Digital platforms strategy
In this blog, we shall discuss on the importance of having a Digital Platform strategy and why so many incumbents are starting to build their own platforms or looking to forge partnerships with digital natives and third parties to have its own digital platform.
At this time, with Platforms business more profitable than products business, repercussions for not having a digital platform can be high.
Significance of Digital Platforms business
- Powerful platforms like Amazon and Alibaba have fueled rise of these companies and have pushed their market capitalization to the top.Their meteoric rise has led to the incumbent companies analyse on how to build their own digital transformation strategy.
- Companies are confused whether they build their own digital platform or partner with leading digital platform leaders or not venture into digital platforms at all.
- The cost of not venturing into digital platforms would be high as platforms beat products anytime due to high margins.
- At the same time, building an own digital platform strategy and competing against the leaders is akin to playing a ‘David v/s Goliath‘ game.
Understanding Digital platforms strategy of Natives/Leaders
- Let us understand the strategies of digital leaders in building the digital platforms.As digital platforms are existing in every industry, many incumbents have their own digital platforms while others build industry specific digital platforms that are operated by third parties.Many others leverage the large prominent platforms built by the digital natives.
- In all these scenarios, it is observed that a successful platform play by incumbent companies can yield significant gains.
- In my last post on Digital business, I have written how the new digital structures – Platforms and ecosystem will redefine the digital competition in future.
- Global platforms like Facebook allows other companies to build their businesses at the top of the facebook platform. Many advertising and media companies have built digital products at the top of Facebook platform to run their businesses
- Ecosystems gain importance when there is a need from customer for a service which is provided by a supplier who is part of the same ecosystem. Ride sharing business like Uber, Lyft and Ola leverage this ecosystem where a customer requiring a ride is matched by the car driver who is ready to offer that ride. These ecosystems are prevalent in other business like Airbnb for Accomodation and Swiggy for food delivery.
- Many companies have taken the ecosystem play to a newer level by pushing this business model across industry levels.China’s Ping An offer variety of services from Car insurance, real estate services and Doctors appointment which explains the fact that the boundaries between platforms and ecosystems are blurring.
- Companies realize the difficulties of owning and operating an industry platform, hence they choose to partner with existing global platforms to reap the benefits of scale.
- At the same time, companies also face a challenge on how to differentiate their business from others who are also leveraging the same platforms. In addition there is also a risk of the platform owner becoming a player in that platform.For instance, Swiggy starting it’s own restaurant business can pose a significant risk to other restaurants operating in that platform.
Wide Prevalence of Digital Platforms business
- Platforms have become an essential part of the business landscape and are no longer restricted only to the digital natives.Many large incumbent companies like Nike and Unilever have launched their own platforms as their business models mature.
- Platforms business models are more prevalent in developed markets and in sectors like Banking but found to be less common in less developed markets and in sectors like pharmacy and healthcare.
- The big reasons for success in Platform model is in Network and Scale effects along with an effort to provide end to end digital services.
- The platform model enables the business offering individual services to integrate with other services to offer an end to end offering.This results in access to a bigger base of customers across categories at scale which drives the overall prices down.In addition, all the related integrated data are uploaded to shared cloud based utility.
- In this competitive environment with prevalence of multiple platform models available, Speed (First Mover Advantage) and winner takes all dynamics becomes even more important for the incumbents to consider.
Performance Gains in digital platforms
- Any platform owned business whether it is independently owned and operated, operated by a third party or that leverages global partnerships will show a better gains compared to business not having platforms.
- Within platform businesses, Companies with broader platform agreements with others have better performance than ones operating with own platforms.
- Digital platforms are an important feature of corporate landscape and a competitive necessity.
- With pervasive use of Platforms based models, more incumbent companies have established platforms by allying with third parties or by leveraging global platforms rather than building their own.
- Companies establishing their own platforms realize that better way to compete/survive is by collaborating with other products platforms and ecosystems.This collaboration gives them access to larger customer base.With more platforms following an open source model, this collaboration will further increase.