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Currently viewing the tag: "Product to Platform Transformation"

8818272056?profile=RESIZE_400xFuturistic, technology-driven business models are weakening the conventional advantages of Economies of Scale.  Large corporations, founded on Scale, nevertheless have areas that they can exploit if they reposition rapidly.

For the best part of over a century, Economies of Scale—Cost Advantages that businesses achieve owing to their scale of operation—fashioned the corporation into a perfect engine of business.  The economic concept of Economies of Scale was first floated in the Adam Smith era where the idea of obtaining larger production returns through the use of division of labor was introduced.

A technological rush, distinct in history, was observed near the beginning of the 20th century.  These new technologies were accompanied by scale i.e., bulk production and access to huge markets.  The Economies of Scale guided business success—the strong inverse relationship connecting fixed costs and output grew into a basis of Competitive Advantage.

Back then, investments in scale was the most sensible proposition.  Not only did it lower fixed costs but also created a formidable barrier for competitors, denying them entry in the market.  Every type of business spent the 20th century in the quest for scale.

The advent of game-changing new technologies such as mobile devices, social media, and cloud computing, augmented by Artificial Intelligence (AI), is whirling Economies of Scale into Economies of Unscale.

Specifically, rise of Software as a Service (SaaS) and emergence of Product to Platform Transformations—coupled with AI’s ability to customize—overthrows bulk production and mass marketing as a basis of Competitive Advantage.  These progressions have battered the powerful inverse correlation between fixed costs and output that delineated Economies of Scale.

Today, minor, unscaled businesses, leveraging Platform Scaling Strategies while renting SaaS, can hunt in niche markets, effectively contesting big companies that are strained by decades of investment in scale, i.e., in large-scale production, distribution, and marketing.

The triumphant companies in the current tech rush—enabled by Platforms and SaaS—are the ones led by Customer-centric Design, providing each customer precisely what they want, that too while making a profit, and not companies offering everyone uniform products.

Large corporations can remain relevant in this era of niche marketing by taking leverage of their existing infrastructure through astute modifications in their use.  They can deploy 3 key tactics to accomplish this:

  1. Product to Platform Transformation
  2. Absolute Product Focus
  3. Dynamic Rebundling

Let us delve a little deeper into the details of the 3 tactics for leveraging Economies of Unscale.

Product to Platform Transformation

Dynamic corporations have expended decades building scale which is extremely specialized for their industry.  Efficient factories, distribution channels, retail outlets, supply chains, marketing expertise, and global partnerships have been painstakingly developed.  It is time for these corporations to take a decision on whether it is more viable to rent out this capability to other companies or not.

An example of such an approach is that of P&G’s Connect + Develop program that has been running for more than a decade.  

Absolute Product Focus

As corporations become bigger, emphasis on control becomes more pronounced—processes, regulations, stock prices, and a variety of non-core issues take precedence over great product offering.  Niche market focus blurs and attempts are made to make a product that may appeal to the masses in an effort to create Economies of Scale.

In this age of Unscale, the product/customer-focused competitor preys on such weakness.  Large corporations can mitigate the repercussion of such weakness by organizing as a network of small businesses focusing on core function while outsourcing non-core functions.  Each business, completely dedicated to creating a product perfect for its part of the market.

Apple Inc. contracts out manufacturing to Chinese companies while keeping the R&D and innovation—its core function—in the U.S. 

Dynamic Rebundling

Successful companies in this day and age of Unscale are the ones that make every customer feel like a market of one.  A corporation—a compendium of products—can match this by initially understanding its customer, then bundling its products as per each customer’s needs.

A great example is The Honest Co., which in 2012, began selling specialized line of diapers and wipes by subscription.  First year, the company raked in $10 million in revenue by supplying a niche customer, a niche product, dissimilar to mass-market brands.  By 2016 it was making sales exceeding $300 million.

Interested in learning more about the 3 tactics for leveraging Economies of Unscale and how corporations have, in their own way, taken advantage?  You can download an editable PowerPoint on Economies of Unscale here on the Flevy documents marketplace.

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8812893896?profile=RESIZE_400xThe phenomenal success of tech innovators using Platforms has spurred a desire in companies, from a greater variety of sectors and markets, to gain advantage of Product to Platform Transformation.

This Transformation is based on the need to model businesses on a Customer-Centric Design approach.  The need has arisen because the concept of Economies of Scale has become archaic and has been taken over by Economies of Unscale.  Each customer is now being offered customized products and solutions.

The phenomenal success, by the trailblazing tech innovators, was achieved partly by deploying Platform Scaling that enabled Business Transformation and monopolization of the market.  Though, this monopolization and questionable use of the Platform, especially data generated therefrom, saw attempts to regulate these tech companies—making the decision to scale a complex one.  Understanding the intricacies of Platform Scaling is thus critical to the development and deployment of any Platform Strategy.

When considering Platform Scaling Strategy, there are 2 key aspects that are of utmost significance:

Regulatory Complexity

Regulatory Complexity means present level of legal and regulatory impediments that govern Platform entry and operation in a sector. 

Regulatory Risk

Regulatory Risk refers to the probability of an upsurge in Legal and Regulatory Costs and Complexity in the future.

Some equitable and measurable metrics for calculating Regulatory Risks do exist but generally it is extremely challenging to predict policy outcomes or even ascribe odds to various outcomes.

A straightforward approach for Platform owners and operators to understand and evaluate the prospective combinations of Regulatory Complexity and Risk is to create a 2×2 matrix of high vs. low for the 2 factors.

Regulatory Complexity and Risk are turning out to be the determining factors in the strategic decision between Fast and Slow Scaling.

Fast Scaling, which has also been referred to as Blitzscaling, requires choosing speed over efficiency.  Fast Scaling has the strategic objective of growing briskly, experimenting swiftly to tweak product-market fit, and taking advantage of robust network effects to achieve and maintain a leading market share.

Fast Scaling is required to activate 3 interconnected positive feedback loops:

  1. Network Loop
  2. Data Loop
  3. Capital Loop.

Slow Scaling is the most sensible strategy in areas with both High Regulatory Complexity and High Regulatory Risk.  Slow Scaling does not disregard the quest for network effects, which are a requirement for success of platform businesses, but it gives preference to analysis, constant growth, and risk curtailment instead of speed.

Platform businesses functioning in High-Risk, High Complexity situations may evade pitfalls by employing 4 key components of Slow-Scaling strategy:

  1. Analysis of the Macro Environment
  2. Careful Risk Management
  3. Investment in Stakeholder Trust
  4. Incremental Geographic Expansion.

Let us now delve a little deeper into the various permutations of Regulatory Complexity and Risk, quadrant-wise, in the matrix.

QUADRANT 1

Regulatory Risk              Regulatory Complexity

Low                                        Low

Compliance costs are comparatively low in such situations and there are no serious deliberations among regulators and policy makers concerning restrictions on business models or operations.

The Strategy in this case is to Scale Fast.

QUADRANT 2

Regulatory Risk             Regulatory Complexity

Low                                        High

Sectors in such scenarios are highly regulated e.g., financial services sector.  Significant workforce is employed in governance, risk management, and compliance activities.  Entering such markets necessitates careful consideration of Regulatory Complexity.

The strategy in such scenarios is to Scale Fast.

QUADRANT 3

Regulatory Risk             Regulatory Complexity

High                                       Low

Operations are generally in a Regulatory void—i.e., no established and powerful regulatory authority, tight net of rules, or strict barriers to entry.  There is a great degree of ambiguity regarding how regulators may react.  Environment in such markets makes it difficult for businesses to mature discrete policy scenarios, allocate probabilities, and make strong assumptions on timing.

Strategy is to Scale Fast in such environments.

QUADRANT 4

Regulatory Risk             Regulatory Complexity

High                                       High

There is high Regulatory Complexity, such as unclear approach by various regulators in the various markets.  There are strong chances of sudden change in regulator and policy maker’s approach due to a particular incident.  Precipitous increase in entire sector’s Regulatory Risk triggered by events is highly likely.

The most sensible strategy in such cases is to Scale Slow.

Interested in learning more about the permutations of these 2 Scaling Strategies, areas of strategic focus, and the 4 components of Slow Scaling Strategy?  You can download an editable PowerPoint on Platform Scaling Strategy here on the Flevy documents marketplace.

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– Roderick Cameron, Founding Partner at SGFE Ltd