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Platform innovation

Watch any group of kids playing with Lego and you’ll quickly get the idea behind platform thinking.  A small number of standard modular components linked to a basic architecture – and you can build almost anything!  And whilst you may have bought a particular model most of the pleasure comes from reassembly into new and unplanned designs.  Millions of homes have the Lego box into which children (and not a few adults as well!) dive to let their imaginations run riot. 

Although there’s a buzz about the word now platforms have actually been around a long time. Back in the 1920s Harry Ferguson developed a device to put on the back of tractors which enabled farmers to hook up all sorts of tools and equipment.  The business model was simple – buy the basic tractor and add on the tools you want.  Ken Wood’s idea for domestic kitchen equipment followed the same pattern and it was one which Black and Decker and other power tool makers took to the do-it-yourself (DIY) market.  And IBM opened up the personal computer business by coming up with a platform architecture around which thousands of hardware and software developers could work.

The model goes deep inside the workings of product architecture.  Intel’s breakthrough into becoming ‘Intel inside’ at the heart of so many devices came from switching from discrete products to platform architectures and consciously working to develop that mode of thinking across all of its design. 

But with the rise of digital tools has come an explosion in the idea of platform business models.  Digital technologies enable networking and connectivity on a massively enhanced scale, virtual partnering, online communities, consortia, etc.  And successful organizations are able to capitalise on this by creating new networked architectures to create and deliver their innovative solutions – they have deployed ‘innovation model innovation’.  Players like Amazon, Yandex and Alibaba have created completely new models building on the emerging IT infrastructure. 

The challenge these organizations face at a strategic level is not simply the deployment of new tools, nor in substitution of better products or processes enabled by digital technology.  Instead it requires taking a broad view of the whole system of value creation and its emergent properties – the whole becoming greater than the sum of its parts.  As the authors of an excellent new book on the subject put it, ‘they bring together individuals and organizations so they can innovate or interact in ways not otherwise possible, with the potential for non-linear increases in utility and value’.

This involves moving the  innovation management focus from the level of the enterprise or the immediate network with key customers and suppliers.  Pitched at a system level it raises questions about governance and control and introduces some fascinating paradoxes.  Apple, for example, is in head-to-head competition with Samsung for a share of the global smart phone market – yet some of the key components in its phones are made by Samsung.  Netflix depends on Amazon’s servers to keep its streaming services running, yet Amazon Prime is one of its big competitors.  So the idea of system level collaboration and interaction is more than simply focusing all players on a common goal; it is about finding models which allow for both individual and collective action in an evolving ecosystem.

Whilst we hear much of the success stories around platform/ecosystem businesses we should recognise that building such operations is risky and complex and many fail.  For example MySpace was a powerful early entrant in the social media space but lost out to Facebook.  Sidecar was the start-up which pioneered ride sharing but was eclipsed by Uber.  And Airbnb was not the first rental platform for accommodation, being preceded by players like VRBO.  The costs of building an ecosystem are significant and there is a high risk of not achieving the scale or the co-ordination necessary to make it work. 

It’s clear that some major players are successful less on the basis of the individual products or services which they offer than on their ability to act as system architects.  Apple’s rise, for example, owes a great deal to its ability to put together the ecosystem around iTunes, enabling legal file sharing and digital downloading of music by bringing together all the relevant stakeholders into its network.  Google owes a lot to the development of Android and the open system which it created to engage thousands of apps writers. And Yandex built out from a search engine (the name derives from ‘another index’ program) to offering an integrated suite of services targeted at the huge Russian-speaking market.

Of course there are multiple variants of the platform business concept – which makes it all the more important to have a clear strategy if you’re contemplating a move into this space. Annabelle Gawer and her colleagues draw on extensive research on platform thinking to offer some valuable guidance on how to develop viable platform business models, focussing on four key areas of strategic action:

  1. Choose the architecture – platforms can be multi-sided, bringing different players together. Managing a two-sided platform is difficult, managing a multi-sided one becomes increasingly so.  Uber’s problems (it has yet to become profitable)  may lie in part because of its attempts to build and manage so many different sides to its platform and associated ecosystem.  There’s also the issue of choosing the relevant platform type – they distinguish between innovation  platforms (like Windows, Amazon Web Services and Apple’s IoS) and transaction platforms (like Facebook, Alibaba’s Taobao, Airbnb and Uber).  Transaction platforms, as the name suggests, operate as market places, bringing buyers and sellers together efficiently and exploiting the richness and reach of the digital world.  Innovation platforms  involve the creation of products and services, usually involving building blocks and connectors which enable others to participate – for example the developer community working across the Android platform.

  1. The ‘chicken or egg’ problem at launch – for innovation platforms it is important that the provider begin with products/services which do not need a third party complementor. For example Microsoft’s dominance of the PC platform world owed much to having MS-DOS as a core product and making that available easily so as to build volume; Google adopted a similar strategy with Android, offering an operating system into which others could then connect. 

  1. Building an effective business model – whilst platforms offer significant network effects which can quickly multiply their reach and potential revenue it still requires careful attention to the underlying business model. Which parts are offered free or at low cost and which will provide revenue – and when?  Google’s strategy with Android was to give away the core operating system and then generate revenue from the developer and user side.  The essence of a platform business model is its scale; Microsoft spent $1bn developing Windows XP but recouped this across its market in three weeks after launch.  By contrast Symbian, Nokia’s micro-device operating system failed to build sufficient scale for it to become an effective platform.

  1. Establishing and enforcing ecosystem governance – platforms involve, by their nature, players with complementary assets and operate as an ecosystem. But there needs to be careful design of the governance and rules to manage issues like quality and conformance to standards.  The current concerns about misuse of platforms by apps providers has highlighted the responsibilities which platform owners have to ensure that their systems operate legally and in morally acceptable fashion.

Platforms aren’t a new idea but the enabling technologies in the digital space means that it is becoming easy to set them up.  The danger is that without a clear strategy many of these ventures will fail.

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