New to platforms and their effect on the modern world? Keen to read more about what we can expect? Laure Claire Reillier gives us the history lesson we all need in this new Platform Age.
The Industrial Age, which started 200 or so years ago, has been characterised by the success of traditional linear firms. Their business model was to buy raw materials (inputs) to transform them into products (outputs) that could then be sold at a margin. The most successful companies in the world, such as General Electric, General Motors, Exxon or Coca-Cola, have all been following this traditional model. But something has changed in the last 15 years as some firms, operating differently from the traditional model, have managed to overtake established industrial giants. In April 2017, the five largest firms in the world –in terms of market capitalisation– are Apple, Google (Alphabet), Microsoft, Amazon, and Facebook.
These firms have something new and unique in common: They are platform-powered businesses. They combine platform business models with linear ones to create powerful ecosystems. Instead of just manufacturing or distributing goods and services, these firms also match and connect community participants to enable transactions. Apple does this with its App Store where it harnesses the power of thousands of developers to offer one of the largest marketplaces for applications. Amazon does this by connecting its customers with merchants connected to its platform. Google matches people looking for content to those creating it.
Most companies have now understood the importance of digital transformation, yet few understand that the real opportunity is to transform –rather than transpose– their business model for the digital age. Firms who understand this shift are transforming their business model so that they can place themselves at the nexus of transactions. They are becoming orchestrators of ecosystems rather than mere manufacturers or distributors.
We illustrate these developments via the matrix below.
Physical platforms that attract, match, and connect people to enable transactions are not new. In fact, the grand bazaar in Istanbul, the largest marketplace in the world for centuries, was founded in 1455. Yet physical marketplaces do not typically scale beyond a limited geography. We had to wait for the Web to become pervasive for the first digital marketplace, eBay, to scale globally. Since then, many traditional brick and mortar companies have tried to offer their products and services online and been through some kind of digital transformation (Arrow 1), but often realised that this was not enough to compete against those who had developed digital platform capabilities.
As a result, we are seeing increased M&A activities by established players trying to acquire platform businesses (the acquisition of jet.com for $3 billion by Walmart or onefinestay by AccorHotels are to be seen in such a light). Even digital native companies like Amazon and Zalando are embracing platform business models (Arrow 2). And rightly so, since there is mounting evidence that these new orchestration roles are more scalable and more profitable.
Another group of firms being disrupted are the traditional platforms like the grand bazaar, or traditional estate agents and old fashioned dating agencies. The entry of digitally enabled competitors often has devastating consequences – who would think about going to see a matchmaker in the age of Tinder?
These developments have far reaching consequences. For example, the way platforms are managed is fundamentally different from the way traditional firms work. The frameworks and tools that were developed to manage linear firms –and are still taught in business schools– no longer apply. The value chain is no longer internal and controlled, but distributed and shared (Airbnb has no real estate to rent, Uber owns no cars, Facebook has no journalists, etc). The role of the firm is no longer to produce but to enable interactions and transactions amongst platform participants. The bottlenecks are no longer simple hurdles in a linear process, but complex feedback loops in an ecosystem. In this world, the ability to co-create value with platform participants and harness the power of communities are new core skills and capabilities.
Laure Claire Reillier and Benoit Reillier recently co-authored Platform Strategy: How to Unlock the Power of Communities and Networks to Grow your Business, published by Routledge in April 2017. They are co-founders of Launchworks & Co, an innovative digital transformation advisory business.