The operating model of diversified platform companies utilising AI and analytics has proven victorious.
In seven years, the list of the world’s largest companies has changed significantly: the domination of oil companies has been brought to an end by the triumph of data economy (source: Wikipedia).
|2011 Q1||2018 Q1|
|BHP Billiton||Berkshire Hathaway|
|China Construction Bank||Alibaba Group|
|Royal Dutch Shell|
|Chevron Corporation||JPMorgan Chase|
|Microsoft||Johnson & Johnson|
Many of these companies are now familiar to nearly all of us from our daily activities. Interestingly enough, protecting the business model of platform companies has not been easy. Platform companies have been so successful because they are able to utilise the competitive edge provided by network effects and protect their business through data.
Facebook is a perfect example of the efficiency of network effects. Many of its users think about leaving the service because of its capriciousness (things such as partly unnecessary contents and data abuse), yet they don’t do so because the efficient communication facilitated by the large number of users is very valuable to them. The network effect causes a structural delay that enables the protection of business operations. I will not go into further detail here; interested readers can find more information elsewhere 1, 2, 3, a16z. However, in the sister article of this text, I examine the change in the role of data in particular, because it is possible to identify data-related developments that benefit all Finnish companies now and in the future.
Before having a closer look on the characteristics of the business of platform companies that make use of AI, we must understand what platform business is.
Digital platforms offer a new form of business operations, enabling the interaction between the members of a single group or between several groups through the offered infrastructure. Key actions of platform companies include the capture and controlling of data, monopolising of the market through network effects, cross-subsidisation between various user groups, and usage of a management architecture that enables meaningful participation. Management is a focal part of platform economy: in the end, the platform – such as Facebook or Uber – is a collection of rules and standards that have been implemented technically. In other words, even though platforms are often presented as empty interaction space, they in fact exercise power and guide users’ actions. The owner of a platform (often a company) decides the laws, rules and standards, such as who gets to interact with whom and how.
Through such rules, the platform ensures the formation of value-generating connections between service providers and consumers. The purpose of platforms is to promote encounters between user groups and to facilitate the exchange of goods and services or social interaction. This results in value for all parties.
Traditional companies are built on value chains. The purpose is to capture value between every link of the chain. Platforms work differently. While a traditional company receives a product from its supplier at just the right time (just-in-time inventory; hotels with an occupancy rate of almost 100%, for example), a platform company never even needs to have a stock (not-even-mine inventory; peer-to-peer apartment rental services, for example).
Each business model consists of a profit model and a business system – the adaptation of the organisation and its business in accordance with the profit model. Platform economy may seem like nothing more than a new way of adjusting the profit model, but it also gives rise to significant changes in the operations and goals of the organisation.
In the past, interest groups and ecosystems were on the outer edges of business operations; now the focus is on them. Similarly, many past key operations are now handled by the ecosystem. In Platform Revolution: How Networked Markets Are Transforming the Economy, Geoffrey Parker, Marshall Van Alstyne and Sangeet Paul Choudary explain how things such as marketing, IT functions and product development have gone from in-house operations to outsourced ones. The strategic functions have also changed, with focus shifting from the nurturing of internal resources and hindrance of competition to the fostering of external resources and communities.
Genuine shifting of focus to the management of ecosystems and to people’s needs and actions is essential. Interestingly, in Finland, public administration has been a forerunner in the understanding of value built around people. There is talk in public administration about tailoring services around lifetime events and companies’ business operations, with the purpose of providing relevant support. This talk is likely to turn into action as soon as during the next term of government. However, a change in the public sector is not enough. To create a competitive society, business operations have to follow the lead. This is only possible through the construction of ecosystems. In practice, this means that companies have to create joint offerings to meet actual customer needs of various kinds.
What kind of an ecosystem is needed if Peter, 14 years of age, wants to go skiing? How about if Rain Travel Ltd. wants to organise a training- and strategy-related event for its employees? These questions are much more complex than they seem at first. Peter needs much more than skis. He needs a piste, a ride to the piste, insurance, warm clothing, hot chocolate and friends. In the post-platform economy market, a business can only succeed by being a platform or joining one. Competitive benefits can be created by offering convenient value to customers jointly with other operators.
We are not far from a future in which Peter is offered the full package in an agile manner. The first steps towards this are the opening of companies’ interfaces and the deepening of the understanding of customers’ actual needs. Global platform companies operate in many fields, and they aim to guide consumers and their habits in the long run. If a Finnish company wishes to stay up to speed with this development, it has to be able to develop its business operations in this digital era into an ecosystem that functions well in the long run.
Johannes Koponen works at Demos Helsinki, an independent think tank. His core competences lie in strategic foresight and the development of business models through scenarios and other methods used in futures studies. At Demos Helsinki, he has been in charge of extensive futures studies related to things such as work, health, and hyper-connected society. Koponen’s achievements include the founding of a start-up called Scoopinion, which won the Helsingin Sanomat Foundation’s media innovation contest, Uutisraivaaja, in 2011. He has also created a device for hospitals that turns children’s hearing test into a game.