Reflections on World Economic Forum Digital Platforms & Ecosystems working group meeting, June 2018, New York

The World Economic Forum held the first meeting of its new 'Digital Platforms & Ecosystems' executive working group last Thursday, at its offices in New York.

It was a high-powered gathering of about 40 senior participants from business, public policy and academia from across the globe. Organisations represented included GE, Google, Salesforce, Deutsche Bank, Allianz, Standard Chartered, Commerzbank, Kaiser Permanente, SAP, Zuora, Upwork, Booking.com, InBev, Henkel, DHL, Ikea, Daimler, Cemex, Schneider Electric, Cognizant, Coca-Cola, Kloeckner, MIT, London Business School, NYU.

Many thanks to Cristian Citu, the program leader, for his excellent organisation and warm hosting.

The focus of the overall project is nicely summed up by the following chart. The outputs will be a set of practical frameworks, blueprints, and best practices that corporate leaders, policy makers and start-ups can adopt/adapt.

From a commercial perspective, this topic is very important as less than 2% of companies today have effective growth strategies and incumbent business models are getting increasingly stale as digitisation continues to bite. Strategies incorporating digital platforms and ecosystems offer a new way to grow and create value.

Along with some others I was asked to give a short presentation to stimulate the debate. I shared some analysis and frameworks from the New Growth Playbook executive training programme.

Below are the slides I presented, with some commentary.

Marshall Van Alstyne, Professor at Boston University and co-author of the superb  Platform Revolution, had already described the key principles of platforms and why they beat product-centric business models by exploiting network effects.

These were discussed and debated with leaders of organisations who already ran digital platforms, either as start-ups, Unicorns or incumbents, and with those who enabled them with new tools, such as subscription and API management systems.

Issues of trust, identity, regulation and the impact of new technologies like blockchain were discussed in-depth at the event.

The importance of creating 'magical customer experiences' came through as a key theme.

This is a useful point to make when discussing platform strategies with executives: platforms are fundamentally about enabling deeper and richer relations with customers (see this video about how Amazon achieves this). This is a goal everyone can understand and support.

The difference - and complication - is that there are many types of 'customer' within a platform-powered ecosystem: consumers, producers and developers whose roles can swap in different situations and who 'pay' in different ways, with money, time, and/or attention. This is very different from a traditional linear business model, which 98% of companies still run today.

From a public policy and society point of view the concept of a 'magical customer experience' also needs to take into consideration freelance producers and workers in a 'gig economy' (eg. Uber drivers) whose labour can quickly become commoditised and exploited. (For more on this, see this excellent report for the International Labour Organisation by Sangeet Choudary)

My presentation followed a lively intro from Prof Michael Jacobides from London Business School about ecosystems

I focused on the practicalities of incumbent organisations generating value from platform-powered ecosystems. I covered five topics which I believe are important and often ignored:

The starting point has to be much more profound education and engagement of today's leaders. In many of the companies I speak to less than 10% of the Executive Team and Board understand the basic economics of platform-based business models. It wasn't taught when they were at business school and they've never run a business that operates them.

Without a fundamental change in the way leaders think about how to generate growth and value in a hyperconnected digital world traditional companies will continue to act in the same way they always have (in terms of capital allocation, organisation structures, operational processes and metrics) and not get anything different (beyond continued disruption and/or low growth, hard growth...or even worse).

My research shows that most companies are constrained by what they know (or don't know) and their past 'successes'. The immune system of the existing operation prevents breakthrough innovations. So, many leaders find it hard to incorporate new types of business models.

A careful approach to executive education that addresses existing 'mental models' is therefore needed.

One useful approach is to hold a new type of mirror up to executives - to show why their current business model performs as it does, compared to others. I'm surprised at how rarely this is done.

Most companies have a pre-dominant business model that monetises a particular type of 'capital'.

Car companies make and sell physical objects. They also sell some insurance (monetising financial and human capital), and increasingly are looking to create digital services. But 80% of their business model rotates around physical capital.

The problem is that cars are getting more and more expensive to produce (up to 25% more in the future), as consumers expect, regulators require and competition stimulates investment into more advanced technological capabilities.

Investors find this 'asset heavy' business model less attractive than others and so valuation multiples and other measures of future growth potential are low.

Car companies seek to 'diversify' by expanding into new areas that are more asset light, such as 'transportation services', which also have the potential to create direct and ongoing relationships with consumers between car purchases.

Some have started to invest into business models which are based on monetising 'relational capital' due to the attractive economic characteristics and successes of Uber et al. Daimler, for example, bought MyTaxi, a car-hailing service.

But the chart below shows that most incumbents have a long way to go to catch up with the business model 'portfolios' of the digital masters.

Apple and Amazon used to operate pre-dominantly asset-heavy business models based on physical goods. But they transformed their business models by re-allocating capital (money, management attention, skills) towards exploiting 'relational capital' via multi-sided platforms and ecosystems.

Microsoft came from a software starting point (and invests more and more in ecosystems, witness the recent GitHub acquisition). Alibaba started by creating a platform-powered ecosystem and has since incorporated other types of business model into its mix.

You can see this in the pie charts below which show the relative levels of 'investment' in different types of business model. Compare that to the portfolios of most incumbent organisations in most traditional industries today. They are tinkering at best. Or, more charitably, let's say, 'feeling their way'...

But what is most important about the analysis below is how the digital masters have created a total business model 'system' that creates synergies between all the elements.

This is what creating a 'platform-powered ecosystem' means. And this is the skill that incumbents need to learn if they want to keep up with economic trends and stay relevant to their customers and partners. (See the Amazon video again)

The good news is that there is a new breed of 'pioneers and mavericks' that incumbents can learn from. Most are from outside the West. Below are a few examples (more details and other case studies in the New Growth Playbook).

Xiaomi was born in 2011 when Nokia was dying. They are due to IPO this year at a valuation of $50bn+. They offer a great case study in leadership mental models: ambition, understanding and commitment. See here for a detailed analysis.

Naspers started life as an Afrikaaner newspaper publisher over 100 years ago. It transformed it's business model 18 years ago and is now Africa's most valuable company at $100bn.

Softbank is breaking the business model mould of traditional 'telcos' through an appreciation of the power of platforms and ecosystems and a commitment to investing in them and integrating them into their operations (see why here and here).

Ping An should also offer inspiration to incumbent leaders. Ostensibly a 30 year old Chinese insurance company, it morphed its whole business model five years ago towards becoming a platform-powered ecosystem orchestrator.

It operates several non financial services platforms to deepen its relationships with its customers and partners, and invests 1% of its profits in new technology. 

You can see in the chart below the financial impact of Ping An's bold business model transformation and my projections for how it will evolve into the future.

(HSBC sold its stake in Ping An after the financial crisis. Recently Ping An bought 5% of HSBC and for a while this year had a higher valuation.)

Of course, every company operates in different conditions. But these non-Western companies all demonstrate the value of investing heavily in and committing to platform-powered ecosystems.

Key Actions

For traditional incumbents in any sector there are some key actions they can take to help them move forward effectively.

They can be undertaken as part of the process of executive education and engagement, as inputs and support. 

 

The first is to analyse existing markets and new 'white space' opportunities through a 'platform and ecosystem' lens. There are new tools and techniques which I find are  very helpful to uncover new potential flows of value (tangible and intangible) between multiple stakeholders that can be enabled.

The second is to show how platform activity can support the most profitable part of the existing business and create additional 'pull' for it. This is about designing a 'new growth flywheel' for the company or business unit which successfully integrates platform and ecosystem thinking.

Thirdly, it's important to realise that there are in fact 10 Types of Platform Strategy that companies can adopt, each with different benefits. They can be applied at different levels of the organisation: corporate centre, BU and/or product group level.

Creating an overall business model strategy requires full understanding of each of these and how they support a new growth flywheel.

Fourthly, to bring these ideas to life and grab attention of senior management, of the Board and of shareholders, it's important to extrapolate the potential value in terms of impact on growth rates, valuation multiples, customer satisfaction, margins, return on assets and other key metrics. This is most effective when the economics of platform-based business models are understood. 

But the most important activity, ultimately, is the fifth: creating an 'ambidextrous organisation'. This means not trying to tackle the immune system of the existing business operations head on. It means establishing a unit with the power, prestige and people to invent the future using very different methods and tools. 

Unfortunately, today 90-95% of incumbents either have no such unit or if they do (an R&D function sometimes, or an incubator) it does not operate at internet speed, is often under funded, and is not focused on platform based business model transformation.

Arms-length, off balance sheet investments, 'techquisitions' or 'acquihires', and partnerships with start-ups are all fine to start with, but they do not move the needle in terms of financial performance in a digital and increasingly platform economy.

It's time for bigger, bolder moves. Incumbents have plenty of assets and advantages to leverage, especially as we move into an IoT world.

It's time for a Business Model Renaissance for incumbent industry in all parts of the world, to create new levels of productivity and social benefits. I'm delighted the World Economic Forum is lending its weight to help achieve this, and am looking forward to supporting the effort.

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