Platform Business Models: Keys to Governing New Organization Designs

June 5, 2017

Platform Business Models: Keys to Governing New Organization Designs

A stagnant business model can no longer compete in today’s marketplace; relevance requires globalization, innovation, and technology. From Henry Ford’s breakthrough assembly line to the mail-order catalog offered by Sears Roebuck and Company to McDonald’s franchise model, the last century saw unprecedented change in both business structure and customer outreach. What trends will become breakthrough 21st century archetypes (e.g., Uber’s ride-sharing platform, Salesforce.com’s cloud ecosystem, Apple’s app store, etc.)?

Platform business models have emerged as a significant alternative to traditional, vertically aligned companies. Platform business models cannot be effectively developed or successfully run without significant change in how the organization is designed. The traditional command-and-control management structure or a vertically-integrated value chain may not align with the dynamics of a platform business model, so a decisive step towards a successful platform model is setting up flexible governance mechanisms and processes. Leaders must establish new forms of organization alignment and the corresponding change that leaders, employees, and partners will experience when making the shift.

Platform business models cannot be effectively developed or successfully run without significant change in how the organization is designed. In a vertically integrated business model, leaders maintain governance through structure, processes, policies, product/services, and supply chains. In contrast, the platform business model does not always rely on these more rigid and planned arrangements in favor of creating a dynamic platform where providers and customers connect to exchange value. This shift in leverage demands a new emphasis on governance and corresponding organizational alignment.

Governance through Product and Service Standards

A business can establish tremendous influence over its area of commerce by successfully creating boundaries that define how other providers must operate. If core products and services are successful, other providers will work to compliment these products/services but must adhere to the limits of the governing model. Apple’s business model, for instance, has engendered countless support products for its iPhone line. Phone cases, power cords, and applications offered by other providers all must be updated or revised as Apple modifies their original design.

Governance through Customers

Customers are the reason a business exists. By breaking down the barriers between a business and customers, a successful platform will allow customers to prescribe exactly what is needed. Uber has established itself as a leader in this model by removing virtually all barriers between the company itself and the customer. Providers (drivers) interact directly with riders (customers), who may offer scores and ratings on the Uber app. This allows customers to select a driver who is most likely to suit their preference, and gives drivers specific feedback to improve their services. Uber has no direct involvement with these transactions, but the governance mechanism allows satisfaction for both providers and customers.

Governance through Marketing

Platforms may be developed with the emphasis not on the product or service, but on promoting awareness of the goods and services. The online commerce that exists through Etsy is an active and global industry. Yet the products Etsy offers are created and posted by artisans and small businesses that would otherwise never reach such a vast customer base. Etsy’s governance platform requires very little oversight over the product or customer experience, but singular focus on how to capture the attention of millions of internet shoppers.

Governance through Simplicity

Consider how to make the customer experience effortless. Any successful business must direct at least some attention to this, but for some simplicity is the principal focus. Amazon began as an online bookseller and gradually added other products until they grew to be the biggest online retailer in the world. Despite the expansive product offerings the buying experience itself is effortless. One-click purchasing, saved shipping addresses and credit card information, and precise algorithms for product suggestions make Amazon the place to turn for virtually any retail need. Their concentration on the effortless shopping experience is being further tested in the brick and mortar world with the opening of Amazon Go, for which the company developed “Just Walk Out” technology and dispensed with cashiers and check-out lines.

As you consider the governance mechanisms for a platform business model that would best meet your goals, bear in mind that any company might utilize more than one of these principles simultaneously. Consider what customer experience would make your business successful, and let that drive the governance structure(s) that are then adopted. Remember that although platform models are revolutionizing the way some businesses are governed, traditional organizational alignment may still be the best option for many companies.

The Authors: 

Reed Deshler is a former HR executive, organization design practice leader, and author of Mastering the Cube: Overcoming Stumbling Blocks and Building an Organization that Works. He has worked with leaders in  top organizations, including General Electric, 3M, Benjamin Moore Paints, Southern California Edison, Consumers Energy, Hertz, Black & Veatch, TVNZ, American Family Insurance, and Honeywell to clarify strategy, align organization choices, and manage change. Reed has facilitated numerous strategic and tactical planning processes for SBUs and BUs leading to significant operational efficiencies and cost savings. He can be reached at reed.deshler@alignorg.com.

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