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Turning your business into a platform business

Leading Edge Forum offers four paths CIOs can take to develop the sophisticated ecosystems necessary to transform into a platform business.

Platform businesses and ecosystems are headline news. Seven of the world's eight largest companies by market capitalization, representing about $4 trillion, are all some form of platform business -- Microsoft, Apple Inc,, Alphabet Inc, Berkshire Hathaway, Facebook, Alibaba Group and Tencent. Each of them orchestrates many ecosystems of thousands of organizations that serve billions of people. They are systemically important to society and increasingly considered the sixth "utility" behind water, electricity, gas, transport and telecommunications.

Every sector has felt the impact of these new digital-first platform organizations, whether by joining one of their ecosystems as a producer, consuming one of their services or having business stripped away. Conversely, traditional digital-second organizations -- those whose genesis is in the physical goods and services world -- in every sector must find a way into these modern business ecosystems either as a strategic producer/consumer or by becoming a platform organization.

Many organizations and industries have felt the impact of platform businesses and asked themselves the question, "What if Amazon entered our market?" As Leading Edge Forum researcher Bill Murray pointed out last year in Liberating Platform Organizations, "Platform businesses often first appear in niche markets" and don't look like traditional competitors, thus making them stealthy.

The challenge for digital-second organizations, especially successful ones or those that operate in a protected market, is to look at competitors and business models in an entirely different way: as a combination of platform and ecosystem.

Other digital-second businesses are going further -- changing from a pipeline business model, which is the classic value-chain model, to a platform business model. How do they do it? How do you evolve a traditional, linear business towards a platform business?

The challenge for digital-second organizations, especially successful ones or those that operate in a protected market, is to look at competitors and business models in an entirely different way: as a combination of platform and ecosystem.

We see four distinct paths that digital-second businesses can take to change their business model from a pipeline to a platform. These begin with the two different paths they can pursue to evolve their business model and shape a modern ecosystem. Path 1 applies to manufacturers and producers and Path 2 to retailers and brokers.

Path 1: Build out for a manufacturer, creating a platform ecosystem around a core product-centric offering.

Most B2C and B2B businesses offer some form of digital product extension, whether it be on-product (e.g., connected features) or off-product (e.g., a mobile app), to better interact with consumers. Some pioneering businesses are taking the next step and pursuing a build-out platform model. Simply put, the instrumented product and service bundle generates data about a new ecosystem. The new platform business model then uses that data to find and match producers with consumers at various points in the customer journey. As these stakeholder groups trade and grow, an ecosystem builds around the core offering. Finally, the platform business incorporates the data exhaust from the transactions into its data sets and learns and grows.

Path 2: Build out for a retailer (or broker), creating a platform ecosystem where there are already third parties

The significant difference between Path 2 and Path 1 is the presence of third-party suppliers from the start. Building out and transitioning to an orchestrator role in a way that prevents these third parties from dealing directly with the customer, especially where those customers are tradespeople or smaller enterprises, is tricky. You must use your brand to scale large data sets and loyal customer groups to avoid being disintermediated.

To illustrate this, BCo is a fictitious significant supplier of building materials and some services to DIY consumers and the building trade. Its ambition is to reposition itself as a platform business in this highly fragmented, commoditized sector. 

BCo helps its more advanced customers plan their building projects by delivering project planning

support through SaaS. This service generates a bill of materials which would, at this stage, be ordered from BCo. This is a digital extension of the current proposition to offer and supply building materials. Launching this service allows BCo to start building one side of a marketplace and collect customer data that will be useful to the marketplace as it develops. 

Once the core interactions in this marketplace are identified, tuned and sustained, some scaling can be done, but still within the target DIY and trade segments. As the proposition evolves, more customers from other segments are encouraged to use the service. Eventually, the platform can be spun off under its platform brand and trading identity -- and thus, BCo becomes a supplier to this entity.

Path 3: Utilize spare asset capacity, activating dormant assets

This is the most well-understood form of platform business, popularized by Uber and Airbnb, and often grouped into a societal movement referred to as the sharing economy. As the name suggests, this model identifies underutilized assets and exposes them to a market. Success is built on the liquidity of the network. For example, at Uber, a market equilibrium forms when driver supply pushes down customer wait times so that more customers use the service, which subsequently attracts more drivers, creating a self-reinforcing cycle.

Any industry or market that has a set of underutilized assets might be suitable for this type of platform strategy.

Path 4: Centralize, forming a marketplace for the design, build, management and operation of complex industrial assets

Let's look at the design and build of large, complex, mission-critical industrial assets like ships, aircraft, power plants and oil rigs. It's very complicated -- many businesses of different sizes are involved, and the tendering process can be long and challenging. 

Typically, one business takes the systems integrator -- or prime contractor -- role and responds to requests for proposals by assembling tiers of OEMs that provide parts of the asset. By doing so, they are changing the dynamic by orchestrating a prototype information marketplace. Here, they facilitate many-to-many relationships, removing the forced intermediation that normally slows request and response cycles.

So how can you help your company become a platform business? By following one of these paths, digital-second organizations can grow and orchestrate more sophisticated ecosystems using network effects, inverting the firm and shifting production from inside to outside.

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