Product Vs Platform - Who is The Force With?
Products and platforms have a very unique relationship. On one hand platforms support development of products while on the other products often generalize overtime to become platforms — a chicken and egg situation. Recently, while helping a friend with a project proposal I was faced with an unusual connundrum, would the project be more successful if delivered as a product or would it be more successful if delivered as a platform. This started a chain of thoughts that led to some interesting revelations and motivated me to write this article.
Let’s start by asking two basic questions — what is a product? and what is a platform? Unfortunately there is no clear answer and depending on who you ask, the distinction between a product and a platform can get you a range of opinions. A simple search on internet would present you with a bunch of articles that try to articulate this distinction and some of them do it rather well. A simple rule that I have found useful in making the distinction between a product and platform is to map a functional artifact somewhere on a spectrum that runs from a generalized to a more specialized use of the artifact. The more general the use of an artifact the more of a platform it becomes whereas, the more special the use of an artifact the more of a product it becomes. The question then arises — as a matter of strategy — what’s more valuable, building a product or building a platform? Let’s try to answer this question by evaluating two types of business models — one that develops a product and other that develops a platform — in the context of Porter’s five forces or threats. This is a slightly unorthodox application of Porter’s model, where we apply the model to different categories of businesses rather than specific businesses.
Porter’s Five Forces Model is a popular tool developed by M.E. Porter to analyze competition in business. The model evaluates competition on five dimensions of threats namely suppliers, buyers, new entrants, substitutes and competition.
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Threat of suppliers
A product being a specialized application would generally tend to have more specific requirements for ‘raw materials’ needed to build it. Thus suppliers would tend to have a greater control for products. For example companies like SpaceX have to work with a tiny pool of suppliers that provide highly specialized components that make up a launch vehicle, this supplier pool directly impacts SpaceX’s success and therefore commands power. Therefore depending on the product, it is reasonable to conclude that the threat of suppliers for products is moderate to high.
Platforms represent general building blocks on which specialized products can be built. Typically platforms are designed to work at scale and thus rely on commodity ‘raw materials’ that are easily available.Thus it is highly likely that dependency on specialized ‘raw material’ is low. Therefore it is reasonable to conclude that the threat of suppliers for platforms tends to be low.
Threat of buyers
A product has functional boundries that gives it an economic and/or a differentiating edge over rest of the competition. However in a perfectly competitive market, it can be assumed that buyers would have more than one choices in the same category. Thus the threat from buyers for products is moderate.
Platforms provide a foundation on which the users can build specialized offerings. At the time of adoption of a platform, buyers do influence the nature of interfaces that are needed from the platform. However unlike products, the cost of switching platforms is high, which means once on a platform the threat from buyers becomes low.
Threat of new entrants
There is always a moderate threat of new entrants. Again, assuming a perfectly competitive market, there would be opportunites for new entrants to create differentiating products in the same area. Therefore it is reasonable to conclude that threat from new entrants for products is high.
Platforms have two relevant attributes; they represent a standard and they usually form at more mature stages of a company. Both of these attributes make threat of new entrants competing in a platform space rather low.
Threat of substitutes
Products target specialized use cases and tend to have limited scope in their functionality. This limited scope typically results in easy availability of substitues. For example a tax filing software can easily be replaced by a tax consultant, they both have very limited and well defined scope of helping with tax preparation. Thus, the threat from substitutes for products can be considered to be moderate.
Platforms have a much broader scope and functionality. It is relatively tideous and complex to substitute a platform. For example Google App Engine, a platform, abstracts out all the complexities of managing the lifecycle of an user defined software application. A substitute for such a platform is complex and expensive to build. Thus the threat from substitues for platform is relatively low.
Threat of competition
Generally product based business models tend to have high degree of rivalry from competition. This is due to the fact that product based businesses have a narrow focus and are often easier to get started, and thus tend to have more number of players. However since products are more specialized, they also have some sort of intellectual property associated with them. As long as this core competency is protected the rivalry between competition poses a moderate threat to products.
Platforms tend to create standards, and in a competitve market standards offer certain leverage to businesses that drive them. A well designed platform tends to attract and retain users and to counter this, competitors invests in developing competing platforms, thus offering alternative standards and therefore resulting in further market segmentation. This increases the threat of rivalry between competition for similar platforms.
To summarize, as seen from the five forces analysis, in the long run platform oriented businesses generally tend to be better from a strategy point of view. However success of platforms, to some extent depends on the first mover advantage. Businesses that are first to introduce new platforms tend to have an upper hand in retaining customers when competition eventually arrives. Platforms also usually tend to manifest more after businesses have reached maturity. Products on the other hand tend to be agile and, have a shorter horizon before they become successful. However products tend to suffer from threat of new entrants more than platforms.
Finally, I hope that the perspective presented in the context of Porter’s five forces helps you in making the right strategic choice between a platform or a product. May the Force be with you!
