Pipelines versus Platforms
Alibaba. Amazon. Uber. These are some of the fastest growing companies in the world. Founded in 1999, Alibaba’s market value reached US$231 billion by September 2014. Uber, the ridesharing mobile application, was founded in 2009; ten years later, however, the company boasts north of a 100 million users in over 780 cities in the world. This is the strength of platform businesses: if well managed, they grow their value and market share at an exponential rate. In this article, I would like to discuss the difference between pipeline and platform businesses.
Pipelines are businesses characterised by linear processes ranging from input to output. The traditional value chain, for instance, starts with raw materials, which are then transformed into a finished product before it is distributed to consumers. In this type of businesses, competitive advantage is gained by ensuring the efficiency of the procurement, manufacturing and distribution processes. One of the factors that make pipeline businesses slow is that the company has to be directly involved in procuring, processing and distributing all the products and services offered to consumers. For instance, if I am in the business of selling cakes, I have to bake or outsource the cakes and then pass them onto the final consumer. I make my profit by charging the final consumer a higher price. Clearly, I can only bake or procure a limited number of cakes a day.
Unlike traditional businesses, however, platforms essentially mediate the interaction between suppliers and consumers. A good example of a platform is a city council market, where goods change hands without the direct involvement of the city council. All the city council does is to lease a space to vendors. Alternatively, the market owner could decide to charge a commission on every item sold at the market. Instead of controlling resources, a platform orchestrates them by bringing them together through what is known as network effects. Instead of trying to optimise internal processes, a platform optimises the interaction of various users on the platform (cf. Harvard Business Review, April, 2016).
Traditional platforms are land-based, such as shopping malls and printed newspapers. Physical platforms often involve significant capital investments and can easily become liabilities. If, for instance, you put up a shopping mall and nobody is willing to rent a shop there, your complex becomes a white elephant. The advent of information technology has, however, reduced the risks involved in the creation and management of platforms. Websites and mobile applications have become a boon for platform businesses. Internet-based platforms can easily become ubiquitous, reaching millions of users every single day. Online platforms collapse physical boundaries and allow users to interact across borders.
Their strengths notwithstanding, platforms have a number of pitfalls. First, the platform owner can be held accountable for security breaches suffered by users. Data theft is also become a serious challenge for online platforms. Second, the profitability of a platform depends on the willingness of people to interact on it. To attract a critical mass of users requires a lot of advertising. In the nascent stage of the platform, you may have to pay users to interact on your platform. Once the motor starts running, your platform will experience what is called a feedback loop, whereby value attracts more participants, which in turn creates more value.
There are many opportunities for platform businesses in our world today. If you are considering launching a platform business, identify a sector where business interaction remains largely unmediated. That could be your jackpot!
Article by Wilfred Sumani, S.J.
This article was first published in Newpeople Magazine