Coordination Challenge

Solving coordination problems in hidden markets is a really big deal.  The last 5 years at Lijit and the 4 years prior to that building an Open Source software business evolved my thinking about the nature of markets and how institutions take advantage of scale opportunities.

Institutions are great at solving coordination problems for a relatively small set of customers.  This is driven by simple economics.  They do it best and most efficiently when large amounts of capital are concentrated and available to them through this subset of the market their solutions address. Over time, the economic costs of any institution inevitably rise.  But what happens when the majority of the market is smaller than the average market participant?  This phenomena occurs increasingly often as technology becomes more democratic, mobile, and "good enough" to be professionally useful.

Friction in a business model historically has been used to create lock-in (or stickiness if you prefer the politically correct).  Institutions have a vested interest in friction, but I think its rapidly becoming the achilles heel of the enterprise.  Its not to say that creating mechanisms for loyalty aren’t good or appropriate to building a large and viable enterprise, but they have to be done is a way that embraces a more frictionless outcome for a customer. Said another way: most institutions have a vested interest in consolidating ranks around the problem they can solve.

The corporate response to nearly any problem is to institutionalize around the problem: focus on streamlining costs, and attack the market where most of the concentration of dollars exist.  By definition this is the head of any market.  Its the 80/20 rule.  The problem is that markets are increasingly becoming more fragmented and long-tail.  The average is not the middle, its getting closer to the head, with the majority of the market existing below the average point.  The larger the market gets with the fuel of "good enough" democratized technology, the more this coordination problem opportunity exists for those that can solve it using unconventional means.

The punchline:

Institutions and traditional organization economic structures are simply unable to solve a mass coordination problem.  It cant be done economically.  The successful enterprise in these markets has to scale the coordination of the response outside the institution itself.  If you crack this code, you win.

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