For a Return on Platform Investment, Focus on New Capabilities

The mere mention of Alibaba, Netflix, or Facebook evokes “platform envy” among executives at traditional, legacy organizations. That’s understandable. From Google to GitHub, platform companies — businesses that create value by connecting participants — continue to disrupt global industries and established business models alike.

Companies alert to strategic opportunities recognize that business success today requires taking part in and even creating open platform ecosystems — it’s not enough just to promote digital transformation. As the CEO of a global German industrial equipment supplier told me, “We know that in an internet of things world, we must go beyond products and components, and embrace platforms.” Every serious business is trying to embrace and extend its inner Amazon; to paraphrase Amazon CEO Jeff Bezos, “Go platform or go home” is the new managerial mantra.

But to what end? Too many world-class product and services companies find their platformization quests painfully procrustean. Like Procrustes of Greek mythology, who brutally hacked up or stretched people’s bodies to fit them into a bed of a certain size, companies risk defining their “platform” value so narrowly that they end up with constricted or conflicted implementations. Even when fully embracing application programming interfaces, micro-service architectures, and other enabling digital technologies, companies frequently fail to get the business impact they crave. The technologies work; their wannabe platforms do not.

One Challenge: We Don’t Have a Common Language

Many of the problems with translating platform principles into specific practices can be attributed to conflicting and confusing definitions. For instance, a blog in Harvard Business Review a few years ago noted that “by building a digital platform, other businesses can easily connect their business with yours, build products and services on top of it, and co-create value.”

On the other hand, Quora’s platform definition declares: “Platforms are ways of enabling one product to work with other products.” And Microsoft cofounder Bill Gates is said to have described platforms this way: “A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it.”

These definitions — individually and collectively — may be provocative, but they offer little practical guidance to managers struggling to compete with tenacious, born-digital disruptors unburdened by history, legacy, and costs.

Too Narrow a Vision Undermines Platform Initiatives

Technical interoperability — the ability of information systems and devices to exchange data and perform tasks — is but a means to an end; the true purpose of platforms is creating new business capabilities. Misunderstanding this perspective highlights how legacy companies unwittingly undermine their platform investments and initiatives, causing them to fail to spot the business impact that matters most.

Traditional product companies, be they B2B or B2C, often treat platformization as a technology-driven opportunity to add new features and functionality to their existing portfolio. Typical service organizations see platforms as mechanisms for better analyzing, optimizing, and “app-ifying” their deliverables. But these platform efforts shortchange the innovation future when they emphasize conversion — How can we comprehensively digitize what we’re doing? — rather than asking what valuable new capabilities the platform can now facilitate.

Simply put, platform investments prioritizing technical means over business ends typically underperform expectations and impact.

At one medical device company I spoke with, for example, a skilled engineering team did an excellent job designing APIs and writing software development kits in an effort to create an open-source platform for one of its more successful diagnostic devices. More than a year after launch, third-party software and analytics had undeniably improved device performance. The problem? No novel diagnostic capability had been discovered or created. The digital-enhanced devices that emerged from the improved ability to collaborate didn’t change in any measurable way how health care providers or insurers created or received new value. The technical investment made the product “better,” but failed to inspire or invite a new capability.

Focusing on New Capabilities Drives Successful Platform Strategies

Amazon’s open API architectures arguably represent the epitome of interoperability design, but the company’s greatest disruptive success comes from creating compelling new business capabilities. These range from recommendation engines to customer reviews to seamless product returns. Note how Amazon’s Bezos publicly points to “customer-obsessed culture” as its competitive edge.

Similarly, GitHub’s software repository platform doesn’t just facilitate version management of code bases, it creates new enterprise capabilities around project management, DevOps, and systems deployment. Yes, GitHub’s technologies are the essential enabler, but the platform’s power comes from compelling capabilities created for its global developer community.

Indeed, when the CEOs of Alibaba, Amazon, and Airbnb discuss the platform future, they typically describe new capabilities, not new technologies, to explain their platform achievements.

What I’ll term “Return on Platform Investment” almost always equals “Return on New Capabilities.” Consider the experience of a professional services company I recently worked with looking to improve a global fulfillment process for one of its biggest clients. Developers had first planned to optimize an existing fulfillment process platform, but they quickly realized that linking fulfillment data to other data sets could create valuable new capabilities for customers and suppliers. For example, instead of simply providing a virtual catalog, the services company could spin up a recommendation engine to generate greater customer insight and to better manage customer expectations.

This process yielded a platform win-win: Both user experience and process efficiency improved, while new business capabilities complemented new economic efficiencies. This type of compound, innovative benefit is just what platforms should deliver.

Three Insights for Legacy Platform Development

Given the experiences of both successful and unsuccessful platform experiments, three key insights stand out as effective drivers of legacy platform development:

1. New capabilities: Successful platforms consistently and reliably bring new capabilities to market. Strategic conversations around platforms that subordinate a capabilities road map to a technical road map reflect a failure both of leadership and of vision.
2. Compelling use cases: If leadership can’t describe and discuss novel, scalable, and compelling use cases that their platforms will enable, they have not thought explicitly and specifically about new value creation. Use cases are the lifeblood of platform innovation and its inspiration.
3. Scalable network effects: Thriving platform enterprises — and the most serious platform researchers — identify network effects as the essential ingredient and secret sauce for platform effectiveness. Marshall Van Alstyne, my Boston University colleague and collaborator, simply, brilliantly, and usefully defines network effects as “users creating value for other users.” And that means creating new capabilities.

Successful platforms make user-driven value creation faster, simpler, easier, and cheaper than any other business model. Recommenders, search engines, and software repositories are real-world examples. These are just a few of the network effects-enabled capabilities platforms empower.

Clearly, platform road maps shouldn’t turn into procrustean beds where management chop up or stretch their products and services to comply with rigid technical requirements. The best way to effect platform transitions is a focus on new capabilities. You know your platform is most effective when those capabilities come from ecosystem users creating new value for other users. That’s the true measure of platform success.