Simon Torrance is an independent advisor to boards and leadership teams on business model transformation, platform strategy and digital ecosystem management. He is a member of the World Economic Forum’s new ‘Digital Platforms & Ecosystems’ executive working group, a guest lecturer at Singularity University, a venture partner at Factor10, and author/presenter of the New Growth Playbook (www.newgrowthplaybook.com) an online education program to help leaders understand the key principles of platform-based business model transformation.
Torrance is also the executive producer of the Platform Economy Summit (www.platformeconomysummit.com) , taking place in Berlin on November 20–22. He recently spoke to The Innovator about why corporates should consider developing a platform strategy.
Q : Ever since Apple launched its app store in 2008 pundits have been telling big companies to “be like Apple” and build platforms. Why aren’t more companies following that advice?
ST : Apple until 2008 was a traditional manufacturer of goods. Then, in 2008 it decided the better business model was to create a platform via the app store and leverage the talents of developers. There were a lot of arguments internally about whether they should do that — Steve Jobs didn’t want to at first. Apple, like 98% of companies today, operated a traditional type of linear business : it focused on building great products. That is what traditional companies have been doing for the last 120 years. Operating as a ‘platform’ — which means being intermediary between multiple third party producers (in Apple’s case app developers) and consumers is quite new.The reason more companies do not try to be like Apple is that this model is not something that today’s corporate leaders were taught at business school. Very few leaders at non-digital companies understand, to a profound degree, business models like this and even when do they do it takes time to perculate through the strategy process. In a really connected world what a platform business does is to optimize supply and demand between the producers of certain goods and services and consumers. It orchestrates those interactions and makes them more efficient — just like farmers markets or stock exchanges do. In a digital world you can put many, many more types of people together, as eBay and then Apple, Facebook, Amazon and Alibaba have demonstrated.
Q : Can you point to some examples of big, traditional companies in Europe that have successfully launched platforms?
ST : There are very few if you define ‘successful’ as moving the needle in terms of the financial performance of the company. The problem for many traditional companies is they tend to get stuck with a business model that they know how to operate, which delivers certain types of return and which the capital markets can easily categorize. The adoption of a platform model — like Amazon did in 2000 with its marketplace, Apple did in 2008 with the appstore, or Alibaba from birth — should mean a big improvement in financial performance metrics. This is why you see car companies investing in ride hailing or other platform business models. But these are still tiny, tiny investments and they are not really moving the needle because full commitment to the principles of the platform business model are not there yet. Kloekner [the German steel company] has invested in an open digital platform to try and help the whole steel distribution market operate more efficiently. But again, it is very early days. On the industrial side you have Schneider Electric, Bosch and Siemens launching new IoT platforms, but they are still very technology focused. I really can’t point to a European company today and say that company has taken bold shifts to radically transform their overall business model with a platform strategy. Less than 2% of companies have committed to bold platform-based growth strategies let alone proved their ability to successfully implement them.
Q : What about the rest of the world ?
ST : In China a great example of a traditional corporates transforming its business model is PingAn, an erstwhile insurance company that decided five years ago to re-frame itself as ‘a technology company with financial services licenses’. It wanted to embed itself more deeply into more aspects of peoples’ everyday lives. They have created a portfolio of platform businesses that are directly related to insurance: in healthcare, connecting patients with doctors, in automotive for buying and selling cars and even in entertainment. Thanks in part to these moves PingAn is now the most valuable insurance company in the world. European companies are starting to wake up but they are five years behind and their cultures are certainly not digital.
In South Africa Naspers, a 100-year-old company, transformed from being a printer of newspapers to a digital and platform company in the last five years. It took a stake early on in Tencent that is now worth more than the whole of all their companies combined, built up a global online classified businesses, OLX, and has acquired a stable of tech and platform businesses like Delivery Hero.
I would say American incumbents are also starting to be bolder. Look at Walmart’s acquitions of Jet.com and Flipkart. These have already started to pay dividends. Walmart has moved from 15 million SKUs (stock keeping units or unique items for sale) to 60 million. That sums up the power of creating a platform. By having an system that allows and incentivises others to plug into Walmart could quadruple the number of SKUs offered to customers without taking on inventory risk. This is essentially what Amazon did 18 years ago — let other people fulfill their customer requirements and rent out their infrastructure to enable it. Stickier customers and a lower cost structure funded by others. GE has been using platform thinking for a different purpose. They make big machines and they wanted to figure out ‘how do we allow other people to develop useful applications that will help our customers leverage our increasingly connected machines’ They looked at what products or services they could build themselves but realized that their customers have a range of other needs that they couldn’t possibly anticipate all by themselves. So, they decided to create an ecosystem of innovators to create digital solutions for customers. GE Digital — which organises this — generates significant new revenue streams from its platform. The vision was excellent — and GE was a trailblazer for traditional corporates — but unfortunately GE Digital was established in a pretty traditional way within an organisation that has big fundamental challenges. Transforming an incumbent business model to be fit for a digital economy is very hard. If you look at the top 1000 publicly traded companies worldwide the amount traditional companies have invested in platform strategies — the most poweful digital business model — is still tiny. You need to boldly re-allocate capital and resources if you want to be able to play in this market.
Q : Can working with startups help accelerate the move to a platform economy in Europe?
ST : Today working with startups has been mostly ‘innovation theater’ — tick the box with a hackathon or accelerator, do some direct venture investment in startups or ask entrepreneurs to come and work in shared office space. It is all dabbling around the edges. There doesn’t seem to be a very clear strategy to really leverage entrepreneurial talent. You see that with banks. They create all these partnerships and invest a bit in startups but they have not addressed their business model — the way they will create and capture value in the future — and they are not really harnessing third party innovation. The World Economic Forum has been looking at the issue of how corporates can work with entrepreneurs to stimulate innovation. One of the best methods is to proactively create joint ventures with proven tech entrepreneurs whereby the entrepeneurs can leverage a corporate’s assets but doesn’t have to work for the corporate. A true joint venture that is strategically relevant for the corporate, with aligned incentives, not a partnership or an investment. Nowadays there are more and more entepreneurs who have experience of creating and scaling platform business models, who may have recently exited a venture and are looking for the next big thing but don’t want to start from scratch. Big corporates are very slow to change their internal culture and can’t move very quickly, but their have cash and great assets. So it makes sense to create a portfolio of joint venture ‘speedboats’ with successful entrepreneurs to grab new ‘white space’ market opportunities fast. This model is relatively new but proving very popular at the moment.
Q : What advice would you give to big corporates who want to create platforms?
ST : Firstly, the board and leadership need to understand in much greater depth the economics of platform business models and how to operate them. Seven of the ten most valuable companies globally operate platform-based business models and these companies have the power to disrupt many, many traditional industries. Platforms will mediate more and more socio-economic activity. There are plenty of high value niches available to be grabbed by existing businesses. But while 90% of corporate leaders are saying — anonymously in surveys — that they know their current business model is not fit for the future, very few are acting fast enough to create platform strategies that can meaningfully impact their performance. The reason? It’s new and different. Secondly, don’t try to develop this entirely within the existing corporate structures. It will fail due to cultural challenges. Create a separate unit to invent the future, allow it to work in a different way and crucially have it report directly to the CEO, not the core, otherwise any innovation will be stifled and killed. Thirdly, try new approaches, like JV’s with entrepreneurs, to grab opportunities fast before they disappear and to build up experience and knowledge.