Articles, IT

How Einstein’s formula E=MC² can help firms to succeed on their network and platform journey

Firms especially from mature and asset intensive industries are right to be worried about digital transformation. Research and projects alike show that firms with platform and network-based business models are much (exponentially) better at creating value. The growth is faster and cash flow higher.

Creating a successful platform business is hard if you don’t have a brilliant idea, ample capital, no core business to cannibalize and a team of top (digital) talent. So, what can established firms do?

From our point of view firms are confused by thinking and doing. They need to understand that platforms and networks are mental models and business models alike. The traditional way of management thinking is still linear and incremental. The value lies in the products and serves themselves. However, the new way of thinking about value and value creation is based on networks and is exponential. A platform connects (content) providers and users in a multisided market. The value is not the thing being produced but in the connections, being made. Thus, the platform provider is fostering the connections between nodes instead of creating the nodes (between people, things, data etc.).

A great way to understand that a platform defines the ability to generate a network effect is to adapt Einstein’s famous formula E=MC². E is the enterprise value. M is mass, in this case all the things, people and assets of the ecosystem. C² is the exponential effect of connectivity and co-creation. In established firms or businesses there is little connectivity or co-creation. Which means that the enterprise value is equal to the “mass” of the company. But adding connections and co-creation the ability of theses mass to create value multiplied.

Therefore, it is necessary to understand that principle; Start always with M and add the C² to generate more E. Every firm has several structural elements i.e. types of capital: human, financial, intellectual, physical etc. Let’s focus on the links rather than the nodes.

Considering a firm i.e. an organization itself as a platform, connecting people who have ideas and vision work with people with skills and execution expertise. Furthermore, using crowdsourcing platforms that engage people from inside and outside the firm. Some firms focus on a more networked approach which means work on increasing connectivity (C²) instead of increase productivity of M.

For intellectual capital, the value is not in the IP itself but in the connectivity of that IP. APIs are for data exchange that enable the sharing of software and data among customers, suppliers and partners. This software connectivity and data exchange is the core business of platform companies like Google. Leading firms recognize that the way to create value (E) is not by creating scarcity and exclusivity (M) but connectivity of utility (C²).

Physical assets are able in digital world to generate value in how they work together. The internet of things (IoT) is not just about making products smarter, it’s about connecting them to each other. Every firm need to be thinking about how its products and assets could become part of “The Internet”.

Digital currencies like bitcoin, build on distributed models of verification and payment through blockchain and move financial capital toward more-networked form of currency. Funding sources can be networked e.g. Kickstarter and other crowdfunding models. Money itself becomes more intelligent and connected.

Every firm who embark on their network journey, should keep in mind that the place to start is with their mental model. Value in a network is about what you connect, not what you make. Change the firms thinking will naturally change what the firm do. Then change what you measure to align incentives and track the transformation process.

About the author:

Dr. Bastian Halecker is the CEO of Nestim – A company that match entrepreneurs, managers and ecosystems to create innovations at the core of the digital age.

Leave a Reply

Your email address will not be published. Required fields are marked *