AlignOrg Solutions recently hosted a free webinar helping companies explore platform business models. What makes them so desirable? How are they different from traditional business models? Why are they getting so much attention? Despite the appeal, one of the challenges of a platform business model is the governance systems required to make them operate effectively to take advantage of the strategic benefits of the platform.
In a traditional, vertically integrated business model, leaders execute a clear governance process over supply, manufacturing, sales, and others. They do this through direct control over or ownership of the processes, resources, and decisions that contribute value to a product or service that customers choose. In a platform business model, however, a traditional hierarchical governance model may not suffice. Unlike vertically integrated businesses, a platform behaves like a mini-market ecosystem, arranging connections between providers and customers. Rather than enforcing rigid governance systems relying on direct control or ownership, platform businesses must design their organizations in ways that properly incentivize participants to contribute and “play by the rules.”
The following four principles explore how platform business models establish the governance needed to ensure quality, maintain service, assure accountability, and preserve competitive distinctiveness while incentivizing providers and customers to “buy-in”:
Governance through core products and services. A common way that businesses create governance over their platform is through core products and services. When a business establishes a platform around their core products/services, they can inherently create boundaries around which other providers need to operate. In other words, providers compliment the products/services that the platform owners provide but only within the bounds of the products and services themselves.
For example, Apple provides core products and services (e.g., computers, phones, payment services, apps, music, etc.). If providers that sell cases, headphones, power cords, applications, or music want to participate on the Apple platform, they must do so in a complimentary way with Apple’s core products. More importantly, these complimentary providers need to ensure they work with and on Apple’s systems (e.g., operating systems, technical standards, payment terms, development protocols, etc.).
When Apple changes the products, services, systems, or policies on which they operate (like the recent introduction of the USB-C adapter), providers must also change to continue their services/products.
Governance through customers. Many successful platforms govern their providers by building customer feedback and rating mechanisms into their platform.
Uber is a great example of this. Uber continues to attract a lot of professional and non-professional drivers alike. Their platform diminishes the barriers of entry to the traditional taxi business and allows even the casual Uber driver to participate as much or little as s/he likes.
From the outside looking in, Uber has little to no governance mechanisms, few feedback loops to Uber itself, and limited customer support. What Uber is doing, however, is enabling providers to interact with customers and providing a simple rating tool in their app. In this way, Uber governs the quality of their drivers’ performance through the scores and ratings that customers leave after each ride. This feedback mechanism allows customers to choose providers that meet their needs while helping drivers change practices that aren’t appreciated by customers. Uber merely diminished the barriers to taxi services and the customers help maintain quality through driver-specific feedback.
Governance through marketing. Many providers turn to platforms to push the awareness of their products. Without a platform, they would struggle to create customer awareness of their products or penetrate their desired market.
Consider the online global marketplace that the company, Etsy, has created. For many artisans and small-time businesses, they don’t have a local market to sustain their offering nor the resources to get the word out about their products on a regional or global scale. Etsy provides a virtual marketplace for consumers world-wide and a reputation, size, and online presence to attract customers and amplify unique offerings. That online presence, controlled by Etsy, provides the governance they need over providers despite not having any control over how providers interact with customers or the products they produce.
Governance through simplicity. Customers want a simple, intuitive, and safe buying experience, and that can be hard to create. However, platforms known for simplicity attract and keep customers and in turn help govern provider’s actions and business practices.
You can’t have a discussion about platform business models and not mention Amazon. One-click buying options, dash buttons, suggested purchases, and bundled packages make Amazon an overall leader in an intuitive, fast, and safe buying experience. If you want access to the many customers that Amazon attracts through their simple site and business practices, as a provider you must play by Amazon’s rules. The power of Amazon’s platform helps sellers operate in up-front and consistent ways. If each customer were to find the thousands of sellers on Amazon individually, imagine the variety of business practices each would employ. Amazon standardizes these and helps ensure an online retail experience that is simple, straightforward, and consistent.
The governance mechanisms above are by no means exhaustive nor are they exclusive of one another. One platform might utilize all the governance principles above or just one. Regardless, they provide an idea of how platform business models can design their products, services, and offerings to enable the same level of governance as traditional business models despite the independent nature of their participants.
While platform business models are changing the game for many companies and markets, that doesn’t mean that we should throw out everything we know about business operations, structures, and processes. Governance is an important part of any business or platform and conscious organization design can ensure that businesses continue to grow and govern their businesses even if their business model shifts.