How to Become a Platform Business

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Once in a generation or so, a massive change in business occurs: a fundamentally new way to create meaningful new value for customers. The change can be so profound that it alters the nature of competition, disrupts the pecking order of players, creates entirely new industries and categories, closes existing markets and opens new ones. The change can lead to new ways of building powerful brands and pursuing innovation, which requires the devising of entirely new types of organizations and business relationships.

Today, we are in the earliest stages of such a massive change. Its scientific foundation has been worked on by two economists Charles Rochet and Jean Tirole nearly fifteen years ago: Platform Competition in Two-sided Markets, for which they received the Nobel Prize in economics in 2014.

Rochet and Tirole described a two-sided platform or marketplace, a powerful new approach to business. Some speak of this approach in terms of platforms or platform ecosystems, digital ecosystems or the networked organization, others speak of multi-sided marketplaces or simply MSPs. It has been called the business model of the 21st Century.

Regardless of the name, there is no question that the company of the future is going to be a platform business, particularly in B2B. Platform businesses are different from nearly all firms today that are organized around a pipeline that produce products or services and that scales in a linear fashion.

Over more than a century, the organizing principles for businesses has been the pipeline. With this approach, progress in value creation was largely reduced to improving, modifying, digitizing, and optimizing the steps, stages, and functions along the pipeline or value chain. Typically this happened within the activities of a single function: procurement improved the processes of sourcing, R&D improved the R&D output, manufacturing improved quality. Marketing was often relegated to downstream activities such as communications, sales, and service and brought about improvements in reaching customers.

Platforms change these age-old practices. With platforms, it is not about improving pipeline activities, but in managing networks, collaborations and interactions with customers, partners, experts, suppliers, and even competitors and with this, an entirely new world of value creation has become real and practical.

Platforms will rule because collaborations and interactions with multiple parties is now possible at an unprecedented scale. This is so because the costs associated with the global and digital technology infrastructure of connectivity – computing power, data storage, and bandwidth – relative to its performance have been decreasing exponentially.

This created a business context in which value creation shifted from supply-side economies of scale to demand-side economies of scale with associated network effects. Network effects occur when a product or service becomes more valuable to its users as more people or companies use it. Some examples of companies that built platforms on the top of their existing pipeline businesses are:

  • John Deere improves farm productivity by enabling collaborations with a vast ecosystem of collaborators, farmers, AgTech software firms, fertilizer companies, and seed providers, and academics. It built a cloud-based platform where farmers share farm data with other farmers and the ecosystem who contribute their capabilities to increase the yield per hectares of land. e more farmers contribute their data, and the more the ecosystem partners contribute their capabilities, the more value is created far beyond what the state-of-the-art tractors, combines and other equipment from John Deere could possibly do.
  • Intuit creates value for small business owners by reinventing its business as an open platform for app developers, accountants or partners such as American Express. Participants benefit from sharing of data and documents, matching business owners with accountants in local areas. Over 1,400 apps work seamlessly with Intuit products. The ever-growing community or network of participants interact in the Intuit ecosystem for mutual benefits.
  • Kloeckner Metals, a medium-size metals distributor from Germany, creates value for its 200,000 customers and suppliers of steel such as Tata Steel or ArcelorMittal and even competitors. It built a platform that eliminates the time-consuming price-haggling that is so customary in the industry while drastically reducing the inventory holding costs of the entire industry. In an industry with extremely unfavorable business conditions, and years of declining sales, Kloeckner now performs above expectations, adding nearly a billion of new sales through the platform in three years.

Today, many B2B companies already have taken the first steps. Their experiences provide valuable guidance for those who wish to build a platform business. From a technology or digital standpoint, the foundations exist and can be built with relatively little investments.

Business marketers or researchers should raise the following issues before building a platform business:

  1. What is the problem or tension that your product or service solves for within your industry or beyond? Defining the problem – the biggest, difficult, intractable problems and challenges – that a platform solves is a critical first step. Some methodologies do exist in the areas of business modeling, design thinking and systems thinking. But more work is needed here. Research is also required to define what types of platforms are best able to solve these problems.
  2. What unique assets and capabilities are required to develop a platform business? A business needs to ask: What do I already possess that could be leveraged in moving to a platform business? Kloeckner had its huge customer base. John Deere had its high-performance farming equipment range. Johnson & Johnson is a trusted brand. But beyond the capabilities or assets of a firm, there is a need to define the assets and capabilities in the broader business ecosystem of participants who can create value for customers. John Deere, for example, accessed the software capabilities of numerous AgTech startup companies who built applications for farmers.
  3. What organizational changes will be necessary to create value with platforms? The linear or pipeline business’s organization structure, people configuration, and cultural values may not be best-suited to the platform model. That is why Kloeckner created a new unit, based outside the traditional home of Duisburg, to escape the constraints of pipeline thinking. Researchers who wish to pursue this line of research should consult the recent work on networked organizations.
  4. What new business models and pricing strategies should be deployed to capture the value and profit opportunities from platforms? This is one of the most challenging issues of platform businesses. It involves issues of the value proposition to the multiple participants of the platform and the brand strategy. It involves the need to create a field of interaction that attracts participants to the platform and exerts a sort of gravitational pull of value creation. There is an enormous gap of research in this area. Traditionally, marketing and brand strategy focused on creating value for just one side of the platform, namely customers and extract a price for the value delivered. However, in a platform world, the value is created for many participants. Research is needed to identify mechanisms to capture and share the value across participants and partners of a platform business. A good starting point for further research is the work by Stefan Michel.

This article was originally published in the ISBM’s January 2018 Research Newsletter.