When Is A Platform Business Model Right For You and Your Company?
By Vivaldi, September 26, 2017
Once considered the domain of unicorns and start-ups, platform thinking has evolved and been adopted by established brands in a wide array of industries with great success. The potential of tapping into a new source of value creation has led to a lot of interest as well as some reservations in terms of the investment and mindset shift required. Thus the question we are frequently asked: “When is a platform business model right for me and my company?”
How can established companies harness platform thinking to compete in a world of ever-rising customer expectations and respond to the tough competitive challenges they are facing today?
We share three stories illustrating how three different companies have harnessed the power of platforms to respond to three market dynamics that make platform thinking particularly relevant: rising customer expectations, competitive attacks and pricing pressures, and market pressures from intermediaries.
Platforms create value through a process that is different from that which most companies are used to. They build advantage through demand-side economies of scale, or network effects, which occur when a product or service becomes more valuable to its users as more people use it. This is very different from traditional sources of competitive advantage that are built on supply-side economies of scale and optimize the means of production of a product or service.
In platforms, value is created not by means of production but by means of interaction. The more consumers connect, the more interactions they have, the more value is created. This is particularly attractive as it means that platforms scale exponentially while value traditionally scales in a linear fashion. Let’s explore how Chinese consumer electronics giant Haier, North American farming equipment manufacturer John Deere, and Norwegian media group Schibsted applied platform thinking to their advantage.
Platforms as a way to respond to rising customer expectations
After riding the wave of the real estate and appliance boom in China and elsewhere, Haier has become the largest high-quality consumer electronics and appliance manufacturer in the world. But the digital era is changing customer expectations. High quality is no longer enough and consumers demand extreme responsiveness to their needs, high personalization and mass individualization.
Addressing these challenges would be difficult for any company that relies on standardization, highly automated factories, efficient R&D, manufacturing and supply chain operations. And Haier was no exception. Its traditional advantage of relying on supply-side economies of scale and scope by producing standardized high-quality products at a reasonable cost turned out to be a liability in the face of these new customer expectations.
And so Haier had to reinvent the company and adopt platform principles to accompany the transformation it underwent from a hierarchical organization of 60,000 employees to 2,000 self-operating business units.
One good example is Haier’s Open Partnership Ecosystem (HOPE) which connects consumers and their needs to customer ideas with innovative solutions, and links resources from Haier with those of technology partners. The reported numbers are staggering: over a million customers engage every day with the platform which includes 30 outside companies and third-party providers such as R&D companies and 370,000 innovators who participate regularly. HOPE has led to such novel ideas as a mini-fridge for students, freezers with a slightly warmer compartment for keeping ice cream soft or two-tier drawers for people too lazy to dig to the bottom to get the product out, or new products that keep spinach fresh for seven days.
CosmoPlat, which enables large-scale customization of products by facilitating interaction and feedback throughout the production process between customers, factories, products, supply chain, R&D and marketing functions, as well as external ecosystems of partners and suppliers, is another great example of how platform thinking can help companies respond to changes in marketplace expectations.
The result is a much more intimate and closer connection with consumers. They’ve even called it “zero distance.” Platform thinking has affected every aspect of Haier’s global operations and most importantly, it has become a very powerful basis for creating new value for consumers through mass customization and personalization.
Platforms as a way to deal with competitive attacks and pricing pressures
John Deere is the worldwide leader in agricultural equipment and its tractors command a price premium. Global competition is intense, especially in markets where higher quality and higher price points are a significant disadvantage such as in Latin America where there is a greater use of smaller, lower horsepower equipment.
When other companies are faced with this type of pricing pressure, a typical response is to provide a lower-priced version of the flagship product. Kodak introduced a lower-priced Kodak Funtime film roll to compete with aggressive price competition from Fuji. IBM introduced Ambra, a clone personal computer to compete against emerging competitors such as Compaq.
But John Deere chose instead to invest in its product, technology, and customers. Tractors were equipped with sensors and state of the art autonomous driving technology that improved the efficiencies of the farm equipment. The real-time monitoring of data collected from farmers enabled precision agriculture that optimized the yields per unit of farming land.
But beyond enabling its products with new technologies, John Deere also built an entirely new relationship with its customers and the larger business ecosystem in which it competes by adopting new platform principles that enabled, even more, productivity for farmers than its machines alone could realize.
The MyJohnDeere.com portal allows farmers to make better decisions about how to get the best results from their land by combining the data from their tractors with weather and other data reports. For example, they can now analyze agronomic data in real time, including average yield, total yield, average moisture, seeding variety and rates, and more.
The portal has further evolved into the John Deere Open Data Platform which lets farmers share data with other farmers and with third-party application developers. The SeedStar Mobile app, for example, captures row-by-row planting data which can be of help to optimize planter settings, diagnose potential problems, and scout fields.
The potential of these applications rises when farmers share their data not just with other farmers, but with the entire agriculture ecosystems from the various suppliers and manufacturers to even adjacent experts such as academics worldwide. When everyone focuses on the goal of improving the yield of agriculture, everyone profits. And John Deere wins by strengthening its customer relationship and retaining its competitive position worldwide.
Platforms as a way to preempt being squeezed out by intermediaries
The Norwegian publisher Schibsted is a major player in 13 European markets, with presence in Indonesia, Thailand, Mexico, Dominican Republic, Colombia, Chile, Brazil and Morocco and Tunisia. Today, Schibsted also owns a few of the biggest European online classifieds sites like Le Bon Coin, Finn.no and Blocket as well as a range of other online classifieds sites, most if not all of which are immensely profitable. The story of how the company became a major leader in classifieds is a case study of how platform thinking can help companies resist intermediation.
When Norwegian newspapers faced the risk of seeing their major revenue streams of classified advertising eliminated through digitalization in the late 90s, Schibsted decided to create a collaboration of the five main Norwegian newspapers, each one of which had unique strengths, and little geographic overlap. A few business model tweaks later, the common classifieds section was relaunched under a separate new brand, Finn, with national ambitions. By offering scale and visibility across Norway, the Finn brand became quickly known for trustworthiness and credibility, something emerging digital classified competitors did not have.
Within 18 months, Finn took the No. 1 position in real estate, and then in cars and later in jobs. Within seven years, it took 90 percent of the national market in all major product categories of online classifieds. The success in Norway led to international expansion and a global leadership position in classifieds worldwide.
The major reason behind the success of Schibsted is that it quickly acknowledged the difference between the news business and the classifieds business. One enables network effects, the other does not. They could not be managed the same way.
It also recognized that it would be necessary to separate out the classified business. By setting up a separate entity to go after a market that was undesirable and low margin from the perspective of its newspaper business, it allowed a focused team to grow using a different model and even encouraged them to cannibalize the older, higher margin parent company brands.
So how should companies use platform thinking to navigate the challenges of rising customer expectations and current or anticipated changes in the competitive context?
Senior executives should begin by asking themselves these questions:
- How can we take advantage of our existing assets and capabilities and develop competitive advantage through network effects?
- How can we enable deeper relationships with customers, and consumers and other stakeholders in our ecosystem so that we can create more value for them?
- Which elements of a platform can we integrate into our products, services or business units to enable competitive advantage through network effects?
- Which elements of a platform business do we need to build ourselves, which do we need to acquire, and which should we provide through partnerships?
- What new capabilities do we need in order to collaborate and compete effectively in a platform world? How much of these capabilities do we have in-house and how much of these capabilities do we need to attract?
- What new business models should we deploy to capture the value and profit opportunities from platforms?
If you’re interested in platform thinking, check-out our 2-day workshop, or email email@example.com to discuss how Vivaldi can help transform your business with its platform approach.
- Platform Strategy
Meet The Expert
Erich Joachimsthaler, Ph.D.
CEO & Founder