Four Paths to Platform Business Models
Ecosystems are replacing industries – what will you do?
It’s increasingly difficult for traditional businesses with pipeline business models to compete against modern, digital-first, platform businesses. They connect and orchestrate huge ecosystems of different organizations to fulfil the whole spectrum of customer needs. We’ve always had business ecosystems, but now they’re changing their nature and starting to replace existing industries. Almost every market shows signs of these new, more complex ecosystems that are centred not on a product or organization, but on the customer journey. LEF believes traditional businesses have no choice. They must, at the very least, extend their pipeline business model to participate in new platform ecosystems. Most are already doing this, creating their own ecosystems through venturing, partnership or acquisition, or joining ecosystems created by others. But that is not enough.
Traditional businesses have no choice. They must, at the very least, extend their pipeline business model to participate in new platform ecosystems.
Modern ecosystems orchestrated by platform businesses are so powerful because they can construct customer-centric combinations that traditional firms cannot.
They involve networks of shifting, semi-permanent relationships, linked by flows of data, services and money. These relationships combine aspects of both competition and collaboration and often involve complementary products and capabilities. In modern ecosystems, players coevolve as they redefine their capabilities and relations with others over time.
Only fully platform businesses can coordinate these modern ecosystems. Customers will increasingly do business with whoever helps them along each section of their journey, rather than with a single product or service producer. Traditional pipeline businesses can digitally extend to serve larger sections of the customer journey, but their business model cannot stretch to orchestrating a complex ecosystem. Platform business models, however, are capable of serving the customer journey wider, deeper and with better customer experience.
Customers will increasingly do business with whoever helps them along each section of their journey, rather than with a single product or service producer.
Let’s dispel some myths about ecosystems.
- First, not everyone can be a platform – platform organizations need a brand, ability to scale, large data sets, loyal customer groups, cash reserves and huge patience. It’s rare that an organization (or its investors) has all or even most of these.
- Next, you cannot control the design and build of an ecosystem – too much collaboration is required for a single participant to plan and control the interactions. You and others co-evolve a ’shaping strategy’.
- Last, you do not have to tightly manage a modern ecosystem – if you are the platform or a producer, you influence and orchestrate, not manage.
The stages of platform and ecosystem development
LEF has found there are four stages in liberating a platform business from a traditional business. They start as a pipeline business in Stage 1 and digitally extend by digitally augmenting a product or service during Stage 2. As the new ecosystem grows around the segmented product or service, there comes a point where only a platform business can orchestrate the growing variety of participants. The organization must swap to a platform business model while still running the old pipeline business model. At that point, it hits a wall of financial, operational and commercial challenges. Currently, there are four proven paths through that wall to move from a pipeline to the platform business model of Stage 3. These paths grow and orchestrate more sophisticated ecosystems, inverting the firm by shifting production from inside to outside. Stage 4 is reached when the platform business develops more sides – distinct sets of producers and consumers – in its existing ecosystem and/or seeks nearby ecosystems that enhance its markets.
There are four proven paths to move from a pipeline to the platform business model.
The four paths to platforms
The Platform Explorer’s Guide explains the four paths that traditional firms are pursuing to evolve their business model and shape a modern ecosystem.
Path 1: Build out for a manufacturer, creating a platform ecosystem around a core product offering. We are seeing this in industrial manufacturing firms such as John Deere and Philips Healthcare. Even B2B organizations that have little direct insight into the usage of their products or services are taking this approach (and variations of it). Most start just trying to get closer to the customer by either purchasing a stake in something customer-facing or building a digital product to bolt on to a physical one.
Path 2: Build out for a retailer, creating a platform ecosystem where there are already third parties. The difference here is the presence of third-party suppliers from the start. The new platform must use it's brand, scale, large data sets and loyal customer groups cleverly to avoid being disintermediated by its original supplier base as well as new entrants.
Path 3: Utilize spare asset capacity, activating dormant assets. This is the best-understood form of platform business, popularized by Uber and Airbnb, and often seen as part of the societal movement known as the sharing economy. This model identifies underutilized assets and exposes them to a market. For example, new consumption models in the privately-owned jet market make unused flight time available, creating a new semi-private market; they are productizing custom, private travel and challenging commercial first- and business-class services.
Path 4: Centralize, forming a marketplace for the design, build, management and operation of complex industrial assets. The design and build of large, complex, mission-critical industrial assets such as ships, aircraft, power plants and oil rigs are very complicated. Many firms of different sizes are involved, and the tendering process tends to be long and challenging for all concerned. While this type of B2B marketplace is in its infancy, progress so far is encouraging. The challenge for traditional system integrators is to adapt their existing culture and processes, built around levels of control.
Higher orders of value – Spotting paths with maps
The choice of path depends on the type of business and the opportunities that are available. The wider customer journey takes in a bundle of products and services from many producers. For example, the transportation market is already aggregating different forms of transport at either end of an airline flight, such as the helicopter services BLADE and Uber Elevate. A technique that can help identify paths or a combination of paths that serve the whole customer journey is Wardley Mapping. Mapping also creates space to discuss how components of the journey change their characteristics or evolve over time. This is important to a platform discussion because components that have reached the commodity stage lend themselves to alternative consumption models (such as on-demand) and aggregation by a platform. In the full report, we use this technique to explore how entire sectors are evolving and where a platform business model may appear.
The challenge for traditional system integrators is to adapt their existing culture and processes.
Traditional businesses have advantages as well as challenges
Traditional businesses face significant challenges on their evolution towards a platform model, including the difficulty of changing capital allocation, the cannibalization of revenue and investor inertia. But they can work with digital-first start-ups – including their own internal ventures – on the journey towards a platform model. Start-ups need some of the benefits of the scale of digital-second companies, so why not offer it to them in exchange for equity? Rent out your scale, use your large and possibly unique datasets and recruit your loyal customers.
The full Platform Explorer’s Guide sets out how ecosystems relate to customer journeys, the important detail of each path, and how ecosystems evolve across the stages. Traditional, pipeline organizations are explorers in the world of modern platforms; this LEF guide will help them find their way.
If you would like to know more about how to contextualize the findings from this summary in your organization or for more information about the full report please contact us.