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Vallabh Sambamurthy & Robert W. Zmud

Guiding the Digital Transformation of Organizations - Second Edition

© 2017 Legerity Digital Press

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ISBN 978-0-9857955-9-7

Digital Strategy Formulation for Network Organizations

Chapter

07

Guiding the Digital Transformation of Organizations By Vallabh Sambamurthy and Robert W. Zmud

Second Edition Copyright © 2017

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ISBN 978-0-9857955-9-7

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Chapter 7. Digital Strategy Formulation for Network Organizations

Within a network ecosystem, market participants connect and conduct

interactions with one another using a market platform provided by a network

organization – the network orchestrator. While interacting, market participants make

use of platform content/functionality to exchange data, exchange items of value

(e.g., value-units, monetary payments, etc.), and collaborate in co-creating new

value-units.

This chapter discusses digital strategy formulation within network

organizations. Because of the huge variety of network ecosystems, our discussion

will be in the form of general concepts and frameworks – that are then grounded

through two different network organizations (see Figure 7-1 and Table 7-1):

TopCoder38,39 and Metropia40. TopCoder is an established organization that has

constituted a single network ecosystem handling all of TopCoder’s work activities;

Metropia is a relatively young organization that aims to constitute many local

(geographically-bound) network ecosystems.

38 H. Tajedin and D. Nevo, “Value-Adding Intermediaries in Software Crowdsourcing,”

47th Hawaii International Conference on System Sciences, IEEE, January 2014, pp. 1396-

1405. 39 H. Tajedin, D. Nevo and R.W. Zmud, “Beyond Matching: Intermediaries’ Market

Design and Market Development Roles in Software Development Crowd Markets,” working

paper, Rensselaer Polytechnic Institute, January 2017. 40 The Metropia material has been gathered by one of this book’s authors through

interviews with two members of Metropia’s leadership team, including the founder/CEO.

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Figure 7-1 The Communities Participating in TopCoder and Metropia

Clients Developers

Market Platform

TopCoder

Commuters

Market Platform

Metropia

Mobility Service

Providers

Merchants Government

Agency

Table 7-1 Describing and Contrasting TopCoder and Metropia

TopCoder Metropia

Core Transaction

Delivering a solution (software code) that satisfactorily meets a client’s specification (a software project)

Provide an optimal mobility solution for moving the commuter from point A to point B

Community 1 Clients

(money-side) Commuters

(money-side)

Community 2 Developers

(subsidy-side) Mobility Providers

(subsidy-side)

Community 3 Merchants

(subsidy-side)

Community 4 Government Agencies

(money-side)

Market Geographic Scope

Global Local

Maturity Established Young

Founded in 2001, TopCoder offers crowdsourced software design and

development services to (mostly North American Fortune 500) clients across

numerous industries. As of May 2015, TopCoder had built a community of over

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700,000 developers, of which nearly 20% were active. Metropia was founded in 2010

as a Mobility-as-a-Service (MaaS) platform for commuters in congested urban areas.

At the time this case material was collected, Metropia was in five urban areas (Austin,

El Paso, Houston, New York City and Tucson) and was in various stages of rolling out

platforms in five additional urban areas.

The chapter introduces intuitive ways of thinking about the digital strategies

formulated by network organizations as they establish and evolve network

ecosystems by covering the following topics:

 Business Models for Network Organizations

 Strategic Intent for Network Organizations

 Market Design and Market Platform Design

 Digital Strategy Formulation

 Sustaining a Network Organization’s Market Position

Business Models for Network Organizations

Business models for network organizations (see Figure 7-2) differ from those

of pipeline organizations in two primary ways:

 The presence of an additional business model element – the number of communities interacting through a network organization’s market platform.

 The existence of a unique value proposition and a unique profit model for each of the interacting communities.

Typically, two of these interacting communities are directly associated with the core

transaction: the producer and the consumer of the value-unit(s) being exchanged via

the constituted market. Other interacting communities are then attracted by the

opportunity to touch producer participants, consumer participants, or both. A

network organization’s success is ultimately linked to (1) the (continuing) presence

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of engaging value propositions for each of the interacting communities, and (2) a set

of community profit models that additively produce a profitable revenue stream.

Figure 7-2 Business Models for Network Organizations

Community Value

Propositions

Community Profit Models

Core Capabilities

Dynamic Capabilities

Number of Communities

Similar to pipeline organization business models, network organizations deliver

value propositions and profit models through sets of core capabilities and dynamic

capabilities. As might be expected, these capabilities tend to vary somewhat with

regard to the community (or communities) being targeted. Consequently, capability

development and management requires the balancing (for effectiveness and

efficiency purposes) of local (a single community) and global (all communities)

interests.

Table 7-2 provides an overview of TopCoder’s business model. Here,

tournament-style crowdsourcing is applied to incentivize a developer community (the

producer) to deliver software solutions (the value-unit) to a client community (the

consumers). Importantly, the client community is the money-side of the market,

while the developer community is the subsidy-side. Client software projects are

broken into a series of contests (project specification, architecture design, version

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specification, version design, version coding/testing, etc.), with three (or so) winning

solutions selected for each contest. The client accepts one of these winning solutions

as the overall winner and the project-related work then moves on to the next contest.

The core transaction is contest design and fulfillment – the delivery of a satisfactory

contest solution to a client.

Table 7-2 TopCoder’s Business Model

Business Model Element

Description

Client Community Value Proposition

Obtain quality code (e.g., tested against specifications, secure, etc.) within agreed-on schedule and budget.

Client Community Profit Model

 Clients pay subscription fee.  Clients provide contest incentives (payments to winning

developers).

Developer Community Value Proposition

Earn income, acquire new skills, demonstrate skills and interact with forward-looking technologists.

Developer Community Profit Model

No associated revenue stream (the developer community is the subsidy-side of this network ecosystem).

Core Capabilities

 Software development & software development management.  Translating software development projects into contests.  Contest design & fulfillment.  Acquiring, developing and retaining community participants.  Creating a sense of community for participants.

Dynamic Capabilities  Sensing & identifying software development trends &

innovations.  Sensing & identifying new participant sources.

Metropia’s business model (summarized in Table 7-3) is more complex. The

core transaction involves a commuter desiring to move from point A to point B by

selecting one of a number of offered mobility solutions: self-navigation (driving,

walking, bicycling), toll roads, car-pooling, ride-sharing, car-sharing, bike-sharing,

ride-hailing, various mass transportation modes, etc. The mobility service portfolios

vary across the local market platforms, and the offered solutions are produced

through the application of sophisticated traffic algorithms on massive collections of

historical and streaming traffic-related data. The commuter earns reward points for

selecting solutions that contribute to the common good, and these reward points are

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exchanged for goods/services at participating merchants. Each local platform is

supported by one or more governmental agencies, motivated by a desire to improve

the transportation common good by changing commuter behaviors and by obtaining

enhanced capabilities for collecting and analyzing transportation-related data.

Table 7-3

Metropia’s Business Model

Business Model Element Description

Commuter Value Proposition  Provide optimal mobility solutions for going from point A to point B.  Provide reward points for contributing to the common good .

Commuter Profit Model  Subscription fees & transaction fees.

Provider Value Proposition  Gain exposure with the commuter community.  Gain revenue from servicing the commuter community.

Provider Profit Model  Negotiated mobility services costs.

Merchant Value Proposition  Build reputation with commuter community.

Merchant Profit Model  Exchange goods/services for reward points.

Government Agency Value Proposition

 Enhance commuting common good.  Obtain mobility-related data.  Obtain knowledge from Big Data analytics.

Government Agency Profit Model

 Revenue (from developing, launching & enhancing local market platforms).

 License fees (from Big Data/analytics products & services).

Core Capabilities  Traffic optimization & Big Data analytics.  Interconnect market platform with government/provider processes.  Relationship management (all communities).

Dynamic Capabilities  Sensing and identifying new mobility services and providers.  Sensing and identifying new government regulations.

Strategic Intent for Network Organizations

A strategic intent directs, rather than constrains, organizations’ digital

strategists’ thought processes as competitive actions are formulated and as the

capabilities necessary for implementing these and future competitive actions are

developed. With pipeline ecosystems, strategic intents are established to emphasize

and evolve a dominant consumer value proposition – and, hence, the capabilities that

enable the value disciplines (i.e., operational excellence, customer intimacy and/or

product leadership) that underlie this value proposition. Given the multiplicity of

value propositions that co-exist with network ecosystems, these organizations’

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strategic intents tend to be considerably broader than those of their pipeline

organization counterparts. In essence, network organizations’ digital strategists face

a more complex and more dynamic competitive space than do pipeline organizations’

digital strategists - think about not only juggling more balls, but balls that are

erratically moving about.

Table 7-4 illustrates the primary value propositions offered by TopCoder and

Metropia. As suggested, all three value disciplines are critical to the competitive

success of both of these organizations.

Table 7-4

TopCoder’s and Metropia’s Value Propositions

Community Value Proposition

Value Disciplines

Operational Excellence

Customer Intimacy

Product Leadership

TopCoder

Clients Obtain software code that meets specifications within agreed-on schedule & budget.

Developers Earn income, develop skills, demonstrate skills and interact with forward-looking community.

Metropia

Commuters Obtain optimized mobility solutions & reward points.

Providers Gain exposure to and services revenue from the commuter community.

Merchants Build reputation within the commuter community.

Government Enhance the transportation common good, access a new source of traffic data, and enhance Big Data analytic capabilities.

Market Design and Market Platform Design

The competitive moves taken by a network organization’s leadership team can

be viewed, conceptually, as focused on one of two levels of design: market design,

or moves aimed at enhancing the efficiency of the constituted market; and, market

platform design, or moves aimed at building market platform content/functionality

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in order to enhance community participants’ satisfaction with offered value

propositions. Table 7-5 describes each of these design levels by providing the

primary attributes serving as each level’s focus and offering examples of competitive

moves addressing these attributes. While moves taken at either of these design

levels can affect both market efficiency and participants’ satisfaction, distinguishing

competitive moves in this manner can ease the cognitive and communication efforts

of leadership team members and of digital strategists as they formulate their

organizations’ digital strategies. It is also important to note that taken competitive

moves can be initially implemented by fully-digitalized processes (i.e., built into a

platform’s functionality) or by staff being supported through digitalized processes.

Over time, the operational and managerial processes associated with competitive

moves handled initially by humans are typically digitalized as the processes are

institutionalized.

Table 7-5 Market Design and Platform Design

Attribute Targets of Competitive Moves

Market Design

Market Thickness

 Recruitment of community members.  Retention of community members.

Market Congestion

 Maintenance of an effective balance in community sizes.  Occurrence of value-adding matches.

Market Safety

 Perceived fairness & trustworthiness of market transactions.  Perceived trustworthiness of platform content.  Perceived level of platform security.

Market Platform Design

Core Transaction Fulfillment

 Core transaction fulfillment rate.  Participants’ satisfaction with community value propositions.

Ease-of-Use  Participants’ abilities to access platform functionality & content.

Data & Information Exchange

 Participants’ abilities to contribute data & information.  Participants’ abilities to interact with other participants.

Adaptability  Ease of adding or removing: communities, participants, platform

functionalities & platform content.

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Market Design

The objective of market design is to create the conditions most conducive to

efficient market operation. Three such conditions are suggested as being most

important:41,42

 Market thickness: ensuring sufficiently large numbers of producers and

consumers such that a strong likelihood exists that satisfactory producer- consumer matching will occur.

 Market congestion: ensuring the ease by which producers and consumers

are able to consider a sufficient number of alternatives in arriving at a satisfactory match.

 Market safety: ensuring that market transactions are sufficiently safe such that producers and consumers are willing to reveal or act on confidential information and are willing to keep the transactions inside the market.

Let’s now look more closely at each of these market design attributes.

A classic example for understanding market thickness is that involving credit

cards. What do you, as a consumer, value in a credit card? While things like reward

programs and interest rates are obviously important, you would not even consider a

credit card unless it was accepted by most of the merchants you patronize. What

leads a merchant to decide to accept a specific credit card? While setup costs and

transaction fees are clearly important, a merchant would hesitate to invest in a card

that was not held by a sizeable portion of the merchant’s customers. Invariably, the

decision by producers or consumers (or, in general, market participants) to join a

specific network ecosystem is largely a function of the size of the cross-side

community. Successfully resolving this chicken-and-egg problem represents a major

41 A.E. Roth, “What Have We Learned from Market Design?,” The Economic Journal,

March 2008, pp. 285-310. 42 H. Tajedin, Three Essays on Crowdsourcing as a New Mode of Organizing, 2016

Doctoral Dissertation, Schulich School of Business, York University, Toronto, CA.

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challenge for network organizations. Further, because of the learning costs borne by

participants engaging with a new market platform, ensuring sufficient market

thickness requires a simultaneous focus on attracting and on retaining participants.

Your first thoughts when hearing the term congestion is likely to bring up

images of difficulties faced by participants as they navigate through a market

platform in order to locate attractive value-unit matches. While such navigation

challenges can certainly deter market platform use and hinder market efficiency,

market congestion tends to be most problematic when the demand for available

value-units is highly skewed, resulting in too few participants being able to satisfy

their needs through a marketplace. To counter demand skewness, network

orchestrators need to undertake initiatives aimed at balancing demand by (1)

attracting or developing producers of the in-demand value-units, and/or (2)

educating consumers on how available value-units in less demand might as well

satisfy their needs.

Many potential threats to market safety arise when market participants

interact and carry out transactional exchanges via a market platform, such as:

 Is my exchange partner trustworthy?

 Is the market platform content trustworthy?

 Will all data or information I provide in carrying out a market transaction be treated in a confidential and protected manner?

 Will the value-unit(s) delivered to me meet my expectations?

 Will the value-unit(s) delivered to me be free of intellectual property or licensing concerns?

 Can I be confident that financial exchanges will be carried out in a secure and protective environment?

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If potential market participants develop safety-related concerns, one of two things is

most likely to occur. First, many of these potential participants will simply decide not

to participate. Second, many of the participants who do decide to participate will end

up identifying, but not consummating, a match; instead, matched participants will be

motivated to consummate the match (along with associated revenue streams)

outside the market platform.

Many of the competitive moves taken by TopCoder and by Metropia have been

aimed at enriching market design, with associated market platform functionality put

in place to enable or support the taken moves. Tables 7-6 and 7-7 illustrate these

market design competitive actions for, respectively, TopCoder and Metropia.

Table 7-6

TopCoder’s Market Design Competitive Moves

Primary Processes

Market Design

Attribute Competitive Moves

Grow Developer Community

Thickness  Talent teams engage in on-campus campaigns.  Talent teams run algorithm challenges (competitions).

Grow Client Community

Thickness  Sales teams target, market to and interact with potential clients.

Enrich Developer Skills

Congestion  Account teams induce clients to offer projects requiring hot skills.  Internal R&D offers projects requiring hot skills.

Enrich Client Demand

Congestion  Account teams broaden clients’ views of what can be done via software

development crowdsourcing and on the crowds’ capabilities.

Match Developers with Contests

Congestion  Account teams work with clients to break projects into contests.  Account teams modify contests not attracting sufficient developers.

Enrich Solution Fulfillment Safety

Safety  Staff managers and developer co-pilots monitor projects & contests.  Staff & developer-crowd assess solution completeness/trustworthiness.  Contest appeals process for non-winning developers.

Retain Developers Thickness  Contest reviews & project management increasingly outsourced to the

developer community.  Enrich the developer community through events & developer forums.

Retain Clients Thickness  Long-term contracts, strong client relationships, and the provision of

rich metrics regarding contest, project & client success.

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Table 7-7 Metropia’s Market Design Competitive Moves

Primary Processes Market Design

Attribute Competitive Moves

Grow Commuter Community Thickness

 Partner with government agency in promoting platform.

 Partner with an organization sponsoring a traffic-congesting event to promote platform.

Add a Provider Thickness  Leverage government agency (permitting &

regulatory) relationships with providers.

Grow Government & Merchant Communities

Thickness  Establish program managers/teams.

Enrich Commuter Perspectives

Congestion  Programs directed at broadening commuters’

understandings of mobility alternatives.

Enhance Data/ Algorithms Congestion  Continual improvement

Enhance Platform Safety Safety

 Reengineer reward points schemes, processes & algorithms to detect and to prevent fraud.

 Commuter data shared only in aggregate forms.

Retain Commuters Thickness  Threat of losing accumulated reward points.

Retain Government Agencies Thickness  Threat of losing data/analytic capabilities.

Market Platform Design: Digitalizing the Operational Domain

Table 7-8 describes five major operational purposes of all network

organizations’ market platforms. Most of the activities listed should be familiar to

you, but one may not: ancillary transactions. As explained earlier, the core

transaction refers to the market exchanges that bring a producer community and a

consumer community together. Ancillary transactions refer to transactions

associated with the value propositions that bring communities other than producers

and consumers to the platform. Perhaps the most familiar example of this distinction

can be seen with Google. Google’s core transaction involves finding satisfactory

matches between consumers’ search cues and producers’ website content. Google’s

ancillary transactions involve the placing of and clicking on the advertisements that

show up along with search results.

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Table 7-8 Operational Purposes of Network Organizations’ Market Platforms

Platform Purpose

Associated Activities

Community Hosting

 Adding a new community.  Removing an existing community.

Community Member Hosting

 Adding a new community participant.  Providing functionality & content through which participants can

develop & promote their needs & capabilities.  Removing an existing community participant.

Matching Facilitation

 Providing functionality & content enabling participants to identify matches aligned with sought value propositions.

 Providing functionality enabling participants to select a match.

Core Transaction Facilitation

 Providing functionality & content to negotiate & execute transactions.

 Providing functionality & content to verify completed transactions.

Ancillary Transaction Facilitation

 Providing functionality & content to negotiate & execute transactions.

 Providing functionality & content to verify completed transactions.

A number of critical operational performance requirements are reflected in

Table 7-8: ease-of-use (simplicity, multi-channel convenience, mobility and

flexibility), efficiency in executing platform functionalities, cost-effectiveness

(especially with regard to subsidy-side communities), scalability (as communities

grow rapidly), and adaptability (adding/removing communities, participants,

functionalities and content). Collectively, these performance requirements dictate

that network organizations’ market platforms adopt particular architectural features:

many-to-many connectivity, modularity, the tight-coupling of modules delivering

global (i.e., used by multiple communities, including internal staff) functionalities,

and the loose-coupling of modules delivering local (i.e., used by a single community)

and experimental functionalities.

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Market Platform Design: Digitalizing the Analytical Domain

The nature of network ecosystems – that is, communities with large numbers

of members, participants’ interaction within and between communities, participants’

navigation through the market platform provided by a network orchestrator,

participants’ transaction exchanges, etc. – results in the capture and generation of

huge amounts of data. These data can then be stored and organized for a variety of

analytical purposes, including:

 Learning about each community in order to better understand and anticipate community members’ capabilities, perspectives, desires, needs and expectations in order to grow/retain community members, to enhance value

propositions and to enhance profit models.

 Learning about participants’ platform navigation behaviors, as well as

participants’ use of platform functionality and content, in order to improve ease-of-use, to enhance community value propositions and to enhance profit

models.

 Learning about the core transaction and, if they exist, ancillary transactions in order to better understand, improve and predict fulfillment success in

order to enhance value propositions and to enhance profit models.

Importantly, the capabilities fashioned to undertake such analyses can be used by

network organization staff and by participants. Figures 7-3 and 7-4, respectively,

illustrate some of the ways in which TopCoder and Metropia are digitalizing the

analytical domain.

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Figure 7-3 Digitalizing the Analytical Domain at TopCoder

Example Core Data

Example Analytic

Processes

Diagnosing & predicting the success of a proposed project.

Prescribing how projects should be broken up into contests.

Predicting contest success and prescribing contest modifications.

Metrics production for contests, projects, clients, developers & matching.

Project, contest & matching post-mortem analyses to identify areas for primary process improvements and to identify hot developer skills.

Project Data

Client Profiles

Contest Data

Developer Profiles

Primary Process Performance

Data

Figure 7-4 Digitalizing the Analytical Domain at Metropia

Example Core Data

Example Analytic

Processes

Traffic flow modeling – overall and for each mobility service.

Scheduling routines – overall and for each mobility service.

Routing routines – overall and for each mobility service.

Determining reward points for commuter trip selections.

Commuter behavior modeling.

Mobility Provider Profiles

Commuter Profiles

Historical Transportation

Data

Merchant Profiles

Commuter Trip, Common Good,

Provider & Merchant Outcomes

Streaming Transportation

Data

Commuter Services

Usage Data

Market Platform Design: Digitalizing the Collaborative Domain

A primary function of network organizations’ market platforms involves the

facilitation of information exchanges – between community members, between the

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members of different communities, and between network organization staff and

members of different communities. These information exchanges are crucial, as such

exchanges enable participants to learn about offered value propositions and to decide

whether or not to participate further (and, ultimately, take advantage of offered value

propositions).

These information exchanges occur through one-to-one, one-to-many and

many-to-many connections. Importantly, establishing a connection involves much

more than providing the necessary connectivity. As these information exchanges

tend to be directed toward specific purposes (e.g., exploring or negotiating a potential

match, learning more about a value-unit or value-proposition, co-creating an idea or

value-unit, etc.), sophisticated digitalized collaboration environments are established

– environments characterized by specific functionalities, content and behavioral rules.

Given the heterogeneity present across the members of most interacting

communities, a variety of collaboration modes (messaging, social media,

conferencing and collaboration tools) are typically provided to participants. Tables

7-9 and 7-10, respectively, illustrate some of the digitalized collaboration

environments that have proved invaluable for TopCoder and Metropia.

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Table 7-9 Digitalizing the Collaborative Domain at TopCoder

Collaboration Environment

Examples

Messaging & Conferencing

 Peer-to-peer messaging: client/developer, staff/client, staff/developer, staff/staff, and developer/developer

 Forums: client/developer, staff/client, and staff/developer.

Ideas Processing  Identifying hot technology trends & skills.

Joint-Work Space

 Project & contest monitoring.  Project design (contests, deliverables).  Contest software design (specifications, architecture).  Contest software coding/testing.  Assessing contest solution completeness &

trustworthiness.

Decision-Making Processes

 Setting contest incentives.  Modifying contests & contest incentives.  Ranking contest solutions (selecting winners).

Table 7-10 Digitalizing the Collaborative Domain at Metropia

Collaboration Environment

Examples

Messaging & Conferencing

 Peer-to-peer messaging: commuter/commuter, staff/commuter, staff/government, staff/provider, and staff/merchant.

 Forums: staff/commuters and staff/government.

Social Network  Commuters.

Joint-Work Space

 Real-time resolution of traffic congestion hot spots.  Improving algorithm accuracy & reliability.  Big Data analytics: staff/staff and staff/government.  Market platform functionality development.  Promotional campaigns.

Decision-Making Processes

 Reengineering of reward schemes.  Product launch.  New market platform (urban area) launch.

Digital Strategy Formulation

The task facing network organizations’ digital strategists is quite daunting. In

addition to having to confront many of the same strategic challenges as those facing

pipeline organizations’ digital strategists, network organizations’ digital strategists

have to design and build a market ecosystem from scratch and motivate participants

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to engage in value-unit exchanges through the market platform. The heightened

complexity facing network organizations’ digital strategists is perhaps best

understood through the five strategic challenges summarized in Table 7-11. We

begin this section by discussing these five strategic challenges. Then, we describe

how digital strategists evolve their organizations’ business models.

Table 7-11 Network Organization Strategic Challenges

Strategic Challenges Key Issues

How fast should each community grow?

 How can we overcome the chicken-and-egg challenge?  Is it possible to exploit side-switching?  How can we keep a balance in community sizes?

Which pricing mechanisms should be applied to each

community?

 Which communities should be subsidized and which represent viable sources of profit?

 How will a particular pricing mechanism affect participant behavior or community growth?

 Should price-differentiated functionality levels be used?

Should a new feature be added?

 Is the expected benefit greater than the expected cost?  Will one or more communities be negatively affected?

Should transactions and participant behaviors be

regulated?

 Which types of market failures are most likely to occur?  Which community members should be allowed to join?  What should members of each community be able to do?

How many communities should connect to the

business platform?

 How does the presence of a community influence other communities’ value propositions?

 How does the presence of a community affect platform complexity?

 What is the economic viability of a community?

How Fast Should each Community Grow?

When a network organization first launches its market platform, the first hurdle

to overcome is the chicken & egg problem: producers only wish to participate in a

market with a large pool of potential consumers, and consumers only wish to

participate in a market with a large pool of potential producers. Table 7-12

summarizes a selection of tactics that can be used to resolve this chicken & egg

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problem.43 And, in certain situations, growth can be accelerated by promoting side-

switching. With side-switching, existing producers become consumers and/or

existing consumers become producers (e.g., with Airbnb, short-term renters often

decide to become hosts, and hosts often become short-term renters).

Table 7-12

Tactics for Overcoming the Chicken & Egg Problem

Tactic Description

Follow-the-Rabbit Build a producer community by incenting members to create value-units, which in turn will attract a consumer community.

Piggy-Back Connect with members of an existing community - either a producer community to gain access to value-units or a consumer community (if value-units already exist).

Seeding Attract an ancillary community by first growing the producer and/or consumer community to which the ancillary community is attracted.

Marquee Provide incentives to attract highly-visible and influential participants (producers or consumers), whose presence attracts other participants.

Pipeline Begin as a pipeline organization to build a targeted producer or consumer community; then, attract other communities desiring to interact with this first community.

Big-Bang Marketing

Invest heavily in traditional push marketing strategies to attract the communities critical to the in-play business model.

Micromarketing Begin by targeting a niche market whose producer & consumer communities are already interacting.

However, if one side grows too fast, negative network effects are felt: too

many consumers leads to insufficient supply, resulting in unsatisfied consumers; too

many producers leads to insufficient demand, resulting in unsatisfied producers. It

can be difficult, if not impossible, to retain or to regain an unsatisfied participant.

How can the threat of negative same-side network effects be managed? Three

common tactics are (1) invest in growing an undersized community, (2) impose rules

43 G.G. Parker, M.W. Van Alstyne and S.P. Choudhury, Platform Revolution: How

Networked Markets are Transforming the Economy – And How to Make Them Work for You,

2016, New York: W. W. Norton.

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that constrain the behaviors of members of the oversized community (e.g., limit the

number of allowed transactions), and (3) segment the market so as to increase the

likelihood of successful matches within each segment.

What Pricing Mechanisms Should Be Applied to each Community?

With few exceptions, communities are brought to a network organization’s

market platform for one of two reasons: to serve as a revenue source (a money-

side), and to attract other communities that can serve as revenue sources (a subsidy-

side). Determining an appropriate profit model for each community is critical because

of the powerful growth dynamics of network ecosystems:

 Charging (or charging too much) for access will limit or reduce community

size.

 Charging (or charging too much) for feature use will inhibit participants’

engagement with the business platform.

 Charging (or charging too much) for value-units will reduce demand.

 Charging (or charging too much) for production will reduce supply.

Generally, pricing mechanisms are imposed on the members of a community when

these members are able to use the market platform to extract value from the

members of another community. The greater the value being appropriated, the

greater the price that can be imposed.

Often, pricing mechanisms can also be imposed on subsidy-side communities,

providing a revenue stream from the subsidy-side. This can occur if the value

proposition is highly-attractive and unique (i.e., not available elsewhere), and if these

subsidy-side community members are likely to accept some level of access/usage

charges. That said, it is wise to never charge any participant for services he/she has

become accustomed to receiving for free. Instead, add new features to the value

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proposition, attach the charges to these new features, and continue to make the

base-level (initial) features available for free to community members.

Should a New Feature Be Added?

An infinite variety (limited only by creativity and capability) of new, ideally

innovative, features can be added to a market platform to enhance the value

propositions offered to the platform’s interacting communities. Generally, these

deliberations about new features are quite straightforward: add any new feature

whose acquisition and implementation costs are less than the value being created.

However, if the new feature being considered is not viewed as a benefit by all

communities or, even worse, if the new feature portends to bring some participants

in conflict with other participants, this decision can become quite challenging. In

such situations, the trade-offs to be reasoned across communities can be extremely

difficult to navigate, especially prior to the new feature’s actual implementation. For

this reason, network organizations often engage in strategic experimentation to

assess the likely impacts of new platform features. With a strategic experiment, a

new feature is implemented – but only for a limited set of participants and a limited

set of transactions – and relevant data is captured that can be analyzed in

determining the positive and negative impacts of the feature. Further, digital

strategists need to recognize that short-term revenue gains (from one community)

may need to be bypassed so as not to alienate participants (from another community)

and that it is not always best to favor the community that brings in the largest share

of current revenues, as this community may not be the most important source of

future revenues.

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Should Transactions and Participant Behaviors Be Regulated?

Some regulation is indispensable as a means for preventing market failures,

i.e., an improperly-functioning (or collapsing) network ecosystem:

 Insufficient information and transparency in the market with respect to the

value-units and payments being exchanged can result in low-quality participants driving out high-quality participants.

 Excessive competition within an interacting community or an unwillingness by a community’s members to maintain their capabilities reduces the value being created in the market and, hence, the market’s attractiveness to other

interacting communities.

Accordingly, network organizations develop regulations targeted at participants’ use

of a market platform’s content and functionalities.

These regulations are most often imposed to force a trade-off of quality over

quantity. The strength of any cross-side network effect is ultimately a function of

the number and the quality of the market exchanges taking place. If, over time, a

growing proportion of market exchanges are seen by participants as decreasing or of

low quality, the positive cross-side effect will attenuate – eventually becoming a

negative cross-side effect that results in the market’s collapse.

How Many Communities Should Connect to the Market Platform?

The advantages of attracting a new community to a network ecosystem’s

market platform are often very appealing to digital strategists. The addition of a new

community raises the promise of additional positive cross-side network effects, the

promise of a new revenue source, and the promise of greater scale.

However, adding a new community does not always result in positive

outcomes. If not mindfully thought out and carefully timed, a new community can

produce: negative cross-side network effects (when the new community’s value

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proposition conflicts with aspects of the value propositions of one or more existing

communities), increased operational and strategic complexity, and increased

operational costs. Further, a tendency exists for innovativeness to be dampened as

additional communities are added. Here, the radicalness of a functional innovation

targeted at one community is toned down to maintain the acceptability of the

functionality to other communities, appropriating little value from this functionality

enhancement.

Evolving Network Organizations’ Business Models

The strategic challenges summarized in Table 7-11 serve as a backdrop that

pervades digital strategists’ deliberations as they evolve their organizations’ business

models via competitive moves targeting market design, market platform design, or

both. Figure 7-5 overviews the factors typically considered in fashioning specific

competitive moves.

Figure 7-5 Factors Driving Business Model Evolution

Business Model Evolution

Business Model Deliberations  Number of communities  Value propositions  Profit models  Core capabilities  Dynamic capabilities

Strategic Intent

Beliefs about:  Communities’ needs &

desires  The core transaction &

adjacent transactions  Same-side & cross-side

network effects  Core capabilities  Dominant value

discipline(s)

 Installed platforms  Held digitization capabilities  New digital technologies  Others’ digitalization innovations

 Natures of adjacent (competitive & substitute) markets

 Adjacent market business model innovations

 Socioeconomic & cultural trends

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A taken competitive move typically affects multiple elements of a business

model. Table 7-13 organizes a sample of TopCoder’s competitive moves by the

primary business model element affected. Examples of this include:

 Having platform-related R&D carried out by the developer community via

contests both incents developers to participate in the market and develops their capabilities. In addition, the R&D project outcomes produce

functionality improvements that can enhance the client communities’ value proposition, as well as TopCoder’s capabilities and the community profit models.

 Providing incentives for non-winning developers clearly enhances the developer community value proposition, thus finding more developers willing

to invest their time and effort in contests (and in the process honing their capabilities by participating in a greater variety of contests). The client community value proposition is also enhanced, as retaining and honing the

capabilities of the developer community increases the likelihoods that matches will be found for clients’ projects and that these projects will be

satisfactorily fulfilled. Finally, by growing the developer and client communities and by improving project fulfillment rates, TopCoder’s

community profit models are likely to improve.

The above examples illustrate that a taken action targeted at one purpose often spills

over to affect other purposes. It is important to remember that such spillovers are

not always positive. Clearly, fashioning successful competitive moves for network

organizations requires considerable analysis – that often must be performed quickly

and imprecisely given the fast-moving dynamics of network ecosystems.

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Table 7-13 Examples of TopCoder’s Competitive Moves

Business Model Element

Business Model Evolution

Communities None observed.

Value Propositions

 Platform R&D carried out as contests.  Transferring software development management tasks (contest-

co-pilot, solution assessment, solution appeals process, etc.) to the crowd.

 Incentives to ensure winners of a project’s completed contests are available to interact with participants in the project’s subsequent contests.

 Crowd-engaged appeals process regarding winning solutions.  Imposing a 30-day time period for vetting winning solutions.

Profit Models  Incentives provided for non-winning developers.

Core Capabilities

 Contest success prediction.  Contest fulfillment.  Client capability development.  Crowd skill development.  Develop crowd into a community.

Dynamic Capabilities None observed.

Table 7-14 similarly lists some of Metropia’s competitive moves directed at

specific business model elements. Which of these are likely to spillover to other

business model elements?

Table 7-14

Examples of Metropia’s Competitive Moves

Business Model Element

Business Model Evolution

Communities  Host private mobility service markets (e.g., car-pooling, ride-sharing,

etc.) for use by a specific organization’s employees.

Value Propositions

 No platform subscription fees for commuters at initial launch.  Develop a personalized mobility health checkup functionality that

uses data on a commuter’s commuting behavior to broaden the commuter’s mobility perspectives and to offer the commuter customized trip solutions.

 Customized consulting services for government agencies.  Customized performance reports provided to participating

commuters, providers, merchants & government agencies.

Profit Models  Commuter subscription fees added as a local platform matures, the

platform’s portfolio of mobility services broadens, and commuter platform interactions are personalized.

Core Capabilities  Big Data transportation analytics consulting services.  Commuter & government agency capability development.

Dynamic Capabilities

None observed.

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Sustaining a Network Organization’s Competitive Position

Two pathways exist for sustaining a network organization’s market position,

with the preferred path depending on whether or not winner-take-all market

dynamics apply:

 Winner-take-all market dynamics - apply: act quickly to become one of the

two or three dominant firms in the market space and then sustain this market position.

 Winner-take-all market dynamics - do not apply: grow both the market

space and the firm’s share of the market space more deliberately by evolving a business model that becomes increasingly attractive to all

interacting communities, and then sustains (or increases) this market position.

Our focus here is on sustaining a strong market position in the face of the constant

threat of digital disruption, regardless of the above market-position pathways.

Perhaps this most important insight for digital strategists is the realization that

a focus on just amplifying positive cross-side network effects cannot guarantee the

barriers to entry that protect a firm from existing competitors and from new entrants.

Attention must also be directed at finding ways to:

 Impose switching costs on participants.

 Drive down market platform costs (the average costs to host communities, to facilitate participant interactions, and to execute transactions), thus

making it cost-prohibitive for new entrants to enter the market space.

 Continuously improve market platform ease-of-use.

 Introduce business model innovations, especially those related to community

value propositions and profit models.

 Quickly imitate (ideally with enhancements) competitors’ and new entrants’

business model innovations.

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Network ecosystems are powerful and hard-to-replicate because of their inherent

community dynamics. However, achieving and then sustaining a strong market

position is difficult, requiring high levels of both strategic vigilance and creativity.

A Recap and Look Ahead

While network organizations represent a smaller share of nations’ GNPs than

do their pipeline organization counterparts, this rapidly growing segment of most

nations’ economies is spurring much of the digital innovation (and digital disruption)

being observed today. This chapter has described how digitalization is applied within

network organizations, as well as the processes used by network organizations to

formulate their digital strategies.

While well-reasoned digital strategies have become a dominant driver of

competitive success for both pipeline organizations and network organizations, the

pervasive digitalization that results can raise serious threats for organizations’

leadership teams. The next chapter examines these threats, and the tactics being

applied to attenuate the threats.

GLOSSARY

Ancillary transactions – transactions associated with a network organization’s

value propositions that bring communities other than producers and consumers to the platform.

Market congestion – ensuring the ease by which producers and consumers are able to consider a sufficient number of alternatives in arriving at a satisfactory match.

Market design – a network organization’s competitive moves aimed at enhancing

the efficiency of its constituted market.

Market platform design – a network organization’s competitive moves aimed at

building market platform content/functionality in order to enhance community participants’ satisfaction with offered value propositions.

Market safety – ensuring that market transactions are sufficiently safe such that

producers and consumers are willing to reveal or act on confidential information and are willing to keep the transactions inside the market.

Market thickness – ensuring sufficiently large numbers of producers and consumers such that a strong likelihood exists that satisfactory producer-consumer matching will occur.

Side-switching – existing producers become consumers and/or existing consumers become producers.

Spillover – when a taken action targeted at one purpose affects other purposes.