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Digital transformation: Why it pays to be a platform business
If you’re not participating in the digital ecosystem as a platform, you may become disintermediated
Digital transformation is pitting two types of businesses against each other: platform-oriented businesses and traditional ones that operate like supply chains. To become more relevant and thereby survive in this digital era, traditional businesses must transform themselves into platform-oriented businesses.
[ Read our related article, 4 factors to rethink when leading innovation. ]
In this new digital world, a company shapes its own survival. Picking the right path and investing wisely in this journey becomes the most critical strategic decision for management, and requires the right level of board oversight. This strategic decisioning process and operational execution has to include understanding your client needs, building the right partnerships, and digitally transforming the organization. These three pillars must be considered together when transforming a company to become more platform-oriented.
Here are some factors to consider along your company’s journey.
Platform-oriented vs. supply chain-oriented companies
Platform-oriented businesses are ones that connect clients with service providers. Uber, for example, connects drivers with people who need rides. Airbnb connects vacationers with landlords. You pay Uber or Airbnb, and they pay their drivers and homeowners.
Supply-chain-oriented companies, in contrast, provide the goods or services to the client by assembling or creating the components, typically by responding to an order made by the client. These are the traditional businesses – such as the hotel business, or a taxi service – or most other businesses that have formed in the last few centuries.
The digital era is elevating platform-oriented companies at the expense of traditional supply-chain-oriented companies. The move to digital, mobile, and the ability to have information at your fingertips has enabled ecosystems to form in the marketplace, allowing clients to interact in multiple ways with their providers. As a result, the very nature of those providers is changing.
If you’re not participating in this digital ecosystem as a platform, you become disintermediated. Therefore you're not as relevant to the client, and hence a commodity. Platform-oriented businesses are built on three pillars: the client, partnerships, and the digital transformation of the organization. Traditional companies that want to transform in this new digital era need to understand and learn to play in these three areas to remain relevant and platform-oriented.
Understanding the client
It’s important for businesses to understand the client’s needs. Being present at their moment of need, providing the client the right information, and adding value at that moment, is the key to truly meeting client needs.
If you’re buying a car, for example, you are unlikely to open your banking app despite the fact that you may need a car loan; you typically visit a car-buying website or read car reviews. Once you’re ready to make a purchase, you may realize that you need a car loan. That is typically too late for the car loan provider to intercede – the car dealers themselves may broker these loans – and the car loan provider becomes a commodity provider.
So what can a bank do to avoid becoming a commodity car loan provider? They have to be where their clients are, know when they’re looking for a car, and then offer them the right advice regarding affordability, loan size, and payment options.
To understand your client’s needs, put yourself in your client’s shoes: interact with your systems the way they do and work to understand the context of what they’re doing, why they’re doing it, what sites they’re visiting before and after you, and how they’re searching for information before they buy.
Building the right partnerships
Succeeding in the digital world isn’t something you can do alone. Look at your own phone and notice how many applications you use – that number is just going to grow over time. Because it’s impossible to own everything in the ecosystem that it takes to fulfill your client needs, you have to partner and ensure that your systems are capable of supporting those partnerships.
Platform-oriented businesses pursue partnerships to thrive. If you’re a mortgage company, you want to partner with real estate websites, like Zillow or Trulia, so you’re aware when your clients are browsing for a home. A simple example is if your mortgage calculator is listed on your partner website, you will know your client is in the market for a new home when they click on your calculator; thereby allowing you to offer them the right solutions and services they need.
It’s smart to tap the knowledge of venture capitalists, too, to learn who the new startups are, what gaps they’re filling, what kinds of new partnerships you should be forming, and how they solve your needs as a business. With these startups, you might find you want to partner with them, acquire them, or just invest in them.
Digital transformation of the organization
Platform-oriented businesses also need to ensure that they’ve transformed their internal systems digitally such that they are open and that they’re agile. You need to have an open, modular, API-based architecture and the ability to spin up new services as needed, when needed. You need the data and the analytics in your systems to be relevant to your clients at their moment of need – either directly or through partnerships. You need to have elasticity in your infrastructure, ideally leveraging cloud technologies, to respond to volatility in your processing needs. Lastly, you will need to create the culture in the organization that embraces the change that you will need to go through.
This digital transformation is by far “the longest pole in the tent” for a traditional business trying to transform themselves to become more platform-oriented. It takes the most investment and frankly has the most likelihood of failure.
However, embarking on a digital transformation, without taking into account the first two pillars - understanding the client needs, and building the right partnerships - is likely to lead to poor investment decisions and bad execution. The three pillars play a critical role in transforming a company to become more platform-oriented.
In summary, to compete in the digital world, traditional businesses must transform themselves into platform-oriented businesses. This requires choosing the correct course and making wise investments - strategic decisions that leadership and board members must be aligned on. To be successful, you must have a deep understanding of your client needs, build key partnerships, and make the technology and culture changes required to digitally transform.
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