Our new article on Rebooting the Real World is about the future of real-world businesses as virtual platforms reach peak dominance. By virtual platforms, we mean companies including Alibaba and Amazon, Lyft and Uber, Flexe and Airbnb, and so on.
Platform businesses are born in the virtual world, and their business models gravitate towards a massive global scale. And with unmatched scale, platform businesses develop hyper-competitive competencies around data, artificial intelligence, logistics, and more.
Walmart is a real-world business; one that is locked in a pitched battle with virtual platforms. The battle is one of titans and may be a winner-take-all conflict. Alex Moazed’s book, Modern Monopolies, provides invaluable insights by exploring the platform business model and explaining the case for their dominance over traditional businesses. His podcast provides frequent reporting from the front line.
But understanding the battle between virtual platforms and giants like Walmart will not help the vast majority of real-world businesses find their way to innovations that matter. Real-world businesses must move forward in a way that builds from their core, turning their size, facilities and people from weakness to strength. Real-world businesses need a plan.
Are Platform Businesses Friend, Foe or Something else?
To have a plan, real-world businesses must assess the challenge and opportunity of platform businesses relative to their unique business models and strategy options.
Near the end of a very excellent HBS Managing the Future of Work podcast, From Opt-In to Check-Out: How Digital Platforms are Transforming Retail, a thought-provoking prediction is made — platforms may make it easier for small retailers to survive. Far from acting as a competitor, platforms may offer “retail as a service” and help small retailers prosper — and by extension — many other real-world businesses.
In a way, platform businesses may act as digital-age infrastructures or utilities, offering market access and enabling services. Just as modern highways and telephone systems allowed companies to compete and grow, so may platforms. But they are private, immensely powerful corporations. The implications for real-world businesses bear close examination. Not just the prospects available a consequence of disruption, but as businesses that can decide their fate.
As a start, we would offer four variables for consideration:
- Incremental profits — virtual platforms have the potential to connect real-world businesses with new customers, creating growth. But, as all or most traditional companies take advantage, this growth may be a one-time hit available to all. Perhaps the pain of not participating may be more significant than the benefit of joining in.
- Competency gains — virtual platforms may offer their data and artificial intelligence tools to real-world businesses, thereby enabling capabilities they cannot achieve on their own. If so, forward-looking businesses must take advantage. Otherwise, many traditional businesses may remain information-poor and automation-challenged and therefore unable to fully compete in the digital age.
- Margin migration — will virtual platforms perform business activities on behalf of real-world companies? Are these activities new and incremental? Or are they activities that currently performed one way or another? If yes, they will usher in a margin transfer from traditional companies to virtual platforms. If a proportionate value is gained, no problem. But, if slimmer margins mean reduced operating space or an inability to fund innovations, watch out — danger is close.
- Real-world dominance — the first three variables are implications of collaborating with virtual platforms and may or may not result in a cumulative advantage. But these variables say nothing about what real-world businesses can (and should) do on their own. Massive platform players dwarf almost all real-world companies. Advantages for traditional businesses lie elsewhere — they are (relatively) small in size but massive in number. A movement around real-world innovation, enabled by technology, is the most likely path for achieving dominance in the face of disruption.
Are these the only variables for exploring the opportunity of virtual platforms for real-world businesses? Are they enough to spark a real-world renaissance? Time will tell, but the work to understand the future starts now.
Owning the Future
Traditional businesses can make choices. More importantly, they can offer up game-changing innovations built on their foundation as real-world businesses. If platform businesses offer access to virtual opportunities, traditional companies may take advantage. There is no reason to look a gift horse in the mouth. However, there is a genuine reason to pursue game-changing innovations that rival those of virtual platforms, but it comes from another place and that is human-centric innovation.
Real-world business innovations must come from doing business as humans for humans, with people and assets that exist in the real world. By reinventing the role of customer-facing roles, the use of physical space for customers and workers, and business processes that engage and reward communities, real-world businesses may find a way to own the future. Human-centric innovation gets scant attention and is not backed by rigorous discipline, but it is the future for people that live and work in the real world.
Looking forward to our journey together,