More than 30% of the world’s economic activity — about $60 trillion — will be delivered by digital platforms in 6 years’ time, according to a McKinsey research report.
Yet it’s estimated that only 3% of established companies have adopted a platform strategy. And first mover advantage is important in a digital world where often the winner takes all.
In this four-part series we’ll be discussing the Platform Economy – what it is, how it works, why it matters to your business, and how your business can be transformed with the platform model.
Of the world’s 10 most valuable companies, 7 are based on a platform business model. Companies like Apple, Google and Amazon have used this model to grow exponentially, and seize market share from long-established companies.
No matter what industry your business operates in – manufacturing, retail, financial services, hospitality or any other – the chances are good that a Platform competitor is about to transform it, creating new opportunities and displacing incumbents in the process.
If that’s already happening then you need to adapt your strategy and business model – fast.
Understanding the Platform Economy – business models and technologies
Let’s start with a basic definition of a platform.
A platform is a business model that’s based on enabling value-creating interactions between external producers and consumers.
The platform makes it quicker and easier for producers and consumers to find each other, and the platform that can offer the best experience is the one they’ll prefer.
How platforms differ from traditional “value-chain” business models
To understand the powerful forces that are being unleashed by the explosion of platform businesses, it helps to think about how value has been created and transferred in most markets – the producer at one end, and consumers at the other.
A firm first designs a product or service. Then the product is manufactured and offered for sale, or a system is put in place to deliver the service. Finally, a customer shows up and purchases the product or service.
Because of its simple, single-track shape, we describe a pipeline business as a linear value chain.
In recent years, more and more businesses are shifting from the linear value chain structure to the platform structure. In this shift, the simple linear arrangement is transformed into a complex relationship in which producers, consumers, and the platform itself enter into a variable set of relationships.
In the world of platforms, different types of users—producers, consumers, and some who may play both roles at various times—connect and conduct interactions with one another using the resources provided by the platform.
In the process, they exchange, consume, and sometimes co-create something of value. Instead of flowing in a straight line from producers to consumers, value may be created, changed, exchanged, and consumed in a variety of ways and places.
This is all made possible by the connections that the platform facilitates.
The 4 platform business models that support most businesses types
Some technology companies use innovation platforms to co-create value with external developers and consumers.
Examples include: Microsoft, Apple, Salesforce and Sage.
Investment platforms provide back-end infrastructure to create a front-end user experience.
Examples include: the Priceline Group that includes Booking.com, rentalcars.com, agoda.com, Kayak.com and Priceline.com, and Naspers with the Chinese platform Tencent.
Transactional platforms reduce transaction costs through disintermediation and enhancing interactions through connected technology. Most economic and social platforms fall into the category of transactional platforms including social media platforms, marketplaces, media, music, money, financial technology (fintech) and gaming.
Examples include: Spotify, Stripe, eBay.
Integrated platform companies exhibit some aspects of transactional platforms, and depend largely on third-party developer networks and multi-sided markets to build value.
Examples include: Airbnb (with hosts and renters) and Uber (drivers and riders).
Platform technology – Design your business model first, then choose the technology that enables it
To be clear, there is no single “platform economy technology”. In reality, platform economy leaders have blended and leveraged existing technologies in innovative ways, to deliver services and experiences that earn great profits and build large communities of users.
Geolocation, payment, messaging and all the other powerful new technologies already existed before Uber built their app, but it was the way that they applied those technologies to support their unique business model that gave Uber their edge.
The great news is that most of that ground-breaking technology is available to your business. It’s tested, relatively inexpensive (sometimes free) and a lot of it is open source, so you can improve on it if you need to.
The important thing to bear in mind is that you have to design your business model first. Then make the technology choices that support your model, and that way you’ll avoid the “Field of Dreams” syndrome.
We’ll discuss the role of technology in more depth in the next article in this series.
The 4 ways that platforms beat traditional “value-chain” business models
#1 – Platforms beat value chains by exposing new sources of supply
Consider how the hotel industry works today. In order to grow, companies like Hilton and Southern Sun need to add rooms to sell through their existing brands. This means they have to continually develop new properties, invest in existing properties and spend heavily on maintaining and upgrading them.
Like the hotel chains, Airbnb also uses refined pricing models and booking systems to help guests find, book and pay for accommodation. However, as we know, Airbnb doesn’t own these properties. Instead, it taps an enormous pool of unseen capacity – renters with rooms to let.
Since the increase of capacity is no longer limited by investment capital and the need to manage physical assets, growth is much faster and practically risk-free.
#2 – The “Network effect” drives platform success through exponential scale
The Internet introduced the idea of network effects – the fact that a network grows exponentially more powerful as nodes (or people) are added to it.
Because of network effects, the value created and the profit margins enjoyed by platform businesses also increase exponentially, as more users join the ecosystem.
#3 – With platforms, “not mine” beats “just-in-time”
For years companies have been aspiring to Lean production with Just-in-time inventory management, in a bid to contain costs.
And in a similar way, if Avis could deliver a car to an airport just as the plane arrived, it was operating as well as they could hope for.
Airport real estate rental is very expensive, especially for car rental companies, and minimising the time vehicles spend in the carpark means keeping costs down.
With RelayRides, an arriving traveller borrows the car of a departing traveller (who now gets paid, complete with insurance) for its use, while saving those big airport parking fees. Everyone wins, except the traditional car rental companies.
#4 – Platforms beat value chains with data-driven tools for community feedback
Traditional pipeline firms rely on managers and supervisors to ensure quality, but these control mechanisms are costly and difficult to scale.
Platforms like Airbnb and YouTube use feedback loops to compete with traditional hotels and television channels.
With community feedback about the quality of content (YouTube) or the reputation of hosts (Airbnb), subsequent market interactions become more efficient. Feedback from other consumers makes it easy to find videos or rental properties that are likely to suit your needs.
The Platform Economy is growing grown at an exponential rate, driven by the power of ecosystems, the scale of network effects and the innovative use of technology.
Platforms are disrupting entire industries by revolutionising the way companies interact with their customers and partners.
Platform companies are beating traditional value chain companies, by tapping into underutilised capacity, growing faster with the scaling power of network effects, listening to the needs of customers and partners, and building industries without needing to investing in expensive assets like properties or transportation fleets.
Coming up next
Winning in the Platform Economy – Part Two: The role of technology and ERP in Platform Models
In the next article we’ll focus on the changing role of ERP systems in the Platform Economy, and using a business case for ERP system renewal to support your new platform strategy.