Just when we thought we were reaching the end of the unicorn parade, a new company has joined the ranks of billion dollar startups. Last week, we saw the announcement of RigUp and its $300M growth financing by Andreessen Horowitz. Now valued at $1.9B, RigUp connects oil rig workers with rig operators. Although many may have thought that Oil & Gas were relatively safe from business model innovators, apparently no industry is safe from the growth of platform business models—and the unicorns that are capturing all the capital, talent, suppliers and customers. Unfortunately, most corporate leaders and boards of legacy firms think that platform businesses aren’t coming to their industry or seeking a foothold relationship with their customers or suppliers. Yet still, platform business models are emerging in every industry seeking to disrupt every industry stronghold.
Why do Platform Companies Matter to Your and Your Industry?
The Platform business model is clearly today’s economic winner. Rather than seeking to control the means of production (creating and selling products, services, or technology), platform companies focus on the means of connection – connecting and facilitating the interactions between buyers and sellers, suppliers and consumers, or even just friends and families. And they generate revenue by collecting a “toll” from each interaction on their platform. Increasingly, platforms gather data and use to feed artificial intelligence that helps manage the platform—an essential step due to the scale of due to scale of their organization – e.g. numbers of buyers and sellers on their platforms and data that is exchanged – they also rely on the help of AI to manage the millions, if not billions of interactions a day.
Most leaders and boards argue, wrongly so, that this business model started with Uber or Airbnb and does not apply to their industry or company’s economics. This confidence is unfounded. In fact, platform business models have been around for decades. Companies like Visa and Mastercard, along with NYSE and NASDAQ realized the value of controlling the means of connection and harvesting the derived data decades ago. More recently, entrepreneurs and venture capitalists have realized that this same business model could be applied to all industries and by so doing could wring out the inefficiencies of any industry, as opposed to creating software companies that remove the inefficiencies inside a company. As a result, there are hundreds of start ups seeking Unicorn status by bringing platforms to new industries. Because legacy companies, have been slow to adopt and activate their latent networks, The have left a large opportunity for new platforms to enter their industries as most companies remain focused on the means of service or production
Legacy business models can’t compete with the low scaling cost (near zero due to the fact that platforms leverage other’s assets – be they friends, cars, houses) and rapid growth (driven by network effects) of platform business models. These advantages are what has led investors to price platforms at a premium—their values are often four times higher per dollar of revenue generated than companies using legacy business models.
Despite the many advantages and imminent disruption of platform business models, few legacy companies have transformed their core business model to become platforms in a meaningful way. Strategy innovators in these firms run up against framing, cognitive and blocking biases and the lack of digital and platform business model leaders on their boards and among their executive team. To put this in context, we found that from the period of 2007 to 2018, only 12% of companies changed their primary business model. Those that did change what they invested in – new intangible assets and technologies to create new business models over a 10 year period reported saw 40% higher revenue growth and received 30% higher market capitalization to sales ratios compared to the companies that “stuck to their knitting” and did not change their business models
Building a Platform Company
Transformation is never easy, but the payoff is large. While most companies are focused on cost optimization and new products, platforms expand their view externally to coordinate across and entire industry. This foundational shift in focus requires a completely new lens for leaders.
To begin this process, leaders must understand exactly what platform businesses entail so they can begin to reframe their thinking:
1. Platforms use two-sided models where the organization acts as a point of connection between external groups that want to transact, exchange information, or socialize. For example, with Uber it is drivers and riders. For Visa It is merchants and buyers. For Facebook it is me and you.
2. The company creates direct relationships with all of the users of the platform, both producers and consumers. Only by owning these interactions can the platform recruit the members it needs and also obtain the data it needs to manage the platform and add further value.
3. The platform adds value by curating the interactions on its platform. That is to say, the platform does not merely act as a pass-through or a bulletin board. The platform provider often provides security, helps users identify the content they need, and incentivizes the desired behavior form all parties.
4. The platform is a digital environment which means that it can scale up and down rapidly as needed and at near-zero cost. Once the platform is created, additional users and transactions create very little load, meaning that growth and extension are easy to manage.
5. The company uses AI to create personalization at scale – e.g. it uses the data from each interaction and transaction to anticipate wants and needs – whether froma customer or supplier. The result: platforms earn trust, build support, and generate repeat business.
Every Company can Become a Platform Business Model
The opportunity exists to build platform business models in every industry, although some, like transportation, have seen platforms attack their status quo approaches with significant capital and new capabilities, while others remain open to new business model innovation.
Whatever your industry, platform plays are coming. You can be a part of them, or risk being overwhelmed by well-funded unicorns coming after your customers. To get there – start with a new definition of your business, apply our PIVOT Playbook, and measure the right things – given that what you measure is what you manage and value. Every industry faces a clear and present danger from new business models. Transformation does require new talent, new KPIs, and a bold attitude, but it’s a heck of a lot more fun than wasting away in a legacy business model with eroding profits, shrinking revenues and declining customer engagement.
Source: Forbes – Leadership