focused knowledge brief (fkb 001) - internal …...• platform business models are often labelled...

Focused Knowledge Brief (FKB 001) Platformisation

March 2016

FKB 001 – PLATFORMISATION COMMERCIAL IN CONFIDENCE | © Internal Consulting Group 2016

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Table of Content

3

Section Component Description

1 Executive Summary •  Overview of our research and findings

2 What is a Platform? •  Key Frameworks •  Relevant articles and books

3 Appendix •  Relevant published materials for further reading

FKB 001 – PLATFORMISATION COMMERCIAL IN CONFIDENCE | © Internal Consulting Group 2016 4

Source: ICG analysis

Platformisation: What is it?

•  Direct/same side network effects: the more users in one customer segment will attract more users in that customer segment (users of fax machines; users of an instant messaging system)

•  Indirect/cross-side network effects: the more users in one customer segment will attract more users in the other customer segment (users of videogames and game developers)

•  A platform business model creates value by facilitating interactions between the different customer segments (eg matchmaking and transaction costs reduction)

•  Platform business models are often labelled “two-sided markets” or ”multi-sided markets”, on the basis of how many customer segments they work with

•  Platforms generate network effects (see below) but also a chicken-and-egg problem in terms of how to attract both sides of the market at the same time (they use “ratcheting” or “zig zag” strategies to achieve this

WHAT IS PLATFORMISATION

NETWORK EFFECTS

•  Apple iPod/iTunes system •  Windows operating system •  Google platform •  Ebay •  Credit cards •  Newspapers •  Consulting, unbundled: (ICG)

EXAMPLES OF PLATFORMS


Table of Content

5



2 What is a Platform? •  Key Frameworks •  Relevant Articles •  Published books



Platform businesses: definition and the chicken-and-egg problem

Definition and network effects

•  A platform business model creates value by facilitating interactions between the different customer segments (eg matchmaking and transaction including search cost reduction)

•  Platform business models are often labelled “two-sided markets” or ”multi-sided markets”, on the basis of how many customer segments they work with

•  The value of the platform grows to the extent that it attracts more users

•  Direct/same side network effects: the more users in one customer segment will attract more users in that customer segment (users of fax machines; users of an instant messaging system)

•  Indirect/cross-side network effects: the more users in one customer segment will attract more users in the other customer segment (users of videogames and game developers)

Key success factors

•  Attract both customers on board at the same time through a sophisticated price mechanism

•  You might need to subsidize the more price sensitive segment and charge the side that increases its demand more strongly as a result of the other side growth (Xbox, PSP)

•  In markets with high sensitivity to quality, you may need to charge more the side that has to supply quality. In this way, you are able to attract providers of high quality products (Xbox, PSP) and maintain a quality platform that attracts the other side of the market

•  Acquiring new customers at a low cost

•  Retain customers for a long period of time

•  Attract “lead” users, with lower joining prices or agreements not to join rival platforms to build initial momentum

Source: Eisenmann, T., Parker, G., & Van Alstyne, M. W. 2006. Strategies for two-sided markets. Harvard Business Review, 84(10): 92


Source: ICG analysis

SUPPLIERS RETAILER CUSTOMERS

CUSTOMER SEGMENT 1

PLATFORM

CUSTOMER SEGMENT 2

“Right” to use the platform

A)

B)

From linear supply chains to platform-based business models


Networked market Side 1 Side 2 Platform Providers

Examples of two-sided markets from a variety of industries provide a springboard for innovation in your industry

Source: Eisenmann, T., Parker, G., & Van Alstyne, M. W. 2006. Strategies for two-sided markets. Harvard Business Review, 84(10): 92


What does a platform-based ecosystem look like?

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•  Ecosystem: Interfaces to other platforms, data sources (bank feeds, tax records, payment systems) and compatible devices

•  Platform: architected system which facilitates housing of components and easy navigation by customers to compile their ideal solution set

•  Pillars: categories of components to assist with customer navigation

•  Components: best-of-breed (curated) products, services, learning modules, tools and apps, which help along the path of many customer journeys

•  Customer Solution Set: Platform-mandatory, platform-advised, and customer-selected component combination which mass customises or personalises the customer experience at a granularity that no segment-based business model can achieve

Platform

Platform Platform

Pillar

Pillar

Pillar

Pillar

Component Component Component Component

Ecosystem

Third-party components

House components

Co-created components

partnerships/ extended enterprise

Customer Ideal Solution Set

Mandatory Customer-selected

Device Agnostic Customer Journey Support

House Purchase Car Accident

SOURCE: David Moloney, ICG


Platforms create digital “enmeshment”?

10

1.  Customer to service experience

2.  Frictionless

3.  Context sensitive

4.  Needs based selling

5.  Asyncronous communications

1.  Customer to platform components

2.  Customer to cohort/community

3.  Constantly connected/part of daily life

4.  Real time/synchronous communication

5.  Cognitive solutioning

•  Customer to product(s)

•  Product sales

•  Branch manager

•  Stilted HQ communications

Effection Enmeshment Engagement 1.  Customer co-dependency

2.  Third line forcing

3.  Uncancellable contracts

4.  Refuse, difficult to close/switch

Entanglement

Unconscionable, Illegal

Legal

# Products

Footings

FOC

US

MEA

SUR

ES # Connected

Platform Components

EV

Customer Outcomes

NPS

NPV

20th Century 2010-2018 Starting

SOURCE: David Moloney, ICG


Digital disruption enables new institutional options with distinct economics

11

TWO DIMENSIONS DEFINE STAKED ARCHITECTURES: UNCERTAINTY AND ECONOMIES OF MASS

•  Smart, connected products require companies to build and support an entirely new technology infrastructure

•  This “technology stack” is made up of multiple layers, including new product hardware, embedded software, connectivity, a product cloud consisting of software running on remote servers, a suite of security tools, a gateway for external information sources, and integration with enterprise business systems

•  In a smart, connected world, companies face key new strategic decisions. A firm’s choices. will have a major impact on every activity in its value chain

Source: Borges’ map: Navigating a World of Digital Disruption, Boston Consulting Group, 2015


In the Internet of Things, playing with platforms and ecosystems is the norm rather than the exception

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KEY POINTS THE NEW TECHNOLOGY STACK

•  Smart, connected products require companies to build and support an entirely new technology infrastructure

•  This “technology stack” is made up of multiple layers, including new product hardware, embedded software, connectivity, a product cloud consisting of software running on remote servers, a suite of security tools, a gateway for external information sources, and integration with enterprise business systems

•  In a smart, connected world, companies face key new strategic decisions. A firm’s choices. will have a major impact on every activity in its value chain

Source: How smart connected products are transforming companies, Porter, M. and Heppelmann James, Harvard Business Review, 2015


Source: Osterwalder, A., & Pigneur, Y. 2010. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers: OSF

Key points

•  The Business Model Canvas has become the “standard” visual representation of business models

•  Business model is here defined as “A business model describes the rationale of how an organization creates, delivers, and captures value”, clearly identifying the three key area of the canvas

•  Multi-sided platforms (or multi-sided markets):

•  A credit card company needs a large base of credit card holders and a large base of merchants who accept those credit cards

•  An enterprise offering a free newspaper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work

•  Multi-sided platforms can use aspects of other business models, such as freemium business models and open business models

Business Model Canvas

The Business Model Canvas has become the “standard” visual representation of business models

In a multi-sided business model, the offer (or value proposition) and the customer segments are tightly linked


PSP/Xbox “give away” expensive consoles to hardcore gamers and obtain royalties from game developers

Key points Business Model Canvas

•  Targeted gamers are very demanding and require high quality game experiences

•  Thanks to a platform business model, PSP/Xbox guarantee that only the best game developers participate on the platform because only the “good” ones are willing to pay the expensive entry fees.

•  Game players are subsidized by the “other side of the market”. Note that PSP/Xbox also develope their own ‘house’ games to seed the platfomr


Console Audience

Game Developers

High Performance Console

Hardcore Gamers

Hardware Sales at a Loss

Royalties


Wii attracts a large group of casual gamers with relatively inexpensive consoles and royalties from game developers


•  Originally, Nintendo’s Wii value proposition was attractive to non professional gamers because of the “fun factor” and “social interactions” – especially younger children, retirement home communities and families

•  These didn’t need a sophisticated and expensive technology like hardcore gamers but wanted a simple intuitive interface model


Maddie: Please redo chart using ICG

colours and use the cavnvas from slide

10

“Family” Console

Access to console users & cheap game development costs

Casual gamers

Game Developers

Profitable Hardware Sales

Royalties


Freemium as a business model: providing the service for free to some customer segments to subsidize other customer segments

Infrastructure development & maintenance

Free basic service Large base of

free users

Premium service

Small base of paying users

Platform

Free basic services Fixed costs

Cost of service for premium users

Cost of service for free users

Automated and mass customized

Paid premium services


•  Skype is an example of platform business model with a freemium component

•  A large base of free users is subsidized by a small base of paying users



Managing strategy and innovation in an uncertain world requires executives to think in terms of platforms rather than products

FROM PRODUCTS TO PLATFORMS KEY POINTS

•  To strive for competitive advantage in an uncertain world, platform thinking should replace product thinking I

•  Key capabilities to develop to succeed in a platform based competition are:

•  Pull: link each step in a company key operations backwards from the market in order to respond in real time to changes in demand, customer preferences, competitive conditions or internal difficulties

•  Scope: seek efficiencies in activities not suited to conventional economies of scale, such as research, engineering, and product development as well as design and delivery

•  Flexibility: companies should be flexible not only in manufacturing product development and other operations, but also in strategic decision making and organizational evolution

Source: Cusumano, M. A. 2010. Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World: Oxford University Press


A Platform Ecosystem is comprised of the Platform, its Complements and the Network Effects

•  To compete effectively in a platform market, a company needs to have

1.  open (but not too open) interfaces

2.  modular architectures (easy to build on/extend)

3.  compelling complements (generally result of most vibrant ecosystem)

KEY POINTS THE PLATFORM ECOSYSTEM



Types of Platforms and “Platforms within Platforms”

•  There are several types of platforms, and the last one is the most important nowadays

1.  In-house product platform: set of common components or modules around which an organization can create a family of related products or services

2.  Retail distribution platform: network of distribution channels, including physical outlets or web sites, through which an organization can distribute a variety of products or services

3.  Supply-chain platform: network of suppliers who provide components (or “content”) that enable an organization to create new products or services

4.  Industry-wide platform: one of the above but opened to outside organizations to create an “ecosystem” of partners

KEY POINTS EXAMPLES OF FOUR INTERCONNECTED PLATFORMS



Types of Platforms and “Platforms within Platforms”

HOW TO USE LEVERS TO DESIGN PLATFORM STRATEGIES

•  To compete effectively in a platform market, a company needs to have

1.  open (but not too open) interfaces

2.  modular architectures (easy to build on/extend)

3.  compelling complements (generally result of most vibrant ecosystem)

KEY POINTS



Four Business Models for the Digital Era KEY DECISION DRIVERS

•  In selecting the business model, with associated capabilities and relationships, executives need to determine

1.  the extent to which they want to control the value chain, or drive or be part of an ecosystem that delivers on the end customer’s total needs; and

2.  the extent to which they know about their end customer’s goals

FOUR BUSINESS MODELS FOR THE DIGITAL ERA

Four business models in the digital era: the power of being an ecosystem (ie platform) business

ECOSYSTEM DRIVERS: FIDELITY

•  An ecosystem is a destination for customers in a specific domain (for example, health care, retail, entertainment, financial services or small business)

•  Ecosystem drivers use their brand strength to attract participants, ensure a great customer experience and offer one-stop shopping

•  They aspire to “own” the customer relationship in one domain like financial services by increasing their knowledge of their end consumers

•  They extract rents from participants in their ecosystem — both consumers and service providers — and rely on brand strength and feedback from consumer ratings and reviews to build their reputation and revenues.

•  Example: Fidelity’s platform offers its own mutual funds but also includes funds from competitors such as Vanguard and products and services from complementors such as personal investment advisors

Source: Weill, P., & Woerner, S. L. 2015. Thriving in an increasingly digital ecosystem. MIT Sloan Management Review, 56(4): 27


Use the following questions to assess your digital business model and prioritize improvements

DIAGNOSTIC QUESTIONS

Source: Weill, P., & Woerner, S. L. 2015. Thriving in an increasingly digital ecosystem. MIT Sloan Management Review, 56(4): 27


FOUR MODELS OF PLATFORM BUSINESSES KEY POINTS

•  Platforms get enormous value from third party developers

•  Platforms should split IP rights from point of customer contact

1.  Open access 2.  Extent platform 3.  Touch customers 4.  Change platform

Controlling openness is a key strategic decision for platforms

Source: Parker, G., & Van Alstyne, M. W. Platform Strategy & Open Business Models, The MIT Centre for Digital Business

One Provider Many Providers

One Sponsor

Many Sponsors

Users

Users Users

Users Dvprs

Dvprs Dvprs

Dvprs

Provider

Provider

Sponsor Sponsor

…

…

Providers

Sponsors

Dell Acer HP

RedHat Debian Ubuntu

1) Proprietary: e.g. Mac 2) Licensing: e.g. Google Android

3) Joint Venture: e.g. Orbitz 4) Shared: e.g. Linux


THREE MODELS OF PLATFORM CONTROL KEY POINTS

•  Originally, Apple tried to control too much of the original Macs, controlling both hardware and software, chocking network effects

•  Instead, Microsoft, opened much more of its ecosystem, including open APIs. It achieved strong network effects

•  To achieve real profits, platforms need to control a full layer

Control full layers to achieve real profits

Source: Parker, G., & Van Alstyne, M. W. Platform Strategy & Open Business Models, The MIT Centre for Digital Business

Users Dvprs

…

…

Dell Acer HP

RedHat Debian Ubuntu

Users Flights

Sponsor Providers

Users Dvprs

Provider

Sponsors Linux:

No one driving the bus. Limited scope of

control.

Joint Venture: e.g. Orbitz airline

collaboration

Licensing: e.g. Google Android


Relevant Articles

Title Year Authors

Disrupting beliefs: A new approach to business-model innovation. The McKinsey Quarterly (July)

2015 De Jong & van Dijk

Strategies for two-sided markets. Harvard Business Review, 84(10): 92 2006 Eisenmann, Parker, & Van Alstyne

Borges’ Map: Navigating a world of digital disruption 2015 Evans & Forth

A method for architecting product platforms. Research in Engineering Design, 12(2): 61-72

2000 Gonzalez-Zugasti & Baker

Multi-sided platforms: From microfoundations to design and expansion strategies. Harvard Business School Strategy Unit Working Paper (09-115)

2009 Hagiu

Strategic decisions in multisided platforms. MIT Sloan Management Review, 55(2): 71-80

2014 Hagiu

Platform leadership: How Intel, Microsoft, and Cisco drive industry innovation. Innovation, 5(1): 91-94

2003 Hauptman

Developing product platforms: analysis of the development process. Technovation, 20(11): 617-630

2000 Muffatto & Roveda

Platform Strategy & Open Business Models, The MIT Centre for Digital Business 2015 Parker & Van Alstyne

How smart, connected products are transforming companies 2015 Porter & Heppelmann Optimizing your digital business model. MIT Sloan Management Review, 54(3): 71 2013 Weill & Woerner

Thriving in an increasingly digital ecosystem. MIT Sloan Management Review, 56(4): 27

2015 Weill & Woerner


Relevant Books

Title Year Authors Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World: Oxford University Press

2010 Cusumano

Invisible engines: how software platforms drive innovation and transform industries: MIT Press

2008 Evans, Hagiu, & Schmalensee

Platform economics: Essays on multi-sided businesses 2011 Evans, Schmalensee, Chang & Garcia-Swartz

Platform leadership: How Intel, Microsoft, and Cisco drive industry innovation: Harvard Business School Press Boston

2002 Gawer & Cusumano

The power of product platforms: Simon and Schuster 1997 Meyer & Lehnerd

Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers: OSF

2010 Osterwalder & Pigneur


Table of Content

27



2 What is a Platform? •  Key Frameworks •  Relevant Articles •  Published books



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