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Platform strategies key to success curve

Mark Bonchek & Sangeet Paul Choudary
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Every business today is faced with the fundamental question of ‘How do I enable others to create value? Building the right platform offers a smart solution.

We typically think of companies competing over products — of working to “build a better mousetrap.” But in today’s networked age, competition is increasingly over platforms. Build a better platform, and you will have a distinct advantage over the competition.

In construction, a platform is something that lifts you up and on which others stand. The same is true in business. By building a digital platform, other businesses can easily connect their business to yours, build products and services on top of it, and co-create value.

Consider the smartphone market. Today, Nokia and BlackBerry-maker Research in Motion are a shadow of their former selves. Their technologies and products lag behind Apple and Android. But the triumph of the iPhone isn’t simply a function of its great features and usability. It also has to do with the Apple App Store on which external developers can create value. Microsoft has received excellent reviews for its new smartphones, but their ultimate success will have more to do with Microsoft’s ability to create a viable platform.

Such platform thinking extends beyond the technology sector. Retailers are shifting from distribution channels that sell products to engagement platforms that co-create value. Online retailers like eBay, Etsy and Amazon.com have led the way, and now traditional retailers are following in their wake.

J.C. Penney has made platform thinking a pillar of its reinvention strategy — the American retailer’s new stores feature an increasing number of small “boutiques” overseen by other companies. It’s no coincidence that J.C. Penney’s CEO, Ron Johnson, used to work as Apple’s senior vice president in charge of retail. Johnson has said, “All those boutiques are the apps. What J.C. Penney is creating is a new interface.” While J.C. Penney’s pricing strategy has been controversial, analysts have been very positive about its in-store platform.

Nike is also shifting from products to platforms. Building on the success of its Digital Sport products, the company recently launched its Nike+ Accelerator to help other firms build on the Nike+ platform. The announcement on the Accelerator website reflects platform thinking: “We are looking for people who ... want to create companies that build upon the success of (Nike+) to make the world more active.”

Three transformative technologies are driving the rise of platforms: cloud, social and mobile. The cloud enables a global infrastructure for production, allowing anyone to create content and apps for a worldwide audience; social networks allow people to connect globally and maintain their identities online; and mobile allows people to tap into this global infrastructure anytime, anywhere. The result is a globally accessible network of entrepreneurs, workers and consumers wired to create businesses, contribute content and purchase goods and services.

Three factors determine the success of a platform strategy:

1. Connection : how easily others can plug into the platform to share and transact.

2. Gravity : how well the platform attracts participants, both producers and consumers.

3. Flow : how well the platform fosters the exchange and co-creation of value.

Successful platforms achieve these goals with three building blocks:

1. The toolbox : Creates connections by making it easy for others to plug into the platform. This infrastructure enables interactions between participants. For example, Apple provides developers with its OS and underlying code libraries; YouTube provides its hosting infrastructure to creators; Wikipedia provides writers with the tools to collaborate on an article; and J.C. Penney provides stores to its boutique partners.

2. The Magnet : Attracts participants to the platform with a kind of social gravity. For transaction platforms, both producers and consumers must be present to achieve critical mass. Apple needs to attract both app developers and users. Similarly, eBay needs both buyers and sellers. Platform builders must pay attention to the design of incentives, reputation systems and pricing models. They must also harness the network effects of social media to achieve rapid growth.

3. The Matchmaker : Fosters the flow of value by making connections between producers and consumers. Data is at the heart of successful matchmaking, and distinguishes platforms from other business models. The Matchmaker captures rich data about the participants and leverages that data to facilitate connections between producers and consumers. For example, Google matches the supply and demand of online content, while marketplaces like eBay match buyers to the products they want.

Not all platforms place the same emphasis on all three building blocks. Amazon Web Services, which provides businesses with cloud-based information technology products, has focused on building the Toolbox. Meanwhile, eBay and Airbnb, a marketplace for travellers seeking accommodations around the world, have focused more on the Magnet and Matchmaker roles. Facebook has focused on the Toolbox and Magnet, and is actively building its Matchmaker ability.

In the future, we’ll see more and more companies shifting from products to platforms. Even those in the extermination business may worry less about building better mousetraps, and more on building better mouse-catching platforms. For example, imagine a smart mousetrap with sensors that wirelessly communicate to a cloud-based mouse-catcher service. Homeowners and exterminators could monitor the status of the trap on their smartphones, and receive a text message when it needs more bait. In fact, smart traps similar to these already exist. But the shift from products to platforms would focus on building the digital service that enables anyone with a smart trap to connect and communicate.

Every business today is faced with the same fundamental question underlying platform thinking: How do I enable others to create value? Building a better mousetrap probably won’t cause the world to beat a path to your door. But building the right platform might just do the trick.

Mark Bonchek is the founder of the consulting firm ORBIT+Co, and a designer of social business strategies. Sangeet Paul Choudary is a Singapore-based entrepreneur and blogs at Platform Thinking.

© 2013 Harvard Business School Publishing Corp.

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