Building a Digital Platform to Lead in the API Economy
Economic theory suggests that pursuing economies of scale and scope is a dominant competitive strategy: that organizations win by virtue of their scale driving down production costs, or by virtue of their scope driving efficiencies across business activities. For example, Walmart, the world’s largest retailer, is able to outcompete others on ‘everyday, low prices’ by virtue of the purchasing power that its size affords. And Johnson & Johnson, the world’s largest pharmaceutical company, is able to leverage the same production, distribution and sales and marketing capabilities across its portfolio of brands, thus lowering the cost of bringing products to market.
Competing in a Digital Age
In today’s competitive environment, winning companies have upended their respective industries by leveraging economies of scale and scope in unprecedented ways. The companies that are winning are those that are able to drive these economies not just within their immediate organizational boundaries, but beyond them, by leveraging digital channels to build a surrounding ecosystem of buyers, partners and suppliers. For example, Amazon’s success as a retailer does not come from simply selling goods online. Rather, it also comes from allowing other retailers to sell their goods through Amazon’s platform and leverage the same marketing activities that drive visitors to Amazon’s site (Sell on Amazon), and to leverage the same warehousing, distribution and logistics capabilities that Amazon uses for its own products (Fulfillment by Amazon).
Through exposing these capabilities, Amazon has built an ecosystem of retailers around it - that now account for some 50% of products sold through Amazon.com - that allow it to leverage hypereconomies of scale and scope. Hypereconomies of scale in that Amazon is able to broaden its retail offerings and increase value to the customer, and hypereconomies of scope in that all of these sellers are using the same Amazon retail services, helping to drive additional Amazon revenue streams and lower operating costs for all. By thinking of itself not as a retailer, but rather as a digital retail platform, Amazon has been able to effectively build a surrounding ecosystem that is driving its continued success.
This imperative for leaders to think of their organizations as platforms stems from an increasing complexity in competition (See Figure 1). The traditional market model that brings together consumers and suppliers in a 1-sided transaction i.e. a single party on either side of the transaction, has been superseded by ecosystem models in which organizations compete and collaborate across multiple fronts through monetizing digital platforms directly (Sell on Amazon), through partnering to leverage and embed those capabilities in third party offerings (Fulfillment by Amazon) or to expand into adjacent markets (Amazon Pay). In this complex N-sided model with parties on either side of the transaction, organizations must compete across multiple dimensions, leveraging core capabilities across each dimension of competition. For example, an organization may be both a customer and a competitor to Amazon, leveraging Amazon’s fulfillment capabilities to sell products that compete with those on Amazon.com. In either case, Amazon is able to capture value because it has delivered on a platform a vision that makes available these core capabilities to multiple stakeholders.
Building a Digital Platform
The Digital Platform as an Application Network
MuleSoft’s mission is to help organizations change and innovate faster by making it easy to connect applications, data and devices. In our work helping organizations build digital platforms, we see the imperative to develop core capabilities as reusable building blocks that build on and complement one another. What emerges as a result of this approach is an application network whereby these capabilities can be recomposed and changed as necessary according to business needs. Underpinning the network is a set of reusable APIs that are the building blocks used to define how data is accessed, exposed and shared. This modular, easily pluggable infrastructure enables the digital platform by making it easy to create, change, and monetize new capabilities. These capabilities, built on owned infrastructure, creates and attracts value and resources outside the platform, providing greater customer stickiness and more opportunities for revenue. Contact us today to learn more about how to build an application network and make your digital platform vision, a reality.