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Article 3: Pipelines, platforms, and the new rules of strategy - Marshall W. Van Alstyne, Geoffrey G.Parker, and Sangeet Paul Choudary
Pipeline business: create value by controlling a linear series of activities – the classic value-chain model where inputs (raw
materials) at one end of the chain undergo steps and transform them to outputs (finished products).
Even though Nokia and other mobile phone manufacturers had strong product differentiation and other strengths, they
were overruled by Apple by exploiting the power of platforms and leveraging the new rules of strategy they give rise to.
Platform businesses: bring together producers and consumers in high-value exchanges. (e.g. malls link consumers and
merchants, but nowadays no physical infrastructure is needed to do so -> Uber, Alibaba, Airbnb). Information and
interactions are the source of the value.
Firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.
IT: building/scaling up platforms is simpler and cheaper and allows nearly frictionless participation that strengthens
network effects and enhances the ability to capture, analyse and exchange huge amounts of data that increase the
platform’s value to all.
The basic structure nowadays:
- Platform owners: control their intellectual property and governance.
- Providers: platforms’ interface with users.
- Producers: create offerings.
- Consumers: use offerings.
Pipeline product apple: iPhone
Platform: AppStore (connects app developers and iPhone owners)
Working platforms always win from pipelines.
The move from pipeline to platform involves 3 key shifts:
1. From resource control to resource orchestration: it’s about the resources the members own and contribute (cars-
Uber; rooms-Airbnb).
2. From internal optimization to external interaction: it’s about facilitating interactions between external producers and
consumers, by which often variable costs decrease.
3. From a focus on customer value to a focus on ecosystem value: it’s about maximizing total value of expanding
ecosystem in a circular, iterative, feedback-driven process.
Thus, Porter’s 5 forces still apply but on platforms these forces behave differently, and new factors come into play.
Network effects are the driving force behind every successful platform.
Greater scale generates more value, which attracts more participants, which creates more value. Firms that achieve more
platform participants offer a higher average value per transaction because a larger network better matches between
supply and demand and the richer the data that can be used to find matches.
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, Platform participants typically create value for a business and boundaries can shift rapidly. Consumers and producers can
swap roles in ways that generate value for the platform: you can ride with Uber today, and drive for it tomorrow. Platform
providers might also switch to compete with the owner. This is why Netflix controls consumers’ interactions with content
it offers, so it can extract value from platform owners while continuing to rely on their infrastructure.
Platform competition can arise from seemingly unrelated industries. Competitive threats tend to follow one of three
patterns:
1. They may come from an established platform with superior network effects that uses its relationships with customers
to enter your industry. Google has a wide network and a strong relationship with consumers, so they moved from web
search into mapping, mobile, etc.
2. Competitors may target an overlapping customer base with a distinctive new offering that leverages network effects:
Airbnb and Uber challenge the hotel and taxi industries.
3. Platforms that collect the same type of data as your firm go after your market: for health care, traditional providers,
producers of wearables like Fitbit and retail pharmacies like Walgreens are all launching platforms based on the health
data they own.
With platforms, a critical strategic aim is strong up-front design that will attract the desired participants, enable the right
interactions and encourage ever-more-powerful network effects. It’s usually wise to ensure the value of interactions for
participants before focusing on volume. Most successful platforms launch with a single type of interaction and later
extends (Facebook).
Platforms consist of rules and architecture and the owners decide how open both should be.
- Open architecture: players can access platform resources like app developer tools and create new sources of value.
- Open governance: players can shape the rules of trade and rewards sharing on the platform.
A fair reward system is key.
Normally, platforms open up more as they grow bigger. Effective governance will inspire outsiders to bring valuable
intellectual property to the platform.
New metrics managers need to track:
- Interaction failure: ‘no cars available’ in Uber. If this happens often, users will stop use and network effect diminishes.
- Engagement: content sharing and repeat visits for Facebook.
- Match quality: poor matches between needs of users and producers weaken network effects: Google monitors users’
clicking and reading habits to refine results.
- Negative network effects: badly managed platforms often suffer from problems that create negative feedback loops
and reduce value: banish troublemakers.
- Financial value.
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