A recently as a decade ago, the world was largely dominated by “pipeline” businesses with linear value chains. We would buy products at retail outlets, or possibly their online versions, stay in hotel chains when traveling and hail taxis one the street and nobody thought much about it.
Clearly, a lot has changed. Today, platforms like Amazon, Airbnb and Uber are dominating those earlier, linear business models. Two new books by prominent economists, Matchmakers and The Platform Revolution, ably explain the dynamics of how platforms like these function as multi-sided markets.
Yet while understanding how platforms work as economic entities is both interesting and important, unless we’re planning on designing a platform ourselves — and very few of us are — it isn’t very helpful. The real value of platforms for most businesses today is that they allow us to access ecosystems of talent, technology and information.
Ecosystems of Talent
In 2001, when Fabio Rosati left his job as Global Chair of Strategic Consulting for Capgemini to lead Elance, the company was a startup in transition. Originally conceived as a platform to match companies with freelance contractors, it was now entering the nascent market for vendor management software.
Under Rosati, the business grew and began making money, yet he saw darker days ahead as competition stiffened. So he agreed with the investors to sell the software business in 2006, although the company would retain its name, a small staff, and some intellectual property to pursue an even bigger opportunity by returning to the platform model.
However, its experience in vendor management software showed that it could do vastly more than make matches between firms and contractors, it could widen and deepen the connections between them by monitoring work, offering training and certification in crucial skill areas and developing algorithms that would lead to more successful engagements.
Today, after having merged with its chief rival oDesk, Elance has been rebranded as Upwork. With over 3 million jobs are posted annually, worth a total of $1 billion USD, it is by far the world’s largest freelancer marketplace. 90% of its corporate customers who use the service rehire there.
Ecosystems of Technology
In truth, platforms are nothing new. In medieval times, village markets and fairs served as platforms to facilitate connections between ecosystems of merchants and ecosystems of customers. More recently, enterprise software companies like SAP and Oracle used the database as a platform to control software ecosystems, much like Microsoft used the operating system to dominate PC’s.
Yet, Christian Gheorghe, CEO of Tidemark, sees two problems with that model. First, it inhibits innovation. Outside developers can only do what their proprietary partner allows them to. Second, with more powerful open technology like Linux, Hadoop and Spark, proprietary solutions are often at a disadvantage.
“We built Tidemark on top of open technologies from the start,” he told me, “because we believed that it offered much greater functionality and flexibility.” Not only can the firm build solutions on top of those systems, it can also offer other developers API’s so that they can build more applications on top of Tidemark’s, just as Tidemark can do with theirs.
So today’s open technology platforms allow us to access vastly more technological capability than any one organization could provide by itself and do so at far lower cost. Any firm that would try to go it alone simply wouldn’t be able to compete. That’s why today, even Microsoft loves open software.
Ecosystems Of Information
Clearly, Amazon is the 800-pound gorilla of e-commerce. In 2015, it accounted for a full 60% of US online sales growth. That gives it a leg up on traditional retailers because it can leverage its unique access to data about consumer behavior to outperform any other online retailer.
However, BloomReach offers traditional retailers a platform that allows them to compete on a much more even playing field. Because its technology powers a full 20% of web commerce in the US, it can offer its clients insights on far more than their own sales. Although the data is non-personally identifiable, it allows retailers to benefit from insights that boost sales.
Credit bureaus work in a similar fashion. By offering their data on customer transactions to credit bureaus, companies can benefit from the creditworthiness of potential customers that they have never dealt with before. Consumers, for their part, benefit from much broader access to credit than they would have had otherwise.
We all contribute to data ecosystems everyday, such as when we enter a query into a search box. We then use those platforms to gain access to those ecosystems, which makes us vastly more productive.
A Change In The Basis Of Competition
Business theorists have long thought of strategy as a game of chess. By making the right moves, managers could diminish the threat of new market entrants and substitutes and improve bargaining power with buyers and suppliers. That, it has long been thought, was what led to sustainable competitive advantage.
Yet strategy in a networked world is different. Competitive advantage is no longer the sum of all efficiencies, but the sum of all connections. Strategy, therefore, must be focused on deepening and widening networks of talent, technology and information and we do that by accessing ecosystems through platforms.
So rather than making strategic moves to undercut new market entrants, many firms are establishing internal venture capital operations and incubators to get in on the action. And instead of mere trying to improve bargaining power with buyers and suppliers, they are partnering with them to co-develop new products and services.
Today, power is shifting from corporations to platforms and the best way to become a dominant player is to become an indispensable partner. Smart strategic moves today are not necessarily the ones that allow us to control value chains, but those that will move us closer to the center of networks.
This article has been adapted from my upcoming book, Mapping Innovation.