by Peter B. Nichol

Platform ecosystems: a new strategy for generating profit

Nov 11, 2016
IDG EventsInnovationInternet of Things

Platforms shift value from products and services to interactions. Ecosystems promote scale through interactions, not volume. Platform ecosystems build better businesses.

digital transformation
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Platforms shift value from products and services to interactions. Ecosystems promote scale through interactions, not volume. Historical growth drivers focused on consumer goods will transition to business models where platform-enabled connected interactions are at the center of the ecosystem. The orchestration of interactions enhances an ecosystem’s value as organizationally siloed processes transform into a shared ecosystem — a community of trust.

A new definition for scale

Emerging business models are moving from pipes to platforms: toward communities of value and away from the traditional pipeline value models originating from manufacturing supply chains. Shifts in markets, shifts in competitive advantage, and shifts in value creation have highlighted that value can no longer be created solely by company processes rearranging labor and resources. Value creation stems from scale grown out of interactions.

Platforms ecosystems and strategy

Platform-based companies employ 1.3 million people with a total market capitalization of $4.3 trillion, making platform ecosystems a critical component of corporate strategy. Today, success demands business leaders understand how platform-based ecosystems are reshaping traditional organization hierarchies and building new value.

A sure way for companies to become obsolete is to maintain a narrow focus on internal products and services. Managerial incentives and new organizational cultures are creating business curiosity about ecosystem profits and asset-light platforms. The question of profits raises questions about what competitors are working on next. Yesterday, a firm’s competitors were known. Today, competitor identification is not so simple. How are competitors defined? Should we focus on incumbents or emerging markets? Do we weight risk by market capitalization and value or agility? Nielsen, Forrester, Gartner, Millward Brown, Ipsos, and Capital IQ are all discovering the challenges of defining industry outlooks.

Profit considerations with multihoming

The speed and explosion of platforms have created platform competition for horizontally differentiated platforms that offer complementary interactions. When two-sided markets contain more than one competing platform, the condition of users affiliating with more than one platform is called multihoming. Carrying credit cards from more than one bank is an example of multihoming. This concept is not the same as switching costs, as these users do not terminate service switching to the second platform — they use both platforms.

Have you used LinkedIn and Twitter? You didn’t cancel your LinkedIn account when you joined Twitter, right? This is an example of multihoming. The “homing” costs are what’s important. These costs are comprised of all the expenses incurred by a user’s affiliation with different platforms. When multihoming costs are high, users are less willing to be affiliated with multiple platforms that provide similar services. As industry regulations mushroom, multihoming costs rise, increasing the likelihood of industry consolidation.

Platforms and the surge of value

Outside-in technology-driven business models define the platform economy. These models don’t create value from inside the organization; value is created by the community outside the organization. These technological changes disrupt business models and alter the global macroeconomic environment. The economy is undergoing a rebirth with platform ecosystems that bring the enterprise to scale in months not years. Every company across every industry has the potential to unlock the power of platform-based business models. Unparalleled growth has arrived: Accenture estimated the top 15 public platform companies represent $2.6 trillion in market capitalization worldwide. “Unicorns” (companies with valuations of $1 billion or more) and “decacorns” (companies valued at over $10 billion) are realizing profitability leveraging profitability with platform ecosystem strategies. Platform strategies have fueled the growth of over 168 “unicorns,” with private unicorn companies reaching a cumulative valuation of $500 billion. Platforms that utilize network effects place producers and consumers together to create new value — co-creation of value through communities.

Traditional brick-and-mortar companies are embracing platform ecosystems and developing new emergent strategies. In fact, Accenture identified even traditional companies that are embracing dynamic platform strategies including: Fiat (connected car), Kaiser Permanente (digital health), Disney (MagicBands), Caterpillar (connected machines), Schneider Electric (smart cities, buildings and homes), Walgreens (retail pharmacy), Goldman Sachs (customer analytics), Bank of New York Mellon (financial services), McCormick/Vivanda (FlavorPrint), Houghton Mifflin Harcourt (education) — and the list goes on.

The platform world has arrived. Business profitability depends on platform-based business models leveraging communities to build value.