Branching out to a Platform Model
May 18

Branching out to a Platform Model

Building something valuable isn’t a one time process anymore, it is a continuous process and requires you to enable a network of people both inside and outside your company with the right building blocks

What’s common between Facebook, Twitter, Amazon, Airbnb, Uber and Apple? Of course, leave aside the success part! They all conduct their business on a scalable online platform that connects producers and consumers. They create value by facilitating exchanges between two or more interdependent groups bringing in tailored products to the market faster and with less investment. By using the platform model, these companies have grown in leaps and bounds to grab greater market share from well-established firms.

The difference between platforms and traditional business models lies in the way they create value. With producers at one end and consumers on the other, the latter model transfers value along a linear pipeline. The platform model creates value by connecting producers, consumers and the platform itself. Platform companies have now become the major drivers of innovation as they are setting the standards for digital transformation. As platforms have become the new normal in how leaders are conducting business, enterprises must make the most out of this opportunity.

Enterprises can bring their core value unit to the platform and customers can extend the product by adding features relevant to their business

Go figure!

A 2016 survey by Accenture says, “81% of executives say platform-based business models will be core to their growth strategy within three years“. Let’s look at some figures to find out how much popularity platform business has gathered in the business to consumer (B2C) context. Almost 80% of China’s ecommerce market is controlled by Alibaba. WeChat messaging platform by Tencent, Asia’s most valuable company, has nearly 850 million users and according to some estimates is the largest gaming company in the world. In the early 2010s, BlackBerry Limited (formerly RIM) and Nokia lost huge market share to Apple and Google because they were acting as product companies in a world speedily embracing platforms.

We’re not even fighting with the right weapons, … The battle of devices has now become a war of ecosystems
Stephen ElopFormer Nokia CEO

This is spurring the investors to put in more money into platform business than in their linear counterparts. The S&P 500 shows platform businesses have an average revenue multiple of 8.9 while for linear businesses, it’s two to four times more revenue on average.

Platform business is also making a lot of noise in the business to business (B2B) world. PingAn, an insurance company in China, is an example of how a traditional corporation transformed its business model. Reframing itself as a technology company, PingAn created a portfolio of platform businesses related to insurance in different verticals – connecting doctors and patients in healthcare; purchasing and selling cars in automotive and even in the entertainment industry. Five years into this transformation, PingAn is now the world’s most valuable insurance company.

Let’s loop in South Africa as well. Naspers, a 100-year-old company printing newspapers, transformed itself into a platform company in five years, built global online classified business OLX and acquired food delivery startup Delivery Hero.

What’s fanning the transformation?

Why are established companies conducting business in traditional ways thinking of disrupting their operations and going bonkers about platforms as a business? These benefits of offering a platform over a product might make for a strong case –

  • Instead of bringing complete products to the market, businesses can be set up around extending the core product. This can reduce the need for capital, manufacturing capabilities and building the product from scratch. Through documented APIs and SDKs, developers can add features to the product using the platform.
  • Though a product might support limited use cases, a platform can be leveraged to support a wider set of use cases, broadening its market space. Vendors can also reuse the platform for their own benefit.
  • Companies marketing products with limited use cases are less likely to keep customers for long. Platforms on the other hand are deeply integrated into the business architecture and are not easily replaceable. This means that customers will think twice before discarding it and instead adapt it to their needs over time.
  • The value of a platform business increases with more number of people using it. The examples that we talked about at the beginning – they all rely on a large number of people using their platform to interact. This increases the value of the platform over time.

A promise of growth

At times, when there is increasing pressure to build and market something new, a product platform strategy can be the perfect solution. This is because a healthy network of producers will allow the platform owner to reach out to more customers and have a flourishing business. This network becomes more valuable when the platform fosters distributed innovation and each player can grow faster than they would on their own.

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