If we can develop a platform, instead of just an app, we can have a much greater upside. The authors of Platform Revolution explain managing a platform instead of a product pipeline.
Platforms have existed for years. Malls link consumers and merchants; newspapers connect subscribers and advertisers. What’s changed in this century is that information technology has profoundly reduced the need to own physical infrastructure and assets. IT makes building and scaling up platforms vastly simpler and cheaper, allows nearly frictionless participation that strengthens network effects, and enhances the ability to capture, analyze, and exchange huge amounts of data that increase the platform’s value to all. You don’t need to look far to see examples of platform businesses, from Uber to Alibaba to Airbnb, whose spectacular growth abruptly upended their industries.
Though they come in many varieties, platforms all have an ecosystem with the same basic structure, comprising four types of players. The owners of platforms control their intellectual property and governance. Providers serve as the platforms’ interface with users. Producers create their offerings, and consumers use those offerings....
The move from pipeline to platform involves three key shifts:
1. From resource control to resource orchestration.
The resource-based view of competition holds that firms gain advantage by controlling scarce and valuable—ideally, inimitable—assets. In a pipeline world, those include tangible assets such as mines and real estate and intangible assets like intellectual property. With platforms, the assets that are hard to copy are the community and the resources its members own and contribute, be they rooms or cars or ideas and information. In other words, the network of producers and consumers is the chief asset.
2. From internal optimization to external interaction.
Pipeline firms organize their internal labor and resources to create value by optimizing an entire chain of product activities, from materials sourcing to sales and service. Platforms create value by facilitating interactions between external producers and consumers. Because of this external orientation, they often shed even variable costs of production. The emphasis shifts from dictating processes to persuading participants, and ecosystem governance becomes an essential skill.
3. From a focus on customer value to a focus on ecosystem value.
Pipelines seek to maximize the lifetime value of individual customers of products and services, who, in effect, sit at the end of a linear process. By contrast, platforms seek to maximize the total value of an expanding ecosystem in a circular, iterative, feedback-driven process. Sometimes that requires subsidizing one type of consumer in order to attract another type.
These three shifts make clear that competition is more complicated and dynamic in a platform world....
Competitive threats tend to follow one of three patterns. First, they may come from an established platform with superior network effects that uses its relationships with customers to enter your industry. Products have features; platforms have communities, and those communities can be leveraged. Given Google’s relationship with consumers, the value its network provides them, and its interest in the internet of things, Siemens might have predicted the tech giant’s entry into the home-automation market (though not necessarily into thermostats). Second, a competitor may target an overlapping customer base with a distinctive new offering that leverages network effects. Airbnb’s and Uber’s challenges to the hotel and taxi industries fall into this category. The final pattern, in which platforms that collect the same type of data that your firm does suddenly go after your market, is still emerging. When a data set is valuable, but different parties control different chunks of it, competition between unlikely camps may ensue. This is happening in health care...
With platforms, a critical strategic aim is strong up-front design that will attract the desired participants, enable the right interactions (so-called core interactions), and encourage ever-more-powerful network effects. In our experience, managers often fumble here by focusing too much on the wrong type of interaction. And the perhaps counter-intuitive bottom line, given how much we stress the importance of network effects, is that it’s usually wise to ensure the value of interactions for participants before focusing on volume.
Most successful platforms launch with a single type of interaction that generates high value even if, at first, low volume. They then move into adjacent markets or adjacent types of interactions, increasing both value and volume.