5 Reasons for Shifting into Platform Business
It seems like every industry is built on platform business these days. Platform businesses are taking over in all sectors and our lives, for example, in the entertainment (e.g. Youtube, Netflix), the shopping industry (e.g. Amazon, Tokopedia, Alibaba), or the transportation (e.g. Gojek, Grab, Uber). Economists also call them multi-sided platforms (MSP).
Today’s economy is more focused on who a company connects with than the product or service they own or sell.
So, what is a platform? Deloitte considers it as “a business model (not a technology infrastructure) that focuses on helping to facilitate interactions across a large number of participants”.
It is well known that successful platform businesses have been very valuable. Platforms dominate the market capitalization rankings, accounting for six of the top 10 companies by market capitalization, which are Apple, Microsoft, Amazon, Google, Facebook, and Alibaba. These companies took advantage of the model’s capabilities to grow exponentially and overtook established firms’ market share.
Professor Andrei Hagiu uses the term platform businesses (or multi-sided platforms (MSPs)) to describe technologies, products, or services that create value by providing a platform for two or more customer or participant groups. The participants can be divided into supply side (sellers, service providers, creators, etc) and demand side (buyer, service seeker, guest, consumer, etc).
Product-based vs Platform-based business model
As established businesses, traditional companies follow a linear business model, where they produce goods or services and conduct transactions with other companies or customers. These companies also own their inventory, and customers access them to purchase their inventory.
In contrast to platform businesses, which implement a circular business model, they enable and facilitate transactions without manufacturing, owning, or purchasing inventory. Customers buy products or services on platforms from other platform users.
Platform enables interdependent groups to interact and transact with one another. The direct interactions, naturally result in supply (which is offered by a seller, service provider, or producer) and in demand (which is requested by a buyer, service seeker, or consumer).
Unlike traditional businesses, platforms create value by enabling transactions, rather than simply producing their own goods or services.
5 reasons into platform business
The current growing trend is the increasing number of companies that are transitioning from product-based to platform-based business models. Platforms will mediate more and more socio-economic activity, according to the MIT Initiative On The Digital Economy. However, while nearly 90% of corporate leaders say they recognize their current business model is not adequate for the future, only a small percentage of these leaders are acting quickly enough to implement new platform strategies that can help transform their results. Platform strategies are not something business leaders learned in business school, so today’s corporate leaders are not adopting this strategy.
Whereas there are 5 platform business advantages as reasons why you should considering turning your business into platform business model:
1. The platform economy has become a global trend
The platform economy is rapidly reshaping global trade, which allow participation from small and mid-sized companies with minimal investments in supply chains. Platforms represent a big change in the way industries have traditionally been organized. And in the environment where the winner often takes all, having the first mover advantage is very important.
By 2025, McKinsey expects 12 ecosystems (or platforms) to emerge and will account for $60 trillion in revenues by 2025, or roughly 30 percent of all global revenues. And yet experts predict that only 3 percent of companies have established a well-formulated platform strategy.
Most experts agree that established companies have the potential to build their own platforms or, at the very least, to join an ecosystem created by another company. There are three options for companies already established: develop a platform from scratch, do partnership to create a platform, or look for opportunities to leverage other platforms.
2. Platform business is applied for B2C and also B2B
While many consider that platform business are only relevant in the context of business to consumer (B2C), platform business is also emerging in the business to business (B2B). In numerous areas, B2B and B2C platforms are emerging, including retail, education, health, transportation, agritech, fintech and telecommunication.
Choudary, a business author from World Economic Forum Young Global Leader, thinks that businesses will start using platform business models across industries that rely on heavy engineering, manufacturing, and distribution. In B2B telecommunication sector, we see some wholesale companies also offering the platform business that invite other wholesalers or enterprises to join into the platform, like Telin with NeuTrafiX or PCCW Global with Console Connect.
3. Platforms make high barriers for your competitors
One way to keep competitors out of your market is to utilize a platform that connects buyers and suppliers. New entrants will have a hard time overtaking companies with strong established platform business. With this market domination, higher entry barriers can be more effective than expensive advertising campaigns.
4. Platform business make you grow and scale faster
Because the platform business model doesn’t own the resources, they can grow and scale rapidly. It unlocks value for both buyers and sellers by making interaction and transactions as simple and straightforward as possible.
While linear business models hardly scale to a larger market size, platform business models may not only be able to scale to a larger market size but they may even expand to entirely new markets.
5. Platforms create efficiency in building connection
Platforms establish a central location for supplies, demands, and solutions to multiply your businesses scale and reach your unattainable customers. Automation will allow businesses to scale more easily, while reducing the time, cost, and opacity of platforms.
Platform business model scales many times more efficiently than a linear business model because it relies on increasing value by reducing search and transaction costs (i.e. making transactions simpler and cheaper).
In the digital transformation, platforms will continue to play a significant role for traditional business in years ahead.
