Saturday, November 11, 2006

Two-Sided Markets

There has been a lot of buzz around two-sided and multi-sided markets lately.
In his HBS March interview, Andrei Hagiu identifies Wal-Mart as an example of an organization that is transforming from a traditional merchant into a two-sided platform. Let’s look at the (asymmetric) structure of this transformation.

The traditional retailer acts as a hub in the food supply chain, aggregating food supply from fields and factories, and distributing food to workshops and private kitchens. This is essentially a positional strategy: the retailer seeks to establish and maintain a strategic position within a value chain, as the bottleneck/hinge point between upstream and downstream. Within the positional strategy, the business drivers are understood in terms of the economics of scale and the economics of scope.

2sidepositional.gif

But if we shift from a value-chain perspective to a service-oriented perspective (effects-ladder), we can see that the retailer is providing a service (=delivering value) downwards as well as upwards - it is a food distribution platform for farmers and manufacturers as well as a food supply platform for consumers and catering companies.

So instead of drawing the merchant in the middle, we can draw the merchant as a new kind of platform providing various kinds of market interaction.


2siderelational.gif

This takes us from a positional strategy to a relational strategy. No longer just focused on the economies of scale and scope, the relational strategy emphasizes how economies of governance are generated in relation to two kinds of demand context. The big question for a company such as Wal-Mart is how to balance the exploitation of each of these forms of asymmetric advantage.

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