The traditional pipeline business model has dominated industries for decades, but now with the emergence of platform business models, “pipeline giants” are incorporating platforms into their business models to remain relevant and competitive in today’s market (Parker, Choudary & Van Alstyne, 2016).
We discuss the difference between traditional pipeline businesses and platform businesses:
What is a pipeline business?
The traditional pipeline business follows the value chain model by managing sequential activities to create value (Parker, Choudary & Van Alstyne, 2016). The input of the chain (for example, raw materials from a supplier) goes through a variety of processes in order to produce an output (the finished product). This process takes less valuable input resources and changes it into more valuable outputs (Parker, Choudary & Van Alstyne, 2016). Pipeline businesses yield their own products and services to clients and place a focus on streamlining their processes in order to build and sell these products and services, as well as attract more customers to their business (Vreugdenhil, 2021).
Legacy pipeline versus platform businesses (Gisby et al., 2022)
What is a platform business?
Platform businesses facilitate high-value interactions between participants, namely consumers and producers (Vreugdenhil, 2021). There is a positive correlation between the participants and the value created through the interactions: as the number of participants increase, so the value derived from the platform increases (Vreugdenhil, 2021). The main assets of platform businesses are “information and interactions”, which not only create value but also contribute to an organisations competitive edge in the market that they operate in (Barasia, n.d.).
Legacy pipeline versus platform businesses (Gisby et al., 2022)
Differences between Pipeline and Platform businesses:
Gisby et al. (2022) explains that a distinct difference between pipeline and platform business models is how they compete in the market. Pipeline businesses achieve success above their competitors based on the pricing and appeal of their product and service offerings, and their “breadth of market” (Gisby et al., 2022). Platform businesses, on the other hand, rely on network effects to remain competitive in the market (Gisby et al., 2022). Network effects can be described as an event that occurs when the number of participants on a platform is proportional to the amount of value created: as more people participate within the platform environment, more value is derived from these interactions (Barasia, n.d.).
In order to maintain a competitive advantage within the market, Gisby et al. (2022) explains that pipeline businesses are reliant on “economies of scale, intellectual property, sparse resources and brand power”. For these types of organisations to reach/remain at the top of their industry, their products and services must be unique while offering a positive customer experience, explains Gisby et al (2022).
When considering how each type of business grows, platform businesses create attractive offerings that are used to draw the attention of partners, whereas pipelines businesses are more focused on growth via mergers and acquisitions (Gisby et al., 2022).
Vreugdenhil (2021) explains that companies operating under a pipeline business model can achieve success, however, they lack the “long-term disruptive potential” that is characteristic of platform businesses. Platform businesses succeed in changing their core to the management of resources, instead of maintaining ownership of them, which allows these businesses to grow exponentially with minimal costs (Vreugdenhil, 2021). Legacy pipeline businesses are beginning to adopt the strategies and mindsets that govern platform business models in order to succeed and remain competitive in the market.
References:
Barasia, G., n.d. Platform Business vs. Pipeline Business: How to Leverage Your Network. [online] Toptal Finance. Available at: <https://www.toptal.com/finance/business-model-consultants/pipeline-business-vs-platform-business>
Gisby, S., Micca, P., Kheyn-Kheyfets, B., Chang, C. and Wagh, M., 2022. New business models in health care: Building platform-enabled ecosystems. [ebook] Deloitte, p.5. Available at: <https://www2.deloitte.com/content/dam/insights/articles/us165009_chs-health-care-ecosystem/DI_CHS-Health-care-ecosystem.pdf>
Parker, G., Choudary, S. and Van Alstyne, M., 2016. Pipelines, Platforms, and the New Rules of Strategy. [online] Harvard Business Review. Available at: <https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy>
Vreugdenhil, A., 2021. The power of platforms and how banks can become one. [online] Finextra Research. Available at: <https://www.finextra.com/the-long-read/225/the-power-of-platforms-and-how-banks-can-become-one>
