What does the business firm of the future look like? In this special episode of the Delve podcast, originally featured in Delve’s Spring 2023 digital magazine, Nobel Prize in Economics winner and Paul A. Samuelson Professor of Economics Emeritus at MIT Bengt Holmström speaks with Desautels professor and Delve Editor-in-Chief Saku Mantere about digital platform economies, blurred firm-market boundaries, and shifting bureaucracies.
Their conversation investigates how companies are changing today: What social structures, financial factors, and digital technologies are at play in how contemporary businesses are changing the traditional nature of the firm? And are hierarchical bureaucracies and conventional leadership soon to become a thing of the past?
Recently, the boundary between firms and markets has become increasingly blurred, most significantly with digitally oriented companies—such as META, Amazon, Alibaba, and Apple—that embrace the “platform organization” concept. These organizations are merging the lines between not only the company and its competitors but the company and its customers.
While bureaucratic organizations offer a seemingly stable hierarchy with consistent governance of ethical and other policy principles, platform organizations are developing into a new frontier, replete with more choices than ever before. What are the governance repercussions and ethical implications of these changes to the world of business as we know it? Who is ultimately responsible for a company whose platform design has mutated or evolved in the process of being co-managed by millions of clients and users with their own interests at heart?
Read on for an excerpt of Holmström and Mantere’s conversation on the Delve podcast—and listen to the full podcast episode for more research-based insights on the future of the firm, flattening hierarchies, and the waning impact of bureaucratic control.
Saku Mantere: Bengt Holmström has seen the conventional boundary between firms and markets become blurred in some instances: he mentions the Haier Corporation, a Chinese multinational home appliances and electronics company, and McKinsey Consulting as examples. Bengt, you’ve seen these companies actually have a market within the firm?
Bengt Holmström: There are very few companies that have had done anything like Haier, I believe. I think it is pointing in a new direction, which has been taking place, which is that the boundaries become more diffuse in general. Today, firms give information and access to their data to outsiders and they don’t even know who will pick it up—outsiders can come and propose or work out solutions. This is part of what we call platform economies. These platform organizations design playing fields for outsiders to play on, and then they cash in on it in various ways. In the case of innovations, they use these innovations for themselves. Amazon, for instance, is such a tech platform for its very transparent assembly specs: the outsiders can come there and help themselves if they want to.
They are pioneers in a certain sense in terms of really facing the customer, getting very close to the customer, and everybody inside coming from a customer perspective to some extent. And, as I mentioned, outsiders coming in. I don’t think the Haier organization has been in a long enough time to try to manifest itself in different parts of the world; I don’t think it has succeeded in that. But these platforms are certainly a worthy and very significant development.
In platforms, you design and own the interface—it’s always a digital interface—and you design the code and the rules of the game.
Saku Mantere: Digitalization, one of the main drivers of change in economy, also impacts on organizations at a fundamental level. The platform organization is heralded as the characteristic organizational form for the digital economy. How would you define a platform organization against the classical picture of a profitable organization?
Bengt Holmström: I would say that platforms are like an instrument or a design feature. Apple’s App Store is a platform: the platform is defined, basically, by enabling the buyers and sellers so they’ll operate on the platform, which is a bit like a playing field—so you’ll own a soccer field, and then people will come and play there. They are delivering the value by playing matches with each other and so on but are cashing in on the fact that they are playing on their field and charge a fee for that. That’s one way of thinking about the platform. The key feature is that buyers and sellers are interacting rather independently of you.
The traditional conception of the organization is that to make money you had to be between the buyer and the seller, you had to connect, you were an intermediary of some sort in a chain, and you took your fee going from one to the other. In platforms, you design and own the interface—it’s always a digital interface—and you design the code and the rules of the game. Eventually of course—think of social platforms like Facebook with billions of people on it—at some point, you sort of lose control of it and there may be a revolution where you are not in charge anymore.
Platform organization leadership ~ Bengt Holmström once asked the new CEO of Alibaba if he could, in the true spirit of the platform organization, shut down the platform? He adamantly refused to accept the idea. “He might have a legal right, but he didn’t want to concede that to be the case,” says Holmström. “But he said, ‘Look, it’s out of my hands in many dimensions; I can’t just go and do whatever I want to do.’”
One of the reasons platform economies have become so popular is this enormous scalability. Information is an interesting good because if I use some information, then that doesn’t prevent you from using the same information. It’s what they call a non-rival good—it can be used with and by everybody. So with digitalization, especially the mobile internet at the core of everything, you can reach everybody almost 24/7 everywhere in the world and the marginal cost is very low.
Then come other features, like the data that comes from the platform is very valuable—that’s the thing that the owner of the platform monetizes in some manner and provide new services on top of the platform because that’s where people are. Platforms are not going to take over everything, but they are in my view the biggest change in organizations.
The whole platform model opens up an enormous can of worms in terms of governance.
Saku Mantere: While many of us hate bureaucracy, the consistent governance of ethical and other policy principles in organizations might require a stable hierarchy. The platform on the one hand includes other organizations that operate within the platform, while it also brings in the customers. If we think about Facebook, it’s probably the biggest publishing house in the world—and they do almost no content themselves, it’s basically us the users who do all the publishing. People have become dependent on that; it’s become a part of our everyday lives. Which brings up the question of sustainability, where organizations actually have to introduce processes and bureaucracy, they have to control things. This new way of doing things, of having a market within the firm, is harder to control. How do you perceive the challenge of sustainability?
Bengt Holmström: The whole platform model opens up an enormous can of worms in terms of governance—who is responsible if somebody misbehaves on the platform, for instance? Is it Apple’s problem? Or is it the person who designed that particular program or that particular part of the platform? They are, after all, designing the rules of the game on the platform in some ways, but then things happen also in the platform—they can’t control everything. This is an organism that’s growing and it’s not under the control of the firm necessarily. A massive change is happening in an effort to deal with these problems. And I’m sure the law will have to change in many ways.
Saku Mantere: Bureaucracy, which was a term that was developed by Max Weber to describe the basic rules of a hierarchical organization, has become a dirty word in many circles. It’s sometimes used to blame an organization for being inefficient. It’s very, very hard to impose accountability in an organization if you don’t have some kind of bureaucratic structure, if you don’t have what you mentioned as governance—it’s a governance problem. If you want to enforce certain principles or values or rules and processes, you have to have some structure of accountability.
Bengt Holmström: One of the things that came out of thinking about these problems was, if you go back to the idea that we are seeking to be efficient, you see that bureaucracy…has to serve a very important function. This notion that bureaucracy is an illness? Excess bureaucracy may be an illness, but just as fever is actually a defense mechanism to something, so is bureaucracy. It can be a good idea, a brilliant solution to a very complicated problem of organization.
For the full conversation between Bengt Holmström and Saku Mantere, listen to the Delve podcast episode.
This podcast is part of the Delve Magazine Spring 2023: Reworking Bureaucracy
This episode of the Delve podcast is produced by Delve and Robyn Fadden. Original music by Saku Mantere.
Delve is the official thought leadership platform of McGill University’s Desautels Faculty of Management. Subscribe to the Delve podcast on all major podcast platforms, including Apple podcasts and Spotify, and follow Delve on LinkedIn, Facebook, Twitter, Instagram, and YouTube.