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Platforms

How to tell if your industry is ready for platform transformation

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Platform strategy is sweeping through the business landscape, upending industries as companies adopt a business model based on enabling interactions between external producers and consumers. Companies like Airbnb, Uber, YouTube, Amazon, and Facebook have set the model for platform economies, with competing companies scrambling to catch up.

Not all industries have been affected equally, however. Retail executives and journalists have seen their industries transform rapidly, while airplane engineers and heart surgeons have not.

Platform transformations work best in industries with precise output, low regulation, and spare capacity, according to Geoffrey Parker, PhD ’98 and Marshall Van Alstyne, PhD ’98, co-authors of “Platform Revolution,” along with Sangeet Paul Choudary.

Business leaders today should pay close attention to how platforms are reshaping industry ecosystems. “The question is, ‘Can we invert the firm? Can users create value in my ecosystem?’” said Van Alstyne, a professor at Boston University, at the recent MIT Platform Strategy Summit.  

Here are some other questions to determine whether a business is ready for platform transformation.

Does your value come from information, or from physical assets?

Platforms have upended pipeline-type business models, in which companies produce product or information to waiting consumers.

Industries based on sharing information, which can be easily digitized and distributed, are especially prime for platform transformation, according to Parker and Van Alstyne, visiting scholars with the MIT Initiative on the Digital Economy. Which is why they were some of the industries that were disrupted earliest, from iTunes to streaming movies and television to upheavals in the book publishing industry.

Platform disruption explains significant changes in the news industry, too, Parker said, as lower production and distribution costs propelled the shift from print to digital platform models.

“This story has played out for 15 to 20 years,” Parker said. “I call that disruption past.”

While printing presses, video rental stores, and CDs are no longer necessary to read the news, watch a movie, or listen to music, some industries still rely heavily on physical assets, making them harder to disrupt.

With industries that rely on construction equipment or oil pipelines, “the principal value is the physical asset,” Van Alstyne said. “You can’t spread that across users the same way you can information.”

Chemical plants and refineries are another good example, Parker said.

“It’s a multi-billion-dollar asset,” Parker said. “You’re not easily going to disrupt them with some sort of distributed platform, because at the end of the day you have to be able to refine hydrocarbons into diesel gasoline. There’s no getting around having to buy expensive equipment to do it.”

These categories aren’t fixed, though, as technology advances.

“There’s a lot of value that can be added to physical supply chains using information,” Parker said.

If information continues to add to physical assets, he said, those supply chains are increasingly likely to be disrupted or reorganized into broader platform systems.

Are your transactions simple and modular, or complex and interdependent?

It is easy to tell when a sale has been completed online, when a hotel stay begins and ends, or when a video has been viewed online.

These kinds of simple, well-defined transactions are ideal for platform consumption because they are simple to track and lend themselves to third-party curation and outsourcing, according to Parker. Users can easily perform those tasks, and everyone agrees when they have been completed.

On Amazon, for example, buyers have a variety of products available at their fingertips, often provided by third-party providers outside the control of the platform company. It is easy for those companies to ensure compliance for one-time transactions with a clear beginning and end.

Products and services that are highly complicated and rely on interdependent steps or parts, like heart surgery and airplanes, are not likely to change anytime soon. Consumers still want a trusted provider or provider network for these complicated, often highly integrated areas.

 “That’s not the sort of thing you just go hey, let’s have a wide-open platform that’s going to deliver all aspects of your next heart surgery,” Parker said.

Pacemakers and airplanes require highly complicated parts that work together, and may require service long after the sale is completed.

 “If it’s a Boeing aircraft, you would never crowdsource that,” Van Alystne said. “You wouldn’t want to fly that plane.”

Is your industry heavily regulated and risk-averse, or more freewheeling and fault-tolerant?

Industries that are lightly regulated and fault-tolerant are more receptive to transformation. With failure costs low and regulation light, there is room for experimentation.

That environment allowed for the emergence and domination of platforms including Twitter, Instagram, YouTube, Amazon, and Wikipedia. These platforms are largely self-regulated (for now, at least), with users both creating content and flagging problematic information or, in the case of Wikipedia, serving as editors.

Regulation is often demanded when failure costs are high, Parker said. When cars, airplanes, or pacemakers fail, human lives are at stake, and regulations are in place to strictly regulate and review those industries.

Nuclear power, banking, health care, and education are other industries have seen little platform transformation.

“These are things where it’s not easy to enter without a lot of effort and certification, and a lot of effort in meeting regulatory requirements,” Van Alstyne said.

New businesses have to overcome high barriers to entry in these industries, and users are unlikely to want to experiment with their health, their children’s education, or their bank account.

There are some exceptions to this rule. Tesla’s emergent driverless car system has resulted in some fatal accidents, but “there really hasn’t been much of an outcry, as you would have expected,” Parker said.

“People have been a lot more accepting than I thought they were going to be with some of the teething problems," Park said.

Does your business have spare capacity, or are resources scarce? 

Renting out a spare bedroom, using extra seats in your car, putting money sitting in your bank account to work. Platforms have made it possible to turn spare capacity into value by connecting users and providers through a digital transaction system with low transaction costs. The result is platforms from Airbnb to Uber and Lyft, crowd-funded loans, and even eBay, which allows people to sell items they no longer need or want.

In the past, trying to match users and providers was costly and difficult — think posting notices on bulletin boards and yard sales.

“Platforms reduce the transaction cost for the capacity to be brought to market and then sold to somebody,” Parker said.

Warehousing, shipping, and manufacturing all have pockets of underutilized capacity, Parker said, and are ripe for platform transformation.

“You can imagine building systems that would expose that capacity to a market and how that would increase efficiency," Parker said.

Other products or services are unlikely to be shared. In-demand MDs are unlikely to freelance.

“Physicians and surgeons are an expensive asset. They’re not easy to re-deploy away from the home base,” Parker said. “So the [business model] there is to keep them employed and then back them up with patients that ‘use’ them as much as possible. “

Is your market ‘information asymmetric’?

Parker said markets with information discrepancies between buyers and sellers are an emerging area ripe for transformation.

“You can find pockets where the supply side and demand side do not have the same levels [of access to data]. Platforms can come in and expose them to data, and that can be very disruptive,” Parker said.

Think of Carfax, which serves data to consumers in the market for cars, or the various websites that offer information about home values.

Another example, which Parker and Van Alstyne highlight in “Platform Revolution,” is the Fasal Initiative, an online system that connects farmers in rural India with information about their crops, including the price of goods at nearby markets. Farmers are able to use the information to negotiate better practices and prices, where previously they were at a disadvantage.

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