LLamasoft Supply Chain Blog

← Back to Blog

The Psychology of Building Enterprise Platforms

By Arad Adler  January 29, 2019

We live in a platform-powered shared economy. Nearly all industries from transport (Uber), retail (Amazon), payment (Square), service (Etsy) and much more have been touched by the power of digitalized platforms. In some instances, the power of industry disruptions has been such that governments and regulators have lagged far behind the changes. Over time, governments needed to adjust laws to conform to these new socially accepted conventions. In just the past few years, Uber, the ride-sharing startup that takes passengers from point A to point B on demand, has disrupted the taxi business. The immediate comfort and ease of fare payment showed its value to the customer immediately and as a result put the livelihoods of taxi companies and individual taxi owners at stake. This set the traditional taxi industry, which needed to operate with a license within the city limits and a limited number of operating taxis, in financial hardship. Now, the taxi industry ought to compete with a company that writes software, maintains servers, owns zero taxis and does not require a taxi license to transport people. So, what is a platform and what are the economic characteristics of platforms? What roles do platforms play in the overall strategic direction of companies? and finally What can enterprise businesses learn from existing platforms?

What is a platform and what are the economic characteristics of platforms?

The book ‘Platform Strategy’ by Laure Claire Reillier and Benoit Reillier defines a platform as “A business creating significant value through the acquisition, matching and connection of two or more customer groups to enable them to transact.” In other words, a platform is a business that delivers value to the end users by connecting them to one another and enabling participants to interact with each other or to use its service offerings in various levels. The value-add by connecting these different groups is such that it ultimately distinguishes itself from the traditional businesses concerning pricing, governance and the markets they serve. It is worth noting that the word ‘platform’ has frequently been used recently; however, companies such as Visa or MasterCard have been connecting customers to merchants for many years, and they perfectly fit into the above definition of a platform. While Visa and Mastercard act as transaction platforms similar to Uber and Lyft, other types of platforms include Innovation (Intel, Microsoft), Integrated (Google, Amazon, and Alibaba) and Investment (Softbank and Priceline).

The two common characteristics of platforms are the ‘Network Effects’ and ‘Optimization’. The value of the product or service increases as more users are directly or indirectly involved in the platform ecosystem. Facebook, for example, benefits from direct peer-to-peer interconnections whereas Microsoft gains and delivers tremendous value by enabling developers to build software applications on top of its technology stack. In other words, Microsoft is the technology enabler of technologies. The innovative and collaborative nature of platforms also enables the platform owners to constantly optimize for their target markets by analyzing large amounts of data and balance the service offerings to the needs of the end users.

What roles do platforms play in the overall strategic direction of companies?

Platform ecosystems present a degree of openness to the business models in which traditional business models could not achieve. As the platform gains network effects more participants generate content onto the platform. In doing so, they also make positive contributions to their own business model. This mutual participation in success is the key distinguisher with the traditional models. Depending on the level of openness, platforms often provide software gateways which are called application programming interfaces, APIs, in exchange for a small fee, to the degree that other players can create innovative solutions that would ultimately lead to value creation for both the platform provider and the end users.

The mix of assets and platforms can come with different varieties. On one end we have industries that are integrating platforms with their asset-heavy business structure and on the other end we have software industry that is creating platform solutions while owning little to no assets other than computers and servers. Understanding full consequences of platform enabled enterprise ecosystems is still unknown. In fact, the nonprofit research institution ‘Center for Global Enterprise’ aims to answer this very important question. A recent global survey that is published by this institution concludes that the success of the enterprise platform lies beneath staying on top of cutting edge technology in building complex platform systems as well as beginning to utilize machine learning and artificial intelligence.

What can enterprise businesses learn from existing platforms?

Platforms are seen as ecosystems to drive innovation and profit. The rules that govern the platforms have to be carefully chosen. Much of the rules that relate to the governance of the platforms exist outside the boundaries of the platform itself and businesses have the luxury of setting their own rules in building the community and controlling the ecosystem that fosters trust and innovation. Businesses should encourage their platform participants to have contributions to the platform and build connections. The platform owners, on the other hand, should act as a neutral entity that resolves disputes and manages bottlenecks.

Enterprise businesses should worry less about a viral growth and focus more on sustainable network effects that get customers hooked with the platform’s core value proposition in the long term. This means that monetization of products and services can be more complicated than what traditional businesses do on what is known as ‘cost plus’. Platform pricing is not a simple question to answer as it requires a clear understanding of the multi-sided markets (that is users and producers) and the value that the platform gains over time as it reaches out to a critical mass usage.

Feedback in building platforms should come from all directions. This means the people that are involved with the architecture of the platform are only one side of the equation. Product management and customer success provide valuable resources that would ultimately lead the shaping of platform vision and mission. This means that building a positive feedback loop between the existing and prospective customers is the utmost importance not only at the pre-launch stage of the products but throughout the lifespan of those products.

Finally, Network effects are deeply intertwined with the mission and vision of the firms. In today’s fast-changing business environment, you have to be able to adapt to new opportunities that satisfy your mission and vision of your company knowing that those opportunities come at a risk. Satya Nadella, Microsoft CEO, in a recent interview with Freakonomics radio, mentioned that “What you have to do is be great at being able to hit refresh at the crucial times and know that not every one of those moments of refresh is going to work out”.

Learn more about LLamasoft and supply chain design by following us on LinkedIn.