parker & Van Alstyne, with Choudary – licensed under Creative
Commons Attribution-ShareAlike 4.0 International (CC BY-SA 4.0).