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Platforms and ecosystems: What is all the buzz about? Why does it matter?

12 April 2019

If you ask yourself why companies like Google, Amazon and Apple are so successful, it is because they were the first to understand about platform strategies and how to best implement them.

While in the 20st century a larger scale was a prerequisite to be competitive, this seems no longer the case in the 21stcentury. We see large, scaled companies such as financial institutions, having difficulties to keep up with and defend their market from both bigtechs and fintechs. Infrastructure has become rentable, distribution models have changed thanks to the internet and new markets have opened up, making it possible for niche players to build a multibillion business.

The democratization of infrastructure did not only take away the most important competitive advantage of large scaled companies. The complexity, inflexibility and required maintenance of the legacy infrastructure actually becomes their single largest disadvantage, while challengers can fully focus on the outside, the ecosystem and the customer. 

Platforms and Ecosystems: What is all the fuzz about?

This shift is so fundamental that a lack of understanding, a clear strategy and a roadmap to adapt, might herald the end of your business.

Let’s get some clarity first around the buzzword bingo and define what the difference exactly is between an ecosystem and a platform.

  • An ecosystem is a community of interacting entities. The members of the ecosystem can be organizations, businesses and individuals, all creating value for one another in some way; mostly by producing or consuming goods and services.
  • A platform is the way a particular community or ecosystem is organized to interact with one another and to create value. A platform typically is focused on bringing the ecosystem together and reducing friction for interactions to take place.

 

Now that we have that straight, we’ll have a closer look at the two main platform strategies: the “product/service platformization” and the “ecosystem orchestration” strategy.

The product/service platformization is a strategy where you take some particular data, activity or knowledge, or more generally a specific capability, productize it and build an ecosystem around it.

A well-known example of this strategy within the financial industry is Stripe. Stripe built a product, “Stripe Connect”, to accept money and pay out to third parties. It provides a full set of building blocks to support virtually any business model in any industry you can think of. Stripe managed to grow a business worth about 20 billion EUR in less than 10 years solely by commoditizing executing payments for the digital world. Thanks to the capturing of massive amounts of data, they gain insights from the ecosystem both to further refinetheir product and launch new products and services.

 Platforms and Ecosystems: why does it matter?

In this strategy the focus is on standardizing a capability,  product or service and commoditize it in a way that almost anyone in need for that capability can use it off of the shelf. This strategy is a “winner takes it all” strategy. Given the fact that every capability, product or service gets commoditized at some point in the future, it is of vital importance to determine the exact right time for the exact right capability to be commoditized. Missing out on the momentum, makes it very difficult, to not say impossible to ever catch up.

Did you ever wonder how the iPhone managed to dominate the smartphone market and make Apple big? Well, that’s because they managed to standardize and commoditize the development of mobile apps. Initially the iPhone had only a few in-house-developed apps. However, very soon after the launch of the iPhone back in 2007, Apple realized that instead of building the apps themselves, a much more scalable and smarter strategy was to standardize the way apps were built and allow for them to be built by others. 

The number of apps increased hugely. Today, we can’t imagine a world without apps. All apps are built either on Apple’s (iOS) or Android’s operating system. All other competition is vanished. This is “the winner takes all” demonstrated at its best.

 Ecosystem and platforms: why does it matter?

The second platform strategy is the ecosystem orchestration strategy. While in the previous strategy you seek to commoditize a capability, here the mission is to mobilize an ecosystem by removing any friction or hurdle that makes the interaction within the ecosystem suboptimal. Commonly known examples are Uber and Airbnb. They both remove friction in their ecosystem. Airbnb makes it easy and simple to rent a room or a house anywhere in the world from hosts you don’t know. The main hurdle to rent from or out to people you don’t know, is trust. And that’s exactly what Airbnb has tackled with the platform. This is a schoolbook example of the opportunities the internet created and how extremely scalable such a platform or ecosystem business is.

On top of the clear value proposition for all parties involved, the success of the platform also relies on its core, highly standardized capabilities such as the rating system building trust in the platform. Such a platform can only work if the core capabilities on which it depends, have reached a right level of standardization.

Take for instance peer to peer lending platforms, which are popping up like mushrooms. Even though this business is booming, it still did not manage to really threaten the traditional banks and remains an insignificant fraction of the total lending market. The main reason are the higher interest rates. Rates are higher because the core capability for lending, namely credit(risk) scoring, is not yet fully commoditized. If and when this happens, this type of platforms will be able to offer competitive interest rates and could take over the credit market currently dominated by banks in no time. The major investments VC’s are currently doing in this kind of platforms, do they announce the disruption of the credit market is at hand?

 

I believe that because of the disruptive character and the high scalability of platforms, every financial service provider needs to put this topic on the agenda and think about its ecosystem and platform strategy. The above described strategies are clearly linked and interdependent. In the next blog, I’ll further explain this link and elaborate on the right approach to define and implement your strategy successfully. Just watch out for our posts on social media!

Hope you found the blog interesting, if you have any comments, questions or feedback please share them!

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Arben Dervisholli

Written by Arben Dervisholli

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