Pipes and Platforms
Our SAUNA companies are platform businesses. They have well-established ecosystems of producers and consumers creating and exchanging value. Sangeet Paul Choudary, in his book in on Platform Scale, compares and contrasts platform businesses with the traditional way companies operate today. He refers to these traditional companies as pipe businesses and goes on to explain how the marketing leaders have embraced becoming platform businesses. Pipes and platforms. In fact, Sangeet maintains that the exponential growth of platform businesses growth is directly attributed to their ability to achieve platform scale, where:
(Platform) business scale is powered by the ability to leverage and orchestrate a global connected ecosystem of producers and consumers toward efficient value creation and exchange – Sangeet Paul Choudary.
Pipe Business
A pipe business has a single producer offering products and services to its consumers. It’s a pipe because value flows in a straight line from the producer to the consumer. Pipes businesses create value upstream for consumption downstream. This linear traditional value creation model doesn’t scale in much the same way that consumer purchase journeys became multi-pathed in a digital world. These two threads are linked. Digital brings access, choice and immediacy to consumers that pipe businesses are struggling to satisfy.
You’ve been invited to a fancy dress party. You need a costume. In fact, you want to have the best costume because at a fancy dress party you go large or go home. When I was back at university, I’d take a trip up the road to the local fancy dress shop and hope I got their earlier enough to secure the killer costume. This is a pipe business in its simplest form, where the company:
- Is the only producer.
- Creates all the value.
- Focuses on driving process efficiencies achieve margin.
- Owns all the products (best costumes).
- Keeps the talent in house.
The pipe business scales by driving efficiencies in the creation of owned value from the company to its consumers. It trades on it’s intellectual property (IP) and the people that apply the processes to deliver that value downstream and into the hands of its waiting consumers.
Platform Business
A platform business has multiple producers. In fact, when the company steps down from being the sole producer, there is distinct shift in focus away from the consumers to producers. This is because in a platform business the production process is performed by the participants in ecosystem. That’s a radical shift in thinking from managing production processes to facilitating their successful operation by others.
So back to our costume company. Today, I’d never trot up the road in the hope of finding the best costume. Instead, I’d venture online and search. I’d have multiple ways to do this. Access to multiple costume companies (producers) globally. This is platform scale thinking. The platform business facilitates the match of producers with consumers and scales those interactions for exchange value. However, this a platform business in its simplest form, where the company:
- Is not the only producer.
- Does not create the end value (e.g. Airbnb does rent our space).
- Facilitates the value exchange between producers and consumers.
- Does not necessarily own the value (e.g. Uber owns zero taxis).
- May not deliver the production process.
Where pipe businesses competed on resource ownership and control, platform businesses do not. Instead, the focus is in maximising the value exchange between producers and consumers within the ecosystem.
Where Next?
The race to understand all participants within the ecosystem started many years ago with the likes Google giving away it’s tools (e.g. gmail, google office, analytics) in exchange for you personal data. The more platform businesses know about their participants the better they can serve them.
