Design Rules Volume 2: Chapter 11—Platform Systems vs. Step Processes - The Value of Options and the Power of Modularity

Abstract

The purpose of this chapter is to contrast the value structure of platform systems (e.g. a computer or a marketplace) with step processes (e.g. an assembly line or a steel mill). In distinguishing between step processes and platform systems, the chapter lays out the core theoretical arguments of the book.

A step process is a technology that changes the material world in a predictable way that humans find useful or valuable. In contrast, a platform system is a technology designed to support the creation of options.

Historically, the increasing importance of platform systems is inextricably bound up with the spread of digital technology and the related use of modular technical architectures to manage complexity and accommodate technical change. I go on to explain why platform systems have modular technical architectures, and to trace the history of modularity in early digital computers and software.

I then use option theory to identify a set of complementary conditions—risk, modularity, and openness—that are favorable to the adoption of platform systems. I contrast these to the conditions—growing markets, automated machinery, and systematic management— favorable to the creation of large-scale flow production processes.

This analysis in turn leads to a predicted correspondence between technologies and organizations. In essence, interdependent step processes require and reward modern corporations characterized by risk aversion, unified governance, and a hierarchical structure, coordinated by managers exercising direct authority. In contrast, platform systems require and reward platform ecosystems characterized by risk-taking, distributed governance, and autonomy, coordinated by centralized rules.

Finally, I show how the benefits of flexible platform systems may be balanced against the benefits of efficient step processes in designing large technical systems.

Keywords: Technology, Organizations, Modularity

JEL Classification: L1, L2, O3