We took this approach because we wanted to establish a firm foundation about ecosystems and platforms generally, that wasn’t subject to debate about their applicability to one industry or another.

In the next several posts we will be looking at two diametrically opposed industries and the importance of ecosystems and platforms to both of these industries. Fittingly, I’ll be looking at the importance of innovation in ecosystems and platforms for an “old economy” industry – the railroads, while Paul looks at the importance of platforms and ecosystems in a new economy company – Alibaba.

On the (rail)road again…

Full disclosure, my spouse works for a railroad affiliated company, so a lot of what I know, rightly or wrongly, about the industry comes from that source.  The railroad industry relies on an important platform, one that is shared by every rail company, box car company and transporter.  That common platform is the tracks themselves.  In North America we have a common rail platform across states and across borders between Canada and Mexico, making it simple for trains to move from coast to coast and north to south.  At one time it was important, if not strategic, in European countries to have different track gauges.  This was done to keep invaders from using a country’s railroads against them, but it meant people and equipment had to transfer at some border crossings.  Spain and Russia intentionally used different gauge sizes than their neighbors.

Virtual Platforms matter

It is from a common platform (rail gauge) that so much commerce flows. But the railroads increasingly share other platforms as well, and these platforms enable the increase in transport we’ve witnessed lately.  From an outsiders perspective, railroading seems straightforward but in reality is one of the most interconnected of the large industries, because equipment from one railroad (say a box car) could end up on another railroad’s system.  That box car could even be maintained by a third railroad company, and all three want to track the costs and revenue associated with the car and its load and tally up at the end of a quarter.  This means that beyond rails, the railroads need common platforms for tracking assets, maintaining assets and determining the revenue each company should expect from each train.

When you add to this the “ecosystem” involved in trains and goods transport, you can see it becomes much more complex, because many of the cars that have a specific railroad brand, for instance NorfolkSouthern, may in fact be owned by a private equity firm and leased to that railroad.  A vast amount of rolling stock, as the cars are called, are actually owned by private equity firms and leased to the railroads.  This allows a tremendous amount of flexibility for the railroads, as goods increase or decrease in demand.  For example, when the Bakken Shale Oil in North Dakota was discovered, many of the railroads needed more tanker cars to transport the oil than they had on hand.  The railroads leased the additional cars, and as the demand for the oil falls, they’ll end their leases.

What appears on the surface to be a rather staid and old-fashioned industry is in fact built on a handful of robust platforms – rails, financing and data – and incorporates a wide array of companies in an ecosystem:  data companies, companies that maintain the equipment, companies that manufacture rail cars and engines (GE as an example), leasing companies, trans-shippers, the railroads themselves and much more.

Why should innovators think about platforms and ecosystems?

Once we understand the platforms that exist, and the ecosystems that are enabled by these platforms, we can begin to consider the real innovation opportunities in the industry, and the challenges of attempting innovation because of the existing investments and ecosystem.

Innovators must consider the platforms and ecosystems that exist in an industry for several reasons:

1. Platforms and ecosystems play simultaneous roles – they facilitate an industry but also create standards, which can lead to rigidity.  Standards and rigid structures or conventions are often the target of disrupters.
2. Understanding platforms and ecosystems may help identify important gaps or emerging needs.
3. Platforms and ecosystems that have long lives often facilitate complacency in the participants, leading to new opportunities
4. Understanding platforms and ecosystems will help innovators understand the “whole product” their innovation must deliver.
5. As Kansas City’s Southern’s struggles demonstrate, fixed platforms (in their case tracks that go to Mexico) can become a problem if an administration decides that specific types of trade aren’t favored.  Rigid, fixed platforms can be disrupted by political or economic changes, as well as technology changes.

For example, imagine that a company that manufacturers rail cars spots an innovation opportunity – a car that can convert from a tank car during high demands for oil into a car that carries grain or other farm commodities.  If the car is practical, the manufacturer still has to consider the car’s place in the ecosystem.  Can it be adequately tracked as it traverses different rail lines and companies?  Can the existing maintenance companies adequately clean the car and maintain it?  Can it fit within existing infrastructure?  You may laugh at the idea of fitting into the infrastructure, but when new railroad engines were introduced in France, it was discovered that they couldn’t be used in many stations, because the engines were so large that they could scrape against the existing platforms.  Further, cars use different methods and devices to offload their cargo.  A grain car may have  bottom vent or provide for an elevator to remove grain, while a tank car may use a pump.  This infrastructure is relatively consistent at each loading and unloading point.  Would a new innovation to a car require new loading and offloading technology?

Build, Catalyze, Join…disrupt?

In Stephen Elop’s famous “burning platform” memo about the fate of Nokia, he said that Nokia had to build, catalyze or join an ecosystem.  Right now, Elon Musk is trying to demonstrate several of these activities, creating a new “hyperloop” transportation system that would compete with high speed rail.  The question is, does Musk’s system build and catalyze a platform and ecosystem while simultaneously disrupting other forms of mass transit – both passenger trains and even short hop flights?  And, further, what other ecosystem partners does Musk need in order to succeed?  Building a prototype is one thing.  Building a full fledged rapid train system in crowded, litigious California and competing with the car and the airlines is quite another.

Starting from the outside and working in

It’s in this context that good innovators will start from the outside, looking at the customer need and experience, then understanding the ecosystems and platforms, before beginning an innovation activity.  Musk looks at the system and sees incomplete and inefficient passenger transport, which leaves customers frustrated and causes them too much agony and cost.  He blames this on a poorly constructed and aging platform (old trains, old, crowded roads, congested airports and airspace) and rather than compete with a powerful and lethargic ecosystem, he’s going to try to create a new one to disrupt the old.  This doesn’t mean that other innovations within the ecosystem aren’t viable.  There are certainly gaps and need throughout the entire customer experience or journey.  But he’s a good example of an innovator considering the ecosystem and customer experience, working from the outside of the problem toward the technology, rather than the other way round.

Come full circle

And so we come full circle.  The first railroads in England were wonders, traveling at 20 to 25 miles per hour, new technology that soon made travel possible and created the basis for more industrialization.  Musk’s hyperloop concept may create an entirely new and faster way to travel or ship goods, opening up new opportunities.  Both the original steam locomotives and the new hyperloop will rest on important platforms, and will rely on extensive ecosystems for success.  We can also see the many difficulties a company with significant, tangible platforms has when it attempts to innovate, while a company like Alibaba with few tangible assets or platforms finds opportunities in business model, channel, financing and value network innovation everywhere it turns.

The lesson that these two firms provide for us is that innovation opportunities are almost always available, but often there’s far more potential in the virtual opportunities – business models, channels, service innovation and customer experience, especially in industries and companies that possess a lot of legacy infrastructure.  The future of innovation lies in understanding the physical and virtual platforms and the ecosystems that are symbiotic with those platforms, and turning those platforms and ecosystems to your advantage.

Save

Save

Save

Save

The post Old economy ecosystems signal innovation opportunities first appeared on Your Ecosystem Design Hub.

In the late, late 1990s and very early 2000s, many individuals and corporations were experimenting with ecommerce, learning what the “web” would do to and for commerce.

Thousands of startups obtained billions of dollars in venture capital money to exploit the new idea of e-commerce.  We were assured that this would be the end of brick and mortar stores.  Every industry would be disrupted by the web.  Pet owners would go to Pets.com, famous for its sock puppet mascots.  The CEO of Accenture would leave his post to become CEO of Webvan, which would revolutionize grocery shopping and delivery.  And so on.

Mostly what happened in that period was a vast blooming of a number of experiments on the web, which led to the “dot com” crash only a few years later and drove many of these startups and some larger, established companies out of business. Most of these crashes happened because no one had figured out how all of this new ecommerce stuff was supposed to work, or because of vague promises of the ability to monetize eyeballs.

New technologies or capabilities will always create a “land rush” of companies, new and established, who seek to stake their claims.  Schumpeter called this creative destruction and he couldn’t have been more right.  There was plenty of creativity at that time, and plenty of wealth destroyed.  But on the ashes of that destruction rose a new way of working.

The new land rush

We are on the cusp of a completely new land rush, with all of the potential for success and disaster as the dot com boom and bust.  Only this time the land rush is driven by innovation, especially in platforms and ecosystems.  We will very shortly see scores of platforms and ecosystems emerge, of all types and categories.  These, like the early dot com models and channels will be fabulous experiments.  Many of these will crash and burn spectacularly, but a number of them will become the basis for future competition and will lock up a significant portion of the customers, collaborators and ecosystems.

The problem with this new land rush is that it is at least as complicated, if not more complicated, than the dot com boom.  In the dot com era, a company simply had to decide how to make money on the internet (real cash flow or monetizing “eyeballs”) and whether to stand alone or connect to “bricks and mortar”.  The new land rush focused on platforms and ecosystems will be far more complex.

Reasons for complexity

As we can see by scanning only a few of the leading platforms, the potential for diversity is already rather striking.  Consumer oriented companies like Amazon and Facebook have the potential to establish very powerful platforms connecting people with their friends and relationships, as well as consumers to products and services.  With a bit of work, both of these platforms can also become monetary or payment platforms as well, exchanging goods and services for payment – or creating new payment forms or types.

Conversely, GE, IBM and others are leading the way in more commercial or industrial platforms.  GE with its Predix platform is creating a backplane and AI capability that any firm can connect to and gain benefit.  Unlike Apple’s closed platform and somewhat open ecosystem, Amazon, Facebook, Google, GE, IBM and others are creating scalable platforms and integrated ecosystems, which will allow far more flexibility and participant choice.

Ross Dawson recently described a range of platform options and types in a keynote to CeBit Australia:

From this example we can see that there are a number of platform options and types, and in some cases several of these platforms may be combined to provide a complete solution to customers.

One of the first questions an innovator must ask is:  what platform extends my capabilities and how do I connect to that platform?  There are at least four answers to that question, depending on the size and scope of the participant:

1. Build your own platform and attract others to it, to add value (Apple’s model)
2. Build your own platform but extend it and invite others to extend and augment it (GE’s model)
3. Join with others to create an industry standard platform that is relatively open and shared (a number of industry standard platforms. Here’s one for industrial companies.)
4. Choose an industry leading platform and burrow as deeply into the platform as possible, creating value for your own company and for the platform.

Clearly many small and midsized companies will be forced to select an industry standard platform (so as not to be crowded out by larger competitors) or will choose to cast their lot with one of the more established platforms.

Other considerations

As an innovator, we must understand the customer journey and our value or position in that journey to gain the most competitive advantage.  Increasingly this will mean understanding our place in an ecosystem and/or platform.  The platform selected must align to the customer and their value proposition.  For example, most consumers are more likely to integrate and enjoy experiences on Facebook or Amazon’s platforms, rather than GE’s, which is more commercial or industrial in nature.

Further, some platforms will be “horizontal” – they’ll cut across industries while others will be “vertical” – spanning the breadth of the customer experience.  Given this horizontal and vertical nature, customer journeys and platforms may intersect across one or more customer touchpoints.

Also, these platforms must incorporate all aspects and activities of the customer’s experience, from finding a product or service, comparing and acquiring (Amazon like strengths) to information on using, feedback, customer support (not Amazon’s strengths) to payment (mixed bag).

Impact on innovation

Corporate innovators will find they must define the core platforms that become the basis for vital ecosystems and customer exchanges.  Then, they must create new products, services, channels and business models that work in conjunction with existing platforms (easier), or that build on existing platforms but replace components of the ecosystem (more difficult) or that simply overturn existing platforms (much more difficult).

It’s not a question of “incremental or disruptive” product innovation, since even a radically new or different product without supporting platforms and ecosystems are doomed to failure.  It’s now a question of how to provide the best and most seamless experience either within or on top of an existing platform, or creating the solution from the ground up, replacing or overcoming existing platforms.

BetaMax versus VHS

One important point to remember is that technology leadership or being first in a market does not by itself guarantee a platform’s success.  We need look no further than the battle between BetaMax and VHS to see how this is true.  Back in the dark days when we used videotape to record our shows, rather than a DVR, there was a battle for platform technology between BetaMax and VHS.  From a purely technical perspective, Betamax was the best standard.  It was preferred by experts and had much better recording and playback technology.  But in the end, VHS won out over Betamax for two reasons.

Why? First, VHS tapes could record much longer movies or programs than Betamax tapes, which meant consumers could capture a full movie on one tape, providing more convenience.  Second, the developer of the VHS standard, JVC, licensed the technology broadly so any electronics manufacturer could use the standard, while Sony kept Betamax technology close to the vest and no one else could manufacturer the tapes or machines.

Convenience and interoperability won out over technology leadership.  New technologies and I’m sure platform companies will relearn this in the coming years, much to their chagrin.  Integration, seamless customer service and experience and convenience will be more important in winning platforms than technological leadership.  You heard it here first.

Back to 1999

We are in an innovation stage, where platforms are concerned, that is eerily reminiscent of 1999, the beginning of the dot com boom, when every firm was rushing out to win market share, profits and eyeballs. That land rush was led by a number of experiments, and we are about to repeat the same experience, but at an entirely different level of sophistication.  Those who ignore their history are doomed to repeat it, and we are doing just that.  Innovators must expand their knowledge and their understanding not only of customers and their needs, but ecosystems and their enabling platforms, to create real, lasting products and services.  Innovators must decide to join platforms and ecosystems and will need to experiment to find the right relationships and positions from which to deliver the most value.  It’s likely there will be some significant disruption and many of the most promising early platforms may falter, as we saw with the earliest dot com sites, as business models were still being worked out.  But the time to experiment, to learn and to adjust is now.

Save

Save

Save

The post Innovating like it’s 1999 first appeared on Your Ecosystem Design Hub.