Geoffrey Parker is a professor of engineering at Dartmouth College (effective July 2016) and a visiting scholar at the MIT Initiative on the Digital Economy. He has been a professor of management science at Tulane University since 1998.

Marshall W. Van Alstyne is one of the world’s foremost scholars of information business models, is a visiting scholar at the MIT Initiative on the Digital Economy, and holds a tenured professorship at Boston University.

Along with Sangeet Paul Choudhary, Entrepreneur in Residence at INSEAD, the three are co-authors of Platform Revolution: How Networked Markets are Transforming the Economy and How to Make Them Work for You.

I’d like to begin with a comment – this book is now the leading book on ecosystem strategy. To me this is the future of strategy… ecosystem and platform thinking.
We’re glad to hear you say that. We just published an article in Harvard Business Review called Pipelines, Platforms, and the New Rules of Strategy about the power of platforms and leveraging the new rules of strategy they give rise to. We talk about Apple’s success in building a platform business within a conventional product firm. This holds critical lessons for companies across industries.

The move to platforms involves three key shifts:

1. From resource control to resource orchestration.
The resource-based view of competition holds that firms gain advantage by controlling scarce and valuable—ideally, inimitable—assets. In a pipeline world, those include tangible assets such as mines and real estate and intangible assets like intellectual property. With platforms, the assets that are hard to copy are the community and the resources its members own and contribute, be they rooms or cars or ideas and information. In other words, the network of producers and consumers is the chief asset.

2. From internal optimization to external interaction.
Pipeline firms organize their internal labor and resources to create value by optimizing an entire chain of product activities, from materials sourcing to sales and service. Platforms create value by facilitating interactions between external producers and consumers. Because of this external orientation, they often shed even variable costs of production. The emphasis shifts from dictating processes to persuading participants, and ecosystem governance becomes an essential skill.

3. From a focus on customer value to a focus on ecosystem value.
Pipelines seek to maximize the lifetime value of individual customers of products and services, who, in effect, sit at the end of a linear process. By contrast, platforms seek to maximize the total value of an expanding ecosystem in a circular, iterative, feedback-driven process. Sometimes that requires subsidizing one type of consumer in order to attract another type.

Firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.  Of course, that is what our book is about.

So how do you define platform?  And what is the Platform Revolution?
Platforms have existed for years. Malls link consumers and merchants; newspapers connect subscribers and advertisers.

What’s new is that information technology has profoundly reduced the need to own physical infrastructure and assets. IT makes building and scaling up platforms vastly simpler and cheaper, allows nearly frictionless participation that strengthens network effects, and enhances the ability to capture, analyze, and exchange huge amounts of data that increase the platform’s value to all.

Uber, Alibaba and Airbnb, are all platform businesses, and they are all disrupting their industries.

A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and sets governance conditions for them. The platform’s purpose is to consummate matches among users and facilitate the exchange of goods, services, or some sort of social currency, thus enabling meaningful value exchanges between all participants.

Platforms all have an ecosystem with the same basic structure, comprising four types of players:

Owners of platforms control their intellectual property and governance. Providers serve as the platforms’ interface with users. Producers create their offerings, and consumers use those offerings.

Platforms define who participates, how they divide or share value, and, perhaps most importantly, how to resolve conflicts between participants. The matching exchange may be between user to user, consumer to consumer, or producer to consumer. There’s value in intangibles, social currency, even psychological needs.

For marketers, we see a shift with push marketing becoming pull, or in-bound marketing. External participants create value outside the organization. There are more smart people outside the organization than within. How will your organization tap into that talent?

At an operational level, platforms allow companies to move from “just-in-time” inventories to “not-even-mine” inventories. Even variable costs are outsourced. A company no longer has to own all the assets it needs to create value. It does not need to build spare capacity. It’s capex is significantly lower because it uses the resources of third parties.

Can you explain how platforms create network effects – negative and positive?
Network effects refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refers to the ability of a large, well-managed platform community to produce significant value for each user of the platform. Negative network effects refers to the possibility that the growth in numbers of a poorly managed platform can reduce the value produced for each user or participant. David Sacks‘ napkin sketch (below) for Uber’s network effect shows the impact of a two-sided network.  The more drivers, the more geographic coverage.  The more geographic coverage, the less driver downtime and lower prices.  This virtuous loop creates a spiral of value for all participants.

David Sacks’ napkin sketch of Uber’s virtuous cycle

The Uber example is what we call a two-sided network effect in which both the driver and the customer gain together.

How do you recommend building platforms?
We think there are three factors at work here:

1. Magnetism: one side attracts the other – so more drivers for example means lower prices and more customer demand.
2. User-generated content – from comments and reviews, to expert contributions that educate participants.
3. Implicit creation of value – the platform owners glean learning from the platform users themselves to continuously improve the experience.

We see four distinct approaches for managing and participating in these platforms: a proprietary model, a licensing model, a joint-venture model, and a shared model.

Reference: FIGURE 7.3, Four models for managing and sponsoring platforms (Platform Revolution, p. 136) 

No matter what the model, we see the need for governance.  Platforms must have a governance structure whether it is motivated by profit (as are most platforms today) or whether they will have more of a share ownership.  Wherever innovation is needed to keep the core platform competitive, we see investment as central to survival.  When investment is at the periphery, and the core of a platform is stable, we envision more collective business models.

Businesses many want to focus on the most valuable interactions in the platform, and build their business around those specific activities.  Less important functions and activities can be developed by platform partners – third parties that are enabled by the platform.

What industries are most vulnerable to the platform revolution?
In the years to come, we think certain types of businesses will be more likely to be impacted:

• Information-intensive industries
• Industries with non-scalable gatekeepers
• Highly fragmented industries
• Industries characterized by extreme information asymmetries.

Conversely, we see industries like healthcare, banking and even education resisting this shift for the following reasons:

• Industries with high regulatory control
• Industries with high failure costs
• Resource-intensive industries

The impact of these factors will change over time. As more and more processes and tools get connected to the Internet, every industry has the potential to become an information-intensive industry. For example, resource-intensive industries like mining and energy will increasingly need to leverage the power of platforms, creating efficiency gains and faster learning by connecting their resources— material, labor, and machines—over a central network to coordinate workflows. Over the next few years, we will see the start of transformation in large resource-intensive companies as they leverage platforms toward greater efficiency gains.

What should businesses be doing to build customer intimacy in a platform world?
There are two approaches – one, where the business itself focuses on learning from the interactions of the platform participants to continuously refine their value proposition.  We call this the “sensing function” of the platform.  For example, Netflix can quickly learn which pilot programs will likely succeed before making significant investments in programming.

Or Amazon can learn what will sell virtually before it deploys a pop-up store…?
Yes, exactly.  This sensing function is a competitive edge.

The second approach is to encourage third parties to provide services that you don’t. So this creates a market for other participants on your platform.

I was intrigued by your chart showing the growth in platform businesses in North America and Asia but weakness in Europe. What is that about?

Reference: FIGURE 1.1 (Platform Revolution) Source: Peter Evans, Center for Global Enterprise

We just discussed this recently in Europe. We see three reasons.  One – language. Both English and Mandarin have a large population to support large platforms.  And second, the regulatory regime.  In Europe there are too many barriers – for example, each country has a different privacy policy which does not easily facilitate platform growth.  Silicon Valley is the third reason.  The innovative and collaborative platform thinking is a product of the culture of the Valley. Of course that culture exists in other pockets around the world, but we’re lucky to have this engine of ingenuity in the US.

INTERVIEW by Christian Sarkar