Building platforms? Here are the opportunities for entrepreneurs

Building a platform? Here are the opportunities for entrepreneurs

Nearly every company wants to build an online platform, courtesy of the success stories of some major technology companies. What is the potential and what should entrepreneurs do with it? 'A platform removes a lot of friction and makes an ecosystem work better.'

Airbnb built a powerful position in the tourism market without owning a single hotel room or apartment. Uber is unmissable in the cab market, but doesn't own cabs itself. And social media companies? They don't create content themselves, but they earn billions.

Such successes show how platform companies have emerged as the poster boys of business in recent years. This also put the topic on the table in the boardrooms of Dutch companies. This is leading to action in many places.

Beer brewer Heineken sees platforms as an opportunity for direct contact with thirsty customers. Web store Bol.com has become a platform for sellers with numerous services for which it engages other parties, from logistics to inventory financing.

this article previously appeared on www.mtsprout.nl. Image: www.mtsprout.nl.

Code is cracked

What exactly is going on? Is the rise of platforms just another hype or is there something more fundamental at play? In essence, platforms all do the same thing: they link supply and demand for products and services. That in itself is far from new; markets and auctions have been doing this for hundreds of years.

KPMG consultant Jochem Pasman points to the innovation in the past decade. He specializes in platforms and ecosystems. These are partnerships between various parties.

'Digitization, with data and algorithms, makes it possible to link supply and demand many times more efficiently than before. A platform therefore removes a lot of friction and allows an ecosystem, such as the cab industry or healthcare, to function better.' By friction, Pasman means all the hassle it used to take to arrange a cab, for example.

Network effect of platforms

Digitization often has another function as well: it makes it possible to create the necessary trust between parties who do not know each other. The easiest example is renting your house to a complete stranger. Twenty years ago, you wouldn't have thought it possible. But Airbnb, among others, has cracked that code by organizing trust with ratings, among other things.

Also typical is the "network effect" of platforms. Broadly speaking, this means that the more users there are, the more the value of use increases. Simply put: the first telephone connection was useless, with two users it became useful, but only when large parts of the country got a connection did it become truly useful.

This old law holds true for platforms as well. The engine of their growth is the self-reinforcing cycle from more users, greater attractiveness to new users, to more new users and even greater attractiveness. This is precisely why in successful ecosystems we often see one dominant - and therefore powerful - platform.

Totally different value creation

What does the rise of platforms mean for the strategy of existing, "conventional" companies? It varies by sector and individual case, but there is a common denominator: with a platform, value creation is fundamentally different.

It no longer takes place within the boundaries of an organization, but outside them. Platforms are thus, according to KPMG consultant Pasman, actually an "inside-out" version of traditional organizations.

The cab industry makes this clear. A cab company used to buy the best - or most cost-efficient - cabs and set up the processes around rides as smartly and customer-friendly as possible. Whoever did that best was the winner.

A platform company in this industry creates value in a different way. The winner is no longer whoever has the best cabs, but the party that seamlessly matches supply and demand.

Growing the pie

The user is at the center of this new model. The value creation henceforth lies in connecting supply and demand, whereas in the old model this was seen as overhead. In this way, the platforms effectively create a market for themselves without competition. "Competition is for losers," venture capitalist and technology guru Peter Thiel (of PayPal, among others) said about platforms years ago, during a guest lecture at Stanford University

Sangeet Paul Choudary, one of the most prominent authorities on the subject and co-author of the bestselling Platform Revolution, described it a bit more fundamentally than Thiel several years ago. From a blog post: 'The business model of a platform is not built around a user, but around an interaction between users.'

Essentially, the concept of competition is changing and the pie is getting bigger, Choudary writes. 'While traditional models played zero-sum games, platforms instead focus on building a larger market in partnership with other parties.' Growing the pie with others, he calls it.

Choudary also outlines that in such a world there is only one essential question for businesses: how do I contribute to enabling others to create value? That line of thinking really takes some getting used to for many executives and entrepreneurs.

The Next Revolution

The next question is: do "conventional" companies really have a role to play in the world of platforms, now that the poster boys have already shuffled the cards? Certainly they do, Choudary argued in an interview on the occasion of the 2018 Dutch Transformation Forum. There, the top of the Dutch business community addressed the issue.

Every sector in which information plays a major role - and what sector doesn't in today's information society - will have to deal with the platform theme sooner or later, according to Choudary. 'I expect the battle will center around organizing ecosystems that will offer services around certain themes.'

As examples, he cites parts of healthcare, mobility, logistics services and finance. This approach, according to the author, is more complex than platforms shaping marketplaces.

The need for open standards

To get that right, open standards are essential. How far along sectors are varies quite a bit, according to Choudary. In healthcare, for example, it is still difficult to build well-functioning ecosystems because those standards are not actually there yet.

But in the financial sector, he says, things can move fast, partly as a result of Open Banking legislation. The so-called PSD2 directive allows a party to bundle the offerings of multiple financial parties. 'The platforms that are so successful now were created mainly because large amounts of data became available to enrich their offerings. That is exactly what can happen in finance now.'

The coming of age of the Internet of Things, with every conceivable device connected to the Internet, may well spark the next platform revolution, according to Choudary. Just as the cell phone proved to be the breakthrough for consumer platforms - because suddenly all data was seamlessly accessible 24/7 - the Internet of Things will be the accelerator for industry platforms. 'Consider that Facebook was able to become a platform because there was an infrastructure: the Internet. For other industries, such as logistics, that infrastructure is not yet ready.'

Every company's platform?

Building a platform is not rocket science in itself. But, according to consultant Pasman of KPMG, that certainly doesn't mean that every executive should just start setting one up now. Building one can be done, but scaling it up to a large and successful platform is a lot more complicated. That requires a lot of capital for information technology and marketing, among other things.

It is also not so easy to make a good return with a platform. Revenues are low, so you can only make a healthy living with scale.

It can sometimes work just as well to join another platform as a business. In doing so, you have to reason from value for the user, says Martijn Arets. He is an independent researcher and author of the book Platform Revolution. His advice: look at your own legacy, that is, simply your added value.

'That often sounds like a dirty word, used for unwieldy computer systems. But legacy is also a great thing. What are you really good at, what is your core competency? What can you do better than a party starting something from scratch? And how can you leverage that in an ecosystem to serve the user?"

New obstacles for platform companies

Using an existing platform is not so crazy. Especially since platforms don't have it easy at all right now. They are now in what Pasman calls "the perfect storm."

'First, they now have to move from focus on growth to focus on profit. The unbridled expansionism is tempered somewhat. Secondly, they're going to have a tough job with new European legislation that will have a big impact on their internal processes. That maturing requires a lot of attention and also costs money.'

A third concern is that capital is no longer available (almost) for free. Market interest rates have risen sharply and investors are keeping their powder dry. 'The time of blindly throwing money against the wall is well behind us,' says Arets. 'The hype around flash delivery companies and their aggressive growth plans was probably a last convulsion. There is nothing wrong with such a turnaround, because it forces us to think more carefully about exactly what value a platform adds. Both financially and for society.'

Old and new players need each other

This perfect storm may be good news for conventional companies and their place in emerging ecosystems. The balance of power may shift in their favor when negotiating with the platform companies now facing these challenges.

Existing service providers sometimes offer more than just their products. Thanks to their well-known name, their added value can also lie in the trust they inspire in consumers.