Evolution of the Enterprise and the Age of Platforms

From the ‘Invisible Hand’ to the ‘Digital Hand’

To be successful, an enterprise must adapt to the environment in which it operates. Since external conditions are continuously evolving, the enterprise must find the right strategic fit. The enterprise that comes closest to finding that strategic fit by aligning the core elements that make up the enterprise, such as strategy, organizational structure and talent, greatly increases its chance of becoming a frontier or superstar firm. Those that do not lag behind or, worse, perish.

If we look across history, we find that the “hand” has served as a metaphor for describing the complex interplay between the enterprise and the environment in which it operates. The “invisible hand” metaphor helped to capture the conditions of the preindustrial period when proprietorships ruled. This was later replaced by the invisible hand, with the rise of the large multidivisional firm. Today, enterprises operate in an environment shaped by computers, networks, data, and algorithms. We can call this the “digital hand” to distinguish it from previous periods. Platform companies excel in this environment, which helps to explain why they have, as a class, moved to the productivity frontier.

Let’s dig into each of these periods a bit further and tease out the implications.

The Invisible Hand

Our earliest conception of the firm is strongly influenced by Adam Smith and his seminal work, The Wealth of Nations.¹ Smith was among the first to recognize the importance of the division of labor and the productivity that could be achieved through specialization via his famous pin factory example. These and other ideas about the firm and national wealth creation came together in his powerful metaphor of the ‘invisible hand.’ In this conceptualization, if left on their own, atomized self-interested firms would produce social prosperity.  

But Smith’s metaphor and analysis of the enterprise gave little attention or credit to the role of managers. It ignored the importance of managerial coordination, expertise and leadership. As the industrial revolution drove increasing returns to scale, the role of managers became too important to ignore in establishing the strategic fit and the ability of an enterprise to reach the productivity frontier.  

The Visible Hand

A corrective was introduced by the late Harvard business historian Alfred Chandler. His detailed study of the rise of modern large-scale enterprises, such as Sears Roebuck, Ford Motor, and US Steal emerged between 1870 and 1920 led him to reject Adam Smith’s metaphor. In Chandler’s view, the ‘invisible hand’ had been supplanted by the ‘visible hand’ of professional managers. The coordination role played by managers is played out within multidivisional organizational structures. Managerial hierarchies lowered costs through routinizing transactions among the different stages of production and distribution. They also contributed to making large-scale corporate R&D centers like Bell Labs possible. Chandler’s work was highly influential and won him the Pulitzer Prize in 1978 for his book aptly titled The Visible Hand.²  

Digital Hand

What about today? The visible hand of the vertically integrated firm run by efficient professional managers no longer defines success. Today, frontier firms are flatter, more networked, data-rich and lean into the value of engaging third-party providers. The most successful firms today are platform companies, such as Apple, Amazon, Google, Alibaba and Ping An. Today, the top 100 platform firms now have a market capitalization of over 14 trillion dollars and dominate the top ranks of the world’s largest enterprises by value.  

Companies that align to the conditions of the digital hand by adopting platform strategies outperform. Studies show that platform companies demonstrate superior performance across a range of metrics market value growth, sales growth, and operating profit.³ Because digital technology reduces transaction costs and makes it possible to efficiently coordinate with third-party ecosystems, platforms can ‘invert’ the firm. That is, they can create significant value externally by harnessing the creative energy and value of external contributors and collaborators.  

The digital hand has important implications for firm leadership and strategy. Three capabilities stand out.  

First, platform leaders must be versed in the underlying logic of platforms. They must have a strong grounding in how demand for a product is dependent on the demand of others buying that product and how partners can contribute to that demand. They need to have a deep understanding of economic principles driving platform business models and how technologies, data, and operations enable these models. They must be able to develop the platform’s strategic road map; shape the selection of key partners and technology that drive platform growth and understand what design and pricing choices drive positive and sustainable network effects.

Second, platform leaders must be adept at coordinating the actors and activities that build value across the double-sided or multi-sided marketplace they manage. A primary responsibility of the platform leader is to implement mechanisms to provide the incentives necessary for outside participants to bring value to the platform while preventing or at least minimizing the occurrence of bad actors. The ability to drive outcomes across internal business units and functions and with external contributors and collaborators. They need to have a dedicated focus on connecting partners to each other in ways that create value for the overall ecosystem. They must also establish and drive incentives and metrics that enhance positive interactions and sustained engagement.

Third, platform leaders must be able to pilot a company’s system of rules, practices, and processes that are key to not only managing the firm but also its related ecosystem. Platform leaders must develop guidelines, policies and procedures that spell out the required behavior of ecosystem participants contributing to and consuming from the platform. They must have the ability to translate platform logic into operational control systems and regulations that shape desired behavior, navigate conflict, and achieve value creation objectives across a much broader group of stakeholders many of which they do not have direct control.

Conclusion

Today, firms must align to the environment of the digital hand or fall behind. Platform leaders need to be able to orchestrate and inspire. They must not only shape the direct organizational mission, strategies, structures, and culture but also the growth of external user bases and their interactions with other users. They need to engage and lead the whole ecosystem. They must shift their focus from inside the firm to outside, where they can scale faster through partners and where third parties can add ideas and resources that the platform does not own. 

In short, firms today must align to the logic of the ‘digital hand’.

References

1. Adam Smith, The Wealth of Nations: An inquiry into the nature and causes of the Wealth of Nations. Harriman House Limited, 2010.

2. Alfred D. Chandler Jr, The visible hand. Harvard university press, 1993.

3. Michael Cusumano, Annabelle Gawer and David B. Yoffie, Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power, 2019