Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Organization Structure Main
Page | Platforms Bibliography
The authors begin with how Apple's iphone burst onto the mobile-phone scene and began gobbling up market share by exploiting the power of platforms and leveraging the new platform rules of strategy. Platform businesses bring producers and consumers together in high-value exchanges. Information and interactions create value and competitive advantage. Apple connected app users with app developers creating value for both groups. The authors refer to this as network effects, a central aspect of platform strategy. Apple's success in building a platform business within a product firm provides lessons for companies across industries. The purpose of this paper is to explain why firms that fail to create platforms, and fail to learn from the new rules of strategy will not be competitive in the future.
What's New About Platforms
Platform businesses are not new. Malls and newspapers are examples that have been around for years. What is new is that information technology has reduced the need for a business to own physical assets and infrastructure. This facilitates building and scaling up platforms that capture, analyze, and exchange large amounts of data that increases the value for everyone involved. Uber, Alibaba, and Airbnb provide examples of platform based firms that have upended their industries with spectacular growth. (See the Kavadias summary)
Platform Ecosystem Structure
Although there are many types of platform businesses, they all have a structure with four types of players that include:
Owners - Platform owners control their intellectual property and platform governance.
Providers - Providers serve as the interface with users.
Producers - Producers create offerings.
Consumers - Consumers use or consume the offerings.
Platforms vs. Pipelines
A pipeline business involves controlling a series of linear activities in a value chain. In manufacturing for example, materials flow from suppliers to producers who transform those materials into products in a series of steps, and then distribute them to consumers in various ways (e.g., direct or through retail stores). Moving from a pipeline business to a platform business shifts the emphasis in three ways.
1. Pipeline businesses control scarce and valuable tangible assets such as mines and real estate, or intangible assets such as intellectual property. In a platform business, the main asset is the network of producers and consumers. So the emphasis shifts to controlling their interactions.
2. Pipeline businesses create value by optimizing a value chain of product activities. Platform businesses create value by facilitating the interactions between external producers and consumers. The emphasis shifts from controlling processes to motivating participation and interactions to produce value for everyone involved.
3. Pipeline businesses focus on maximizing the value to customers of products and services. Platform businesses focus on maximizing the total value of an expanding ecosystem that involves a circular, iterative, feedback-driven process. The five competitive forces described by Michael Porter still apply, i.e., industry competitors, new entrants, substitute products, the buying power of suppliers and consumers (See Porter's Chapter 1), but these forces behave differently and new forces make competition more complicated.
The Power of Network Effects
In supply-side economies, firms compete by controlling resources, increasing efficiency, and fighting off challenges from the five competitive forces described by Porter. Strategies include cost leadership, differentiation, and focusing on a narrow specific market group (See Porter's Chapter 2). Platform businesses in demand-side economies (internet) compete on the basis of network effects to expand the network ecosystem to achieve economies of scale. The greater the scale, the greater the value. External forces can either add value to the platform or extract value from the platform ecosystem.
How Platforms Change Strategy
The five competitive forces are relatively well defined and stable in a pipeline business, but these forces are not as stable in a platform ecosystem. Consumers, producers, and providers may defect, or turn on the platform and compete with it directly. For example, Amazon and Samsung who provide devices for the Android platform attempted to create their own competing operating systems. As noted above, new players can either add value to (be accretive), or extract value from (be depletive) the platform. This means that platform firms must constantly promote accretive behavior while monitoring participants activities in the system.
Shape-Shifting Ecosystems
Platform businesses may move aggressively into new industries with little warning. For example, Google moved from web search into mobile operating systems, home automation, driverless cars, and voice recognition. Competitive threats include those from:
1. An established platform that leverages its own community of customers, e.g., Google's move into the home automation market.
2. A competitor that targets an overlapping customer base with a unique new offering that leverages network effects, e.g., Uber's challenge to the taxi industry.
3. A platform that collects the same type of data can go after another platform's market, e.g., in health care, Fit bit and Walgreens are creating platforms based on health data.
Focus
Pipeline businesses focus on increasing sales. In contrast, platform businesses focus on interactions or exchanges between platform producers and consumers that are the ultimate source of competitive advantage. A strategic goal is to design a platform that will attract the desired participants, facilitate the right interactions, and promote more powerful network effects.
Access and Governance
In the pipeline environment strategy involves erecting barriers to entry. In the platform environment strategy shifts to eliminating barriers to production and consumption to maximize the value of the ecosystem. Platforms consist of rules and architecture that determine access and what consumers, producers, providers, and competitors are allowed to do on the platform. Platform openness, reward systems, and motivation to share ideas and resources are choices that need to be considered.
Metrics
As pipelines launch platforms, monitoring and promoting interactions becomes critical. Metrics include:
Interaction failure - when producers and consumers don't connect.
Engagement - e.g., content sharing and repeat visits.
Match quality - when the needs of producers and consumers don't match.
Negative network effects - e.g., congestion that can discourage participation.
Leadership
Platforms require new leadership styles to design, govern, and expand platforms on top of existing businesses. The writing is on the wall. Pipeline firms must learn the new rules of strategy for a platform environment, or plan for the end of their business life cycle.
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Related summaries:
Bonnet, D. and G. Westerman. 2021. The new elements of digital transformation: The authors revisit their landmark research and address how the competitive advantages offered by digital technology have evolved. MIT Sloan Management Review (Winter): 82-89. (Summary).
Cusumano, M. A., D. B. Yoffie and A. Gawer. 2020. The future of platforms: Platforms power some of the world's most valuable companies, but it will get harder and harder to capture and monetize their disruptive potential. MIT Sloan Management Review (Spring): 46-54. (Summary).
De Geus, A. 1999. The living company. Harvard Business Review (March-April): 51-59. (Summary).
Johnson, M. W., C. M. Christensen and H. Kagermann. 2008. Reinventing your business model. Harvard Business Review (December): 50-59. (Summary).
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Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).
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