Strategy and Competition in the Platform Economy

How digital platforms can enable growth for your firm and unlock your customer network’s potential

The digital revolution we have been experiencing for the past 20 to 30 years has brought us new network-based value chains and “coopetitive” business models. Traditional, linear value chains and competitive business models – otherwise known as product-based business models – have been replaced by platform-based business models. And, there is no doubt, platform-based businesses are winning out.

How do we explain the increasing dominance of platform business models? Let us begin with an example based on Apple and the handset market. In 2007, the handset market was 99 percent controlled by seven firms, namely Nokia, Samsung, Sony Ericsson, Motorola, LG, RIM (Blackberry) and HTC. Apple was not even among them. Those seven firms prospered and enjoyed the benefits of economies of scale, brand recognition, regulatory protection, world-class logistics, global sales channels and strong R&D programs.

Six years later, by leveraging a platform strategy, Apple disrupted these well-established industry players and, by 2013, was in possession of 93 percent of the profits in the handset market. To fully understand this, we have to take a step back and look at Apple’s history. The Apple iPod business started in the pre-platform economy with production driven by a standard linear value chain and product-first thinking. The Apple ecosystem had very limited network effects and data capture abilities. What allowed Apple to disrupt the market was when it matched the iPod with iTunes, which allowed the company to coordinate users and content providers and remove traditional supply chain inefficiencies. Before that, customers were transferring music from a CD to a laptop and from the laptop to a handset device.

This created a triangulated supply network that allowed Apple to take a cut from transactions occurring on iTunes while capturing customer data to enable more valuable music matches. Apple was then able to create network effects with its growing numbers of customers, partners and providers working together to accrue value for the platform that coordinates them. Apple then applied the same concept to the phone device market, where it was competing with Nokia and Sony and their Lumia and Playstation platforms. In this case, Apple had the advantage of being able to build vastly stronger networks by replicating the functionalities of standalone platforms in each product, including games, phones and others. Companies like Sony failed to bring their offerings together in a unique solution; having a great stand-alone product in this ecosystem was no longer good enough.

There are many other examples of stand-alone products that did not survive the platform revolution. We might think of HP calculators now available as an app, the photo-sharing service Flickr, the Blackberry hand-held device and so on. These products were all replaced by platform-based competitors. Platform-based products beat hardware-based products because it is far easier to add the functionalities of a product to a platform than the other way around.

In their shift from a product-based to a platform-based economy, many firms had to redefine how they were going to compete, from controlling resources and creating barriers to entry to facilitating more valuable market exchanges among actors of an ecosystem.

Technological changes and the desire for innovation have begun to influence enterprises’ strategic plans. Thinking of this in terms of Harvard Business School professor Michael Porter’s “five forces” model will help. The first of Porter’s principles is that a firm should protect a market niche and emphasize barriers to entry for potential competitors, leveraging cost leadership to sustain competitive advantage. Conversely, the key value for platforms is to generate ecosystems by facilitating interactions that create and reinforce those ecosystems. In the Microsoft Windows ecosystem, for example, some firms might be able to replace Windows with other operating systems, but a different story would be to replace the 6,000 applications that are working on and compatible with the Windows operating system. Those 6,000 applications, which Microsoft allows to run on its Windows platform-based ecosystem, become 6,000 barriers to exit without Windows having any barrier of its own. Needless to say, this allows Microsoft to have a strong advantage over competitors and new entrants in the operating system environment.

In a platform ecosystem, there is no need to own inimitable resources, only core resources that profit from a long tail of active ecosystem partners. In this new world, the desire for positive network effects of an ecosystem requires enterprises to look for external resources in a new way. In finance, for example, blockchain technology now makes it possible to have encrypted records that reside outside the company. In many industries, R&D is augmented by crowdsourcing and open innovation made more powerful by the scale of the ecosystem. In marketing, push messaging becomes pull messaging and outbound messaging becomes inbound servicing. In IT, the focus shifts from back-office enterprise resource planning (ERP) to front-office customer relationship management (CRM) and to external social networks and big data management. And, in operations and logistics, platform companies no longer have to own their assets. Uber owns no vehicles, Airbnb owns no rooms and Facebook owns no media assets.

There is no question network effects amplify the profitability of platform-based companies. For many businesses today, positive network effects are incorporated in the company’s shareholder evaluation.

As digital platform experts at ISG, we focus on understanding how traditional business models across industries can be re-shaped into platform business models to facilitate accelerated growth. Once we have co-developed the business platform concept together with our clients, we help structure the technology framework that will enable the digital platform to go live. This completes an end-to-end solution that encompasses business and technology, making ISG a one-stop shop for our clients’ platform transformation journey. Contact us to learn more.

About the author

Dario is working in the Digital Strategy and Platforms Unit. He manages digital transformation engagements and helps clients identifying their business opportunities coming from the adoption of innovative digital solutions. His consulting focus spans across industry verticals managing transformations mainly in Pharma, Insurance, Banking and Retail.

His specific areas of expertise are digital platforms, client ecosystems and customer experience, while clients can benefit from his knowledge and experience in various fields such as Automation and Cloud Migration.