Understanding the platform business

How the platform and the ecosystem are shaping adaptive organisations

Business platforms are a productive way to organise the modern enterprise. They drive new ways to work. They create much prized agility across a range of related businesses. However, we do not know enough about them to harness their power. Worse than that, I am about to argue, we misunderstand them fundamentally, making big mistakes when we talk about platforms and ecosystems.

These misunderstandings create the impression of leader-takes-all finality that seem to stack the odds against successful enterprise transformation. Only once we understand that platforms are nothing more than a utility for the more important ecosystem management can we start to see new ways to become competitive.

Until our thinking gets some course correction, companies will remain stuck in muddle-mode. Executives will look at their digital transformations and complain that they have not been touched by the same magic that touched Google or Apple. They will not recognise or act on the facts in front of them. We need an agenda for that all important course correction:

  • Why do we confuse platforms with marketplaces?
  • What impact does this have?
  • How can we understand ecosystems?
  • How do we understand the new nature of work, the process of transformation and the new nature of leadership?

Before looking at these issues, consider this. Apple, the powerhouse behind generation one of the modern platform and ecosystem movement, is effectively ceding victory to Spotify in music streaming. Apple’s iTunes is the cradle of everything that Apple got right with its App Store and hence the adoption of the iPhone. Yet it has been disrupted by a startup.

Spotify itself could have been disrupted by music aggregator Soundwave but it bought the Irish startup in time to save embarrassment. Similarly, Facebook would be clinging to its legacy right now had it not bought Instagram and WhatsApp. Uber didn’t become the dominant ride-hailing force we thought it would be, with executives acknowledging that in one version of its future, it may never make a profit. It is currently making huge losses.

The argument that platforms create unassailable monopolies is just not true – even a latecomer can engineer a competitive advantage. But first you need to get platforms in perspective. Secondly, you need to change mindset and embrace the ecosystem.

Platforms as marketplaces

A lot of the discussion about business platforms focuses on marketplaces. These are the two-sided transactions fostered by companies like Uber and Airbnb and epitomised by the Apple developer ecosystem. Herein lie a number of errors that are confusing business leaders.

At one stage in the development of Uber and Airbnb, they looked as though they would become modern monopolies. They had followed quickly on the heels of Apple and Google, two pioneers of the modern platform and ecosystem. They also rose to prominence in the 2011-2014 period, when many other companies were making a stab at becoming platforms (without understanding the nature of ecosystems). So why should we have been persuaded that the marketplace is synonymous with the platform? And why does this error create further problems?

In the 1990s and early 2000s, economists wanted to define policy actions to compensate for what they saw as poor market mechanisms in the new computing era. They were particularly concerned that platforms such as Microsoft’s operating system and Intel’s computer chips were completely dominating global computing.

Operating systems (OS) are a kind of marketplace, with developers of programs on one side and software buyers on the other. It is generally assumed that this condition of having two sides is a special market structure, typical of networks. But it seems to hand market control to the owner of the OS.

In this case, the ability of Intel to continuously improve processing power meant that computer programs could be written with ever-increasing sophistication. This led to the OS and programs being upgraded every 18 months, along with better replacement computers coming on the market. Not only was this platform (the two-sided market) creating unusual market power, this ongoing refresh rate was also enriching Microsoft and Intel.

Lots of dubious ideas about new monopolies grew up on the back of these events, with unique historical conditions (the birth of a computer powerhouse) used to define new ‘laws’ of economics. Analysts tried to find more examples of two-sided markets such as Google but as academic and objective as this analysis seemed, it was in a sense ideological. Its purpose was to find ways to control these new giants.

Network effects

One part of the intellectual armoury came in the form of a relatively new concept: network effects. These are assumed to accelerate the route to a monopoly and can happen when something you buy requires you to advocate a similar purchase by your circle. For example – a telephone is useless unless friends and colleagues also have one.

A weaker version says the value of a marketplace grows as more members join on both sides of the market. In this theory, platforms act as matchmakers, so if it gets its pricing right, it can draw in more users to both sides of a deal. As it does so, each actor in the marketplace gets the benefit of having access to more partners to do deals with.

Think of a dating site, where matchmaking becomes more successful only when more men and women join. The theory goes that if the platform technology is good at matchmaking, each individual has more chance of success. But there are problems with this theory. It assumes app platforms are driven by the power of well-structured pricing, good matchmaking and network effects, yet some of the best known platforms exhibit none of these.

Most charge a standard 30 per cent commission to the content or app owner and then leave pricing to them. Amazon’s book store is driven by low price rather than sophisticated pricing, while most platforms have atrocious ‘matchmaking’ or discoverability. Although there is always an effect of being on a network, there is no real network effect since it rarely becomes the viral rush of people to a new platform that the theory assumes.

Instead, there is advocacy, passion, search engine manipulation, heavy discounting, price shifting (using delivery charges to mask the cost of a product) and branding. These are all powerful market builders but they are not platform magic.

All of these take place at low cost on networks – that after all is the effect of being on a relatively free internet. Actual marketplace platforms can show an abysmal return on investment, as Uber demonstrates, regardless of the sophistication of its pricing engine, its pervasive community of drivers or its ability to match supply and demand.

Even dating sites themselves don’t fit the bill. While they tend to have millions of members and their owners talk up their successes, simple barriers like members having too much choice mean they often disappoint.

The two-sided argument is a neat economic fiction that actually limits our ability to understand the impact of ecosystems. We create these fictions because economics is generally the study of stability, yet what we now need is an economics of disruption.

The rise of the ecosystem

The focus on platforms detracts business leaders from steps they can take to become more competitive. Platforms are now ubiquitous, so there’s a good argument against anyone building a bespoke one for themselves. In ecommerce, use Salesforce; for gambling, use SGDigital. Even in dating, there are already plenty to choose from.

The real key to competitiveness lies in the concept of the business ecosystem, which dates back to the 1990s. James F. Moore’s foresight, in The Death of Competition was that companies were becoming more collaborative. Their behaviour had become less competitive and more ecosystem-like. This, of course, is another potential route into antitrust thinking and indeed, antitrust was one of Moore’s concerns. However his concept was initially used to describe the ways in which, say, Apple might lead innovation across industry boundaries, for example, by pioneering flat panel display construction by gaining third party skills in organic chemistry. In order to innovate, even the largest companies had to cooperate.

The character of ecosystems changed in the early 2000s, with the development of a search engine marketing community around the Google search engine. This ecosystem embraced customers in the form of any business – ones that wanted to target an audience online, search engine optimisation experts, the emerging bloggers, large publishing houses, newspapers, brands, book authors, conferences, companies that made search-related applications, social media sites, customers in the form of people seeking information and so on. Google did so by transforming how we thought about customer centricity.

In a 2011 study for the Harvard Business Review, I showed that the service issue had been a hot topic for business writers and CEOs for 20 years, yet there had been next to no progress. This inability to become more service orientated was a recurring failure point in the Western enterprise. An answer lay in the ecosystem thinking of one company.

The emphasis in a service platform like Google is on system designs that reduce business friction, like self service dashboards, especially in the cost of scale. Scale at low relative cost is the critical business breakthrough.

The ecosystem changed character again with the explosion of apps around the PalmPilot and later, the iPhone. Rather than simply being a lead company co-evolving innovation across industry boundaries, the apps ecosystem was instead marked by hundreds of thousands of companies attempting to reach a market via a platform.

More recently, however, it has changed again. We see in Chinese companies a willingness to collaborate with customers that is again new. Companies such as Haier in kitchen appliances are forging a new way to do ecosystems, focusing on the connectivity of devices and data on, say, the impact of washing and detergents on clothes. The goal is to bring manufacturers and designers into a new understanding of the wear and tear of clothing. Through that knowledge, it should be possible to make better detergents and better machines but also give customers a way to manage their personal assets better.

There is now a proliferation of ways in which companies are bringing customers into ecosystems of value rather than being the end point, or target, of a value chain. Effective ecosystems are difficult to generate, incubate and grow but they are powerful. Apple had a marketplace in iTunes but it had an ecosystem with apps. Google’s initial ecosystem was the community of SEO and SEM experts looking for ways to monetise search.

Google always had an ambivalent relationship with them, a great example of how ecosystems can flourish through conflict as well as cooperation, as long as there is mutual advantage. Airbnb flourishes through an extensive ecosystem of actors who, formally, have nothing to do with Airbnb itself: conference organisers, lettings software vendors, keyholders, access management services, cleaning services and so on.

The Amazon book ecosystem is another case in point. The relationship that many of its members have with Amazon is based on their spotting any weakness in the Amazon platform that they can exploit.

Stowe Boyd has written about Haier, detergent makers and clothing manufacturers coming together as an ecosystem designed to create data around clothes usage and cleaning. Alibaba owns enough companies to pass consumers on from one service to another, all within its own ecosystem of service providers.

New ways to work

Over the past twenty years, great companies have solved the problem of how to do or give great service. It began with customer self service on platforms like Google. It is now all about embracing the customer as part of an ecosystem.

These developments are part of a wider move towards a more social form of capitalism, one that is really about problem solving on behalf of the end user. But there is another ingredient. What Google also did was show businesses they could segment their customer base infinitely. In place of simple market segmentations like age or geography, we can now segment based on how people seek, what they look for and ask about. In other words, segmentation based on a deeper understanding of needs.

This goes hand in glove with the way ecosystem business has evolved. If you think about the App Store and the iPhone, what you were really witnessing was the development of infinite variety. Every Apple customer would quickly end up with a customised version of his or her own personal app collections.

The ability to provide people with infinite choice is one of the main reasons why we now have hyper innovation – the relentless search for new features or functions or services that bring success to people. This is necessary partly because bringing success is no longer an expensive undertaking. We can innovate quickly and cheaply without any investment other than time and creativity. But to do so means organising for the continuous deployment of novelty and when we talk about new ways of working, we are in danger of overlooking this important fact.

New or agile ways to work tend to be bound by new rules – backlog organising, retrospectives and sprints. But what we really need is something quite different. What Fin Goulding and I have argued in Flow is that the primary goal of transformation needs to be in organisational design towards the ecosystem. With that underway, we recommend a shift in emphasis away from traditional structures towards new flows of work. That means less reporting up and down the hierarchy and more nurturing of work items through the organisation, guided by a stronger sense of what has value to the ecosystem.

We therefore recommend more emphasis on value discovery. Based on our research that shows companies in transition can suffer a catastrophic fall in productivity, it is essential that companies do whatever they can to ensure that only work of value goes into the flow.

Then, of course, there is the need to make daily work practices more creative and better-directed at delivering value. In Flow we do this by visualising all aspects of work, so that it is up and on a board and subject to critique. In the modern world we can bury ourselves in screens, yet collective intelligence can only add value if the work is visible.

These are the four mantras for the ecosystem age: make the transition from structure to flow; focus on customer success; use value-based agility to deliver it; be visible. Four simple principles but what about the ecosystem itself? Yes, describe it, make it explicit and embrace every aspect of it, nurture and bring success to the third parties in your orbit so they can do the same for customers. And be ready to do it relentlessly over and over. Ecosystems demand a new approach. Go with the flow.