Smart Platforms for Smarter Planet, An Economics Perspective

Smart Platforms for Smarter Planet, An Economics Perspective
Smarter Planet is an assembly of inter-connected service systems and Disruptive Business Platforms (DBP) are IBM approach to service innovation. 


Background

Singapore and other developed economies have spent billions to deploy fibre broadband networks to make the city smarter. Vast and varied types of information is expected to flow through these networks collected from instrumented patients, people, homes, transport units, power grids, water pipes etc. The intent is to catalyse transformation & growth of various industries through service innovation. One of the key questions that we often encounter is “What is the best approach to value creation and value capture through service innovation ?”

The instinctive approach based on traditional market models would be wherein individual atomistic service providers offer their niche innovative service offerings in independent and unrelated manner. This situation will be analogous to dot-com boom of era of year 2000 when plethora of web sites eager to monetise internet sprung up all over and most of them quickly made their exit. One key learning point was that network based industries require network model market structures for sustainable value creation, value capture and competitive advantage. Disruptive Business Platforms are one such approach identified by IBM to build service systems where-in the collective value offered by whole platform is more than the sum of the parts it is made of. There are some key economics principles that gives mediated network platforms unique competitive advantages that are not possible with other market models. 

Economics Principles Driving Platform Models

Network Effects

The concept of network industries is not new. Singapore, a country with no natural resources has grown to be a developed economy over last 40 years by developing just 2 powerful world class network industries namely its port and airport. The highly efficient port platform has attracted other world class complementary service providers like shipping lines offering extensive connectivity to all parts of the world, logistics operators and freight forwarders that has made the port platform extremely competitive and attractive to users. The idea of a core leader and complimenters working together creates powerful “Network Effects” for competitive advantage.

Theory Of Relatedness

The benefits of “Network Effects” are even more pronounced when we combine it with “Theory Of Relatedness”. Every domain that impacts our quality of life like health, education, environment, utilities, transportation, insurance, lifestyle etc within itself has elements and sub elements that are related to each other. This relatedness mandates that all these elements come together to create a holistic value for the consumer. Imagine if a diabetic patient or his physician has to access 10 different touch points to know his overall health condition. A Philips service for blood pressure, a Siemens service for sugar levels, a OSIM service for urine conditions and many others that independently monitor various body conditions. Such fragmented model would create a very high barrier to adoption since from consumer point of view marginal benefits of using the services individually would be far higher than costs.

Theory of relatedness applies to all industries and their value chain configurations to achieve greater effectiveness & efficiencies.. For example electricity usage patterns information collected by utility retailers from their consumer's smart meters can be traded and monetised in various ways with other ecosystem partners within the same industry or even from adjacent industries. Electricity producers need it to plan demand response and optimise capacity investments, transmission companies gain insights to reduce line losses, equipment insurers could offer dynamic insurance products, appliance manufacturers use it for performance and failure analysis and consumers could use to modify their energy consumption behaviour. The whole industry has to come together to build truly sustainable service systems.

Law Of Increasing Returns To Scale

Industries producing physical goods are subjected to law of diminishing returns. Beyond certain point, the marginal cost increases with output which limits their production. Digital goods on the other hand follow law of increasing returns to scale, The marginal cost and average cost of production, distribution and consumption of digital goods decreases with every additional output. There is virtually no scaling up limitations in digital world. This explains why in general digital & software businesses are highly profitable when they scale and digital businesses that combine “Network Effects” eg: Google & Apple consumer platforms are even more profitable operations. 

Though our port example enjoys network effects, to scale up its operations it will still require additional investments in more land, more berths, more warehouses, more cranes and more personnel and such physical investments are subjected to law of diminishing returns. On the other hand platform leaders together with their complimenters create architectural aggregation & standardisation of digital IP assets (the digital, knowledge, structural & network capital of the platform business) for which scale-up investment ratios are much lower considering the advances in IT-delivery technologies like cloud.

Platforms Increase Switching Costs

Platform leaders and their complimenters exploit the theory of relatedness to aggregate capabilities and create mutually symbiotic relationship for each other to offer compelling value propositions for their customers. The new paradigm of co-opetiion (or collective competition) creates enormous competitive advantage for the whole ecosystem. The competitive advantages created by pre-identified choke points, knowledge asymmetry's, network effects and the relationship capital built over time increases the switching costs for platform customers entrenching the position of early leaders. The resulting strong barriers to entry leads to “Winner takes it all” business models and market competition changes from “Compete-In-The-Market” to “Compete-For-The-Market” with many co-operating platforms working together.

Platforms leverage economies of internet

Internet has enormously reduced search, access , transaction and participation costs for consumers. Similarly internet businesses have access to whole long tail of customers across the globe at almost no cost. Platforms connected to internet are able to exploit this natural cost advantages enabled by internet economics. The cost advantages of pull model in digital world are also worth mentioning compared to push model of physical world.

Platforms build social capital & reduce cost of innovation

Value creation through service innovation is all about building deep insights about customer, how he uses the products and how the use-value of the products be improved to create additional value. Because of lowered access and participation costs consumers are willing to invest their creativity, time and energy to improve the products or services they use. The social media architectural components in the platform facilitates this process and encourages co-creation and open innovation.

Platforms achieve economies of style

Grabbing and monetising the long tail of demand (beyond traditional core 20%) is now a viable growth strategy. This requires that businesses better understand consumer preferences and offer broad selection of products and services suited to their style. The cost of building relationship capital that is required to offer customised products (instead of commodity products) in much lower when platform architecture is enabled with such technology components.

Platforms offer economies of scale and scope

Platforms are ideal approach to create multi-sided market models. They typically aggregate common infrastructure, architectural standards, security, rights management, personalisation, billing, transaction support, promotion & recommendation engines and customer relationship capabilities that are leveraged by complimenters or participants for a fee. This creates economies of scale, minimises duplication of investments on shared capabilities and reduces time to value for all participants.

Key to success : Helping CXOs identify opportunities for business transformation & growth

Smarter Planet is an assembly of inter-connected service systems and Disruptive Business Platforms (DBPs) are IBM approach to service innovation. IBM extends the belief “Network is the computer” a step further. In network economies enabled by platforms, Network is the computer, Information is the new operating system and knowledge mining processes are new applications.

IBM has identified platform patterns across industries to tap the value creation and value capture opportunities from information flow supply chains. IBM complements thought leadership with solution, software, research, cloud and other technology capabilities to help clients build business platforms.

Shri Santhana is a Strategy & Transformation Architect with IBM Singapore. He can be reached at ssanthana@sg.ibm.com