"Platform economy is a must at board level in mechanical and plant engineering".

by Hamidreza Hosseini and Dr. Holger Schmidt

B2B platforms have not yet arrived in Germany. Now the Association of Machinery and Plant Manufacturers is sounding the alarm: the topic of platforms must be given higher priority.

Platforms as the dominant business model of the digital economy are now also gaining importance in mechanical and plant engineering. "Digital platforms will play an increasingly important role in mechanical engineering. Value creation in the mechanical engineering industry is increasingly taking place through digital services," is the conclusion of a VDMA study on the platform economy.

Economic platforms, defined in the study as intermediaries that use digital technologies to connect market participants via a platform and facilitate their interaction, are already widespread in the consumer world. 7 or 8 most valuable companies in the world operate according to this model. But Germany's B2B companies are still a long way off, as a recent representative survey by Bitkom shows. According to this, 55 percent of the industrial companies surveyed in Germany are not familiar with the term platform; a further 29 percent have classified platforms as irrelevant for them. This ignorance could have consequences: "Ten years from now, German industrial players will be asking themselves why they haven't built the leading platform for machines," warns Peter Schmid of Wer-liefert-was.

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In the area of marketplaces, vertically structured platforms are currently emerging in particular. Here, a company offers its products, accessories, spare parts and services, and possibly also used machines via the platform. This offer is supplemented by providers of raw materials, logistics service providers, financing service providers or software houses. In this way, the customer can obtain all the relevant goods and services for the core product on the same platform. However, these are often still first- or second-generation platforms, which tend to have the character of marketplaces, i.e., they hardly create any network effects and also neglect the information economy.

500 IoT-platforms worldwide

There are now around 500 platforms for the Internet of Things worldwide and the market is growing by around 40 percent a year: "The major hurdles for mechanical engineering companies are to become aware of the relevance of platforms for their own business as well as for existing - and also new - customer groups. Additional hardware sales, increased customer loyalty or differentiation in the competition through new digital services - depending on the objective, different platform types come into question for the company," the study states.

The platforms (with marketplaces as early forms of platforms) are expected to bring three main added values:

  • Reduce transaction costs by lowering the costs of initiating a transaction and by using standards to simplify the communication/handling of the transaction.
  • Enable new services and business models, for example predictive maintenance or pay-per-use models.
  • Increasing benefits through network effects, which can lead to the loss of the customer relationship for the platform refusers and therefore has a high disruption potential for existing structures. (If you don't believe it, you should look at developments in the retail, travel, communications or mobility sectors, where this is exactly what has happened).

The reluctance of German companies is reason enough for the association to make a wake-up call to its members: "It is imperative that the topic of the platform economy is firmly anchored at board and management level. Companies must develop a clear strategy for the platform economy," demands VDMA Managing Director Hartmut Rauen. Nevertheless, some major German players such as Siemens, SAP, Bosch and the Adamos initiative for small and medium-sized enterprises are getting involved, attracted by the expectation that they will be able to capture a significant share of value creation in the future. The expected challenges for mechanical and plant engineering are extensive.

  1. Shift of significant value creation and revenue shares to digital services (services run on platforms.
  2. Pricing mechanism and customers' willingness to pay for digital services are unclear in most segments.
  3. Completely new know-how requirements compared to core business (digital services/apps, business models).
  4. Complexity of B2B landscape creates multitude of platforms, but consolidation within industries is expected in the medium to long term.
  5. Expected increasing competitive pressure in mechanical and plant engineering due to new differentiation opportunities.

Blueprint for building a modern platform 

The platform economy is about to significantly change almost all industries, including mechanical and plant engineering. Business areas are being replaced, changed and renewed. Once fundamental issues such as strategy and common understanding have been clarified, the conception, planning and implementation of the platform business model can be started step by step along a blueprint, ideally in an agile approach.

In principle, different platform economic scenarios and business models can be established in the industry. The following scenarios are examples of approaches that can be combined, among other things, depending on the strategy.

1. Platforms with focus on sharing of resources, capacities and capabilities

IIn this scenario, for the time being, industry partners from the relevant ecosystem form an alliance to share the following core elements, among others:

  • Resources such as machinery or equipment,
  • Capabilities in terms of production lines, material flow, warehousing & logistics, etc., and
  • Capabilities such as leveraging complementary R&D units, sharing experience in a horizontal and/ or vertical complementary value creation.

2. Platforms with focus on product/service alliance

Another scenario of the industry platforms are the alliance platforms, which complement products and services of the ecosystem partners with each other. The platform operator enables the industry partners to specifically combine their products and services on different levels and with different diversification approaches (e.g., horizontal or vertical value creation) via the platform and offer them to their customers. On the one hand, these alliances strengthen joint value creation and, on the other, the portfolio and product range design of the individual partners. This in turn leads to more portfolio offerings leading to better market and demand coverage for customers, which in turn leads to more interactions and lastly revenues through more network effects.

3. Platforms with focus on changing market mechanisms and ecosystems

These platforms focus on the interaction and trading mechanisms: the platform operator brings together ecosystem partners that have market power with their trading mechanisms or their customer access. Bringing together such alliance partners expands market access and the number of indirect customers (customers of the ecosystem partner). This in turn leads to more interactions by the ecosystem partners' customers, which in turn leads to more revenues through the network effects.

4. Platforms with a focus on data and technology

Here, the platform operator brings together different ecosystem partners depending on the focus. Ecosystem partners can share and analyze their complementary data (e.g., production, manufacturing, or material flow) (taking into account the GDPR guidelines), obtain cross-partner insights from it, and in turn use it in their day-to-day business (e.g., develop data-driven products and services). In technology-focused platforms, the platform operator brings together industry partners who, for example, merge their IoT products or services or smart factory components up to smart business models. This creates different opportunities to combine smart components or part of a smart industrial business model. Revenue is generated through the network effects of using and monetizing shared data and/ or using and marketing shared technologies.

Once the platform business model has been worked out, the next step is implementation. The following applies: Hope is not a strategy! Ideally, in all of the aforementioned scenarios, platforms will involve (or allow) additional ecosystem partners in the platform after the initial phase (setup and establishment), so that more resources, capacities and capabilities are available with more partners. This creates more interactions and revenue through network effects for the platform operator. Furthermore, there will be indirect or direct effects on the ecosystem partners' customers.

In principle, the following models are conceivable:

1. Establish your own platform business model: This model is recommended for companies that want to establish platform models as platform initiators and pioneers on the market.

2. Build a platform with additional partners: This model is suitable for platform initiators who combine complementary elements upfront and pursue a common strategy.

3. Use existing platforms as a sales channel: In principle, it is advisable for every industrial company to use existing platforms as a further sales channel as part of its sales channel strategy.

Various process models exist for the agile and step-by-step implementation of platform-economic business models. One of the tried-and-tested models is the procedure model of the Massachusetts Institute of Technology® and Boston University®, which are now used in the implementation of various modern B2B platforms.