In this class, I talk about why platforms fail and do an introduction to ecosystems vs. platforms.
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Cited in this talk:
Related podcasts and articles:
- #30: Ecosystems vs. Digital Platforms
Concepts for this class:
- Ecosystems vs. Digital Platforms
- SMILE Marathon #5: Ecosystem Orchestration and Management
- Mismatched and/or Crippled Scale
- Digital-Physical Hybrids
Companies for this class:
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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, Xiaomi, Meitu and Seven Reasons Why Platforms Fail. Now this is actually gonna be a two-part case, which will be a bit of theory, which will be today. And then in the next podcast, I’ll talk about Xiaomi and Meitu. And they really are both in the category of struggling platform business models tried to do one thing and they’ve been scrambling a bit, both of them in different ways. I think that will fit together quite nicely. So this is part one of two. Now today I really wanna just focus on the seven reasons platforms fail, which is, that’s not my theory. This is from a Boston Consulting Group report that came out not too long ago. I thought it was really quite good, quite well thought out. For those of you who are members, I sent you out an email in the last couple days, kind of a long one. of going through a lot of the theory of platforms versus ecosystems, and then sort of citing this report and some of the things they looked at for why these fail. So this is like 70% Boston Consulting Group thinking for this morning. So I don’t wanna take credit for stuff that’s not mine. But it also tees up the idea of platforms versus ecosystems, which I haven’t really talked that much about. I’ve mostly talked about platforms. which are really sort of a simplified version of an ecosystem strategy. So I’m gonna go into that and start to tee up that idea and I’m gonna dig into that more for the next, probably the next month or so. That’s kind of a big deal, particularly if you’re more in a tech space, like if you’re in semiconductors or you’re in PCs or smartphone handsets, you’re much more of an ecosystem strategy than say a platform strategy, which is more like a Facebook or a WeChat. So those are gonna kinda be the ideas for today. For those of you who are members, this is all gonna go under learning goal 30, which is digital platforms versus ecosystems. That’s level seven. And the two main ideas I want you to sort of think about for today, first one would be ecosystems versus platforms. That’s sort of a new concept that I haven’t talked about explicitly. And then the other one will be a bit of review, which is the ecosystem shaping and management, which is something I teed up under the Smile operational marathon. And within that Smile, S-M-I-L-E, the E stood for ecosystem shaping and management, which I always kind of referred to as a platform strategy, but really it’s because I knew that was, we were gonna get the ecosystem, so I sort of made it a little broader. So we’ll talk about that one, but that’ll be a bit of a review for some of you, and for others not, it’s okay. So those are the two goals for the day, learning concepts, ecosystem shaping and management, and ecosystems versus platforms, and that goes under learning goal 30, which is digital platforms versus ecosystems. Now, for those of you who aren’t members, you can go over to jeffthousen.com and sign up there. There’s a free 30-day trial. Actually, let me ask everyone a bit of a favor today. I was on iTunes and like, I have no reviews at all, which is kind of sad actually. Which is fine, but iTunes cares about this stuff. Like I care about how much you’re learning. I’m not really trying to go for traffic in any of this. My metric, my bottom line is I try and think of how much, you know, you’re learning by listening to these and reading emails and things. That’s kind of my bottom line. But at the same time, iTunes bottom line is always reviews. They really care about that. So if you’re sitting there on your phone and you’re connected, if you could click over. Literally just within iTunes or whatever podcast you’re listening to, whether it’s Google Podcast or whatever, just click over and leave a review. That would be helpful because it’s embarrassingly low, which is, I don’t know why that started to bother me in the last week. But anyways, if you could leave a review, I’d appreciate it. Okay, let’s get into the content. So the first idea for today, ecosystems versus platforms. And that kind of tees up. The idea of, you hear this talked about in a couple ways. So one would be ecosystems platforms and the other would be integrated versus modular organizations. Those two sets of ideas tend to go together. Let me read you a little bit. This is from the BCG report by a guy named Martin Reeves, who is the head of their Henderson Institute. I’m thinking of inviting him on and seeing if he’ll come on and talk on this podcast. I haven’t really done interviews on this podcast. I don’t really like to do that very much. I prefer to sort of lay out content that adds to itself and builds on itself. And so that, you know, in theory, this is all cumulative, the longer you listen, you know, it will systematically, you know, get you more and more sort of expertise on this. That doesn’t work well when you’re just randomly talking to people. But I’m thinking about him because I’m impressed with a lot of his work. I chatted with him a little bit online. Okay, so one of the things they tee up in this report, I’m going to read this quote for you. This is from their BCG report. Quote, the traditional model of the integrated firm, so that’s that word integrated, with its hierarchical supply chain. That’s an important term, hierarchical. is increasingly being replaced by business ecosystems, dynamic groups of largely independent partners that work together to deliver integrated products and services. Okay, that’s the first bit. Now, what he’s talking about here is ecosystems. He’s not talking about Facebook so much. He’s talking in a more general term. This is more like when you think about the tech industry, let’s say the PC industry in the 1980s. Microsoft comes out of the gate, they code the operating system, IBM starts to make PCs, they license it from Microsoft, Microsoft does one of the greatest deals of all time where it not only provides the operating system to IBM, but it also retains the exclusive right to sell that to other people. Basically… Microsoft was an ecosystem builder from day one. They were doing a platform strategy from day one. I’ve always wondered if that was because Bill Gates’ father was a lawyer and understood that stuff. And IBM was not. And it turns out you wanted to be a platform player. But you kind of had IBM there doing the hardware. You kind of had Microsoft doing the software. You had Intel jump out of the gate doing the processor. Then you had Sun Microsystems and some others. But really what you started to get was a a coordinated effort by multiple partners. And that’s really how I think about an ecosystem. It’s a coordinated effort by multiple partners who are all doing something that none of them could do individually. You know, launching the PC, getting the software to work with the chips, getting that to work in the hardware, especially the PCs, but also all the peripheral hardware, like… the mouse and the keyboard and the printers and the screens and all the other peripherals that were created shortly after, and then all the application developers start to write software that sits on the operating system. And you’ve got four or five major groups of partners that all start to sort of work together in a coordinated fashion and create something that none of them could create on their own. Cause ever all of this stuff has to be standardized and interact with each other. You know, the chips have to be coded in a certain way or built in a way that they work with the software and then the software has to work with the app developers and all that, it all has to sort of link together. And then the other point is, you have to do a huge amount of innovation year after year. This is not a stagnant system, it advances very quickly. So all the innovation, all the R&D departments of all of those companies are spending together and you get sort of an innovation effort that is far more than any other company could do. So you want to think about compatibility and innovation across a series of partners that is much bigger than any company could ever do on its own. So you all have to start to work together. And that’s why when people talk about ecosystem strategy, it’s about getting partnerships together and start to work. And it usually tends to emerge at a period of time where the industry is going through a major technological disruption. That’s when ecosystem strategy starts to really start to play out, is when you see these technological leaps forward, whether that’s the emergence of the smartphone, the emergence of the PC, the emergence of the web. We’re seeing it in cloud today. We’re seeing it in semiconductors, AI. That’s when you start to see this really play out more than other places. And of course, the strategy here, which I will do a couple classes on coming up, kind of amazing. I mean, it’s you see this in automobiles right now. That would be a better example. We see cars trying to become integrated, you know, these ecosystem players. We have to have the car and the roads and the smart cities and the electrical grid and the charging stations and the AI in the car. But you also have to make the car. You’re seeing lots of players trying to work together. And it’s very difficult because none of the players trust each other. That’s the problem is you know you’re going to be in the ecosystem. You know it. Okay. Who’s going to be in charge? Is one company going to be totally in charge and we’re all going to end up doing what they say? If one player is clearly going to be dominant within the ecosystem, the other players don’t want to play. They’re like, no, no, no, no, no. This looks like a setup. I’m not getting into this and ended up working for that company. So if one of the players is incredibly dominant and aggressive, the other players don’t play. So it doesn’t work. And we saw that with like when Nokia started to make a smartphone and none of the other they tried to do an ecosystem strategy, the software, the phones, and it didn’t work. Apple made it work. But at the same time, if there isn’t what we call an ecosystem orchestrator, someone who is setting the rules for everybody else. It’s too much chaos. It’s too much like herding cats. And so you gotta have, to some degree, someone’s gonna be the ecosystem orchestrator. But you don’t want, so that gets people involved and engaged and it starts to go. But if it’s too powerful, you scare people off because everyone else doesn’t wanna end up being commoditized, even though that kinda happens to most players. You know, Microsoft ended up becoming the ecosystem orchestrator. for operating systems without, and that was a position of power within the entire ecosystem. And you could say Intel had the same thing. They had a position of power. And as you look at sort of ecosystem strategy, the question is, am I gonna be the ecosystem? This gets us to my ecosystem shaping and management category under the smile operational marathon to repeat. I said, look, you’re gonna have competitive advantages where you can. And if you have one or if you don’t have one, you are still in an operational marathon where you have to know what dimension you’re competing on operationally every day. Run, run, run, run, run. If you’re running a restaurant, it’s about scale and efficiency and effectiveness. If you’re running Ant Financial, it’s about machine learning and AI is your dimension. But for a lot of companies, it’s about how am I engaging with the ecosystem? So I call it ecosystem shaping and management. And yeah, you might be the orchestrator. Most companies are not gonna be the orchestrator. So you kind of accept, well, I’d love to be the orchestrator. I’d love to be Microsoft, but let’s be real. That’s gonna be one player. There’s very few of those. More than likely, my ecosystem shaping and management strategy will be about, I wanna be the most powerful, advantaged, well-positioned, complimenter that I can. I’m gonna be one of many merchants on Alibaba. I’m gonna be one of many content creators on LinkedIn or TikTok. And so I’m playing, I wanna be as strong as I can as a complimenter on the ecosystem and not to be a commoditized complementer on the ecosystem. That’s probably your best strategy and it’s probably what most people do. And maybe you get lucky and you end up being the orchestrator within the ecosystem. IBM, I’m sorry, not IBM, Microsoft and Intel were orchestrators within the PC ecosystem of the 80s and 90s. Within the semiconductor industry today, you can see a couple of people that are, couple of companies that are positions of power within the ecosystem. TSMC, the foundry out of Taiwan, 50% of all advanced chips are coming from them. They are in a position of great power within the ecosystem. Now it doesn’t mean you’re the biggest company. You can actually be a small company but still have power within the ecosystem. And the example there would be Arm Holdings out of the UK, a relatively small company, couple billion dollars of revenue, but they’re the group that creates this library of IP that all the developers and all the chip makers and all the device makers, they just sort of draw on their IP catalog to design their chips and they get a nice licensing fee. And then it goes to TSMZHU. creates it. So Arm, we’re not going to get into that because that’s a little bit out of my depth. But Arm would be an example of an ecosystem orchestrator that’s actually quite small, but doing incredibly well in terms of profit. I really think that company is kind of amazing. So that’s sort of the first point on ecosystems. The other point they tee up is this word integrated because you’ll hear this term integrated versus modular structures. You hear it all the time. I mean, if you take a technology textbook in any business school, there’ll be a chapter on integration versus modularization. I mean, it’s very common. And the idea is simple. And it’s, you know, this gets us into Clayton Christiansen land. He was a big thinker in this space. The idea that, you know, an integrated solution would be something like, you know, the Apple iPhone where, you know, they don’t just do the handset. which is the physical aspects and all the devices in there, the camera and the, you know, but they also do the software. And the software and the hardware actually sort of integrate together in one solution. And actually the more interesting aspect of the iPhone integration is not actually the software, it’s the chips that the hardware and the handset integrate all the way down into the chip level. So they have very specific chips that they develop for themselves that, you know, so it’s sort of semiconductors. to the handset, to the operating system. I mean, it’s one integrated solution and then people develop apps for the iPhone and they set lots of rules on those. So it’s kind of one integrated solution. And one of the benefits of that is it usually presents a more seamless and enjoyable user experience because everything is under Apple’s control. Everything on how the screen looks, on how you engage, on how Siri, which is not very good. integrates into every single app and it integrates into the GPS. Everything is integrated, all the functions, all the features, and it works very, very well. It’s a very enjoyable experience. I can do some things that are very, very nice. And that’s sort of the benefit of integration. And you often see integration emerge an integrated solution when it is the early days of an ecosystem, because Nobody quite knows how this is going to work. Nobody really knows what autonomous vehicles like the Tesla electric autonomous vehicle is going to look like. So you see Tesla building an integrated solution where they’re doing everything in-house, the cars, the batteries. They’re not doing the chips, but they’re doing the software, the AI. They’re doing it all in-house in one integrated solution. We saw that with the iPhone, which was really what got the smartphone to take off. We saw that in the early 1980s when Apple did the first sort of Macintosh. And, you know, that was, those were all sort of integrated approaches to the first phase of this new product system, you know, technological dislocation. But integrated solutions have major problems as well because they don’t scale. Apple cannot create all the apps itself. It cannot create all the software itself. It cannot create the chips itself. You know, you’re one player trying to do everything. And yeah, you partner a little bit. I mean, Apple does partner with some of the apps and stuff. So there’s a degree of ecosystem, but it’s much more concentrated in one player if you’re doing an integrated solution. The modular solution, which would be… basically Microsoft in the 1980s, they said, we’re not gonna make all the applications ourself, we’re not gonna make the chips ourself, we’re not gonna make the hardware ourself, which is what Apple was trying to do. They partnered up and they had an ecosystem approach and it was basically a modular approach, which means they create your business, your product, your service is based on modular components, almost like Lego blocks, where every component can lock into another component. And by doing that, everyone who makes a component can plug into yours. And it just grows very, very easily because everything locks into other people’s products and services. And Amazon does this. Amazon loves modular strategy. Where everything they do, whether it’s AWS or Amazon, you know, the Amazon platform, every single merchant can just plug into that platform and plug and play and create their shop on that platform very easily. and their cloud service, everyone can plug their business into there very easily and start to run their stuff on their cloud. So they’re all about those interfaces, those APIs usually between companies. And that’s a pure modular play as opposed to a pure integrated play. And there’s strengths and benefits of both approaches, but you’ll hear this talked about a lot. So as soon as you start talking about ecosystems and then platforms, people will immediately start talking about integrated versus modular approaches. That’s a whole other subject, I’m not going to go into it, but I want to at least touch on the fact that you do hear that all the time. Okay, so that’s just one sentence in this BCG report. The sentence that follows, let me repeat that again. The first sentence was, quote, the traditional model of the integrated firm, there’s that word integrated, with its hierarchical supply chain, hierarchy. is, my quote, is increasingly being replaced by business ecosystems, dynamic groups of largely independent partners that work together to deliver integrated products and services. Then they go on, most of today’s business ecosystems are built around digital platforms. Okay, so that kind of brings us from ecosystems, which is what a more general idea I’ve been talking about, to digital platforms, which is. I’ve had a lot of talks on this. Digital platforms are sort of a simplified version of an ecosystem. They’re a business model that sort of takes usually the juiciest parts of an ecosystem. So that’s Facebook, that’s WeChat. Yes, they’re an ecosystem player, but they’re taking one part of it, which is let’s say WeChat, the interactions in communication, and then the interactions in payment. So it’s a simpler version of an ecosystem play, basically. and it tends to be ridiculously profitable. Okay, so they go on, our smartphones, oh, I’m sorry, our smartphones, smart colors and smart homes are powered by ecosystems of hardware suppliers and application developers. We increasingly order our food, transportation, accommodation on digital marketplaces and industrial companies. I’m sorry, on digital marketplaces, end it there. So basically they’re saying, look, all of these things, Smartphones, smart cars, and smart homes, these are all ecosystems that people are building. There’s hardware, there’s software, there’s increasingly AI specific chips and other things and IoT chips. It’s a whole ecosystem. However, within that, digital marketplaces, which are a type of digital platform, sit on top of that within those ecosystems. So you got to tease those things apart. Anyways, the article goes on, quote, there are good measures. for the success of the ecosystem model in an ecosystem startup phase. This model can quickly provide access to capabilities that may be too expensive or too time consuming to build within a single firm. Once launched, ecosystems can scale much faster than an individual business because their modular structure makes it easy to add partners. Moreover, ecosystems are very flexible and resilient. Their modularity enables both high variety and a high capacity to involve, unquote. Okay, that’s a really good point. I mean, there’s like six really cool things they just said. I really like this paper. Like the thinking is so subtle and the choice of words is so precise. It’s really great. Okay, so the first point they make is, look, there are good reasons for the success of an ecosystem model in an ecosystem startup phase. That’s totally true. There’s a lot of power to ecosystems. However, that power is much more in this startup phase when an ecosystem is just being put together. And they say, quote, because this model can quickly provide access to capabilities that may be too expensive or too time consuming to build within a single firm. That’s this idea of look. We’ve got something new emerging. It’s a smart home, it’s a smart car, it’s a smartphone, it’s PCs in the 1980s. It’s too hard for one firm to do this. So if you do an ecosystem approach, then you access all the capabilities of everybody, all their innovation, all their resource, all their money, and money is a big deal. Don’t discount money as a big factor in how to get these things going. And so an ecosystem approach is very powerful in the startup. phase. And you can do things that a firm never could do. Okay, then they go on. I’m quoting the same quote here. Once launched, ecosystems can scale much faster than an individual business because of the modular structure makes it easy to add partners. So one, you get all these capabilities. But two, when you do get going, you can grow much, much faster because you’re accessing all the benefits of all the companies. So one, it gets you through that hurdle of getting a new product launch that no one has ever done before with an ecosystem. Two, once you launch, you can scale much faster. True. And then the third point, this is still within the quote, “‘Moreover, ecosystems are very flexible and resilient. “‘Their modularity enables both high variety “‘and high capacity to evolve.'” Awesome, that’s just a great point. One of the problems when you’re launching something new, whether it was the smartphone, PCs, smart cars, nobody knows what’s gonna work, right? Nobody can predict it. It’s too hard to know what consumers will want, what business model will be most profitable, what technology is gonna make it work. I mean, there’s so many uncertainties when you’re launching that if you’re just a company and saying, hey, we’re gonna design this thing and launch our product, the chances are you’re gonna fail. However, one of the benefits of an ecosystem model is you don’t have to figure it out because the ecosystem by definition is adaptive. You know, when you put stuff up on Amazon or Alibaba or Youku or TikTok, none of those companies know what individual product is gonna succeed. They’re providing the platform and then tons of people put up stuff on TikTok. And then they just sort of watch and to see what took off and what didn’t. Oh, it looks like these types of videos really worked and these type of content people don’t watch. Here’s a type of car that works and that’s doing well and here’s a type of car that’s not. Here’s a type of chip. Here’s a type of, I don’t know, smartphone app. When you have a ecosystem approach, it’s like evolution in real time. You just watch to see what animals live and die and there’s, okay, that’s what worked. but you don’t have to figure it out on your own. So that point that ecosystems are quote, flexible and resilient unquote. Yeah, they’re flexible. They can adapt. They can shift quickly because it’s not you as one company figuring it out, going through your planning phase and your design phase and your manufacturing phase and let’s roll it out to the market phase, which usually takes nine months to a year if you’re fast, 18 months if you’re a CPG company. No, it’s the ecosystem evolving and adapting And two, it’s flexible and it’s resilient. So if something happens, like COVID, you’re adaptable. You can take the hit and the ecosystems evolve. So that gets us to the next point here, which is really resilience. So here’s another quote from the paper, which is basically about adaptability and resilience. Quote, designing a successful business ecosystem poses multiple challenges. For example, it is not enough to design the value chain and delivery model. Let me read this again. Quote, designing a successful business ecosystem poses multiple challenges. For example, it is not enough to design the value creation and delivery model. The design must also explicitly consider value distribution among ecosystem members. And this requires a systems perspective. At the same time, ecosystems cannot be entirely planned and designed, they also emerge and continuously evolve. This adaptability is one of their major strengths. So ecosystem design must ensure that the basics are in place and strategic blunders are avoided, but it must also leave room for creativity, serendipitous discoveries and emerging customer needs. ecosystems that are successful in the long run need to be ready to modify their design in anticipation of shifts in markets, technologies, regulations, and public sentiment. Awesome. I mean, dude, I got to sit down with whoever wrote that paragraph. I mean, that is just awesome. It’s this idea of, look, ecosystems have tremendous strengths in that they are adaptable because they are very good when the markets shift, when the technologies shift, when the regulations shift, when the public sentiment shifts. And when you build a ecosystem, you have to kind of balance this idea of, look, we have to design the system, that is our job as a company. And we have to have a systems perspective. So they have to be planned and they have to be designed, no doubt. But at the same time, you also have to be open and you have to leave room. for creativity, for quote, serendipitous discoveries and for emerging customer needs. You have to balance openness and evolution with design. Awesome, just a really great, and when you run an ecosystem, it’s not just you do that at the beginning. You have to continually do that as the ecosystem emerges because the thing keeps changing and you are developing like an organism over time. Okay, two last points from their article, and then I’ll actually get to these seven, there’s seven reasons why these platforms fail, which I haven’t gotten to yet. Another quote for you. Quote, managing a business ecosystem also presents distinct strategic challenges. Solving the chicken or egg problem of building supply or demand during launch, preventing the explosion of cost during scale up, which can be very fast when network effects kick in. protecting quality during fast growth and defending against competitors that use the low entry barriers of many digital platform models to copy and improve your model and encourage your complimenters or users to multi-home or even fully switch their allegiance. Dude, that is like literally right out of my playbook. Like my sort of how do platforms compete in my digital competition playbook. I mean, they’re just knocking it down. They cite the chicken and the egg problem. When you get a platform moving, when you get an ecosystem moving, you have a chicken and an egg problem. How do we get all the partners to join in if there’s nothing that’s built yet? How do we get every Uber driver to join our platform if we don’t have consumers? How do we get consumers if we don’t have drivers? Chicken and the egg plays out at the platform level and the ecosystem level. That’s one of our concepts has been chicken or the egg problem. As you get a platform going, as you get an ecosystem going, usually the costs tend to explode as you start to scale up rapidly. That rapid growth phase, even though it’s great, can be a problem cost-wise. When you start to grow and you get bigger and bigger and bigger, TikTok is a massive content platform. Facebook is a massive content platform. Then you hit what they call, quote, protecting quality during fast growth. I’ve called that the mismatched and or crippled scale effect. That was one of our concepts in the class. You can search for that, those of you who are members on the site, which is, you know, when you get to massive scale with usually a modular structure, the benefit is you have more content than any newspaper could ever offer. YouTube has more videos than any movie studio or TV studio could ever produce. But how do you curate the content? at that level so that you don’t have a bunch of horrific stuff. Well, you can’t because it turns out one side of your business scaled beautifully, but the other side, the curation and the quality side, I use the word curation, they use the word quality, doesn’t scale, so I call that mismatched scale. And then they make this point that competitors that use the low entry barriers of many digital platform models to copy and improve your model. I talked about this in digital economics, which is like digital businesses are great because the economics are so powerful because it’s a bunch of people coding. That’s great. The problem is there’s not a real barrier to entry unless you have a network effect. If you’re a purely digital business like a Ctrip or an Expedia, it is pretty easy for another company to just start coding and jump into your business unless you have a network effect. which is why most software, most things on your iPhone are free. The clock on your iPhone or Google phone or Android is free. Right, so if you’re doing purely a digital business, you need a barrier. And the one that people like is network effects. The one I point to more often, because I think network effects are actually quite rare, is what I call digital physical hybrids. And that was one of the concepts. For those of you who are members, you can go on the site and search for that. This is when you pair a digital business with some physical aspects like e-commerce, which is a digital business, has a huge physical component, which is warehouses and logistics and delivery. So it’s very well protected, even if it doesn’t have a network effect. Maytuan and these food delivery businesses have a nice physical component. So you can get network effects or you can do digital physical hybrids. They also mentioned multi-home, which I’m not gonna go into. So another concept. The last point they make here, and that’ll get to the seven, is they say, quote, the stakes are high because the failure of ecosystem-based business models tends to be particularly costly. This is Blitz scaling. They’re basically referring to Blitz scaling, money wars, hyper scaling. The idea that if you’re gonna do a platform play or an ecosystem play, it’s usually a winner take all or a winner take most scenario. So whoever gets their ecosystem running first wins most everything. So the cost of failing tends to be very, very high. So people go all in on the early phase of, look, we’ve gotta get, it’s Uber versus DD 2016. It’s just we’ve got to win because whoever comes in third, you don’t get, you get nothing. So there’s a lot of, there’s a high failure cost. So people tend to put in a ton of money. They tend to go all in on the early phases of these fights for various reasons. And then there’s a lot of VC money that just amplifies the whole thing. I did a talk on blitz scaling, which is a lot about this. Sometimes it’s not blitz scaling, sometimes it’s just what I call a hyper scaling or a money war. People are just throwing money at each other to beat them. Two other podcasts you can listen to if you wanna go into this is, I’m gonna put in the show notes. I’m gonna put the BCG article and I’m gonna put links to two previous podcasts. One podcast is podcast four, which is how did Alibaba beat everyone? And that’s basically just digital platforms 101. And I’m gonna put podcast 16, which again is a review lecture of digital platforms as the super predators of business. So. The articles there and the two podcasts, number four and number 16 are there. All right, let’s get into the seven reasons BCG says these platforms tend to fail. Now, everybody wants to be a platform business model. I’ve called them the super predators of business. They are very, very powerful. They’ve been running around the landscape for the last 10 years, just consuming everybody like the… You know, the indominus Rex in that Jurassic Park movie that runs all over the island just eats everything. These are the platform business models, Google, Facebook, Alibaba, Amazon. You look at the top 10 companies in the world by market cap today versus 10 years ago, you know, four to five out of the top 10 today are platform business models. And platform business models are a simpler, focused business model version of an ecosystem. An ecosystem tends to be much bigger. much more complicated. You tend to see pure ecosystems in technology where the fact that the truth is you have to work together if you’re in the tech business. If you’re making semiconductors or you’re making cars or what you have to make sure all the components and everything works together. So it’s a natural ecosystem business. We don’t see ecosystems in restaurants. We don’t see ecosystems in hotels. We don’t see it with a lot of places. What we do see there is we tend to see platform business models, which are a simpler version. So everyone wants to be a platform business model. The problem, the vast majority of them fail. It’s not like everyone does it, virtually everybody fails. And it’s not just the startup world, the Silicon Valley, the Shenzhen, the Beijing world. Traditional businesses are now shifting to become platforms as well. And I think that’s really where the action is. I think these pure… players, these pure breeds like eBay and whatever, you know, they kind of figured it out first that if you digitize everything and connect everything, you can start to build platforms where there weren’t platforms before. Like people talking, social networks became digital social networks. You know, they kind of figured it out first and they took the low hanging fruit and they took the simple situations like chatting. Okay, most of business is more complicated than that. It’s hotels, it’s industrial, it’s manufacturing, it’s hospitals. These are complicated businesses that are dominated or provided by very complicated businesses like factories and like supply chains and like logistics. And those have traditionally been product or service focused businesses that are very complicated, much more complicated. These businesses are now starting to add platforms to their business. So big industrial players like John Deere and GE, they’re starting to be products and services, which has been their area, plus platforms. And retailers are starting to do this, shopping mall players are starting to do this, health insurance players, banks. So that’s kind of the future, is traditional businesses that are building out platforms that complement or add to their traditional business. So that’s good news for all the traditional players who’ve been taking it in the chin for the last five to 10 years. Okay, quote from the BCG article, they basically studied a lot of platform business models. They use the word ecosystem business, but they’re mostly talking about platform plays. They use a little different language than I use. And they basically say, look, most of them fail, and they have seven reasons why they fail, and six out of the seven reasons are design and basically, design problems, they’re not execution. Of the seven, one of them is execution, the other six are design and governance. So it’s a strategy question, which is good because that’s what we talk about in this class is we mostly talk about strategy. So six of the seven are design and strategy, one is execution. They said 85% of observed failures related to weakness of ecosystem design, while 15% related to bad execution. Okay, so we can go through these. It’s a good list. There’s really two or three that are much more important, and I’m gonna talk about those and skip over the rest. Well, not skip over, but I’ll go over it pretty quick. Now, if you click over to the BCG article, they have two fantastic charts, and I couldn’t reproduce them because I don’t have the rights, so I couldn’t send them to you, but click over. Exhibit one and exhibit three, where they basically list the seven, and then they say, here’s the checklist to see if you’re vulnerable. And here’s who has that risk for this. These are just fantastic charts. Copy these, put them in your file. I can’t reproduce them, but I gave you the link. So number one, insufficient problem to solve. You’re building a platform or an ecosystem against too small of a problem. You need an industry-wide problem. Number two, wrong ecosystem configuration. I’ll go into that. Three, wrong governance choices. Four, inadequate monetization. Number five, weak launch strategy, and then number six, weak defensibility. And then the last one obviously is execution, which would be number seven. So failure mode number one, failure reason number one, is insufficient problem to solve. Okay, this is pretty straightforward. You know, all of this stuff, all the benefits of being a platform or an ecosystem come at scale. It’s… We get a ton of interactions on our marketplace platform we couldn’t have gotten in a local business. If it’s an ecosystem, we get a ton of research and development across multiple massive companies. So we’re all deploying billions of dollars into semiconductor design every year. It’s a scale benefit, that’s the reason. And you really do need the size to work. So you need lots of users, you need lots of interactions, you need lots of… people on your dating site, you need lots of marketplaces, you need a lot of mobile payments happening. So if you start to look at like more narrow B2B marketplaces, like we’re gonna build a B2B marketplace just within the hotel business. We’re gonna connect all the hotels with all the cleaning services they contract, okay? It’s too small for a B2B marketplace to work. I’m gonna be just a marketplace, but I’m only gonna do Vietnam. Eh, probably too small. You probably need Southeast Asia at least. Okay, so you just chose a problem that’s too small. Failure mode number two, wrong ecosystem configuration. This is kind of a bigger one. Here’s a quote from the BCG article. Quote, assuming that an ecosystem has found a substantial problem to solve, the next challenge is to configure the ecosystem to deliver the targeted value proposition. This involves defining the required activities and partners, their responsibilities, and the links among them, and assigning roles to various partners, in particular the role of orchestrator, which coordinates members, defines standards and rules, and arbitrates conflict. The initial configuration should focus on the core value proposition and incorporate the minimum number of partner types required for its delivery. Dude, I gotta meet who’s ever writing this. This is just outstanding writing. One, it’s outstanding thinking, but it’s outstanding writing. If you’re gonna get a platform or an ecosystem to move, it’s usually based on one to two core interactions. You can’t be really complicated at the beginning. And I’ve put this in almost all the charts I’ve sent you over the last nine months. Every time I give you one of my blue diamond charts, I always identify. In the middle of the chart, if you look, it says one to two core interactions. You have to get something simple that’s standardizable and scalable. So payment, I’m gonna pay, you know, I’m on WeChat, you’re on WeChat, I’m gonna send you money. That is a simple, standardizable, core interaction of a payment. WeChat, WhatsApp, I’m gonna chat, just text back and forth. All these platforms, all these ecosystems start. at the beginning with one core interaction that is between two very well defined users, partners in this case, or users. You’ve got to get that going to start to basically get what we call a Coasean transaction cost to drop. And we’ve talked about Ronald Coase and all of that before. But that gets your platform going and starts to get you some demand side scale and that gets you the first mover. So this is really defining the platform or the ecosystems. Who are the core players, partners, users we have to have? What is the simple transaction they’re doing? What are the roles and responsibilities each party has? Who’s gonna be the arbitrator, the orchestrator, who sets the rules? And also when there’s a conflict, arbitrates the rules and makes the call. So this is kind of defining the world. You gotta get that right. It’s actually quite difficult. to figure these out, which is one of the reasons why in most businesses, especially digital businesses, the first mover tends to be very, very important. Whoever gets their first tends to win. That’s actually not true when you’re talking about platforms and ecosystems. Historically, it is often not the first mover who wins. It is often the person who figures out the magic equation that defines the core interaction, defines the key players, and defines their roles and responsibility. And you have to balance all these things. It’s actually very, very difficult. You have to give the drivers on DD what they want, but you also have to give the writers what they want. And if you give everything the drivers want, the writers aren’t happy and vice versa. So you have to balance all of these interests and figure out who’s the orchestrator and who’s the user and get that magic equation right. before the platform will start to go. And it’s usually not the first mover or it’s often not the first mover. The first group to figure out credit cards was not the first mover. Diners Club and American Express launched credit cards in the 1960s. But it wasn’t until Visa and MasterCard came along in the 70s and really figured it out. Mark Zuckerberg didn’t invent social networks. He was third or fourth. Friendster and MySpace got there earlier and they were much bigger than him. but he figured out the magic equation first, got the interaction to go, got the model right, and then it took off. And that’s pretty common actually. So you gotta think about, you know, failure mode two is wrong ecosystem or platform configuration. Failure mode three, which is sort of ties to number two, is wrong governance choices. Okay, let’s say you get the ecosystem configured right, all the roles, all the responsibilities, the players, the core users, blah, blah, blah, the key core interaction. Okay, then everyone’s doing stuff together because your goal as a platform is not to create stuff, your goal is to govern the platform and to, you know, when people start doing interactions on dating sites, on shopping sites, on getting rides to work, on, you know, Intel working with Microsoft to build the smartphone. you are gonna have conflicts and you have to be sort of the judge and the rule maker for behavior that’s acceptable and not acceptable. You are kind of in the governance business. If you’re gonna be a platform or an ecosystem leader, you have basically two jobs. You have to design the ecosystem, which was problem number two. And then number three, you have to be the government for the ecosystem or the platform. You’re basically like I mean Facebook is kind of like a private government and if you look at the people they hire a lot of times they hire ex-government people where you have to make the rules and standards and kick people off and keep people on and which is why people get so mad at them because they’re kind of like a private government and They’re not a democracy. The one thing is like all these businesses like Twitter and Facebook and whatever They have not, you know, they are in the government business of these digital worlds, but the model of government they have chosen is not democracy. What they have all chosen is dictator for life. They have all issued dual class shares where Mark Zuckerberg can never be removed as dictator for life of Facebook. So that’s kind of an interesting thing to think about. Here’s a quote from the BCG on failure mode three, which is wrong governance choices. Quote. The most prevalent failure mode in our database, responsible for more than a third of the ecosystem failures we studied, was wrong governance choices. The governance model is a critical design choice for an ecosystem because it replaces the hierarchical forms of control in traditional vertical supply chains with indirect forms of control appropriate to the complexity and dynamism of an ecosystem. Governance establishes the standards, rules, and processes that define an ecosystem’s formal or informal constitution. Specifically, it needs to regulate access, who can become a member of the ecosystem, and under what circumstances. Quote, participation, how the decision rights distributed among ecosystem partners, and commitment. What level of ecosystem-specific investments and co-specialization is required? According to our analysis, the biggest challenge in ecosystem governance is finding the right level of openness. More open ecosystems can benefit from faster growth, particularly around launch. They enable a greater diversity of participants and variety of offerings and and variety of offerings and encourage decentralized innovation. However, they are difficult to control. So I mean that kind of gets us back to the earlier point of modular versus integrated, and openness versus controlled, and how dominant is the ecosystem orchestrator versus how much is it sort of a free flowing, free form situation? Well, that all tends to play out in governance, which is difficult. All right, failure mode number four, and they did say that was the biggest single cause of failure was governance. Okay, failure mode number four, inadequate monetization. Okay, you’ve built an ecosystem, you’ve built a platform, you’re getting lots of activity, lots of things going on. Doesn’t mean you’re going to make any money. Doesn’t mean you can put up ads and people are going to click on them. Doesn’t mean you can charge fees. You know, we’ve been talking about basically building demand side scale and that, but we haven’t talked about money at all. And in the second part of this case, which will be next podcast, we will talk about Meitu and Xiaomi, who have struggled with monetization more than anything else. even though they have tons of activity. All right, we’ll skip over that one. Failure mode number five, weak launch strategy. Okay, this is the early days, early stage. I’m not gonna go into this too much, not a bad point. Quote, a strategic challenge for many business ecosystems during launch is to solve the chicken or the egg problem of securing enough participation from both buyers and suppliers. The goal is to achieve a critical mass for network and data flywheel effects to kick in. whereby scale begins, whereby scale begets further scale. Success factors include focusing first on the core value proposition and building a minimum viable ecosystem around it that can be expanded over time. Okay, fine. I think we’ve talked about this before the early days. Failure mode number six, now we’re in my world. Failure mode number six, weak defensibility. Okay, this is the Michael Porter meets Jack Ma world. This is… competitive advantage meets digital, which is hopefully what they will put on my tombstone one day. This is my space. It’s a competitive dynamics question, and how does digital impact that, and how does that play out? And they’ve put in a couple paragraphs here that is just a laundry list of my sort of typical things I talk about. Chicken-the-egg problems, network effects, scale advantages based on cost, based on data. But it does tee up this point of, you know, how do you get defensibility as a platform business model? How do you get defensibility as an ecosystem? The worst of all things is when you do this, I’m going to build an ecosystem thing, you get a lot of traffic, you get a lot of usage, and then it turns out you’re not defended. So you’ve built all of this activity and then other people just start jumping in. And even if they don’t take your business, if you’ve built something that scales up, you’ve got your ecosystem, you’ve got your platform, and you’re not defended, when other players can easily jump in, it kills your profitability. You could end up with a very robust, dominant, winner-takes-most-of-the-market platform that doesn’t make any money. Those three previous things, dominance, marketplace, huge activity, those are all required profits, but they don’t guarantee you profits. So you can get all of those things and then if you have a low barrier to entry, you know, you can just be making one or two or five percent at the end of the year. And that’s kind of a frustrating way to end up. When Lucky and Coffee was scaling up rapidly, I was on Bloomberg and they asked me like, oh, this company is hyper scaling and they’re doing the blitz scale strategy, blah, blah, And I said, yeah, they may do that and it may work and they may get to massive scale, but that doesn’t make them defendable. Okay, let’s say they do get to massive scale and they have 5,000 little coffee outlets all over China and an app. What’s to prevent 7-Eleven from launching an app tomorrow that offers everything they offer and that you can walk down to the 7-Eleven and pick up your coffee? It looks to me like they’re blitz scaling with no defensibility. They could get a lot of traffic, doesn’t mean they’re gonna make any money. And that was kind of my point, was like I’d be thinking about the competitive advantage question at the beginning, not later on. So I’ll read you the BCG quote on failure reason six, which is weak defensibility. But this is just a laundry list of concepts in competitive dynamics. So don’t worry if it’s too much. Quote, ecosystems that solve the chicken or egg problem frequently enjoy winner take all takes all effects. Once they have achieved a dominant market position, strong barriers to entry can result from network effects and scale advantages on costs and data. However, we still identified 10% of ecosystems in our database that went down because they did not build effective defenses in their design. Boom, totally that’s right on. That’s my quote, not them. The boom is me, not them. Continuing, the failed ecosystem suffered from one of… or several of the following five basic mechanisms of attack. Multi-homing, in parentheses, suppliers or customers participate in multiple competing ecosystems at the same time or easily switch between ecosystems. This is me. Multi-homing is basically how platforms compete. So it’s a type of competitive, it’s like switching costs for platforms and not companies. If we were talking about companies, we’d talk about switching costs. But when we talk about platforms, people tend to use the word multi-homing. Okay, continuing on, disintermediation, parentheses, partners from two sides of a transaction ecosystem bypass the matching platform and connect directly. We see this in Fiverr and Upwork, where you hire someone in a marketplace for services, like, please come teach my kid, and you find them on a platform business model for services, not products. And you do the transaction, but then the cleaner and the customer tend to just do the business off platform. So this idea of disintermediation, or we call it going off platform, tends to be a problem for services marketplaces, but not product marketplaces. Okay, continuing on differentiation. A subset of users has distinctive needs or tastes that can support a separate ecosystem that takes away market share from the dominant player. This is actually a big deal. When we talk about platform competition, the two words you hear a lot are multi-homing, which I just mentioned, and we hear about differentiation. That the most powerful platforms don’t give room for any sort of differentiation. Like Facebook is a platform and everyone in there is kind of the same. It’s all basic people talking with other people. It’s very hard to be a differentiated type of Facebook where I’m gonna be a social network where these types of people who are differentiated can talk with each other. They have sort of a generic service that’s for everybody. It’s a mass market service. There’s not a lot of room for differentiation. marketplace platforms, let’s say Alibaba, there’s actually a pretty good space for differentiation there, where yeah they’re selling you everything you need in electronics, but people who sell antiques actually have special needs because you have to verify the date and the type of antique and the certification. So you can see marketplace platforms that are differentiated for antiques break off and take part of the market. So certain places you can differentiate, certain you can’t. A lot of the most powerful ones, WeChat Pay, WeChat Chat, Facebook, you know, those are, they’re almost like general usage platforms that don’t give any space for differentiation. That’s actually a really good point. Continuing on, ecosystem carryover, a successful business ecosystem expands into neighboring domain. I don’t really use that term ecosystem carryover. I call that horizontal attacks. That’s Alibaba, hey, we sell you everything that’s delivered to your house. Now we’re gonna sell you hotels, hotel reservations. And they do a horizontal attack. And backlash from incumbents, customers, suppliers or regulators that challenge the business model or practices of the ecosystem. I don’t think that’s important. Continuing on, successful ecosystems respond to these threats by designing user lock-in into their models, incentivizing customer and supplier loyalty, increasing switching costs, and designing their ecosystems, not only for legal compliance, but also for long-term social acceptance. Okay, there’s a lot in there. I’m not gonna go through all of that. I touch on a lot of the things. I think that’s not the whole list. I think it’s good. I think it’s not great. But anyways, it’s good. There’s a lot in there to think about. You can go read it if you want. The way I would characterize this is a couple of those terms I would use. A bunch of them I have that I use that they don’t. And I also don’t think they talked about the most important thing, which is incumbent versus attacker advantages. What advantage you have, a competitive advantage, any of those things they just mentioned, it really depends if it’s… platform versus platform, because that is one type of competition. And it depends if it’s product or service versus platform, which is another type of competition. And it also depends whether it’s attacker versus incumbent. If you’re an attacker, you’re gonna have certain types of advantages you want that you need to build. If you’re an incumbent, a dominant platform, you are gonna focus on other types of advantages. There’s a different playbook depending on which of those scenarios you are. So anyways, it’s a lot more complicated. I’m gonna write a book on all of this, on literally their whole point number six, I’m gonna write a whole book on that. Okay, last one, which I’m not gonna go into because we’re basically done for today, which is Failure Mode 7, which is Bad Execution. Okay, sometimes it’s about the horse, sometimes it’s about the jockey. Execution is the jockey. Okay, some jockeys are better than others, fine. And that’s basically it. I think that’s a… enough theory for today. In the next, in part two, we’ll go into Meitu and Xiaomi, and we’ll start to apply everything I just went through to those cases. But there’s a lot there. I’m gonna list it in the show notes, but the two concepts I want you to remember for this are ecosystem shaping and management, which is part of my Smile operational marathon, and ecosystems versus platforms. Those are the two learning goal, the two concepts for today. This goes under learning goal 30, which is digital platforms versus ecosystems. And then I’ve given you a bunch of sub ideas, multi-homing, digital physical hybrids, blitz scaling, mismatch and or crippled scale. There’s a lot in there, but we cover those in other classes. And that’s it for today. Sorry about the microphone last week. I am back with my regular setup now, so hopefully things are back to normal, but traveling around, it’s hard to carry these big microphones, so I carry a small one. which is not awesome. And you know the other problem with the small microphone is the security people at airports don’t know what it is. So it gets flagged every single time. Like literally every time I go through the X-ray, they hunt for it and they’re like, what is this? What is this? It’s a microphone. I guess it’s confusing on the X-ray scanner apparently because I always get pulled out for it. I am starting to travel again. So I’m gonna have to figure this out. I’m actually, you know what? I’m trying to find somewhere fun to go. For the last… several years I’ve sort of dialed into my schedule that I would spend December or January in Rio de Janeiro, just because I love it. I mean, it’s just, I just hang out in Leblon and it’s great. And it’s a bit far now that I’m mostly in Asia, not in the U.S. anymore. So I’m hunting for a new place to go for this December. I don’t really know. If you have any suggestions, send me a note. It’s, you know what I copied this from? Like I used to work for a billionaire prince for a long time. And by the way, billionaire princes are a total pain in the butt. Billionaires are kind of a pain. Like if you work for a corporation, they have a lot of money and they’re relatively rational. But when you work for a billionaire, you’re kind of at the mercy of whatever personality they happen to have. And I don’t know what it is statistically, but weird people tend to become billionaires because I think Maybe their way of thinking is so unusual, it helps them get ahead. So billionaires tend to be more difficult to deal with generally, because you’re dealing with one person. And then if you add on top of that billionaire princes, well, princes have their own level of ego. So they’re just ultimately demanding all the time. It’s 2 a.m., you get a phone call at 2 a.m. and I’m in Riyadh in a housing compound and it’s like, You just get a message, the prince wants to talk to you. It’s 2 a.m. Well, what do they want to talk about? It’s an assistant, they don’t know. The prince wants to talk to you. And they don’t even tell you to come down. It’s just like the prince wants to talk to you, which basically implies, look, get out of bed, come downtown. And so there’s a lot of that. Anyways, actually he was a pretty amazing boss. I have a book about him coming out. He’s actually an amazing guy, but. Generally speaking, as a demographic, billionaire princes are a pain. Anyway, so one of the things I did learn from working and hanging around that crowd was they have a really awesome lifestyle and it’s really a good life hack, like just to copy the billionaires of the world. Because they have a lot of money and they have a lot of time and they have a lot of people that work for them, so they have a really high quality lifestyle. So you can study them or just keep an eye on them of the things they do in life. and just copy it. Like, so you look, where do all the princes and all the billionaires take their vacations? They all go to the same places. So if you go to those places, one, you can do it cheaply, and it turns out they are in fact quite awesome. Like, if you wanna really have a high quality lifestyle, just copy billionaires. So one of the things I copied from him was, every August, he would basically leave the office in Saudi Arabia, and he would spend a month traveling. and it was just written into his schedule. Every year, every August, he’s gone. And they would plan for months and months where they’re gonna go this year. And they would take a safari of Africa or he would spend a lot of time in Cannes and in Paris. That was kind of the go-to was Paris and then on the yacht in Cannes, Nice, Cannes, that area. And you just watch where they go. They go to, I don’t know, Salt Lake City, Colorado. They have a series of places that rich people go. And it’s a, so I started doing that. I started saying, look, every year I will take a month out of my life and I will just say, look, I’m not gonna be around that month. I’m available. I’m online all the time, but I will be gone. And I would just plan something special every December. And I’ve been doing that for years and it’s great. And Rio was my go-to place, but it’s a little too far. So I’m hunting for a new place and I’m thinking about where the billionaires go. And they go to the Mediterranean a lot. They go to Paris a lot. I don’t know where else they go. So I’m looking for something this December. If you have any suggestions, let me know. I tend to like to go places where it’s like a city or a beach because that’s kind of my thing, even though I can’t be on the beach for more than like 10 minutes before I burn, which is frustrating. I’m too much of a white guy for most tropical places. Anyways, if you have an idea, let me know. I’m thinking the Mediterranean. That’s kind of what I’m in mulling over, is go to the Mediterranean in December. Anyways, that’s neither here nor there. Okay, I hope everyone is doing well. I’m gonna give you part two of this case next week, which will be Meitu and Xiaomi as platform business models that didn’t really play out like they thought they were gonna play out. So not a failure, that’s a bit of a strong word, but let’s say struggling platforms, and we’ll sort of take today’s content and apply to that, and I’ll give you cases to think about. And that’ll be it. But otherwise, that’s it for me for this week. I hope everyone’s doing well, and I will talk to you next week.