Platform companies are all the rage, but for most older companies it is enough to rent or build a substantial platform component to stay in the game. For now, as platforms are merely a wave and what matters most is learning to surf.
While the popularity and proliferation of platforms like Android, iOS, Facebook and Amazon is easy to understand, most fail with an average lifespan of less than 5 years. Social network platforms Google+, Friendster, Myspace, Vice and iTune’s Ping came and went. Others, like Facebook, Amazon, Google and Apple became so successful they are now scrutinized for monopolistic behavior.
More importantly, while platform companies are the fastest growing sector of the S&P 500, both in market capitalization and media attention, most listed companies come from a more traditional background. They often produce a physical asset (e.g. chemicals, cars) or require complex customer-supplier interactions (e.g. building cruise ships) and operate in mature and therefore often heavily regulated markets. All indicators the straightforward platform strategy used by ‘born digital’ platform companies like Twitter, Uber and Dropbox won’t work.
Incumbents have to play another game and turn this seeming weakness into their greatest strength.
Platform strategy for incumbents
John Deere began in 1836 as a farm equipment manufacturer until it launched its MyJohnDeere platform in 2012. By connecting both equipment (e.g. crop harvesters, tractors) and stakeholders (e.g. farmers, dealers, third party software companies, consultants), John Deere enabled farmers to lower their operating cost and increase their yields. The Predix platform from General Electric, the HeatlhSuite platform from Philips and Disney’s Disney Plus streaming platform are other examples of old companies which understood that the ability of platforms to concentrate customers, business partners, data and consequently value could not be ignored.
What they also have in common is the time and talent required to turn the companies’ existing strengths into a complementary platform strategy.
Is time on my side?
Blockbuster bought MovieLink for its movie streaming platform in September 2008, eleven years after Netflix initiated the market disruption. It was too late and a halfhearted approach, two fatal mistakes in a market which suddenly flowed at a much faster rate. Blockbuster filed for bankruptcy protection in 2010.
Before anything else incumbents have to embrace that time flows faster in hybrid and digital markets. Employees of Samsung or other smart phone manufacturers are active in a market shaped by the constant fear of falling behind. They closely follow each other’s moves, always seeking that new differentiating feature that will make the next product launch a success. It is a race that never ends as Microsoft found out after winning the ‘browser wars’ in 2004. After capturing a market share of 95%, the product team responsible for Microsoft’s Internet Explorer lost its edge, allowing Firefox and later on Google Chrome to tip the scales in their favor. However, adopting speed-to-market as a strategic metric is by itself no guarantee for success.
While Google got caught off guard when Apple introduced the iPhone and iOS in 2007, it had enough time and financial resources to catch up and eventually even surpassed Apple in number of smartphones running its operating system. Huawei is in a far more awkward position. It leveraged on Google’s Android platform to quickly gain traction in the smartphone market, but every advantage has its disadvantage. Huawei does not own and thus control the Android platform, Google does. For Huawei, the decision to rent platform capabilities instead of building them suddenly became a liability when it got caught up in the middle of the trade war between China and the United States.
While both Samsung and Huawei sensed the strategic risk associated with renting platform capabilities and tried to mitigate it by investing in Tizen OS and Harmony OS respectively, it is yet to be seen whether customers are willing to board a platform which joined the party ten years late. The decision to build or rent platform capabilities is therefore one of the crucial topics for any incumbent defining its platform strategy.
Do I have the talent?
Platform-related technologies themselves are inert. Revolutionary or not, technology needs a compelling relevance to a customers’ life. Talented people understand that a large marketing budget cannot compensate for a lack of need. They possess the capability to turn the inherent value of technology into realized business value. In contrast to born-digital companies, the team driving the platform transformation at an incumbent faces an important additional challenge: combining the opportunities offered by these technologies and the existing strengths of the company.
Established companies already have a customer base and brand, financial resources, deep market knowledge, committed employees, and an operational backbone. Supplemented by company-specific differentiators, these form the foundation upon which to build the desired complementary portfolio of digital products and platform components. However, the older, larger and wealthier the company, the more likely digitalization initiatives face a mismatch in sense of urgency, cultural fit, governance approach and metrics. Mitigating this risk by organizing these initiatives completely outside the existing corporate structure prevent them from utilizing the available deep market knowledge and operational backbone. Hence, the relative ‘looseness’ between the existing operating model and digitalization initiatives should be a key attention point when defining and implementing the platform strategy.
The right digital-savvy leadership team also recognizes something far more important: platform-thinking will eventually be replaced by something else. No one yet knows when or by what, but noting is impervious to the impact of time. More important than defining a solid platform strategy is therefore creating and nurturing the organizational capability to be successful beyond a single wave.
Learning to surf
Every innovative business model or emerging technology commoditizes and eventually fades into the background after being replaced by something new. Even the decision by John Deere, General Electric and Philips to invest in platform components is merely a step in the right direction. Artificial intelligence and distributed ledgers are pushing the value of first-generation platforms towards the next level, promising personalization-at-scale and improved efficiency throughout the whole value chain. Linking brains directly to devices and platforms may be part of the third platform-related wave. That is, if a yet to emerge technology wielded by talented people does not disrupt the direction we are currently heading.
To be successful beyond a single disruptive wave, every member of the company, from the leadership team to the people manning the front lines, has to embrace a permanent state of ‘divine discontent’. Nokia and BlackBerry failed because their leadership teams missed the transition from selling phones to platform-thinking. It is the same intrinsic motivation to continuously improve and challenge the status quo which determines whether Zara, Apple, another incumbent or a yet to emerge new entrant will dominate the convergence of technology and fashion.
Time is a constant source of small, large and occasionally ‘freak’ waves and the future belongs to those companies that learned to surf.
Rationally, every executive, manager and employee understands that the company they work for has to remain in touch with market realities and act accordingly. The constant stream of companies struggling with strategic, earnings, liquidity or even a “Chapter 11” crisis is therefore counter intuitive at first sight.
However, even at personal level, one can observe something similar. The more ordinary the skill set of the employee, the more likely the job can be automated. Despite the widespread public attention for this trend, many employees still lack a sense of urgency. It is part of human nature to think bad things only happen to others (I). Market and technology shifts don’t affect them or the company they work for.
Until, eventually, the pink slip arrives. Then the need to change is no longer an abstraction.
When a company or individual hits the proverbial wall, radical change is required. This type of change is infrequent, disruptive, forced and of strategic importance.
When the company or individual remains aligned with its external environment, change can be incremental. Incremental change is continuous, focused on improvements, bottom-up and emergent.
The second key ingredient to surf the digital wave instead of being drowned by it is adopting an end-to-end approach. Numerous companies, including retail giant Walmart, initially underestimated the impact of the internet and mobile on their business model. It is more than adding a web shop module to the existing website.
In other words, incremental change should not be confused with isolated point initiatives. This important point is covered in the McKinsey article ‘Modernizing IT for a digital era’.
“Historically, companies have favored an incremental approach to modernizing IT—that is, addressing the most immediate points of pain and then subsequent issues as they occur. However, the threat of digital disruption is creating an urgent need for companies to modernize IT systems end to end, with the big picture in mind.
End-to-end modernization, or a holistic approach to tackling system upgrades, completely redefines how a company thinks about IT. Under this approach, the technology organization is no longer just a shared service; IT becomes a critical part of the company’s DNA, and IT leaders become trusted partners, not just service providers.”
However, the article still treats the business and IT as two separate domains, whereby IT leaders are responsible for technology. In reality, the business and IT domains increasingly converge or even fuse, reflected by the skill set and leadership style of the executives. No longer ‘we’ and ‘them’.
Change as one team
Companies are quickly learning that digitalization requires the business and IT to adopt a joint end-to-end change program. The McKinsey article touches upon the point by calling IT a critical part of the company’s DNA, but comes short of identifying the true key success factor of strategic change in a digital era: recognizing and acting on the interdependence between business and IT.
Notes and references
(I) This behavior is known as optimism bias, unrealistic optimism or comparative optimism.
(II) Please note that one person may perceive a specific change as incremental while the same change is perceived as radical by another.