Platform companies have transformed multiple industries already: commerce (e.g., Amazon), media (e.g., Facebook), travel (e.g., Uber, AirBnB), innovation (e.g., NASA), and many others. Platforms are also taking an increasingly important role in the B2B segment, as many incumbents and new actors are seeking to create their own platforms or looking for their place in the platform economy.
Platforms Excel in Value Creation
Platform business models are effective because they synergistically combine various actors’ activities. Value creation no longer happens only inside the hierarchically controlled boundaries of the firm but also outside firm boundaries. In this way, platforms can quickly assemble a large number of complementary actors to generate value.
In successful platforms, the efforts of the external actors generate network effects: the value of the platform for each participating entity is increased as new entities join the platform. For instance, every time a new restaurant joins Wolt or Uber eats, the customers of the company benefit; and every time a new customer joins the platform, the restaurants benefit. Hence, the value of the platform grows in a self-reinforcing way.
Value creation no longer happens only inside the hierarchically controlled boundaries of the firm but also outside firm boundaries."
Similar self-reinforcing dynamics may also occur in non-consumer-facing activities. For instance, some manufacturing organizations are currently exploring the potential of distributed manufacturing that combines both own and external assets. In such a platform, the platform combines various manufacturing sites and optimizes the production of multiple products. In this way, the platform is constantly optimally using its assets, enhancing both the quality and efficiency of the production system.
Productivity is increased as the platform can use external assets where they work best. For example, an independent factory with over-capacity might join the platform and get additional volume via the platform. At the same time, the owner of the platform gets additional capacity and can use this capacity for select processes to enhance the overall productivity of the platform.
Taking a step further, the platform owner can open up the platform for other manufacturing companies as well. With such a move, the platform would move from being a one-sided platform (independent factories as the only side) to a two-sided platform. In that case, any company wanting to have something manufactured could buy capacity from the platform, and the platform would allocate the work optimally.
In this case, cross-side network effects would occur: the more manufacturing assets the platform had, the better it would be for companies wanting to buy manufacturing services; and vice-versa, the more paying customers the platform had, the better for the manufacturing assets. This would activate a positive self-reinforcing cycle that would continuously make the platform more value-adding for both sides.
Incumbents Need to Adapt
If you are a top leader of an incumbent firm, you have likely recognized the potential threat of platforms. You might be thinking they are still not coming to your industry, but you know that many industries have already been transformed. You might rationalize, however, that you are safe.
Unfortunately, denial never helped anybody. Polaroid’s leaders rationalized that digital cameras won’t challenge their business. Various newspapers rationalized that online media won’t undermine their business. The list is endless. You need to get started.
The challenge, however, is that it is very difficult to know where to start. Fortunately, we have developed a seven-step program that can get you moving. Here are some of the key elements.
1. Turn fear into energy. Denial can stem from ignorance or fear. Most of the senior leaders we know are not ignorant. Rather, they are well versed in the business literature and have skilled staff for market intelligence and following broader societal and technological trends. Hence, the lack of information about what’s happening externally is rarely the problem.
Instead, the problem is fear, whether conscious or subconscious. Senior leaders often fear that they won’t succeed in the new competition or lose control over their firm if they move from hierarchy to platforms. They might also fear that the initial revenue generated by platforms is too small. This fear reduces their desire to explore and experiment with platform business models. Hence, despite having access to information, they fail to truly integrate the information into their thinking and actions.
You need to turn this fear into energy. You can do that by validating the leaders’ identities, increasing psychological safety, and generating multiple strategic options. Validation of identities and psychological safety enable discussing matters that feel threatening and hence open up thinking and action plans. Creating various options further increases the perception that the company will survive and succeed, making the situation exciting rather than scary.
2. Remove friction. The best way to make concrete progress is to identify areas in the current business or among current customers that can be made easier and smoother with platform-like activities. First, fix those and then build on the momentum.
3. Start with focus to create fans. You should first identify a very narrow area where you can be the best in the world. This ensures that you have the critical mass of stakeholders for strong network effects.
4. Create a learning loop. It’s not enough that you have a brilliant idea and then implement it. To succeed, you also need to improve your offering continuously. To do this, you need data on your actions and their consequences. AI and other analytical tools can help you infer from the data what works and what does not – and get better, every day.
5. Open up with an algorithmic handshake. To enable more firms to join your platform, create APIs. You can do this even as a traditional incumbent, as, for instance, KONE has done.
6. Create the unexpected. Once you dominate one domain, you can leverage your assets and capabilities to transcend your industry. Once you are the best, you can diversify your business and grow extremely fast.
7. Organize around AI. Once you have created a successful platform, you can use the intelligence of your platform for your own operations as well. You can manage many activities more effectively via a platform than through a traditional hierarchy. Once you reach this level, nothing can stop you!
Dr. Tero Ojanperä is a Board Professional and Chairman & Co-founder at Silo.AI, the largest AI solution and service provider in the Nordics. He is also a Professor of Practice at Aalto University School of Science, at the departments of Industrial Engineering and Management and Computer Science. Timo Vuori is an Associate Professor of Strategic Management at the Aalto University School of Science, Department of Industrial Engineering and Management. Together, they have published a new book ‘Platform Strategy’, which addresses the key elements described above.
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