Traditional strategy is about choosing a business and running it in a relatively static manner, but successful platform strategy is about continuous improvements and radical expansions, according to Timo Vuori and Tero Ojanperä
Platforms generate new opportunities for both traditional and digitally native companies. They do so by challenging the traditional approach to business strategy. Platforms enable you to create an industry transcending strategy.
But you should not diversify too soon. Rather, you need to build the foundational building blocks of a successful platform in a focused manner. Our research, covering the growth paths of dozens of companies in multiple industries, identified that they first focused extensively. They built momentum and then leveraged what they had created in new domains.
Start with focus to become the best
Zoom has focused on offering video-conferencing software for individuals and companies. As more and more people have liked their software, they have invited ever more users. In this way, Zoom has grown rapidly and become one of the leading video-conferencing software producers. Its success illustrates the two first core elements of a successful industry transcending strategy: network effects and AI-enabled learning loop.
As the number of Zoom’s users increased, Zoom became ever more valuable for each user, as they could reach ever more people via Zoom. Network effects kick in when every additional user increases the value of the product or service for the other users. They create a virtuous cycle as the value continues to increase, making it ever more difficult for other service providers to offer the same value.
AI-enabled learning loop works by continuously improving the product or service by analysing usage data. Such continuous improvements ensure ever smoother user experiences and higher engagement with the product or service. As the number of Zoom calls increased, Zoom could analyse ever larger amounts of data on its functionality and the quality of calls. This helped the company improve the call-experience continuously.
Such focused improvements are not limited to digital companies, but also established companies can start building their platforms with focus. For example, TetraPak, a company which provides solutions and services for the food & beverage industry, created a B2B market place with a focused approach. It started by providing their own and third-parties’ spare parts and consumables to factories using its solutions and services via a platform: the client factories can order them via the platform. With a focused approach, TetraPak is gaining their trust and engagement—customers find exactly what they are looking for and get reliable service.
Successful companies transcend industry boundaries (diversify) only after they have created sufficient success with their focused offering. Due to the network effects and AI-enabled learning loop, they have created loyal users and shown their credibility as a top-quality player. Hence, when they enter new domains, they immediately gain extensive traction.
Use human creativity to transcend your industry
When transcending industry boundaries, the big question is, where should we diversify? Unfortunately, data from your past success won’t give you the answer. For example, Amazon’s expansion to cloud services from an online store did not result from its increased understanding of consumers’ online behaviour. Rather, its move was a discontinuous one –a jump into a different logic – and required human intelligence.
Likewise, Zoom’s recent expansion to telehealth was not the result of Zoom improving its teleconferencing application. Rather, the move required Zoom executives to think in a novel way. Only by rethinking what they are doing and how they could leverage their credibility and capabilities elsewhere, they were able to make the move.
While industry transcending expansions are creative, they are not random. Rather, they leverage the core capabilities and customer engagement of the focal company in a radically new way. A capability that is useful in one industry can be equally valuable in another one—or even more valuable. Likewise, customer engagement in one domain can transfer into a broader relationship and engagement in another domain.
In Amazon’s case, the core capability that the company had been building was operating a massive, reliable server solution for running its online store. The company realised that besides using this capability for running its own web store, it could provide it as a service for other companies. Hence, the company diversified its offering radically, while also keeping to its core.
Likewise, Zoom’s expansion to telehealth builds on its capability to provide user-friendly, reliable, and secure video-calls. But this capability is now not directly shown to the consumer, but embedded in health-providers’ solutions. A radical expansion for Zoom, while still staying close to its core.
How can you find your radical expansion that will stay close to your core? You should combine internal and external perspectives to find the best possible match between your unique capabilities and customer engagement with the opportunities beyond your current industry.
Starting from inside-out, you should identify the core skills and capabilities of your organisation. Discuss and detail what concrete activities your firm is currently doing and what skills are needed for doing those activities. Then, consider how those same skills could be used for various other activities. You should identify at least five skills and five uses for each skill. This gives you 25 new potential expansion opportunities.
Then look at the challenge from the outside: what market opportunities are emerging outside your current industry. This phase requires you to review reports on trends in various industries, consumer and business behaviour, technologies, and other materials that help you see what is changing in the world. In addition, you can draw on analogies from the past: how have other companies created new opportunities in new industries. Overall, this exercise will give you a long list of opportunities that you can then match with those that were based on the inside-out approach.
Once you find a match between the potential new use of an existing capability and the external opportunity, you can create a ‘wormhole’ between industries that initially seem distant. You can travel very far (new industry) without having to travel much, because you are already there (you have the needed capabilities and customer engagement).
Gain speed with partners and AI
Once you travel through the wormhole and enter the new industry, you need to learn fast. Even though your core skills and established customer engagement give you a good start, your new competitors will eat you alive unless you make fast progress. Here, you need to return to the first two core elements of successful platform companies: network effects and AI-enabled learning loops.
In the new industry, you should leverage network effects by partnering with companies providing complementary services to your core offering. In this way, you can rapidly assemble a broad range of capabilities and services that will satisfy customers in the new industry. And network effects are reinforced in an in-direct manner: the complementors benefit from having new customers, while the customers benefit from having new services from you. Hence, the number of both complementors and customers is likely to go up and create a virtuous circle for your platform in the new industry.
In addition to assembling the capabilities, you need to improve the services rapidly. This you can do with an AI-enabled learning loop. As you gain more users, analyse their behaviour and make continuous improvements in your service. In this way, your services in the new industry become better every day, making it ever more likely that you will win also in the new industry.
Conclusion: new approach to strategy
Traditional strategy is about choosing a business and running it in a relatively static manner. In contrast, successful platform strategy is about continuous improvements and radical expansions. You should first focus, build capabilities, and create consumer engagement. Then, transcend industry boundaries through a ‘wormhole’ and become the fastest learner in the new industry.
Timo O Vuori is a strategy consultant and professor at Aalto University. His research on the psychological dynamics of strategy making has won several international awards. Timo helps companies formulate and execute strategies, helping them transform into intelligent platforms.
Tero Ojanperä is a world-renowned technology business leader. The co-founder of Silo AI, he is an investor and venture capitalist. Fast Company crowned him the seventh most creative person in business and he is a Young Global Leader with the World Economic Forum.
Timo and Tero are co-author of Platform Strategy: Transform Your Business with AI, Platforms and Human Intelligence (published by Kogan Page, Oct 2021).