Technology and software develop exponentially and in leaps. This development has enabled new value drivers and digital business models as well as a paradigm shift towards the platform economy. Major players like Amazon, Uber or Etsy have adopted these models early on, becoming some of the most valuable companies in the world.
However, creating a successful platform business is challenging, especially for hardware companies that follow a linear, asset-heavy, often production-oriented business model. Whereas linear businesses create or refine products and services and sell them to resellers or end customers, platform businesses do not produce anything – they connect supply and demand with technology. This divergence in approaches is also reflected in the organizational structure, processes, and culture.
So, the key questions are: What does digital value creation look like in the platform economy? And how can asset-heavy companies leverage the platform business model to drive growth and market value?
For human beings, it is super difficult to understand the scope of exponential growth. Yet, this is how software and technology develop – exponentially, unpredictably, and at unprecedented pace.
Think about taking 30 linear steps, each a meter long. After 30 steps, you have traveled a distance of 30 meters. Now consider taking 30 exponential steps: after 30 steps, you have traveled 536,870 kilometers, which is 13 times around Earth– with only 30 steps. This is what exponential growth is all about.
To even better understand exponential growth and its disruptive power, I can highly recommend checking out the rice grain story. Although this story dates back to ancient times, it vividly illustrates what exponential growth truly means.
The platform economy leverages digital platforms to connect consumers and producers, facilitating the exchange of goods, services, and information while matching supply and demand in real-time.
Unlike linear businesses that create or refine products and sell them directly, platform businesses do not produce anything. Instead, they create value through moderating an exchange between two or more groups. The only requirement: A digital operating model and technology.
Due to minimal marginal costs for production and distribution, network effects, and the profitability of digital goods, platform business models can scale exponentially.
The platform economy has led to the emergence of new business models and forms of competition, along with new value drivers that determine market value.
Linear, asset-heavy value creation is based on the number of customers times engagement. Typically, the factor ranges between 0.9 and 4.
However, the more valuable companies are those capable of generating more receptors – touchpoints with customers – and applying intelligence to scale and monetize the data generated at these receptors. The factor ranges between 10 and 40. Among the 10 largest publicly listed companies in the world based on market capitalization are Apple, Alphabet, Amazon, and Meta – all platform businesses that utilize digital value creation.
For virtual and digital value creation, it’s not just about how many customers you have, but how many touchpoints you can create and how much intelligence you can apply at these touchpoints. Compared to linear, asset-heavy value creation, digital value creation is around 10 times higher.
Most of these are "winner-takes-it-all" approaches: If a company manages to achieve a better leverage effect over the competition, it enables faster development and the potential to become the market leader. By becoming the number one in the market, you are the first company to embark on a 10x growth trajectory and are unlikely to be overtaken anytime soon.
Tying it back to exponential growth and its disruptive power, the 10x effect impressively demonstrates the enormous growth potential – also for companies with a linear business model, when they manage to successfully integrate platform business.
If an asset-heavy company with a linear business model wants to transition towards a platform business model, it must first undergo a shift in understanding value creation:
To be successful in the platform economy, businesses have to focus on creating valuable market interactions, shifting away from supply chain optimization toward extensive ecosystem coordination and governance. Control mechanisms and KPI structures of traditional models do not work in the platform economy. So, the key question is: What is the right balance between linear pipeline business and software and platform business to transform an OEM into a tech company and how do they interconnect? You also need to consider where you want to cooperate and where you want to compete with a tech company.
In general, the linear pipeline model predominates in asset-heavy businesses, whereas in digital pure plays or asset-light businesses, software and platform models dominate. Also, hybrid models are an option.
Compared to pure plays, hybrid models are more challenging because they require combining the best of both worlds. These approaches necessitate a higher degree of flexibility, coordination, and strategic alignment. Managing diverse processes, operational models, and potentially conflicting objectives increases overall complexity. A great example for a hybrid approach is Apple, as they combine their hardware business (e.g. MacBooks, iPhones, etc.) with their app store and software solutions.
Even though there is no one-size-fits-all approach, there are several ways for a hardware company to establish a platform business model: You can either
Overall, all options require a culture change, openness, rethinking, reorganizing, new methods, and the right partners with the right capabilities.