What Porter has to say about your platform strategy

A guest post by Håkon Tiller, internet economy expert.
The emergence of platforms promise to fundamentally change how we do business. Porter’s Value chain is still partially applicable to the business model we refer to as platform.

A platform, in essence, is the efficient execution of the support activities of a value chain. The implications are several, but one in particular is easy to acknowledge: When your business is run by means of a technical platform, it means that the platform is the implementation of your current strategy and vision. To change your strategy, you need to change the platform. Not your organization.

The value chain, competitive advantage and platforms
Competitive advantage stems for the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its offerings.

porter

What we are looking for is how activities are divided between the company and the platform participants. That way we can assess the whole activity system. Where the platform differs from conventional business, is that the primary activities are not directly owned or managed by the firm.

A successful offering is determined by how well it meets the customer’s needs. When you need to hire a room, the appearance of AirBnB and Hilton hotels – at the surface,- is not that different. You search for accommodation and find it, combined with information about what comes bundled in the offering. The difference lays in how the needs of the customer is met, that is, what activities are performed and what resources are used to meet them.

Primary activities In any firm, primary activities can be divided into five generic categories; Inbound logistics, operations, outbound logistics, marketing and sales and service.

Primary activities in the hospitality business include coordination with suppliers of food and beverage, and various partners providing laundry and outsourced services that provide value to the customer not produced by the hotel itself. Most of the activities in a hotel belong to the Service activity group, they are performed to increase the value of the bed rented by the customer. These are all activities that AirBnB chooses not to produce within their current setup.

Marketing and sales include activities that are performed by Holiday Inn and AirBnB both. In addition, platforms will invest in activities related to after sales service to improve recurring business, strenghten commynity and data gathering as these are important elements in the Platform stack. Using the lens of platforms as an implementation of support activities, AirBnB does not perform inbound logistics, operations or outbound logistics in any meaningful sense. In addition, it only produces a small subset of the service activities, those of after sales service.

Support activities Support activities support the primary activities and each other by providing purchased inputs, technology, human resources and various firmwide functions.

A platform facilitates effective coordination between supply and demand of a given service. Given the competitive market for attracting both suppliers and consumers to the platform, any activity that reduces friction for an individual service provider or consumer will act as a value added differentiator in the platforms’ market for each type..

Purchased inputs
AirBnB does not provide purchased inputs to its hosts, most likely because it does not give the platform any competitive advantage. This could change, and it does not necessarily apply to all markets served by platforms.

Technology
Technology is what we usually think about when we think about platforms. Technology provided by AirBnB includes the booking system for the available resources and includes various helpful features that reduces friction and increases perceived value for both buyer and seller. In this way, the platform acts as infrastructure and support for many of the “Operations activities” related to providing a customer with a place to stay.

Human resources
The employees providing the product to the customer are not employed by the platform, but rather free agents connected to it. The main mechanism for ensuring high quality is left to the marketplace via various forms of ratings. These go both ways, which contributes to block customers and suppliers that do not adhere to the policies of the platform out of the system, thereby reducing risk for the counterpart. Ratings are also a central part of what is defined as the “community layer”* in the platform stack – aggregated ratings is an extremely efficient way of reducing uncertainty for the participants and by that a major obstacle to the execution of a value creating transaction.

Firm Infrastructure
Firm infrastructure consists of a number of activities including general management, planning, finance, accounting, legal, government affairs, and quality management.

This class of activities embodies the vision and the complete offering of the company. We should note that the management process only works directly with the development of the technical infrastructure – it does not get directly involved in the management of the primary activities. It can only facilitate these indirectly through the platform.

Implications, in particular for strategy
The management of any company needs to keep tabs on the business and foresee when their current strategy will run into trouble. This is true for an established multinational and a community startup both. The only difference is that for the startup, the strategy is still a theory, whereas for an established company it represents the current competitive advantage.

Usually when a strategy is in trouble, a management who is able to react, will craft a new strategy and implement it – most likely by reorganising, innovate a bit and run some change projects.

When your business is run by means of a technical platform, it means that the platform is the implementation of your current strategy and vision. To change your strategy, you need to change the platform. This means that you do not need to reorganize, you only need to create something different.

Do we need to remodel the Value Chain for this? It doesn’t seem like it. It could be useful to highlight that the firm does not control most of the primary activities directly and also emphasize the platform as part of the infrastructure.

One important aspect of Porter’s model that is not visualized well in the value chain and that we have not touched specifically here, is linkages. They are obviously important to the platform model, so we’ll need to get back to those later.

haakontHåkon Tiller holds an MBA with 2 decades of experience from the “internet economy”, including media, retail, startups and technology. Currently focusing on the application of lean principles to strategy and product management and looking into the blockchain space for opportunities.

Forfatter: Salvador Baille

Daglig leder ved Intelis, et rådgivingsfirma med fokus på Innovasjon og teknologiledelse.

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