In a world characterized by turbulence and uncertainty, business success no longer hinges on incremental change, but on transformational innovation that calls for reinvention of traditional business models and strategies. In today’s Conceptual Age, a whole new way of doing business is emerging – one that rides on high concept and innovative thinking to circumvent unanticipated conditions. Pipes – once the dominant model of business in a more stable and predictable world, is giving way to Platforms in today’s rapidly changing environment, and businesses that have leveraged the power of platforms have witnessed exponential growth and continue to thrive and stay relevant in such an unpredictable environment. Pipe businesses that were leaders in their space just about a decade ago have lost their edge to newer platform players who have been able to capture the largest market share in a much shorter span of time.
Traditional pipe businesses are those where firms create products or services, push them out to market, and sell them to customers. Pipe business models facilitate a linear flow of value that is produced upstream and consumed downstream, just as how water flows through a pipe. Examples of businesses that run on this model include traditional media such as radio and television, manufacturing firms, hotel chains, etc. According to renowned Indian entrepreneur and business author Sangeet Paul Choudary, pipe business scale is powered by the ability to coordinate internal labor and resources toward efficient value creation and toward delivery of the created value to an aggregated consumer base. The management of pipe scale involves the design and optimization of this linear flow of value from the business to the consumer. (Source: Platform Scale, 2015).
Platform businesses, on the other hand, are those that create value by facilitating the exchange of products, services or content between independent groups of participants – usually producers/service providers and consumers. Such business models have existed for decades using brick-and-mortar locations to facilitate exchanges – as in the case of shopping malls that link consumers with sellers. However, driven by the blistering pace of technology advancement, platform businesses now leverage the power of connected technology to enable exchanges among a decentralized network of individuals that form a scalable community. Examples of successful businesses that leverage the platform model include Facebook, Uber, Airbnb, and YouTube, among others. According to Sangeet Paul Choudary, platform business scale is powered by the ability to leverage and orchestrate a global connected ecosystem of producers and consumers toward efficient value creation and exchange. The management of platform scale involves the design and optimization of value-exchange interactions between producers and consumers. (Source: Platform Scale, 2015).
In order to move from a pipe to a platform model, businesses are required to make three key shifts:
1. From internal processes to external interactions: Pipe businesses create value by optimizing internal processes to drive higher efficiencies. Platforms create value by enabling interactions between external producers and consumers on a centralized platform. The focus must shift from controlling internal processes to promoting community participation.
2. From consumers to producers: Pipe businesses create products/services for consumers located at the end of the pipe. Consumers comprise the market for such businesses. Platforms, by contrast, do not create products/services but facilitate exchanges between producers and consumers. Hence, the market for such businesses comprises both producers and consumers, and the focus is on acquiring both.
3. From resources to ecosystems: Pipe businesses drive a competitive edge through resource ownership and intellectual property. Platforms create competitive advantage through an ecosystem of producers and consumers that they are able to attract.
In a world marked by turbulence, platform business models have proved to be more sustainable than traditional pipe business models. By creating networks of scalable communities and building new growth markets, platform businesses are able to facilitate exchanges and create value at an unprecedented scale. Some of the world’s most successful companies today – from Apple to Uber and Airbnb, have embraced the transformational power of platforms to achieve sustainable growth. To thrive in the Conceptual Age, businesses will need to harness the potential of digital technologies to build out a platform strategy, or risk becoming obsolete.
“Learn the new rules of strategy for a platform world, or begin planning your exit.”
~ Harvard Business Review, April 2016