Saturday, December 30, 2006

The compelling logic
of platform companies

The most recent issue of Barron’s (12/25/06) ran an interesting cover story called 'Sizzle Inc.'.

The Barron's writer, Johnathan R. Laing, interviewed the principals of the international research firm GaveKal. I’ve ordered the book. More in future posts.

The subtitle of the article is “For the US, developing the sizzle is now just as important as selling the steak. Shedding risk and stabilizing the economy by making products abroad.”

While this outsourcing article is directed at large businesses, their ideas about creating value are useful for start ups and emerging enterprises.

The GaveKal research shows that the spreading of the economic risks, as represented by outsourcing, is slowing the total amount of volatility we all feel. The suggestion is that macro and micro economic systems become better balanced, less volatile and more valuable as they become increasingly integrated

Those of us in economically better developed countries need to plan our enterprises carefully so as to be able to make the most appropriate contributions.

The Barron's/GaveKal piece talks about platform companies. These are organizations that are highly focused on their core competencies. Core competencies are not static placeholders used to fight off change. Unique core competencies are platforms for growing new solutions for your markets.

Here's what the article says about platform companies, "Platform companies require far less capital because they concentrate on product development and sales, leaving to parties abroad the heavy financial lifting entailed by manufacturing."

As a side note, I agree that manufacturing is the heaviest lifting at big global scales, but for small and emerging firms, the ability to uniquely and innovatively manufacture products is entirely viable. I’m watching many examples of this in my day job. The art and efficiency creative enterprises are able build into manufacturing can be a great core competency in the emerging world of smaller, more specialized production runs.

I think of great short run manufacturing capability as the ‘D’ in R&D, research and development. Great short run manufacturing is always adapting, always getting smarter, often out in front.

That said, the platform model in the article focuses on the three legs of a sustainable economic structure: R&D, design and sales/distribution. Then, they recommend, outsource the rest.

Outsourcing is a controversial term, but remember, for start ups and emerging enterprises, outsourcing doesn't need to be across oceans. Outsourcing for start ups can also be the folks just out your back door, or your next UPS/FedX visit.

The solutions you provide to real problems are your platform. You plug in the rest of the world as needed.

I put up a post about how well this worked for us (Fri., May 13, 2005 'Remote Partnering'). We outsourced out our back door, literally, and it worked very well for many years. We outsourced an expensive manufacturing step we didn’t feel we needed to invest in. We bought into excess vendor capacity. The vendor added to their base load, and everyone benefited, especially our customers.

I watched this platform model work successfully for more than 25 years in our first enterprise, Banner Graphics.

I define a platform company as an enterprise with a unique core competency for solving problems in their carefully identified target markets. A platform company executes repeatable solutions to real problems. A platform company has their business processes in place, not on paper.

A platform enterprise is designed to get smarter and more valuable over time, not necessarily bigger as measured by many of the typical metrics.

For entrepreneurs of any kind, I believe value emerges at the intersection of problem solving, sales, and execution.

You need to deploy these most productive assets skillfully. You have to know enough about your market to be able to approach it with authority and at the least possible cost initially. The platform concept offers this path.

Do what you do best and plug in the rest. If your solutions are valuable, other organizations will knit their platforms into yours.

The Barron's article was heavily macro economics oriented, focusing on China and mega supply chains. However, I've lived the start up side of this and the GaveKal ideas about platform enterprises are just as valuable for emerging enterprises, probably more so.

As you work on your new enterprise, don’t let yourself get caught in the common trap of trying to control all the variables.

It’s more helpful to think of your enterprise as a platform; a platform for solving problems, a platform for helping your markets, and most of all, a platform for continuously creating sustainable growth for your enterprise.

If you plan and execute well, your organization will be able to continuously create sustainable, valuable launches.

That friends, is why we call them platforms.

The Barron's article posted at Silicon Investor

The GaveKal site

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