Catalyst Code: The Strategies Behind the World's Most Dynamic Companies [Hardcover]

Companies like Google and eBay have business models that are touted as "revolutionary". But the same concepts allowed businesses like Diners Club and Sotheby's to change the business landscape many years ago. That "something" is explored in Catalyst Code: The Strategies Behind the World's Most Dynamic Companies by David S. Evans and Richard Schmalensee. Once I had the concept of a two-sided business explained to me, a lot of things started to click...

Contents:

What Is a Catalyst; Build a Catalyst Strategy; Identify the Catalyst Community; Establish a Pricing Structure; Focus on Profitability; Compete Strategically with Other Catalysts; Experiment and Evolve; Cracking the Catalyst Code; Additional Readings; Notes; Index; About the Authors

The catalyst spoken of in the book involves bringing together two groups of people who have complementary needs but no way to meet those needs without a common ground. For instance, Diners Club allowed customers to dine out now and pay later. Restaurants who took Diners Club knew they would attract cardholders and have a guarantee of payment. The trick was that Diners Club had to convince cardholders that there were enough outlets in which to use the card, while convincing outlets that there were enough customers to make it worth their time. The companies that can create and grow these catalysts stand to capture a large market following. A more modern example is eBay. They were the most successful at providing an electronic marketplace bringing together buyers and sellers without the confines of geography or quantity of product. By making the service free for buyers, eBay was able to attract potential customers for sellers. Sellers are willing to pay the transaction fees in order to get access to that buyer group. Evans and Schmalensee do an excellent job in examining this type of business model, and they open your eyes to a different way of looking at companies.

Once you understand the concept of two-sided businesses, it's tempting to start labeling *all* businesses as two-sided. For instance, stores are bringing together producers and customers. But there are market forces that come into play, and the authors do help you differentiate between traditional one-sided businesses and actual two-sided models. I also had a bit of trouble at first accepting software companies as two-sided businesses. But after some thought, I can see how a company like Microsoft would be a two-sided business with their Windows operating system. The platform provides a way for developers to build software that conforms to a agreed-upon standard, and for customers to buy software that will run on their computers. It also explains how a newer two-sided model (Linux) can threaten Microsoft and render their current advantage obsolete.

I enjoyed reading this book, and would recommend it to anyone studying how businesses work. I'd also recommend it to anyone looking to replicate the success of stories like MySpace. You'll be able to avoid some common errors and increase your chances of succeeding.

For the many who read Evans and Schmalensee's previous collaboration, Invisible Engines: How Software Platforms Drive Innovation and Transform Industries, Catalyst Code offers both some expected elements and some new angles. Like in Invisible Engines, Evans and Schmalensee continue to treat themes relating "multi-sided" or "platform" businesses. Multi-sided or platform companies -- relabeled "catalyst" companies in this book -- are those that build businesses based on complex intersections of interests among various constituencies of third parties (partners, suppliers, customers). However, in Catalyst Code, while Evans and Schmalensee continue to describe some platform companies that involve the selling of software, the main focus of the book expands beyond software platforms to the broader application of disruptive multi-sided business models in various market contexts.

Even though I really enjoyed the dedicated focus on software platforms in Invisible Engines, I think that Catalyst Code benefits from the shift in emphasis to the broader thinking involved in crafting, implementing and extending "catalyst" business strategies. In some ways, Catalyst Code is less descriptive and more prescriptive in tone than Invisible Engines; I think that it is also a more immediately practical work for those who might want to consider applying some "catalyst" strategies in their own businesses.

Still, in a strange way, I must say that Catalyst Code was, at least for me, a less satisfying book than Invisible Engines. And I think that this is a good thing. At the conclusion of Invisible Engines, I think that one is apt to get the feeling, "well said: case closed." It's a book with a carefully laid-out thesis and ample examples of software platform companies that fit the model hypothesis. Indeed, Invisible Engines feels like a comprehensive survey of a common, though perhaps not previously well-highlighted, business phenomenon within the software industry.

On the other hand, Catalyst Code left me strangely discomfited and full of the kind of questions that one wants to have after reading a good book on corporate strategy. Questions like: which present generation Internet-oriented companies are really better catalyst companies (i.e., Microsoft vs Google), and which might be in the future (MySpace vs Facebook, Yahoo vs Wikipedia, eBay vs a re-invigorated Apple)? And beyond these questions, one can't help but ponder others about how trust (brand), style (marketing), and the right choice of community participants (who is included or excluded) might ultimately impact the business success, reputation, or longevity of various catalyst players. Provocative stuff.

In an age when Microsoft is investing hundreds of millions of dollars to purchase a miniscule stake in Facebook, I think Catalyst Code serves as a great gloss to the nightly business news. Perhaps it is that immediate relevance that makes the book so thought provocative. I found it a fun read for a serious business book.

On a final note, Catalyst Code is a deceptively quick read (at least much quicker than Invisible Engines). I'm probably not the world's fastest reader, and I still managed to finish Catalyst Code over three or four good nights of reading. The prose is very crisp, something too often lacking in many other business books these days.

This book describes what it calls 'two-sided businesses', which to quote from the front jacket '... generate value by creating simultaneous and mutually beneficial relationships between the different groups of customers they serve'. The book opens with the example of Diners Club which creates value for the following two groups of customers:

1. Restaurants
2. Diners.

In this case, Diners Club allows diners to eat at many restaurants on credit without having to establish a credit relationship with each individual restaurant (assuming the restaurants are willing to offer them credit). The diners benefit from the credit they receive, and the restaurants benefit by getting more diners who spend more and by avoiding the hassle and expense of managing credit relationships with individual diners.

The book is easy to read (no jargon) and provides numerous and familiar examples. It may not astonish you with any earth-shattering insights (that's why I didn't give it five stars), but it will make you look at 'two-sided businesses' in a new way.

This book is a must-have if you are involved with or competing against 'two-sided businesses', and will probably be useful to anyone involved with business generally.