Platform Design Thinking
Let’s start with a deep question: what is the meaning of life? Intuitively, you would think the meaning of life would be to make the world a little more beautiful, or nicer, or more interesting. But how was that possible? In recent times, the answer to that is: through work.
The Pipe Business Model
For centuries, the traditional business model for work has been to flow linearly.
- Firms added value to products through the value chain
- Producers and consumers held very distinct roles.
- Develop inefficient bottlenecks in the form of gatekeepers.
Based on Michael Porter’s value chain concept, global business leaders focused on gaining a competitive advantage/market share by capturing scarce resources. This business strategy was used to increase the value of the manufacturing process with the objective to provide a lower cost or differentiation product or service.
For centuries, the process of monetizing a pipe business model was simple. First, all you need to do is calculate all the costs of running a product through a pipe to the end consumer. Then, the value is created by lowering costs and controlling scarce resources to increase consumer prices and expand the profit margin.
The Shift From Pipes to Platforms
With the emergence of the platform business models, advancements in robotics, the internet of things, and artificial intelligence we have now the opportunity to re-organize the economy and the meaning of work.
“Over the last three years, especially 2014 to 2016, there’s been a huge shift towards traditional businesses realizing that digitization and the resulting digital flow can lead to a fundamentally new business model.” – Sangeet Paul Choudary
Platform-based businesses representation in the S&P 500 has and will continue to increase because they have distinct advantages over more traditional business models; such as more favorable cost structures, higher profit margins, and the ability to respond to technological change and scale rapidly. Some estimates suggest that in 25 years, it is estimated that 50 percent of the S&P 500’s collective net income (profits) will come from platforms.
Today platform companies represent 3 out of the top 5 companies based on market cap and 7 of the top 10 unicorns. And, are now beginning to move out of the startup realm and begin to penetrate industrial companies by learning and value creation from the non-linear interactions.
While traditional competition is built on owning or having exclusive access to supply-side resources such as an oil field, a platform designer facilitates the aggregation of all the supply by providing news tools to enhance the networks.
Thus, platform competition is instead built on exclusive access to the platform ecosystem, along with the data generated from the interactions. By removing the gatekeepers, the platform infrastructure and tools have shown the ability to create new sources of supply and demand in the industry.
- Facebook: The largest media owner, produces no content.
- Alibaba: the world’s largest retailer, carries no stock.
- Airbnb: the world’s largest hotel accommodation provider, owns no real estate.
In 2004, three former PayPal employees – Chad Hurley, Steve Chen, and Jawed Karim came together and created the popular video sharing site YouTube. To do this these entrepreneurs and designers established new rules and tools for video sharing and video content producing. The value created by facilitating exchanges between consumers and producers is called the core interaction.
The core interaction is what produces the core value unit – the central animating idea around which we must organize all our decisions and activities in order to provide the most value and learning to both sides of the platform. And, while economic growth today is still about value added, the transformation process is non-linear.
When users are the main contributors to the value created on the platform, the startup usually doesn’t control the value that is being created. Which means that users often take platforms in surprisingly new directions. As you open your platform to more and more users, you’ll notice 3 main factors that drive platform growth:
- Gatekeepers are replaced by social curation and reputation building systems.
- The more users join the platform, network effects will offer increasing value to users.
- The platform architecture, tools, and rules will unlock new sources of supply.
The platform provides the tools and rules. The users participate in the interaction. The Interaction is guided, facilitated and governed by the tools and rules to deliver the experience. If the platform is properly designed, more and more users will interact with it and network effects will emerge. A product with network effects means that it gets more valuable as more users use it.
In a pipe business model, user acquisition is fairly straightforward. You get users in and convert them to transact. However, platforms businesses often have no value until it reaches a critical mass of users. There are many strategies and resources that you can reference to attract consumer and producer to your platform.
There are many strategies and resources that you can reference to attract consumer and producer to your platform. To get more secrets about platform thinking, attend one of our FREE roadshow presentation “Platform Design Thinking: The New Meaning of Work” in a major Eastern European city near you.
Building great technology is absolutely useless unless you can encourage interactions on top of it. – Sangeet Paul Choudary
The Notion of Competition Changes with Platforms
Platforms generally focus on growing the pie with strategic partners and industry participates in them. So, it’s important to understand that collaboration should co-exist with competition at different levels. The value of the ecosystems also means that old linear rules are no longer relevant in these new platform realities. I’ve already mentioned this, but I’ll remind you again because it’s that important. To build a successful platform, you need to redefine the meaning of work.
You aren’t in the business of building technology, you are in the business enabling better interactions.
YouTube transfers Videos from Video creators to Video viewers.
LinkedIn transfers Jobs from Recruiters to Professionals.
Airbnb transfers Apartment listings from Hosts to Travelers.
Uber transfers a Taxi request from a Traveler to Taxi.
The Future of Work and Enabling Interactions
For the platform to be valuable to users, it must solve a problem. In your research, find what stimulates you an individual and explore its depths, in a focused and persistent manner. Be curious and interested, to seek challenges, and practice to develop your skills and knowledge even in the absence of separate rewards. Your philosophy of strategy needs to contain the seeds of constant rejuvenation to enable growth.
Technological advancements are rapidly changing the nature of work and our economies. It is estimated that in 10 years’ time there will be 150 billion networked measuring sensors, 20 times more than people on Earth. Everything will become intelligent; soon we will not only have smartphones, but also smart homes, smart factories, and smart cities. With so many new ways of interacting, what platforms will create better progress and a smarter planet? The better the interaction, the more value and learning are potentially created.
- In your research, what is something that is an important misconception? What tools would many people desire to make the world more beautiful, nicer, or more interesting? What valuable company is nobody building? Would your business be around 10 years from now?
It’s important to understand that capitalism means capital. According to Peter Thiel, when getting started too much direct competition means investors will ignore your platform because competition destroys profits. Competing on price and differentiation is not often a winning strategy for a platform designer. Think differently. Have purpose. Not in terms of what is traditionally good and bad, think progress.
Once you designed the tools, rules and the main interaction on your platform, start small and look to dominate a niche market. With each subsequent success, gradually expand into related and slightly broader markets.
8 Shifts to Enable Interactions by Sangeet Paul Choudary
- The ecosystem is the new warehouse.
- The network effect is the new scale.
- Community management is the new human resources.
- Social curation is the new quality control.
- Customer journeys are the new sales funnels.
- Behavior design is the new loyalty program.
- Data scientist is the new MBA.
- Purpose is the new profit.