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Mar 9 · 7 min read
See the TOP 10 companies in Market Cap in 2019:
What do 8 out of 10 companies with the largest Market Cap and all unicorns have in common?
They all orchestrate an ecosystem. All have created an environment where exchanges between producers and consumers of some type of value are facilitated and encouraged.
This concept in itself is not new. Credit cards, street fairs and shopping centers have also emerged with the purpose of facilitating exchanges between producers and consumers. They all use the concept known as “platform business”
Although the word “platform” is used indiscriminately today, we are not talking about platforms just as infrastructure and / or technology. If we search for the origin of the word “Plataform”, it comes from the sense of “broad horizontal support”, a “terrain without relief”. And that is exactly what a platform business does. It creates a great horizontal support plan for your ecosystem to interact in a much more interconnected and efficient way on top of it. From AirBnb to the street fair on the corner of your home.
Not coincidentally, market giants (to mention only Brazil) like Magazine Luiza, Grupo Martins, among others, bet their chips on marketplaces. And so many others have invested or bought companies that operate in this way.
But why should your company have the vision to orchestrate an ecosystem?
There are 2 main reasons:
(1) Technology and connectivity has changed the way that value is generated in business and platforms are the ones that present the most appropriate “tools” to capture this new value.
(2) Potential for scale of the platform business superior to traditional business.
CHANGE IN THE WAY OF GENERATING VALUE
In order to understand how the generation of value has changed, it is first important to see how it traditionally happens.
In general, traditional businesses generate value through a linear chain. Inputs are collected, processed or transformed and “pushed” to the final consumer. It does not matter whether it is an industrialized product, a customized or massified service, a media company, or any other segment. Everyone follows a unidirectional sense of production and construction for someone at the end to absorb or consume it. Even e-commerce stores, or “omnichannel” companies, also follow this logic. The only difference is that they have more “meeting points” with the end consumers to push their products.
Thereafter, the challenge of these “linear” businesses is to maximize and minimize internal functions to make this chain more efficient and optimize the use of resources and assets, generally gaining a competitive advantage by accumulating or controlling access to them. This is what Sangeet Paul Choudary, one of the leading experts in platform business, classifies in his books “Platform Scale” and “Platform Revolution” as “Pipe Business” models.
“Value is no longer created and scaled merely through processes that organize internal labor and resources. Instead, value is created and scaled through interactions that orchestrate users and resources in the ecosystem”- Sangeet Paul Choudary, no livro “Plaftorm Scale”
The point is that platform businesses, whether marketplaces, social networks, market networks or development platforms completely change this logic. At the beginning of the text, I commented that these businesses are intended to generate interactions between producers and consumers of some unit of value, orchestrating them in the most efficient way. And to understand how these businesses change the way of generating value, we have to analyze two main effects that the evolution of technology has had on these 2 entities (Producers and Consumers) and that makes platform businesses relevant: Decentralization process and Algorithms.
1-) DECENTRALIZATION PROCESS
For at least the past 20 years, technology and increased connectivity have been coming in consistently, increasing the ability of producers to produce and consumers to consume their “values” in an independent and decentralized manner.
Decentralizing production …
Any entity that produces or offers some kind of value in the market, be it a product, a room for lodging, a ride in your car, are potential participants in an ecosystem for an orchestrating platform business. Technology impacted its process:
· Smartphones, and in general the mobility itself, allows people to generate content, texts, posts, tweets from anywhere at any time. They also allow producers to update the stock availability of their value units such as apartments and cars in real time.
· The democratization of access to cloud and storage services, allows more and more producers to offer their services or products online more quickly and cheaply.
· 3D printers and the spread of maker spaces, allowing producers to literally build their products at home or in close proximity.
· Blockchain increasingly used in several segments, allowing for even greater decentralization of processes and contracting.
Decentralizing consumption …
In turn, consumers are all entities that somehow consume some unit of value from the producers, be it a taxi ride, a lodging for a season or anything else produced by the producers. Technology also changes the behavior of this audience:
• Consumers and users have historically sought some core values: personalization, convenience and relevance in their experiences. The difference is that we are in a unique moment, where perhaps for the first time the potential of the technologies is in fact delivering these “desires”, in any market segment. As a result, platform businesses such as marketplaces, for example, are able to provide these values much more efficiently than “linear” businesses, where the entire value generation process has to be modified and its scale ends up being much more costly.
“We were all seduced by the high discounts, the automatic monthly delivery of diapers, the best free films, the gift wrapping, the delivery in two days, the ability to buy shoes, books or carioca beans or a toilet all from the same place. But it went beyond seduction, really. We expect these kinds of conveniences now as if they were birth rights. They became our ideas about how consumers should be treated. ” Franklin Foer
• As a consequence of the item above, consumption itself also becomes more widespread: Today, we can order a taxi, a meal or rent an apartment for the holiday from anywhere, at any time, and quickly find “inventory” of these items .
The role of technology and connectivity will increasingly be to allow production and consumption to be decentralized, whatever the application in question, favoring the performance of the platform businesses.
2-) ALGORITHMS:
The rise of algorithms, whether the most rudimentary or those built from machine learning models, increase the ability to analyze data on buyers’ buying behavior. Platform businesses, when orchestrating their ecosystem, use this intelligence to provide the ideal “matching” of the consumer to the producer most suited to their profile. Obviously, in this scenario of decentralization of production and consumption, this capacity has a high value for participants, allowing them to connect and trade much more efficiently than if the platform did not exist.
In view of all this, what we have is something more or less like the image above, within a market. Buyers and producers, increasingly fragmented and looking to optimize their performance in some way. In this environment, the challenge is no longer to make the process more efficient. The challenge is to orchestrate the ecosystem. Organize and mediate the necessary interactions, reduce coordination costs between participants with security and governance, and thus have the main function of allowing the generation of this new value to happen and be transmitted throughout the environment.
THE SCALABILITY OF PLATFORM BUSINESSES
The most important thing is that these businesses not only capture this new value, but also manage to scale it differently. This scalability has 2 main sources:
1-) By facilitating exchanges within an ecosystem, it eliminates intermediaries and controllers of access to information, resources and assets, a condition inherent to traditional businesses. Thus, they outsource to producers the capacity to generate, store and distribute units of value.
2-) The marginal cost of “enabling” a consumer or producer in the ecosystem is much lower than that of executing a transaction for the consumer directly. For Magazine Luiza, it is much more viable for her to mediate an interaction for the purchase of a children’s party item between a small merchant and a consumer in the interior of Goiás, than to personalize, customize and execute this product and transaction. As much as it captures a smaller piece of the value generated, it is preferable that this transaction happens under your “management” than it happens randomly, outside your domain. These costs are even more marginal when the model can achieve and generate a network effect, another characteristic inherent in the platform business.
“In 20 years, in business will survive without building an ecosystem, whether it’s mass market or high-end luxury. ”
Adrien Nussenbaum, founder at Mirakl, at MIT Platform Strategy Summit 2019.
Obviously, the journey to build a platform business is complex and involves other strategic pillars such as monetization, network effect generation, launch strategy and governance. But the most important and primary factor is the awareness that orchestrating an ecosystem is a path of no return. And as they say: orchestrate your ecosystem or you will end up being orchestrated by one.
Fernando Teixeira da Silva
