Software platforms: redefining the basis of competition
Competition in the software sector is moving from individual products and services to platform ecosystems. Five key trends are pushing companies to platform strategies.
Platform Ecosystems: Aligning Architecture, Governance, and Strategy by Amrit Tiwana
Platform Ecosystems describes the dynamics that are driving the new basis of competition in software. This is one of the few books in-depth available on product platforms; it covers all aspects of platforms including evolution, strategy, market dynamics, and case studies. The book is incredibly well organized and contains summaries and lessons learned at the beginning and end of each chapter which, given the breadth of the book, is very helpful.
What served firms well in a product-based markets can become their Achilles heel in platform-based markets.
Tiwana begins with the observation that competition in the technology sector now is focused on platform vs. platform rather than competition between individual products and services. This is the case with Blackberry vs. Apple and led facebook and Amazon to market leadership. Because of this effect, a different management mindset is required to win. Since the ability to evolve is key to success in unpredictable platform markets, product-based firms struggle without understanding architecture and governance methods.
Platforms that thrive are the ones whose ecosystems outpace rival ones in the evolutionary race.
In addition to enabling core technologies, the value of platforms like facebook lies in the applications (complementary goods) which are built on them by developers. This shifts power and innovation from internal centers to external communities. The platform value chain consists of the upstream core platform development and the downstream application creation. Many companies begin their evolution as a product or service serving end-users and eventually add a second side (developers) to become a platform.
Tiwana identifes five drivers of industry migration towards platforms:
Because products and services are becoming more complex, firms now need to increase their specialization and, simultaneously, must rely on a broader set of development partners. It’s not possible to innovate alone in an environment where delivering complex products and services requires distributed and specialized skill sets. This spread of involvement results in a simultaneous reducing and expanding the firm’s boundaries. This occurs because companies are specializing and interacting with more partners at the same time. A consequence of this dynamic is that companies must become skilfull at managing their development ecosystems to effectively orchestrate the activities necessary to deliver their offerings.
The rate at which non-digital processes and things are becoming digital is increasing. Tiwana presents an interesting three-dimensional view of digitization: 1) the extent to which the product or service is digitized; 2) whether or not the transactions and payments related to the product or service are digitized; and 3) how much of the delivery mechanism is digital. Products and services now have multiple dimensions along which they can become more digital. Digitization can reduce or eliminate the constraints related to the location at which the product is produced, enabling a broader set of production options.
Digitalization also reinforces the specialization theme by enabling work to be done specialists on the digital components of the product or service. Tiwana provides the example of McDonald’s using order takers who are thousands of miles away from the customer making the order at the drive thru. Another example he provides is a cardiologist who sends digital images to an off-site facility for interpretation by specialists.
More and more business processes are now being encapsulated in software which results in physical products taking on software aspects (e.g., sewing machines which can accept digital patterns). As a company’s products take on more software attributes, they become more susceptible to the evolutionary dynamics of platforms and enter the competitive domain of nearby platforms. An opportunity for software-augmented products is to become services, making them candidates for positive lock-in effects and predictable revenue streams (instead of one-time purchases).
Internet of Things
As computing becomes ubiquitous in consumer devices and objects, the universe of connected things is expanding. The proliferation of connected devices results in a stream of data which also enables new business models. This torrent of data presents opportunities for platform businesses to exploit the information about usage and their customers. New business models can be created on the value inherent in the data.
Tiwana sees the “omnipresence of cheap and fast wireless internet data networks” as a powerful tool for smaller firms to rival the power of larger ones. Access to the connectivity resource empowers smaller companies to deliver new types of products and services. The decreasing cost of connectivity and data bandwidth means that packetized components and services can be run very efficiently. As smaller firms capitalize on this capability, Tiwana notes that the traditional model of scale through ownership is now turned on its head and becomes scale without ownership. Coupled with packetization, this driver “alters who can participate in producing products and services and from where.”
These five forces accelerate the change in the basis of competition towards platforms. At the same time, they open new opportunities for software and products to evolve towards platforms. All industries are affected by these factors, particularly as ubiquitous computing and connectivity embed themselves in a broader array of products and services. This environment creates the challenges which require careful platform architecture and governance which are covered in the book.
Platform Ecosystems: Aligning Architecture, Governance, and Strategy