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As platform companies take over, should product companies question their business model?

Businesses such as Apple, Microsoft and Google have risen to the top largely because they're founded on powerful platforms. How can companies that sell products -- like spices or sprinklers -- benefit from the platform model?

The days when a company could put a good product on the market, run some ads and reliably turn a profit are gone....

Increasingly, product companies -- even those that supply essentials like food -- need an Internet-driven platform to keep up with customer demands and stay ahead of competition. According to experts, such "platform companies" are better equipped to collect important data and use it to create better customer experiences, improve products and even extend each transaction by selling associated products and services.

Is the product model broken?

In a panel at the recent MIT Sloan CIO Symposium, Marshall Van Alstyne, researcher for the MIT Initiative on the Digital Economy, explained the shift away from giant companies that relied on supply-side economies of scale -- such as Ford and Carnegie Steel -- to companies that thrive on demand-side economies of scale, which include today's giant platform companies such as Microsoft, Twitter and Facebook.

He pointed out that three of the top five companies in terms of valuation are now platform companies. "We have Apple, Microsoft and Google joining the ranks of ExxonMobil and Berkshire Hathaway," he said. "Platform firms have begun to displace energy and banking as the dominant firms in terms of wealth creation."

Van Alstyne broadly defined a platform as an open architecture combined with a governance model, and said the potential benefit of a platform-driven business lies in its network effects. The platform allows the company to turn its focus from inside to outside -- where there are more people with the potential to drive more growth than internal stakeholders alone. This can bring partner companies into the fold, but also consumers. "Users are creating value for other users. That's how we’re getting exponential growth," he said.

According to Van Alstyne, this shift continues to alter IT operations. "We started originally in the back office and we got ERP systems," he said. "Then we moved to the front office and we got CRM systems. I'd argue that now we're even moving out of the office, [since] we're getting social that is completely outside the organization."

Do traditional product companies need platforms?

Platforms are all very well for companies like Google and Facebook that are software-oriented from the start, but do traditional product companies need to worry about network effects?

According to another speaker on the panel, Paddy Srinivasan, vice president of products at Xively, they should, largely because customer expectations have changed due to the interconnectedness of mobile devices and of physical objects. At Xively, Srinivasan works with physical product companies that want to make the shift to the product-as-a-service model. While these companies may not have the expertise to do what digital-based companies take for granted, "as soon as you have a product that is digitalized in any sense, your customers expect  customer service, engagement, 24x7 support," Srinivasan said.

He said that even customers of industrial companies expect to be engaged. "They want instant feedback when they're stuck. For example, you just bought a sprinkler and you're using an application to program it, and you're stuck -- you want to be able to push a button and get immediate support from the manufacturer."

Companies can also benefit from product use data, combined with data on elements like location and weather, to potentially sell additional support contracts or to provide predictive maintenance, Srinivasan said.

Building a platform "out of salt and pepper"

Jerry Wolfe, former CIO at McCormick & Company and founder and CEO of Vivanda, Inc., brought McCormick's story to the panel to demonstrate how a 125-year-old physical product company used the network model to drive growth -- or as Van Alstyne put it, to build a platform "out of salt and pepper."

In looking for ways to boost growth at McCormick, a global company known for selling spices, Wolfe found that while e-commerce sales of food products was less than 2% of the total, 50% of all purchases were influenced digitally.

So McCormick tested out ideas that centered on the connected consumer.

"Early on, we found that if we presented solutions in context to a consumer -- 'Chicken's on sale, use this flavor with it,' -- magic. The consumer got the solution she wanted, McCormick sold more stuff, the retailer sold a bigger basket," Wolfe said.

The problem was scalability. But by creating a Web-based platform (inspired by consumer platforms like Pandora Radio) that amassed McCormick's in-house expertise and data and shared it externally, the company was able to overcome that obstacle. The platform, called FlavorPrint, provides a flavor and texture profile of any kind of food, based on McCormick's data repository, and matches that food profile to registered consumers' profiles to provide personalized recommendations.

Wolfe found that users who registered on the FlavorPrint platform were more engaged than non-FlavorPrint users and bought more McCormick products. The company then made the platform API-enabled and created the Vivanda food experience platform, which currently powers FlavorPrint.

FlavorPrint changed McCormick from a food business to an "eating experience business," Wolfe said. "It was beyond synchronizing data. It was the ability to synchronize the creation of an experience."

Srinivasan emphasized that platform implementation needs to be closely tied to a business use case to be successful. This could mean using interconnected products to reduce service cost, or tapping into the kind of customer engagement benefits that McCormick found with FlavorPrint. Or it could mean using a physical product -- even something as mundane as a pepper mill -- to sell more products.

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