Business is about solving customer problems. It’s been claimed that business is primarily about beating the competition or about maximizing shareholder returns but if the successes (and failures) of the past decade are anything to go by, the primary goal of business is solving customer problems. If you think about the approach that businesses take to solving these problems, three broad patterns emerge.
THE ‘STUFF’ APPROACH
The approach of the industrial age to solving customer problems has been to create more stuff. If there’s a customer problem out there, you set up factories and build some stuff. And once consumers have got their needs satisfied but you’ve still got all this excess production capacity, you put in some marketing and convince consumers that they want more stuff. The default model for solving business problems has been the ‘stuff’ approach. If you’re dealing with goods, you’re churning out more goods while if you’re a services-based company, you’re putting more people on the job. The approach to scaling a solution has been creating more.
Most problems do not need to be solved by throwing stuff at them. Most problems are, actually, information problems. In reality, most problems are currently solved inefficiently because of a lack of information needed to make a decision. We’ve been solving problems by creating more stuff largely because we didn’t optimize distribution and access to the stuff that already existed.
THE ‘OPTIMIZATION’ APPROACH
Enter algorithms. You have stuff out there which is sub-optimally distributed. Here’s a two-step approach to solving the problem:
1. Aggregate all the information on the stuff out there
2. Leverage algorithms to optimally match the right stuff with a consumer’s desire
Google built one of the fastest growing companies of all time applying the optimization approach to the world’s information problem. Most internet businesses create value through optimization. Computer science, as a field of study, is itself based on solving optimization problems.
THE ‘PLATFORM’ APPROACH
Platform Thinking adds one more step to the optimization approach. Instead of merely aggregating information on stuff out there (Step 1 above), it enables creation of more inventory without creating more stuff. That sounds paradoxical but that is exactly what Twitter does to news. The media industry has a limited number of journalists. Twitter enables anyone out there to become a source of news without having to become a journalist. YouTube increases the inventory of content without setting up new media houses. eLance allows companies to get work done without having to hire people to do the job.
The ‘stuff’ approach creates supply, the ‘platform’ approach uncovers new sources of supply. The goal in this case is not only to optimize but also to redefine the input (inventory) that you are optimizing.
Every consumer problem out there can be solved in one of three ways:
The ‘stuff’ approach: How can we create more stuff whenever the problem crops up?
The ‘optimization’ approach: How can we better distribute the stuff already created to minimize waste?
The ‘platform’ approach: How can we redefine ‘stuff’ and find new ways of solving the same problem?
THE ACCOMMODATION PROBLEM
Problem: I’m traveling to city X and I need to end myself some accommodation.
The ‘stuff’ approach (Sheraton): Create more stuff. Build more hotels, set up more BnBs. If there are fewer rooms than tourists, buy some land, put up a hotel and create more rooms.
The ‘optimization’ approach (Kayak): There are a lot of hotels out there but travelers do not necessarily have all the information to make the choice they want to. Let’s aggregate this inventory and create a reliable search engine. Let’s build review sites to help make the right decision.
The ‘platform’ approach (AirBnB): How can we redefine travelers’ accommodation? How about enabling anyone with a spare room and mattress to run their own BnB?
THE TRANSPORTATION PROBLEM
Problem: I need to figure out a reliable and safe way of getting from point A to point B whenever I want to.
The ‘stuff’ approach (GM, Toyota): Create more cars. The greater the number of people with this problem, the more cars you need to create.
The ‘optimization’ approach (Avis, Cab Aggregators): There are many taxi operators but consumers aren’t aware of all the choices. Let’s create a search engine and help them figure the best route to their destination and the modes of public transport that will take them there.
The ‘platform’ approach (Lyft, ZipCar, ZipRide): Let’s redefine the problem space. What if we drastically expand the number of cars available to choose from for commuting from point A to point B?
Interesting aside: Avis is acquiring ZipCar, announced a few minutes back.
THE COMPUTING PROBLEM
Problem: I need a mobile phone with all the bells and whistles but every mobile phone has a different feature set and I can’t figure the best one for myself.
The ‘stuff’ approach (Nokia): Create more phones and more models. Conduct your market research, figure out what consumers want, bucket them into groups and design new models for these groups.
The ‘optimization’ approach (Comparison shopping): There are a lot of phones out there. Why don’t you enter your parameters and we will spew out the best phone models that satisfy your needs.
The ‘platform’ approach (Apple): Let’s rethink the phone. We can’t build everything. What if we just built out the tools that others could use to build apps that consumers could then use to extend the functionality of their phone?
THE NEWS PROBLEM
Problem: I need to know about what’s happening around the world.
The ‘stuff’ approach (NY Times): Put more journalists on the job, churn out more content and get the news out to more channels.
The ‘optimization’ approach (Google News): Rank news stories and serve readers with the matches closest to what they’re looking for.
The ‘platform’ approach (Twitter): Redefine the journalist. Everyone can create and distribute news now.
The platform approach is new. Much of this problem solving has come up only in the last five years and few solutions have demonstrated the kind of success that the ‘stuff’ approach and the ‘optimization’ approach have. Hence, one might be tempted to dismiss this as a fad.
While execution challenges continue to exist, they are, by all means, solvable.
Inventory: When you redefine inventory as AirBnB or oDesk does, you need to ensure you have a clear strategy for encouraging users to create the inventory. This often leads to a chicken and egg problem as producers won’t create inventory unless there’s a ready market of consumers and consumers won’t participate without inventory to consume. I’ve written a lot about how to solve this problem in earlier posts.
Quality: When an entirely new set of producers gets created, quality control can be a problem. Platforms need to have robust quality control mechanisms to separate the good from the bad.
External forces: We need new regulations for these new models. Über has already had problems with regulations. We need to solve for trust in the virtual world. Airbnb has already come under the scanner on this count.
Platforms, though, are here to stay and redefine the way business is conducted.
Wish you all a successful 2013! More power to you and your business as you leverage the power of platforms to change the world!