What Is a Platform Business and How Can It Revolutionize Business?

Platform business models enable companies to innovate and generate superior value with reduced capital costs. They are therefore radically more effective than traditional business approaches.

The first wave of successful platform companies—Amazon, Airbnb, Apple, Facebook, Microsoft, Uber, and others—is just the beginning. More and more industries are being transformed, and an ever-larger number of incumbents are creating or joining platforms.

John Deere, the company known for its green tractors, is now a platform company. John Deere’s platform gives farmers access to vast amounts of data and multiple partners that help them radically increase their productivity.

Lanxess, the German US $11 billion chemical company, created its own platform Chemodis. It connects third-party sellers of chemicals and potential buyers. In this way, Lanxess was not eaten by the platform revolution, but is driving it and reaping the benefits.

A new approach to strategy

Traditionally, companies would choose an industry or a set of industries and strive for a leading position. A central element of this strategy is the assumption that industry boundaries remain stable. Platform business models are challenging this approach.

Platform companies have what we call industry transcending strategies. They are no longer defined by a single industry. Rather, they leverage their unique strengths to create value in multiple industries that others consider unrelated.

KONE, the world’s second-largest elevator company, is moving beyond elevators. It is connecting people and companies in a new ecosystem to create intelligent services and people flows. KONE’s ecosystem contains, for example, robot minibars that move autonomously within hotels to satisfy customers’ needs.

Of course, the leading platform companies have also transcended their original focus. Amazon used to be an online book store, but now it sells everything online and in physical locations. Apple used to focus on computers, but now it's producing movies and offering music services, in addition to orchestrating the vast ecosystem around the iPhone and AppStore. Uber has expanded from a simple limousine service to taxis, package and food delivery, and self-driving cars.

Successful platforms have three key elements that enable them to transcend industry boundaries.

1. Network effects
   

An essential element of all platform business models is that they connect multiple independent actors to create value. The firm is no longer owning, employing and controlling everything that happens. Instead, actors outside the firm boundary provide their contribution and get something in return.

What the outsiders get in return is much influenced by the other outsiders operating in the platform. When you order an Uber, you benefit from the independent drivers. The more drivers there are, the faster you get your ride. And the drivers benefit from ride-seekers: the more ride-seekers there are, the more money a driver can make.

The positive spiral is formally referred to as network effects. It means that the platform's value increases for each user as the number of users within the platform increases.

Network effects can be direct or indirect. Direct network effects take place when the network effects occur within users on the same side of the platform. For example, the teleconferencing firm Zoom enjoys direct network effects: the more individuals start using Zoom, the more people each Zoom user can reach via Zoom.

Companies can also intentionally seek to create and amplify direct network effects for value creation. Amazon did not enable its customers to write product reviews for altruistic reasons. Instead, such reviews create a value-adding network effect. When a customer sees others' reviews, they can make a more informed decision. Hence, the more customers Amazon has, the more value-adding it becomes for its customers.

Indirect network effects take place when the benefits occur for the other side of the platform. When you order an Uber, you don’t benefit directly from other people ordering Uber’s too. In fact, they might even be competing against you for the same driver. But you benefit from them indirectly. When there are more people ordering riders, the number of drivers increases. And this benefits you.

1. AI-enabled learning loop
   

A second key element of successful platforms is that they are constantly getting better. The accuracy of Uber's ride-time estimates has increased significantly over time. Amazon's recommendations are ever more spot-on for you. KONE's service robot is getting faster and more reliable as we speak.

While people have a role in continuous improvement, data and AI create a new level of learning. Traditionally, every individual working for your company would learn from their experience. They would see what works and what does not.

AI is creating a new level of learning because it helps companies learn from all actions and outcomes simultaneously and centrally. Rather than having each driver separately learning how long it takes to drive from one location to another, Uber uses data from millions of rides to make more accurate predictions.

With such an approach, the accuracy of Uber's predictions gets much better than any single individual could ever master. This makes it impossible for companies that do not leverage data and AI to match Uber.

Likewise, there is no human working at Amazon thinking about what you might want to buy next. Obviously, the recommendations are based on data on millions of other users and their behaviors. That's a larger number of people profiles and transactions than any salesperson has ever been able to master in human history. Hence, it's no surprise that the recommendations work.

The same logic applies across multiple industries. If you only rely on individual-level intuitive learning and occasional information sharing between individuals, you are learning in slow motion.

1. Human intelligence, insight and creativity
   

But there is a place for humans, too. They are no longer enough for continuous learning. However, humans are still the only entity capable of creative insights that enable discontinuous leaps from one industry to another.

Humans have the mental capability to imagine how an asset that is used for one purpose could be used for something radically different. Amazon's algorithms did not help the company move from running an online marketplace to offering cloud services.

It was the brilliant minds in the management team who did it. They recognized that the servers that they used for running the online store were effective and reliable. This led to the insight that others might want to use them as well and pay for their use.

Conclusion: what does this mean for your business?

Platforms are winning. The only question is whether you will be on board or not. To succeed, you need to consider three things:

1. How can you leverage external actors and generate beneficial network effects among them?
2. How will you collect and leverage data to get better at what your platform does every day?
3. What is your firm’s next creative insight that will help you transcend industry boundaries?

Read more from Platform Strategy: Transform Your Business with AI, Platforms and Human Intelligence.