Directive-based learning is associated with a structured and standardized education model that educational institutions employ. We are familiar with university style teaching where a curriculum is defined, learning objectives set and standardized exams used to validate the students ability. Most importantly, the direction of the program is fixed and cannot be deviated from.

Necessity-based learning is used by students who learn out of need and desire. A person who teaches themselves a given skill (eg. Web Design) will define the curriculum and learning objectives in a dynamic manner as their project evolves. There is no set exam – only that their knowledge is validated by the forward momentum of their project.

Through reflection of my learning experiences, necessity-based learning has had far more of an impact on my life, career and interests in contrast to directive-based learning. Many of the topics that I am most deeply interested in, and those that demand the greatest strength of understanding, have originated from a necessity-based learning model.

It is clear to me that necessity based learning results in a far richer and fluid learning experience in comparison to directive based learning. In trying to answer why this is so, I reflect upon a project from my youth. I was 19 years old and I had committed to delivering an advanced online booking system for a client I was working for. The only problem was that I did not have even 10% of the skills required to program such a solution.

As I read further into the endless programming documentation, my curiosity was roused by the apparent boundlessness of the problem scope. My knowledge exploration caused me to discover and understand whilst simultaneously creating new challenges to further my project. This resulted in a self propagating dynamic such that the more I learnt, the greater the complexity of challenges I could devise.

If such a model trumps directive-based learning, why has it not thrived in the past? Perhaps it is due to changes in our environment? The internet has spawned a myriad of collaborative online tools that have turned the traditional information model on its head – information that was once confined to a selection of libraries in developed countries is now just a search away. This democratization of information is profound as it represents a fundamental structural change in how information is stored, accessed and discussed.

I do not want to detract from the status of the teacher in the education model – they are and always will be an integral guiding element in the process. However, we must understand that traditional education design principals were constrained by the geographical and infrastructural limitations of design in the past. Given the enhanced capabilities that the internet now offers, we need to rethink education with a revised understanding of current constraints and abilities.

From the perspective of necessity-based learning, the foundation has just been laid. The opportunity to learn no longer requires membership of an educational institution and the tools required to collaborate, discuss and teach are freely available online. The combined learning environments offered by Khan Academy, Wikipedia, YouTube, iTunesU, Open Course Ware, Ted.com and many others are challenging that of which established educational institutions are offering.

However, necessity-based learning requires students to possess certain key characteristics such as initiative and curiosity. The model struggles to work without these elements. I would like to frame the challenge as ‘how do we educate curiosity?’ I suspect if you graph curiosity with age you would see a negative correlation. That is to say, we have many of the elements needed for necessity-based learning but we slowly loose them as we grow up.

When we educate children within a defined problem scope, their curiosity to think beyond the confines of the curriculum is inhibited. This is a compounding affect which follows students from primary school all the way through to university. To educate curiosity we need to drive institutional change and a fundamental move away from standardized testing. The environment in which students grow should be one of unbounded problem scope that embraces peer-to-peer educating and student driven curricula definition. A student leaving such an educational program might reflect in saying that the greatest thing they learnt in school was the ability and hunger to learn.

Covered in this article:

• Basic economics of an MSP
• Risks of joining an MSP
• Defence tactics against MSPs

Reasons for Joining a MSP

Given the increasing abundance of MSPs in today’s information economy, one must step back and question their economics. In general, MSPs have the effect of lowering search and transaction costs whilst providing users broader access to products, sellers or customers.

This can be clearly seen in Amazon’s multi-sided platform strategy. Customers not only have the option of selecting from Amazon’s extensive catalogue of products, but they have the option of purchasing products from Amazon’s network of sellers too. User feedback and seller rating systems builds confidence amongst the community and acts as an indirect network affect.

From a seller’s perspective, this provides access to a huge pool of customers on a global scale. These sellers benefit from Amazon’s reputation and the buyer’s familiarity of Amazon’s purchasing flow. Many of these sellers could not attract such a mass audience given their small product portfolio.

Its not surprising that Amazon’s MSP has been a huge success. With a short term horizon in mind, the equilibrium decision for buyers and sellers should be to use the platform. However, with a long term horizon in mind, there are various risks of using MSPs.

Risks of joining a MSP

Loss of differentiation
After 2000, an array of companies such as HMV, Gap, Curcuit City & Borders joined Amazon’s MSP. They were drawn by prospect of reaching so many customers at such a little cost. However, they soon realised the affects as they began to find it hard to diterentiate themselves from the ever increasing number of merchants joining Amazon’s MSP.

Weakened customer bonds
MSPs can also have the affect of weakening the bonds between you and your customer. Through loss of differentiation, you may find it diffcult to command a premium price when Amazon or other merchants sell the same product for a lower price. One of the benefits from a user’s perspective is that a MSP has a consistent and familiar user interface (UI). However, from a sellers perspective this represents a loss of brand equity and can lead to the commoditization of your product offering.

Being held captive by your MSP
When joining an MSP such as Amazon, you must consider their long term motives and strategy. Furthermore, you should consider how their strategy will change as they gain more power. In the case of Microsoft, they have continued to increase the cost to OEMs for licensing Windows. Manufacturers such as HP and Dell are left with little option but to meet Microsoft’s demands.

Another concern for MSP adopters is the prospect that the MSP will vertically integrate into your business. In such a scenario, much of your competitive advantage is under cut as your customer’s trust and relationship has largely been established with the MSP – not you.

Defence Tactics

Although the momentum and advantage seem to be with the MSPs, there are a number of strategic tactics you can employ as defence mechanisms.

Develop your own MSP
Firstly, you do not have to join an MSP. You can follow in Target’s footsteps and develop your own branded shopping platform – leveraging only some order fulfilment offerings of the MSP. This can be a wise decision as it enables you to retain your own identity, differentiate your products and drive brand loyalty whilst leveraging the order management innovations of MSPs. Indeed, the cost of pursuing such a strategy may hinder some companies from doing so. If so, you also have the option of joining forces with other like minded companies and share the development costs.

Leverage your influence
Depending on your size or strategic importance to the MSP, you can leverage your position and command better terms. This is a common tactic in the gaming industry and companies such as Electronic Arts play Sony and Microsoft off each other for exclusive or premier launch rights for major game titles.

Neutralise the platform leader
If you have deep pockets and are concerned that a monopoly or platform winner is emerging, you can choose to develop a similar platform and release it to the market for free. Such open source defence tactics have been used by Google in an attempt to neutralise the leaders in social networking – Facebook & MySpace. Open Social was an open source platform that attempted to provide a single unified and shared application platform for social networks.

In 2007, social networks were commanding more and more mindshare amongst users. Given the strong networking affects associated with the industry and the closed nature of their business, Google identified this as a threat and moved to neutralise their position by enabling other social networks to develop applications on the same platform – effectively initiating a coalition to avert monopolistic trends in the social networking space.

References:

• Gawer, A. and M. Cusumano (2008). “How companies become platform leaders.” MIT Sloan management review.
• Gawer, A. and M. Cusumano (2007). “A strategy toolkit for platform-leader wannabes” DRUID Summer Conference.

Covered in this article

• Difference between two sided and multi-sided platforms
• How to develop a new platform when a previous platform did not exist?
• How to build market momentum around your platform and ultimately win the war?

Taking a two sided platform, one must cater for two types of entities. On the business side, there are users that want to use your platform to solve a business need, and they are often willing to pay to use your platform in return. An example of this would include eBay merchants [sellers].

On the other side, there are entities that want to use your platform because it solves a technical need. Merchants on eBay are willing to pay eBay a fee because of the value proposition that they offer through increased market reach, simple payment processes, inventory management and functionality of their platform.

Strategies relating to platform leadership require one to cater for each side of the platform. For some platforms (eg. eBay) both entities are required to commit simultaneously in order for the platform to operate correctly. Platform liquidity can be achieved through the following two frameworks:

• Coring: How to develop a new platform when a previous platform did not exist?
• Tipping: How to build market momentum around your platform and ultimately win the war?

Coring

The issue of coring can be broken down into two parts. Firstly, the platform leader or wannabe must develop a set of technological solutions that solve an essential problem for the market. For instance, eBay developed an auction system that enabled buyers and sellers to exchange goods. This was first a technical solution that others had not previously developed.

Secondly, the platform leader or wannabe must solve a business need for all stakeholders involved – hence incentivising their commitment to the platform. Both of these dynamics should help ensure that the equilibrium decision for all stakeholders is to join the platform. That is to say, that joining the platform is more economical and rewarding than not joining the platform.

Cusumano et al (2008) outlined a range of business and technological actions that a platform leader could take during the process of coring:

Technological Actions

1. Develop an essential technical solution that is key to the market
2. Build an extensible platform that enables 3rd party developers to build upon it
3. Limit the amount if intellectual property you expose
4. Ensure 3rd party developers are bound to your platform

Business Actions

1. Solve an important business problem for the market
2. Incentivise 3rd party developers to build upon your platform
3. Protect your primary revenue stream whilst enabling 3rd party developers to monazite their efforts
4. Create high switching costs to competing platforms

A good example of a platform leader that successfully cored their platform is Google’s advertising platform – AdWords & AdSense. This is a multi-sided platform (MSP) that has been exceptionally successful for the company – generating over 20 billion dollars in 2009 alone.

As we look at each side of Google’s advertising platform, we will see how they’ve successfully cored their product offering. That is to say they solved both a technological and business problem for all stakeholders involved.

On the advertising side, Google solved the technical problem that many advertisers faced – how to reach a specified target group over the internet. The business solution that they solved was that they managed to do it in an economical and cost effective manner when compared to traditional advertising methods.

On the advertising network side (AdSense), the technological problem that Google solved was how to place highly relevant advertisements on a particular web page. The business solution that they solved with this technical solution was that website owners could then better monetise their website in comparison to tools existing at the time.

On the user side, Google solved the technical problem of searching a huge proportion of the internet in fast manner that returned results that were more relevant than the competitor. The business problem that the user experienced a reduction in search costs visa vi time spent searching.

Tipping

“Tipping is the set of activities or strategic moves that companies can use to shape market dynamics and win a platform war” (Gawer and Cusumano 2008). As such, ‘tipping’ is closely related to incentive models or positive feedback loops.

On the technology side, the platform leader must ensure that the incentive to join the platform becomes greater as more users and complementers join the platform. Such a dynamic is generally associated with platforms that have strong network affects.

On the business side, the platform leader must ensure that the business incentives for all stakeholders continue to increase as the user base and complement community grow.

Cusumano et al (2008) outlined a range of business and technological actions that a platform leader could take during the process of tipping:

Technological Actions

1. Develop unique value propositions that are difficult to replicate
2. Move into adjacent markets by bundling features into your product offering

Business Actions:

1. Create strong incentives for complementers to develop on your platform
2. Consider a pricing mechanisms to attract a larger user base
3. If falling behind: Consider rallying competitors to form a coalition

Continuing on from the previous example of coring, Google’s advertising business also illustrates a good example of tipping. On the user side, Google tracks every search made and every link clicked. This information is fed back into the system which is then used to improve the search algorithms. So the more users that use Google Search the better it becomes (technological solution) and the less time users will spend searching (business solution).

On the advertiser’s side, the tipping dynamic is inter-linked with the other two stake holders. As the number of users increase, the addressable market for advertising increases. This in turn drives more advertisers online until the cost-per-click (CPC) value stabilises as per supply and demand. However, this increased pool of advertisers has resulted in more competition for popular keywords positioned at the short end of the tail. This dynamic encourages advertisers to bid on more obscure keywords positioned at the long end or the tail. As a result, advertisers are able to more granularly target an increasingly large addressable market for a fee which derives an acceptable level of ROI.

On the content network side, we can see incentive feedback loops that are connected to the other 2 stakeholders of the MSP. As discussed, the increased number of users searching on Google ultimately drives a more granular long tail of keywords being bidded on by an increasingly large pool of advertisers. It is this dynamic that drives more website owners to include Google adverts on their site – as a more granular long tail of keywords benefits contextual advertisements as the advert placement will be ever more relevant to the content its being displayed alongside.

In short, Google advertising MSP is a good example of an interdependent MSP that has strong network effects which result in compelling incentives for stakeholders on each side of the platform to join or to spend even more time and money using the platform.

References:

• Gawer, A. and M. Cusumano (2008). “How companies become platform leaders.” MIT Sloan management review.
• Gawer, A. and M. Cusumano (2007). “A strategy toolkit for platform-leader wannabes” DRUID Summer Conference.

Covered in this article

The following article focuses on the dynamics of the strategy war for key platform stakeholders (consumers, suppliers and the platform leaders/wannabes). We consider the switching costs of incompatible standards and the benefits of a backward integration market entry strategy. We also look at how network affects shape the dynamics of a standard war – whether it be through direct or indirect network affects. Finally, we discuss the role the sponsor plays in promoting the standard and how that compares to an unsponsored standard war.

Technology dimension

The dynamics of a standards war is differentiated when we consider the switching costs associated with changing between competing standards. When a standard is introduced that is compatible with an existing standard, we call it an ‘Evolution’ strategy. The owner of the platform is relying on superior performance and backwards integration to drive adoption. Evolution strategies benefit from lower switching costs whilst ncurring the development costs of being interoperable with the legacy standard.

When a standard is introduced that is not compatible with the existing strategy, we call it a ‘Revolution’ strategy. The standard owner must present compelling value propositions to offset the switching costs associated with changing platforms.

Shapiro and Varian

If you and your competitor introduce stan
dards that are backward compatible with the older standard, but incompatible with each other
we call this ‘Rival Evolutions’. If your competitor introduces a standard that is compatible with the older standard and you have introduced a standard that is not com
patible with the older standard, we call this ‘Evolution vs Revolution’. The mirror scenario is called ‘Revolution vs Evolution’. Finally, if both you and your competitor intro
duce standards that are not compatible with the previous standard, we call this ‘Rival Revo
lutions’.

Network affects

The outcome of a Standards Wars is influenced by the network affects of adoption a single standard. In the case where adopting a single standard results in benefits from most parties involved, the positive feedback loop is referred to as ‘Strong Network effects’. It is this force that organically drives momentum around the adoption of a single standard.

Direct network effects: Social Networks such as Facebook would be a good example of a standard that has strong network effect. As the amount of friends, photos and comments increase – so too does the value you associate with the service. As such, your commitment to a given standard is directly proportional to the value you derive from it.

A direct network effect occurs when your participation or commitment to a standard positively impacts others on the same standard. For instance, if you purchase a mobile phone you are positively impacting others who are part of the mobile phone network because they can now call you. Similarly, if you join a social network such as Facebook – the value your friends derive from the standard is increased as a direct result of your commitment to the standard.

Indirect network effects: Strong network effects are particularly common in environments where users can interact with each other. As such, social networks, mobile phones and file sharing services generally exhibit direct network effects.

However, there are many more examples where a users commitment to a standard benefits other users of the standard in an indirect manner. For instance, if you purchase an electric car you would not have directly impacted other owners of electric cars. However, on a macro level – by purchasing an electric car you are increasing the installation base of electric car owners which leads to a greater economies of scale for the provision of electricity to car which results in an improved electricity charging infrastructure for cars which in turn benefits all owners of electric cars.

Edison vs Westington House: A good example of a Standards War that was driven by indirect network affects was Edison vs Westington House in the battle of alternating current vs direct current. Both standards existed side by side for years. As they both had various advantages over each other, they were used to serve different markets and use cases. There were no direct network affects associated with using either AC or DC. However, there were strong indirect network affects that ultimately drove the success of AC. For instance, as an AC generator begins to server a larger user base, its economies of scale increase and per user costs decrease. Further to this, as the user base of AC current increased, there was a greater demand for AC devices which led to greater innovation, greater selection and generally lower prices.

Sponsored or unsponsored?

The dynamics of a standards war can further be understood by looking at the sponsor of the standards – if one exists. Sponsored standards can only be used by the intellectual property owner of the standard. The Apple Macintosh Operating System is an example of a standard that is controlled by Apple.

Unsponsored standards on the other hand can be used by anyone. They are generally technical specifications that enable manufacturers or developers to create interoperable devices. Those who choose to build interoperable devices or applications for the standard benefit by being part of a larger ecosystem. Whether directly or indirectly, increasing the number of developers or manufacturers for a unsponsored standard has clear network effects.

What’s particularly interesting about the sponsored and unsponsored standards are the economic and strategic forces that drive their adoption. Unsponsored standards are generally the simpler of the two as its adoption is driven by demand-side decisions by consumers. From a macro perspective, if control lies with the consumer then the adoption of a standard relies on consumer expectations and their ability to co-ordinate their efforts.

In relation to sponsored standards the dynamics are slightly more complex. Not only does the adoption of a sponsored standard rely on demand-side decisions of consumers but also on the strategic tactics that they implement. These tactics could manifest themselves as price cuts to affect the demand curve, strategic partnerships to increase the user base or marketing strategies to undermine competing platforms.

References:

• Stango, V. (2004). “The economics of standards wars.” Review of Network Economics.
• Shapiro, C. and H. Varian (1999). “Information rules: a strategic guide to the network economy.” Harvard Business Press.