Archive for the ‘centralization’ Category

Survival requires finding the sweet spot between centralization and decentralization

November 9, 2007

The success of an organization depends on its ability to find the “sweet spot” between centralization and decentralization.

eBay is an example of an organization that has landed on the sweet spot. It has centralization: eBay requires people to log on, and buyers and sellers must identify themselves. It has decentralization: users can auction items to each other directly, buyers and sellers rate each other. This combination creates both trust and security.

Consider what would happen if eBay were to become more decentralized. For example, suppose eBay didn’t verify users’ e-mail addresses and allowed anybody and everybody to post anonymously. There wouldn’t be much accountability. Less accountability would translate into diminished trust, and eBay would loose customers.

Likewise, if eBay were to become more centralized — say, by verifying the quality of the goods sold — commissions would become higher, and it would no longer be economical to sell on eBay. Again, this would drive away customers and reduce revenues.

eBay would lose market share if it moved further toward centralization or decentralization.

Note that just because a company is on a sweet spot now (as General Motors was in the 1940s) doesn’t mean the sweet spot won’t shift in the future. In some cases, like the online auction industry, the sweet spot seems to be fairly stable. In other cases, however, it is much more volatile and must continually be pursued. It’s almost like a tug-of-war: the forces of centralization and decentralization pull the sweet spot to and fro.

Of course, understanding that the sweet spot can move and predicting these shifts are two very different things.

The Starfish and the Spider by Ori Brafman and Rod A. Beckstrom