The platform economy: Step right up for exponential value gains

(Image credit: Image source: Shutterstock/TechnoVectors)

Platform ecosystems are nothing less than the new value foundation for today’s leading organisations. In fact, new platform-based business models and strategies are driving the most profound global macroeconomic change since the industrial revolution, transforming the ways companies operate and the customers they can reach.

In today’s global, digital world, it's no longer about simply selling a product, it's about adding value and engaging the customer. Platforms are flexible technology that provides developers the space and necessary tools to build and rapidly release new apps, products and services. Because the ecosystem of technology and service partners have direct access to the platform, that direct interaction brings about a new, customer-centric approach, and companies that transform their traditional business models into platforms enjoy major competitive advantages from new insights into pricing, network effects, supply chains and strategy.

New digital ecosystems allow companies to be more agile and adaptive, with the burden of infrastructure management and other IT responsibilities taken off their plates. This has been true from the start for digital-born companies like Alibaba, Amazon, Google and Airbnb. These huge and wildly successful enterprises are fully dependent on the technology platforms they’ve built and the business models those platforms enable, and most of their ground-breaking products and services have been based on those platforms. For example, when General Motors made its $500 million investment in rideshare platform Lyft, the partnership created a new digital ecosystem for transportation and provided both companies with immediate benefits.

But if digital platforms and ecosystems offer such monumental new avenues for growth and value creation, why do so many enterprises have ineffective growth strategies and stale business models? Examining an existing market through a platform-based lens can transform the possibilities for almost any organisation today.

Platforms can make an old industry new again

The automotive industry is an historically asset-heavy business model that is now turning to platforms to form closer customer relationships and provide a wider array of products and services. Inspired by the success of Uber and other transportation disruptors, car companies are expanding into new, asset-light areas, such as 'transportation services', which allows them to reach exponentially more people, including consumers who don’t even own cars.

Daimler, for example, bought MyTaxi and the urban mobility company moovel, which is the leading provider of public transit mobile ticketing and fare validation solutions in North America. Similarly, BMW and Daimler announced in March 2018 a joint venture to consolidate their car-sharing, ride-sharing, parking location services and charging services that will command more than 30 percent of the global car-sharing market. These automotive manufacturers aim to expand their relationships with their customers by offering platform-based transportation alternatives and forming sustainable urban mobility relationships with cities and communities. This sets the stage for car manufacturers to take on tech competitors such as Uber and Didi and intensifies the race for dominance in the car-sharing market and adjacent services, such as ride hailing.

Ping An is another source of inspiration for incumbent industry leaders looking to expand into platforms. A 30-year-old Chinese insurance company, Ping An morphed its entire business model several years ago to become a platform-powered ecosystem. Now, in addition to being China’s biggest insurer, Ping An has moved into mobile apps and underlying technologies, with ten startups that bridge insurance, banking and asset management as well as several non-financial services platforms that deepen its relationships with customers and partners. What’s more, the company invests one percent of its profits in new technology, paving the way for ongoing growth.

Platform-based models require a fundamental but fluid shift in how businesses operate. In the past, BMW and Daimler acted as pure competitors; now they are competitors as well as partners in a joint venture. Nevertheless, these and many other firms have proven the success of platform models. The quintessential example is Apple, which has vanquished competitors such as Blackberry by creating a platform-based ecosystem that ensures continuous growth.

How to create a valuable ecosystem of partners and customers

Unlike pipeline businesses, which focus on sales and gauge their success in terms of goods and services and revenues and profits, platforms focus on interactions: exchanges of value between producers and consumers on the platform. The number of interactions and the associated network effects are the ultimate source of competitive advantage. In the case of Uber, passengers and riders rate their experiences with each other. In the intervening years, this direct interaction with customers and the company’s ability to rapidly launch new products has led to growth in entirely new ways, such as the development of Uber Eats.

The first step in adopting a platform-based strategy is to analyse existing markets and new opportunities through a platform and ecosystem lens. Organisations must interact with many more partners in functions ranging from customer sourcing to social advertising to payment solutions. The IT function must follow the ‘Amazon principle’ of making system components available ‘As-a-Service’ to enable integration with the ecosystem. The interfaces must be open, dynamic, and functional in real time so that they can integrate partners, technologies, and applications on an as-needed basis.

One clear implication is the need to design lightweight technology architecture built on microservices and application programming interfaces (APIs) to allow third parties to easily hook into the new ecosystem. CIOs and CTOs need to start thinking in terms of platform architecture to allow for future upgrades across the ecosystem. They may even need to offer an ‘app store’ to allow consumers to pick and choose desired capabilities, and of course, the infrastructure must be robust and secure. 

As businesses increasingly engage with external ecosystem technologies, they’ll need full-stack architects and convergence infrastructure engineers with expertise in third-party packaged software, multiple best-of-breed technologies, and integrating multiple technologies. ‘Translator’ capabilities will also be crucial to bridge the gaps between business goals and technology requirements. Any new function within the enterprise architecture should work closely with the business to understand how external services can be integrated with products to extend the customer value proposition on the platform.

Before starting a platform journey, an in-depth analysis must ensure that the organisation’s IT is ready for a platform ecosystem and that the traditional business is not jeopardised. Organisations need to understand how platform activity can support the most profitable part of the existing business and design a new growth approach that successfully integrates platform and ecosystem thinking. The resulting strategy should address these points: 

  • What industry peers or wider ecosystem players will help maximise your platform?
  • Sell through platforms: What platforms will you link to for extended sales opportunities?
  • Enhancing and optimising the existing business: How will this new ecosystem and platform approach benefit your current business?
  • Building a new standalone business unit: Will you need to create a new business unit to manage and optimise the ecosystem?
  •  Joint venturing with another market player: Is a joint venture necessary and the most efficient way to expand your ecosystem?
  • Financial investments: How much investment will be required to put this model in place?
  • Is my current IT ready for a platform strategy?
  • Do I have a big data strategy ready in order to maximise business results out of the platform data?

To bring these ideas to life for senior management, board members and shareholders, it's important to communicate the potential value of a platform-based approach in terms of its impact on growth rates, valuation multiples, customer satisfaction, margins, return on assets and other key metrics.

The risks of a platform-based approach

As beneficial as a platform-based model can be for virtually any type of organisation, there are risks involved:

Interaction failure. Feedback loops can strengthen or weaken a platform, because customer demand for a service has proved strong enough even to overcome regulations. In other words, never underestimate the potential positive or negative impact that strong customer demand – or dissatisfaction – can have on the success of new product introductions or market expansion.

Engagement. Healthy platforms track how participation by customers enhances the benefits of direct customer interactions, such as content sharing and repeat visits, but this requires the constant use of data science to optimise engagement. 

Match quality. Poor matches between the needs of users and producers weaken the benefits of direct customer interaction. To avoid this outcome, Google constantly monitors users’ clicking and reading to refine how its search results fill their requests.

Negative network effects. Badly managed platforms often suffer from other problems that reduce value. For example, congestion caused by unconstrained network growth can discourage participation; so can misbehaviour. Managers must watch for negative network effects and use governance tools to mitigate those effects by withholding privileges or banishing troublemakers.

Competition and existing business: What if a competitor suddenly wants to join forces with my organisation on a certain platform? To cooperate with a competitor without making the existing business operations vulnerable, enterprises could mitigate risk by establishing a separate business unit with the power, prestige and people to “invent the future” using very different methods and tools.

There is no question that any business can benefit from joining the platform economy. Over the past two decades, some of the world’s most profitable and successful firms have adopted a digital platform model strategy, allowing disparate groups to interact over a platform and co-create value. ISG has supported hundreds of clients on their digital transformation journeys, let us work with you to design the right strategy for your organisation so you can mitigate the risk and enjoy the rewards of the platform economy.

Johanna von Geyr, Partner, Information Services Group (ISG)
Image source: Shutterstock/TechnoVectors