Incumbent firms are being challenged by platform companies. Many incumbents could become successful platforms. However, they fail to do so because their leaders’ self-esteem is grounded in their past identities.
When they think of “who they are”, they see a traditional company. Hence, they continue to act like one.
Platforms challenge leaders’ identities because they fundamentally shape core elements of the business. Leaders therefore need to learn new ways to define their self-esteem.
Three traditional ways of defining your worth as a leader are particularly harmful.
1. If I have no subordinates, am I still a leader?
The degree of hierarchical control is diminished in platforms. In a traditional company, employees must follow the leader’s orders. The company also typically owns much of its assets and has full control over their use. In contrast, in a platform, most of the employees and assets do not obey hierarchical rules. They come and go more freely.
The lack of hierarchical control challenges leaders’ identities. This occurs because part of their self-concept is the power they have over others. Their power enables them to control what happens. It also makes them feel good about themselves.
Hence, when such leaders consider platform business models, they feel their identity is threatened. Their (perhaps subconscious) worry is that once they lose their subordinates, they are no longer leaders.
Ironically, we have seen this worry emerge even in situations where a platform business model has increased leaders’ power and impact. They have gained more power because the number of their platform partners has ultimately increased well beyond the original number of their sub-ordinates. Hence, to preserve your self-esteem as a leader, think of “how many people do I move” rather than “how many sub-ordinates do I have”.
2. If my revenue halves, am I still running a major business?
CEOs measure their greatness by the money their firm is making. Typically, they boast about their revenue. The higher the revenue, the more important the leader.
A platform business model often lowers revenues. This occurs because the platform is taking only a share of the revenue the customer is paying for the third-party service provider. For many leaders, the drop in their revenue is tantamount to losing their personal self-esteem.
We have seen this reaction in leadership teams we have worked with. They have approached new strategy creation with a specific revenue target as the primary goal and measure of success. When we suggest platform business models, the relatively low expected short-term revenue is nearly always off-putting for them.
Unfortunately, the psychological reactions to revenue decrease occur despite simultaneous profit increases. Profits increase as platform business models often reduce costs substantially. Furthermore, they enable faster scaling, often enabling rapidly increasing profits. But when identity is rooted in revenue, bigger profits feel secondary.
To overcome this form of inertia, stop asking how much revenue you make. Instead, define your self-esteem by answering “How much profit am I generating?”
3. If I join a bigger pond, will I become a smaller fish?
For some companies, the best opportunity would be to join a platform created by others. In some domains, such as mobile gaming, this is fairly obvious and enables success. For example, Supercell focused on Apple’s mobile platform and has been highly successful.
But when you are an incumbent that has direct customer relationship for a long time, joining someone else’s platform can be painful. Many of the companies we are currently working with are struggling with this challenge: there already is a platform in which they could take their place, but it would be more exciting to build their own platform.
The excitement of having one’s own platform is partly related to psychological factors: creating something new and of your own gives a strong self-esteem boost. In contrast, joining someone else’s platform can feel like sub-ordination and giving up.
Negative self-esteem reactions to joining a platform can occur despite positive economic rationale. In many situations, the cost of building a well-functioning platform is high and the chances of making it successful are fairly low. At the same time, joining an existing platform is relatively easy and often provides reasonable revenue and profits.
Furthermore, joining a successful platform can give the joining company momentum that would be difficult to achieve otherwise. Platforms give access to a larger pool of customers and complementors. Hence, a company can ride on the success of the platform. A leader should not be looking at who’s the biggest fish in the pond, but rather, how big a wave they can ride on when joining the platform.
New questions and actions fuel the virtuous cycle of identity and business renewal
To build the confidence to win in the platform era, you must revise the questions you ask to define yourself. Deliberately force yourself to think of these questions:
- How many people do I move?
- How much profit am I generating?
- How big a wave am I riding on?
In addition to using your mind to refocus on the new questions, take actions that help you do it. Identity change takes time. Fortunately, you don’t have to wait for your identity to change to take actions. Rather, you can intentionally decouple your actions from identity. You should act in a way that does not feel good yet.
Once you take such actions, they start feeling better. Your identity changes as you see yourself taking new actions and ask the revised questions. And this identity change makes it ever easier to take more actions.
In sum, ask new questions from yourself and take bold actions.