Ideas for Leaders #422

How to Turn a Product-Focused Company into a Platform Business

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.

Key Concept

The transition from a product-based company to a platform-based company will have a major impact on your organizational identity: how organizational members conceive of who you are. Understand the fundamental shift and broaden that identity while staying true to your values.

Idea Summary

The most basic business is product-based, involving the manufacturing, assembling and/or delivery of a product. A different type of business, once rare but becoming more and more common, is platform-based, involving creating the context for two or more third parties to interact. EBay and Match.com, for example, were created as platform-based businesses: using technological innovations, they arrange for third parties to either do business together or to meet socially.

A more recent but growing phenomenon is the case of companies transitioning from a product-based to platform-based business models. Technology is often the impetus for this transition. Cell phones were once typical products; now, through capabilities that far exceed the telephone call and even camera functions, cell phones are now platforms, bringing their subscribers together with an endless number of application developers.

The transition from product to platform has been studied from the operational and strategic point of view. For example, transitioning to a platform-based business means moving from providing the best products to developing the best network of complementors. It also means that the path to profitability depends on maximizing the transactions on the platform rather than maximizing the number of units sold of a particular product.

Just as important, however, is the impact of such a transition on the organizational identity of the company. A company’s organizational identity is based on such fundamental questions as “Who are we?” and “What business are we in?” The answers to these questions help guide the equally important question of “what we do.” Moving from product-based to platform-based companies can change the answers to all of these fundamental questions.

In many product-based companies, for example, research, engineering and product development are the key functions of the organization. In a platform-based company, the key function now becomes business development — finding the partners and third parties who will make the platform profitable. As business development activities become more important, this shift in "what we do" eventually leads to a change in "who we are:" the organization shifts from being an engineering-oriented company to a business-development company. 

In additional to strategic and operational considerations, corporate leaders must thus identify the organizational identity impact of a shift to a platform-based business. When a company’s actions are not in sync with its organizational identity, there will be discord and dysfunction. A simple example is the case of liberal arts colleges that began to offer vocational and professional courses, which for many liberal arts professors and administrators constituted an abandonment of the colleges’ core identities.

Business Application

Understanding the fundamental shift to organizational identity caused by the transition to a platform-based business begins with understanding how your business will change:

  1. From technology-driven to business development-driven. As noted above, technology or engineering skills are no longer the core differentiation for your company. Your marketing and business development functions take precedence.
  2. From end user service-oriented to end user and complementor service-oriented. As a product company, your focus is your end user customer. As a platform, you still want your end users to be satisfied with their transactions, but you must also serve the needs of the complementors as well. Cell phone companies must ensure that they meet the needs of both cell phone buyers and app developers. This can be a trickier transition than it seems. A kitchen appliance company can choose any design it wants for its products; a platform company must make sure any design changes are compatible with its third-party complementors. 
  3. From self-reliant to team player. This can also be a difficult transition. Product companies are in control of the design and manufacturing of their products. Nokia was lauded for being a centuries-old Scandinavian pulp and paper company that transitioned to a 21st century cell phone pioneer. However, it was resolutely self-reliant, building its success on in-house technology and product development. It failed to successfully shift to the exterior team-based business model required in the smart phone industry.

In the context of your new business development-driven, end user and complementor service-oriented, team participant strategies and activities, you must adjust or broaden your organizational identity accordingly. However, it is important to keep as much as possible the attributes of your organizational identity that made your company a success. When Amazon moved from being a simple online bookstore (albeit the “earth’s largest”) to its current platform with a huge variety of products mostly from third-party sellers, it did not forget the customer-centric philosophy that had guided its activities from the beginning. It thus broadened its identity from “the earth’s largest bookstore” to “the earth’s most customer-centric company.” Apple’s identity had been built on using design to create the most customer-friendly experiences. Its development of its own streaming media system (to access other firms’ products) as opposed to using the standard Bluetooth application is consistent with its desire to ensure customer-friendly experiences — while recognizing the importance of its partners.

Your organizational identity will need to be adapted, sometimes dramatically, to your new platform business model. Otherwise, there will be a disconnect between what you say you do and what you are actually doing — a disconnect that can undermine your innovativeness, creativity and entrepreneurial activities. However, the core attributes that differentiated your company in the past and built its success must not be abandoned.

Contact Us

Authors

Institutions

Source

Idea conceived

  • November 2013

Idea posted

  • August 2014

DOI number

10.13007/422

Subject

Real Time Analytics