Q&A: Sangeet Paul Choudary on how open business models are changing how businesses compete

open business modelsThis is part two of a Q&A with Sangeet Paul Choudary on platform businesses and open business models. In part 1, he answered some questions about platform businesses.

Sangeet Paul Choudary writes the blog Platform Thinking which has been featured on leading publications and research labs including WSJ, HBR, WIRED, FastCompany and the MIT Centre for Digital Business. He is an innovation analyst and consultant who has lectured at leading academic institutions like MIT Media Labs and INSEAD and consults leading startups as well as traditional firms making the transition to digital platforms. He is a mentor at leading accelerators like 500Startups and serves on the advisory board of leading platform startups.

Follow him on Twitter at @sanguit. To know more about Sangeet, visit http://platformed.info/sangeet-paul-choudary/ and sg.linkedin.com/in/sangeetpaul‎.

As it relates to business models, how are platforms changing how companies compete?

Platforms are changing competition very significantly and that’s largely because the way companies competed in the past was very different. In the past, there were three levers of competition

  1. You could either produce a better product, technologically superior product.
  2. You could be better at operations, you could create the same thing in a much leaner, much cheaper way.
  3. You could differentiate yourself based on customer service, the way you interface with your customers would be a point of differentiation.

So, it was either product innovation or operational efficiency or improvement in customer service.

In case of platforms, all these three are important but all three change in certain ways.

  1. Network: Think of customer service. In the case of platforms, it’s not just about customers, it’s about users and there are different kinds of users. And what’s important is that the kind of users who use the platform end up making it different from another platform. So, one lever of competition is the kind of network that you build around the platform. The incentives that you structure and the kind of users you end up attracting. As an example, there could be two different dating websites-one could allow access to anybody and one could allow access only to handpicked, vetted men. It would not allow access to stalkers and the creepy type. So what kind of users get access to the network, how big is the network-these are all levers of competition.
  2. Data: The second lever of competition is data. When you were running a supply chain, if you reduced cost, you had a more efficient supply chain that was a way for you to compete. On platforms, what happens is that the right producers need to be matched with the right consumers. The right video needs to be matched with the right user on You-Tube and the right taxi needs to be matched to the right consumer on Uber. And all of this happens because of data. Platforms that use data better are able to compete better and so, data is increasingly becoming a very important source of competition.
  3. Technology: A third way in which platforms compete is by reducing the friction in the interaction. Suppose there’s a producer and there’s a consumer and they are interacting with each other –the easier you make the interaction, the easier it is for the platform to gain adoption. Let’s take an example of Flickr which started as a social network based around pictures and today we have another social network based around pictures called Instagram. And the key thing which differentiates the two is how the interaction becomes much easier on Instagram. The whole process of taking a picture, modifying it, uploading it and sharing it with your friends is done in a matter of 3-4 clicks. In the past, you’d click a picture on a camera, transfer it to the computer, edit it on photo shop, and then upload it to Flickr and then share it further. So, it’s a much more tedious process-both Flickr and Instagram are essentially social networks of pictures but they compete by providing a very different experience on the interaction.

So, in summary, you can compete in 3 ways-you either compete on the basis of the kind of network you can build, how big that network is, who’s part of the network. You can compete on the basis of the technology that you have on the basis of how you’re enabling the interaction and you can compete on the basis of data.

What are three things organizations can do today to leverage networks for innovation?

There are several different ways in which networks can be used for innovation. Networks are especially good for solving design and research problems because very often the experts on these may not be within your company, they may be outside. What’s important is structuring the incentives in such a way that users from outside participate and then using the expertise of the crowd rather than of in-house experts.

The second way of doing it for more routine activities is for sourcing a talent pool on-demand. You may need certain people, you may need certain kinds of resources on a non-regular basis and you might want to leverage freelancers for that and that’s where freelance marketplaces like ODesk and Elance become important so as to just leverage somebody on a project by project basis. Having an open marketplace helps.

But the most important way that these organizations can leverage networks for innovation is to actually create a platform where users can come and create value for you and you can directly profit from that value. So, the best example for that really is how Wikipedia works. Can you build a Wikipedia model for your industry? Can you build a model where external users can collaborate with each other and create what you ultimately serve consumers. This is where the whole platform model becomes very compelling.

If you think of how Encyclopedia Brittanica solved it, it got people inside for writing these Encyclopedias which were not updated frequently, nor were they comprehensive enough and Wikipedia totally disrupted that with an open approach.

Or think of AirBnB. The traditional model of a corporation solving the problem of accommodation was the hotel model. You created more rooms for serving more travelers. AirBnB doesn’t do that-it just creates a platform and lets both sides interact.

We need to see more of the platform model. We’ve already seen a lot crowdsourcing and freelancing in business. The next competitive advantage lies in building platforms.

From a collaboration point of view, there are companies who are denying themselves of adding and capturing new value because they have yet to embrace external collaboration. How can leaders eliminate those obstacles to collaborating with the outside world?

I think the whole aspect of collaborating with the outside world is new. There are questions of- what can be opened and what cannot be opened, what kind of information is proprietary, what kind of information should not be sent out there, which kinds of things are best done by the crowd, which kinds of things are not, where’s the crowd the best judge and where’s the crowd not the best judge? These are all questions that people do not necessarily know how to answer because they have always operated in hierarchies of control.

When people have the legacy of working in a hierarchy and they’ve never worked on a network, it becomes very different. And that’s where I think a lot of the challenges come into the picture. If you’re not working in a controlled environment, if you’re not working in a hierarchy, how do you decide what parts you control, what parts are opened out to users, what is sensitive information, what is not so sensitive, what are the ways of determining quality, what are the curation tools you give out to users. So, it’s not just about designing a solution, it’s even about understanding where you leverage these open-models and where you are better off with sticking to a traditional model of control. Understanding answers to these design questions is key to eliminating these obstacles to open collaboration.

Traditionally, businesses have collaborated with partners to either develop or enhance existing offerings. But, we still don’t see a lot of collaboration with customers. Why do you think co-creating with customers is a challenge?

Co-creating with customers is often a challenge because it’s about lack of control. Once you open out your production, once you open out the service delivery, once you open out the producer role and get into a co-creation model, you lose control over quality and traditionally big brands build value in their brand because of the reliability and service quality that they offer. And that goes for a toss when you open out the creation process. Whenever there’s a co-creation model, there needs to be a scalable way of ascertaining quality and offering a certain level of reliability. And many traditional brands are concerned about this because much of their value is about delivering with quality and reliability, which goes for a toss in an open model.

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