Our clients frequently have the perception that a business and it’s business model are the same thing, but in fact, many organisations, including Apple, Amazon and GE contain multiple business models which have dramatically different ways of creating value for customers, capturing value for themselves and delivering that value continuously. To help clarify this, we have written this overview of the 2 main types of business model, namely pipelines and platforms.
Pipeline business model
Until recently, the vast majority of businesses could be described as pipelines.
In this model, suppliers sell various inputs (e.g. raw materials, software, products, knowledge, etc) to a business which then adds value to them prior to selling standard products or services to the customer, as in our simplified diagram. A typical example of this would be a manufacturing business such as Ford or a pizza delivery business. An unusual example is McKinsey Solutions, a unit of McKinsey which has managed to standardise certain parts of their traditional strategy consulting service. The service offers a range of cost effective standard software tools, data and processes to support specific types of decisions across a range of industries.
A variant of this type is what is known as a solution shop, which produces a customised product or service based on some sort of customer specification, represented in our diagram (yellow arrow is the specification). Examples of this type are McKinsey’s traditional, knowledge and people intensive, management consulting model or our favourite Cambridge barber, Carmello's. Artificial intelligence, robotics, etc are ways that companies are trying to make solution shops less people intensive and more scalable. Slightly scary to think of a robot cutting my hair - think i'd rather pay more!
Pipeline businesses are focussed on controlling and owning tangible and intangible resources and so tend to have a fairly high cost base. I'm guessing that most of our readers recognise themselves as one of these 2 types.
Platform business model
Platform businesses, on the other hand, are all about facilitating producer and consumer interactions. Forms of these have existed for many years in the shape of physical markets or shopping malls, for example. The job of the platform is to facilitate frictionless transactions between producers and consumers, instead of sweating their own, costly, assets (compare a hotel chain's pipeline model with Airbnb's platform). Both producers and consumers must be treated as customers of the platform business, as illustrated in our diagram. The platform needs both customer types to participate continuously, to thrive.
Platform businesses usually live or die on their ability to acquire and keep more and more active participants in their ecosystem (see this article on network effects), usually via mobile internet interactions. The ability to match consumers and producers and build trust (through 'stars' reviews) are critical for digital platforms - online data management is hugely important.
A highly successful exception to digital platforms is Eden McCallum. This business connects very high quality freelance management consultants with demanding clients, but does not use a digital platform for this - instead they use 'old school' client and consultant relationship managers.
There are quite a few different sub types of platforms, if you want to find out more, read here.
Business model = business?
So back to the beginning of the article and the idea that many businesses contain multiple business models – Amazon is a great example of this. It has pipelines in Prime Video subscription and its Fire and Kindle device manufacturing, platforms in its traditional shopping marketplace and Mechanical Turk and even a solution shop in parts of it’s Amazon Web Services business.
Are you a pipe, platform or both?
So now that you have a deeper insight into the difference between a platform and a pipeline - what kind of business models do you have inside your business? Would there be value in moving from one type to another? We find that more and more businesses are exploring these questions. Contact us if you would like to find out more.
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