The Platform Strategy

The Platform Strategy Revolution

A new business model called platform is transforming business segments, invading and disrupting traditional businesses. Imagine Facebook, with over 1.5 billion subscribers visiting to read the news, look at photos and watch videos it has annual advertising revenue of 14 billion. Facebook can be said to be the world’s biggest media company all without producing original content. The image below is quoting Tom Goodwin that explains how digital disruption has changed six different industries. All of these are platform companies.

disr

In a prominent book written by Geofrey Parker, Marshall Van Alystne and Sageet Paul Choudaray, they unveil the ideas behind a platform strategy and how to build the next platform business model. The book Platform Revolution can be purchased here.

In this post, we are going to examine the platform strategy and how it is applied in the global firms of the internet era. For a quick overview, the infographic below is showing the difference between a platform vs linear business model.

plat.png

Understanding the changes in the economy

Today the list of the largest firms by market capitalization and the fastest-growing global brands are dominated by platform businesses. These companies also have shifted their value proportion from physical assets to intangible assets. One of their workings is deploying technology to produce value and free up resources.

In the second quarter of 2019, the list below shows the rank of the top 5 listed public corporations. For the full list see here.

  1. Microsoft
  2. Amazon
  3. Apple Inc
  4. Alphabet Inc
  5. Facebook

What is a platform?

The basic definition of platform is:

“A platform is a business based on enabling value-creating interactions between external producers and consumers”.

A platform is creating value from the community and network effects. The network effect can be described as that as more people or participants use a service or a product the better it becomes and more value can be derived. Internet is a good example of this; as more people gain access to the internet, the more contact is product and more websites are developed. Another example is the phone network, as more people owned a phone the number of connection increased and thus making it more valuable to be part of the network.

Most firms that estimate from the industrial era were driven by supply-side economies of scale. This was focusing on massive fixed costs and low marginal costs. They also own resources and is focused on making the barrier to entry difficult and innovation is often done by the firm. In contrast, the platform creates value using resources they don’t own or control. They use the community as assets and innovation is done in an ecosystem.

The external ecosystem is an important part of the platform strategy as the goal is to make product and service more valuable as more people use it. One example is that more Android developers lead more to more Android users. With network effects, more users mean better feedback and thus attracs more users as the service gets improved. This means that those firms with the biggest user bases are the winners that take a huge market share.

To gain a better understanding of the differences between industrial firms and platforms, the image below summarizes industrial firm vs. platform firms. Source: (Marshall Van Alystne, 2016)

Industrial Firms

Business Function

Platform Firms

Supply economies of scale

Strategy

Demand economies of scale

Product/Service Promotion

Marketing

Community Engagement Promotion

Linear Supply Chain

Operations

Circular Value Ecosystems

Internal R&D

R&D

Open Innovation, 3rd Party Ideas

Value driven by firm assets

Finance

Value driven by community assets

Employees

Human Resources

Crowd-sourcing, Freelance

Back Office (ERP) / Front Office (CRM) Systems

Information Technology

Out of Office Social Systems

  • In the platform strategy users are creating value for users. The goal is to have many of the ecosystem partners to join your ecosystem and to create more interactions.
  • Users are spreading your content by rewards and reviews.
  • In traditional pipe business model, goods move from left to right. In the platform business model, firms often don’t own or control assets or inventory.
  • Often value will be created outside the firm. As technology advance in cloud technology, people can freelance for a platform firm
  • Information is moving inside to outside the firm. The focus is on building the community and work with sentiment analysis. Teams should expose their data and share their data.

Key elements of a platform

To understand the platform model, three key elements are important to understand.

  1. Open Architecture: To build successful platforms, 3rd parties should be allowed to participate, build and innovative on the ecosystem.
  2. Governance: The platform owner should control and steer the actors. It is important to exclude bad actors and bad behavior.
  3. Interaction: How value is created should be the core of every platform. It can be an exchange of information, exchange of goods or service or exchange of currency. Currency can take form as data, attention or money.

In the core interaction we have three key components:

  1. The participants: The producer that creates the value and the consumer who consume value. In some cases the user may be the producer, see for example YouTube.
  2. The Value Unit: In most of the cases, an interaction starts with an exchange of information that has value to the participants. For example in Twitter, the interactions is “tweets” on the platform.
  3. The Filter: To ensure that the right value unit is delivered to the most relevant users, an algorithm filter enables the exchange between producer and consumers. In this way, the platform can manage the exchange of information.

Monetization

For managers in the platform strategy area, one area is particularly challenging: How should we earn money and monetize our platform model?

The difficulty lies in monetizing a platform without damaging the positive effects derived from network effects. The first thing managers need to understand is how value is created on the platform. The authors argue that value in many platforms falls into four broad categories.

  1. For consumers, value is created when they get access to the platform.
  2. For producers or third-party provides value is created when they get access to a community or market
  3. For both consumers and producers value is created when they get access to tools and services that can make interactions easier. For example, tools for creating videos or tools for online payment
  4. For both consumers and producers value is created when right consumers are connected with the right producer or service quickly and easily

With these four categories derives four types of pricing models:

  1. Transaction Cut: One of the common models simply means that the platform should take a little slice of the deal. Usually, this is done after a match is done. Here Airbnb or PayPal are two good examples
  2. Pay for Access: Let all users or one-side pay to get access to the community. One good example is LinkedIn.
  3. Pay for Tools: Some platform charge for upgraded tools for creating, reviewing or editing. Again, LinkedIn serves a good example. For one side of the network (recruiters), they charge for upgraded tools for searching job candidates.
  4. Pay for Attention: This is simply an ad-model and is present on Platforms such as Google and Facebook. This model is effective if the ads are well-targeted and the user base is large.

Other challenges

In the section below, we look at some other challenges that can arise when managing a platform model. Managing a platform is not an easy task; below we summarize three areas of importance.

  1. Openness: Managers should think long about how open their platform should be and about developer and user participation. This should be reviewed closely throughout the life of a platform as the quality of the platform depends on the participation of both developers and users.
  2. Governance: As within a society, platform governance should include laws, norms, architecture, and norms. How this is designed will affect behavior and interactions within the platform.
  3. Metrics: Platform metrics should focus on measuring the rate of interactions success and the factors that contribute to it. Below is different metrics throughout the life-cycle of a platform.
    • Startup Phase: Percentage of listing that lead to interactions within a given time period, the rate of growth in active users, sales conversion rate
    • Growth Phase: Frequency of producer participation, interaction failures, searches
    • Maturity Phase: Resource allocation, Innovation & new functionalities

The future of the Platform Model

To predict the future and see other business segments the platform model will disrupt we need to first look at strategy creation. Traditionally, many firms creating strategy has followed the Porter’s Five Forces and created differentiation by owning resources and created higher barriers to entry. While this is true today, this is shifting to a move from owning and controlling resources to value creation by orchestrating an ecosystem. The platform model is about creating network effects and expanding its user base. In a platform, both developer and users are key components in creating valuable interactions. Today, cost leadership and product differentiation are no longer in focus in strategy frameworks. Now the goal is to create engagement, frictionless interaction and make it easier for developer and user to enter the platform.

The authors argue that industries that are likely to be transformed by platforms in the short are those industries that are information-intensive industries (news and media), have high regulatory control (banking, health-care and education) or are resource-intensive (agriculture).

As an example, education is perhaps the best of example of the shift we are seen in the platform disruption. Education platform such as Coursera, edX and Khan Academy has disrupted traditional education intuitions. In this moment, these platforms also offer online degrees and diplomas that are recognized world-wide.

Another aspect is the Internet of Things technologies that are emerging with cheaper and more powerful sensors, the platform of the futures will create a new ecosystem that adds value for people and devices.

As a final note, it is also important the challenges for societies regarding policies, security, and privacy. Facebook is a prime example of a platform that has failed in data privacy and security. Other examples include YouTube and its video recommendation system that spread videos of violence in order to maximize clicks for increasing ad revenues. Another area of concerns is employment and its effect on societies. With the platform model, there will be a shift in economic, social and political power. It is therefore needed that businesses collaborate with researchers and regulators to design products and services that are inclusive, available, transparent, and safe.

Resources:

To get more insights, the MOOC course Platform Strategy is a good source. The Platform Strategy Course

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