Unlocking the Potential of Digital Building Blocks: The ONDC and the Building Blocks Thesis

 

Last week, the Indian government launched its ambitious public digital infrastructure for online retail – The Open Network for Digital Commerce (ONDC). The ONDC provides an open and decentralized alternative to counter the growing dominance of Amazon and Walmart (through Flipkart) in India

The ONDC provides yet another timely example of the Building Blocks thesis – introduced in last week’s newsletter – in sharp contrast to the way centralized platforms operate.

In Volume 1 of this series last week, we discussed the building blocks approach. Building blocks are standardized and modular units of value creation which, when combined, drive exponential value creation in an ecosystem.

The building blocks approach focuses on leveraging the ecosystem towards

1. creating standardized and reusable solution components (production building blocks) and
2. creating a diverse range of solution complements (consumption building blocks) that enhance the value of solutions.

Here’s a simple way to think about building blocks in terms of solution components and complements:

 

Effectively, digital building blocks enable a ‘system of solutions’ that are interoperable and can plug-and-play across each other, enabling a vast and seemingly unconnected ecosystem of solution creators to more effectively coordinate their efforts towards solving large-scale problems through diverse context-rich solutions. 

 

 

Through the second volume, we explore why this approach is increasingly important today and how to think about applying a building blocks approach to your own solution. 

 

Why now?

Modularity and reusability enable the building blocks approach.

Modularity is not new. We’ve seen modularity in the automotive industry transform the automotive supply chain. Modularity in technology (especially through evolution in programming language, standards, and more recently APIs) enables creation of building blocks that can plug and play with each other enabling the creation of larger composite solutions.

However, three specific shifts are driving the rise of the building blocks approach across industries:

1. Value chain modularity: The adoption of cloud computing across the value chains of different industries has accelerated over the past decade. As more of the value chain moves to the cloud, more activities across the value chain may be modularized as building blocks which can be opened out for external usage.
2. Incentives for openness and shared resourcing: Industries are increasingly seeing the advantage of shared and reusable resources. Financial institutions are using technologies like the blockchain to share trade finance data in consortia. Industrial businesses (e.g. energy) which have traditionally been very protective of their physical value chain are increasingly coordinating around shared data standards.
3. Emergence of standards and protocols: A wider range of industries are evolving shared standards and protocols, which drive coordination across building blocks. Standards and protocols reduce coordination costs.

These three shifts together are making the building blocks approach increasingly important. A pre-digital value chain didn’t allow the creation of open and reusable building blocks. Lack of incentives to open up further prevented innovation as building blocks within a business’s boundaries – even if digital – only allowed solutioning internally. Finally, in the absence of incentives to open up and protocols to coordinate open resources, transaction costs of employing open and shareable building blocks were too high.

The three shifts above reduce transaction costs and drive towards greater modularity and openness in solutioning across a larger range of industries and value chains.

We’ve seen the power of openness, reusability, interoperability, and coordination in the rise of the open source movement. Today, most software stacks rely on open source software at multiple levels. We believe the three shifts above will drive similar innovation across a wider range of value chains as more firms and value chains move to adopting a building blocks approach.