Pipeline to Platform Organisations

One of the most significant shifts in internet era business economics

Platform-Businesses

The word ‘platform’ is perhaps a little overused these days, but it speaks to perhaps one of the most significant transitions inherent to business economics in the digital age. The internet has always been great at facilitating relationships between nodes in a network, but the shift from traditional ‘pipeline’ businesses to so-called ‘platform’ organisations capitalises on this in a way that neatly characterises truly digital-native thinking and models.

My favourite exploration of this concept comes from Van Alstyne, Parker and Choudary in their piece that talks about the new rules for strategy. I like the way that they make the point that platforms are nothing new (like many things, the digital age simply serves to give certain concepts a heightened importance, a brand new context or application). Yet the internet era has changed some key dynamics: the need to own infrastructure and assets; scalability becoming faster and cheaper; interaction and participation more frictionless; the flow and exchange of data and value more fluid. These new dynamics have enabled a new type of business to take shape:

‘Platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.’

The classic value chain model (originated by Michael Porter of-course) fits the linear idea of ‘pipeline’ businesses, where inputs go in at one end, go through a series of processes and activities in the organisation to result in outputs, and the margin is the difference between the resultant value that is created and the cost of creating that value. In contrast, say the authors, platform businesses sit within an ecosystem that typically comprises four key components:

  • Owners of the platform (e.g. Google owns Android)
  • Providers who serve as the platforms interface (e.g. mobile device manufacturers)
  • Producers who create their offerings (e.g. the app creators making apps for Google Play)
  • Consumers who use those offerings

It’s perfectly possible for companies to be both a pipeline and a platform business (as Apple is, with it’s device manufacturing business, and app store marketplace and services business) but the difference between the two involves a few key strategic and mindset shifts, which Van Alstyne, Parker and Choudary capture as:

  1. From resource control to resource orchestration: instead of a model strongly focused on ownership and control of (perhaps scarce or unique) resources (which may be tangible or intangible, like IP), the main value asset (and what is difficult to copy) comes from the community, assets and contributions of the producers and consumers
  2. From internal optimisation to external interaction: rather than a (internal) primary focus on efficiency in value chain activities, the value in platform businesses comes from facilitating the (external) interaction between producers and consumers. As the authors note, this means a focus on ecosystem governance rather than costs of production.
  3. From a focus on customer value to a focus on ecosystem value: the difference here is that between optimising lifetime customer value and the value that come from optimising an expanding ecosystem powered by iterative, fast-feedback loops (the example they give is perhaps subsidising one type of consumer in order to attract another type)

Key to platform business thinking then, are concepts like network effects — the principle that the more participants there are in the system the better and more attractive the system becomes (better supply-demand matching, more data to apply), driving scalability, demand-side economies-of-scale, and advantages in average value per transaction. Network effects creates the kind of virtuous feedback loop that has enabled companies like Alibaba to scale in the way that they have.

This is very different from linear ‘pipeline’ businesses who are focused on avoiding traditional threats (like those from the five forces), on ‘building a moat’ to counteract competition, and on controlling as much of the process as possible in order to gain from efficiencies. Traditional ‘pipeline’ thinking, say the authors, generally regards external forces as ‘depletive’ (i.e. extracting value from the company), yet in demand-side economies they can actually be ‘accretive’ (i.e. adding value). Powerful suppliers and customers can be beneficial rather than threatening, but the trick is in understanding that dynamic in order to shape an ecosystem.

This kind of platform thinking is a critical element in empowering organisational agility. If we understand how ecosystems work, how we can capitalise on network effects, and how we might facilitate relationships to create value, we can not only survive but thrive in the digital age.

And it’s worth noting that that is as true of public sector organisations as it is of businesses. When Mike Bracken talked about ‘government as platform’ (a phrase originated by Tim O’Reilly some time before) back in 2015, he talked about how siloed approaches to digital transformation create duplication and waste. Instead, the vision he was setting out was about establishing:

‘…a common core infrastructure of shared digital systems, technology and processes on which it’s easy to build brilliant, user-centric government services’

The principles that underpin this way of thinking are about frictionless access, efficiency in matching supply with demand, understanding how value flows through a system, and reinforcing feedback loops that enable continuous improvement. And surely they are all things that every organisation wants to understand.

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Originally published at Building The Agile Business.