We all know what platform businesses are. If not by the name "platform", we know them by the way they create value. One of the prime examples of a platform business that took the world by storm is the iPhone. In 2007, Samsung, Nokia, LG, Motorola, and Sony Ericsson controlled 90% of the mobile phone industry.
These industry leaders seemed to have all the competitive and strategic advantages to stay in the driver's seat for years to come - good market share, strong brands, good differentiation and great economies of scale. In the year 2016, less than 10 years after the first iPhone, Apple captured 80% of the industry's global profits. Nobody expected such a disruptive change in the market. So what went wrong for the "cell phone kings", such as Nokia and Sony Ericsson?
The truth is that the iPhone was nothing technologically special or innovative, but its new platform business model was something that paved the way for global dominance for the next decade. The strength of Apple is enabling interactions between consumers and app developers - and in fact, the power of all other platform businesses is in connecting consumers with producers. Simple as that.
Creating Value by Connecting
Some of the most successful and disruptive B2C companies today are platforms that are, in essence, only facilitating interactions between consumers on one side and service producers on the other. Uber connects drivers with people who need a ride, Airbnb connects apartment owners with travellers and Google started by connecting advertisers with target audiences.
Platforms aren't really all that innovative either. We simply don't think of them in this way. Shopping malls connect different retailers with consumers and even newspapers connect advertisers with readers. These sorts of businesses have been around for decades, except that in the information age, such interactions are much, much easier and can be scaled by an incredible magnitude. A good platform that enters a new market, no matter the industry, will almost always win over competition.
From a Pipeline to a Platform
There are three general steps that a business must take in order to move from a traditional "pipeline" business model to a platform:
Instead of fighting for control over resources, platforms fight for control of the community and the resources that the producers can provide.
Instead of optimizing internal processes to generate higher and higher value, platforms look outwards provide better and easier interactions between its users and look to optimize their ecosystem governance.
Instead of maximizing the value of individual customers, platforms want to maximize the value of their entire ecosystem, which is much more dynamic.
Economies of scale, one of the most basics concepts of every economics class, is what gives a competitive edge over smaller competition in most traditional businesses. Economies of scale also apply to platforms, but on the supply side. The larger the community that a platform controls, the bigger the average value of each interaction is, because of better matches and richer data between suppliers and consumers. This then amplifies circularly by attracting an even bigger community and repeating the cycle - similar to how supply-side economies of scale work.
In orthodox business world, companies protect their knowledge and resources from outside influences and create barriers around themselves. Platforms, however, shift their focus towards eliminating these barriers and towards connecting resources from one end to the other in order to create value for all sides. Of course, the platform has to be very careful how it manages openness and whom it allows to join as a producer. There are a number of examples showing how poor governance and loose regulations hurt platform businesses. Thus, it is important for platforms to strike the perfect balance between openness for increased market effects and exclusivity for higher quality of suppliers.
Platforms are threatening B2B companies
Businesses are realizing they have to transition to a platform business model. Either that, or they will soon have to exit their markets. This does not only apply to B2C companies that have been disrupted by platforms such as Uber, Airbnb, and Amazon, but large B2B companies as well. Traditional B2B companies are already starting to find a way to transform their competitive advantages into a platform business.
Many B2B resellers have already established online B2B e-commerce platforms, most commonly connecting SMEs with specialized but affordable suppliers from all over the world like Alibaba. There are also also large, established outsourcing platforms like Akamai that connect professionals in functions like IT, marketing, design, or other professional services with companies that cannot afford investing in establishing their own departments. Even machinery manufacturers, such as John Deere, have started platforms (MyJohnDeere Operations Center) as an addition to their business offering. 🐦PGN is a similar platform network that connects its marketing or sales members to specific, local market knowledge and international projects. The members are all licensed and are using a common sales methodology and systems.
So, in the words of Marshall W. Van Alstyne: "Learn the new rules of strategy for a platform world, or begin planning your exit."
Sources:
https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy
https://hbr.org/2016/09/the-businesses-that-platforms-are-actually-disrupting