Why Platforms and Ecosystems

written by Inge Rickhoff and Oscar Stark

"The complexity of today’s modern business landscape is making the ability for organisations to survive on their own, more and more difficult. Many are recognising this reality and turning to participate in ecosystems to increase their ability to compete. This movement is predicted by PWC to represent two-thirds of global economic activity by 2030" - PWC, May 2022

Drivers of change

Change in business is not a new concept. Consumers generally change preferences to their needs, which serve as a trigger that businesses need to respond to, to stay relevant or differentiate themselves. This model has largely stayed pretty constant as companies would endeavour to improve their offering every year. Today, there is however a shift in this model, as the ability of technology is changing the organisations' ability to respond to consumer needs. Technology is also changing the economics around the cost to manufacture and service these needs, resulting in increased competitive pressure.

This impact viewed in conjunction with how technology is serving as an enabler to rising platform business models, emphasises the compounding impact of technology. If you then take stock of the reality that technology is improving at an exponential rate (based on Moore’s Law), it implies that the ability of technology doubles roughly every two years. The result of this is that in two years’ time, you will be able to solve problems with technology which you cannot today. This igniting an arms race of change for business.

How this model plays out

The objective is to enable an ecosystem where network effects can play out, based on an underlying platform business, which enables common functions and services. Here propositions are offered to common consumer needs, which attract customers to the platform. As the customer base builds out the platform expands its offering, driving increased engagement of customers. The expansion of offering creates the opportunity to increase the participants in the ecosystem, which in turn creates more opportunity for value exchange. As the platform enables increased engagement and value exchange, participants in the ecosystem are empowered to increase engagement and value creation, which contribute to the network effect.

Although platform businesses depend on levels of organic connection, a strong rules-based approach is in play to support the integrity of the business, and also help frame the trust construct in which the various participants engage to exchange value. Without these practices in play the business model fails.

Nature of platform economics

The economics which sits behind the platform business model rests on two primary pillars of focus – customer economics and production leverage.

The focus on the customer is premised on the cost of acquiring a customer and then expanding the value of this customer of the lifetime of customer engagement with the platform business.

On the operational leverage side, the objective is to get the per-unit cost down as low as possible as the volume scales. This entails managing the variable cost of the service to rather decrease with increased consumption, as opposed to increasing linearly as consumption increases.

Where to from here

If this conversation has piqued your interest and you are wondering how you should think about getting your organisation orientated towards platforms and ecosystems, here are a few points to consider:

• What role does your organisation want to play in the ecosystem?

• Which customer needs in which domains (grouping of consumer needs, e.g. entertainment, health, education, etc.) does your organisation want to focus on, considering that ecosystems might span across various domains?

• Which are the core capabilities that your organisation can leverage in an ecosystem environment?

• Does your organisation have any data sources it can tap into to give them an advantage?

• Does your organisation know how to collaborate?

Answering these questions is often quite challenging, but necessary, as they help organisations appreciate how their existing world relates to this platform world. This is necessary, as the nature of platform and ecosystems clearly differ from the traditional linear business model.

References:

PWC, May 2022, Global business ecosystems 2030 Market size and potential, p5, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft.