The article below, which I co-authored with Barry Libert and Megan Beck, was published by Forbes last week at this link. (Next week I'll bring some of the ideas to life with an analysis of GE's digital transformation efforts...)
There is a new type of business model eating the world, and you know it as the Platform. The famous examples include Uber, Airbnb, Google, and Facebook, but there are many more. Platform, or ecosystem, business models put the company at the center of a self-managed network of producers and consumers. Platforms take advantage of two market effects with dramatic results: Moore’s law, which explains the exponential growth of computing power, and Metcalfe’s law, which describes the exponential growth potential of communication networks. These market-beating firms use digital platforms to connect networks of users, and grow at near-zero marginal cost, bringing disruption to every industry. Proof points are everywhere: seven of the ten most valuable companies globally and 70% of the billion dollar ‘unicorn’ start-ups are all platform companies. Thus far, platform startups have been walloping legacy firms, taking both customers and investor dollars. It remains to be seen if traditional incumbent organizations will be able to fight back and integrate platforms and networks into their own business models.
Unfortunately, there is a third, more profound, “law” that stands in the way: Parkinson’s Law of Triviality. It states “at any board meeting the amount of time devoted to an item on the agenda will be in inverse proportion to the difficulty of the issue.” C. Northcote Parkinson was a British humourist who articulated back in the 1950s a simple human truth that change is difficult and most people would prefer to avoid it and continue doing what they know best and is easiest.
Transformation, although valuable and much needed, is not the easiest course, and thus many leaders fall back on a skill that falls more neatly in their wheelhouse: optimization. Even worse, many confuse the two, believing that bringing in technology to optimize what the company already does will somehow transform its business model. Instead, leaders need to deeply understand the differences between digital optimization and business model transformation:
Digital optimization improves efficiency and effectiveness of a current business model. Since the current business models of most incumbent organizations are not generating the returns they used to, digital optimization creates incremental improvement, but does not allow companies to compete with platform disruptors.
Business model transformation is about boldly and dynamically changing the way capital is allocated and deployed by the organization, to generate better returns. By “capital,” we mean not just money, but also talent, ideas, things and relationships. Research shows that platform and network based business models generate better growth, profit, and value. Still most companies barely re-allocate capital year to year, continuing to support the same business activities in the same proportion. Yet they are surprised when their results don’t change.
We hear many organizations around the world talking about digital transformation, but their hearts, heads and pocket books are focused on digital optimization instead. The clearest differentiator that helps define the two different approaches is capital re-allocation, supported by a new set of metrics and core skills. To “platformify” is to change not just how an organization does something (optimization) but also what it does (transformation).
Business transformation, and particularly platformification, is not core skill sets of either corporate leaders or the consultants that they go to with their toughest problems. To truly platformify and transform a business model, leaders need to go deeper and reconsider some “fundamentals” about themselves and their firms:
So have any existing firms successfully gone through this process? Ones more interesting than the behemoths of Google, Facebook, and their peers? Thankfully, yes. There are an increasing number of incumbent organizations that have taken up the charge of plaformifying their businesses. Here are some interesting examples from around the world:
Companies large and small can platformify and leverage Moore and Metcalfe’s laws, but they must fight determinedly against the pull of Parkinson’s Law. The ease of keeping capital allocation the same year after year and making only minor adjustments to operations is incredibly attractive, even to innovative leaders. Large incumbent organizations must fight the pull of inertia if they wish to re-create a business model fit for the future.
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