Platform Business - Good Vs Bad

Everywhere we look now platform businesses are in the news. Whether its high valued startups that have disrupted the traditional business models or the established companies that are shifting their traditional pipeline business to a brand new platform based business model.

Platform is a biz model that facilitates exchange of a product or service between two or more independent groups thereby creating a unique preposition. This enhances the speed to go to market and consumers/ users get access to products/ services at their convenience.  Platform business model started as early as 1854 where US Locomotive works worked rigorously on developing standardized locomotive parts. Back then it was mainly working internally for development of products using standardized parts and mainly used by product designers and engineers.

These business platforms can be broadly classified into two categories w.r.t. their medium of operation i.e. Physical Platform & e-Platform. Physical platform is a market place where buyer and seller meet physically for transacting business and e-Platform is market place where buyer and seller meets over an online/ cloud platform while physically they may be far apart.

The platform business is there India too for a long time in physical form e.g. Kisan Mandi, Weekly Haats/ Bazaars, Shopping Malls etc. few are listed below-

-       Kisan Mandi (Physical Platform)

o  Transactions – Agro products sold here to retailers, wholesale traders and agro based manufacturers.

o  Focus Area – Getting a better price for Farmers and convenience for traders/ manufacturers for getting the raw material.

o  Current status – not as successful as desired due to - Transparency is missing, margin distribution is imbalanced.

-       Shopping Malls (Physical Platform)

o  Transactions – Multiple products & services under one roof.

o  Focus – Convenience to customers as one-stop shop for their multiple needs.

o  Current Status – Mall success is skewed. Some malls are success in some cities while others failed miserably. Covid-19 is changing the game and malls success is questionable in near future. New concept of Digital Mall is emerging (Digital Mall of Asia is in the news recently).

With advancement is technology and cloud computing, now Indian business as well as Indian Govt. is promoting new e-Platforms as well changing old ones (physical) into the e-platforms. Some are listed below-

-       Government e-Marketplace -GeM (erstwhile DGS&D)

o  Transactions – Multiple Central Govt. offices float their requirement for all type products & services and suppliers can quote for the same.

o  Focus – bring transparency in Govt. purchase and offer equal opportunity to qualified suppliers.

o  Current Status – Partial success. Many Govt. organizations are not putting their requirements yet and expected transparency is still missing.

-       e-NAM (e platform for Kisan mandis)

o  Transactions – Kisan Mandis connected online where farmer and consumer can be directly connected.

o  Focus – better agree price for farmers and consumers getting fresh agro products at lower cost.

o  Current Status – 200 Manid connected and about 1000 mandis to be connected

-       Flipkart

o  Transactions – Multiple products and services on this platform for all willing buyers.

o  Focus - products and services at competitive price to customer and suppliers get multiple customers at much less cost.

o  Current Status – Partial success as the platform missing to balance the right side and also due to lack of deep pockets.

There are many other platform business examples in India like Myntra, 99 Acres, Zomato, Book My Show, Ola, Oyo, Shopify, Zepo etc. which show that success and failure are part of this model as well like we see in our traditional pipeline business model. The ratio between success and failure is skewed towards failure.

Currently Platform Business model is regarded as the most important business model in 21st Century and it is now employed across operations, Software development, manufacturing, Supply chain and Service Delivery. Focus on digitalization and evolution of new technologies like Artificial Intelligence & Machine Learning, Cloud Computing & Cloud Storage has helped building and operating platform business easier and faster.

These businesses require a different strategy and marketing framework when compared to pipeline business. Such business platforms are now proliferated across globe and different industry segments. 

Platform ecosystem constitutes four key components –

Platform Provider – The one who is orchestrating value Co-creation & Managing platform governance (openness, ease of use, transparency etc.).

Service Provider – The one who is delivering services to the target customers.

Customers (users) – The beneficiary of the product or service.

Complementors – Those other value add services available through that platform.

In addition to above, Regulators/ Policy makers, Society (cultures, rituals), Incumbents also affect the performance of the platform businesses like they do for other business models. The ownership of platform assets is also an important area to look into while designing a new business model. It could be under the ownership of the platform provider (WeWork) or it could be Peer provided (Airbnb, Uber).

It’s mainly categorized into two, Innovation Platforms- This model enables third parties to develop and add complimentary product or services to a core product or Technology (e.g. App Stores, Android, AWS etc.) & Transaction Platforms- This model facilitates transactions between two parties related with products, information or services (e.g. Pay Pal, Booking.com, Amazon Market Place etc.). There are also organizations that focus on transaction as well as innovation and those can be categorized as Hybrid Platform business models. One such example is Facebook that has gaming applications capability from third party while they started as transaction platform business model.

These platforms are further categorized by some other names as well e.g. Search platforms, Social Media platforms, Communication platforms, Matching platforms, Content & Review platform, Booking Aggregators, Payment platforms etc. There is still one more way to look at the categorization of the platform business models i.e. Internal or company-specific & External or Industry-wide.

Industry wide platforms are more open when compared to internal ones. Success of these depends upon the potential of network effects. These could be primary network effects are secondary network effects. Primary network effect is where user is motivated to use the platform only when he finds his other contacts are working and be able to connect with them (e.g. Facebook, LinkedIn etc.). While secondary network effects are created with direct benefits through one to one interaction (e.g. search engines).

This is highly debatable whether all businesses can be run through industry platform model and the answer is a clear no as per Gawer & Cusumano (2008). They say, Businesses which (i) perform a function that is essential to a brooder technological system & (ii) solve a biz problem for many firms and users in the industry, are the ones can be successfully run through industry wide platforms.

Platform businesses are gaining momentum as they are performing extremely efficiently when compared with the traditional pipeline business model. Comparatively platform businesses employ fractional count of employees, lot less operational cost and hence bigger profits when compared with the pipeline business of the similar size. More than 5 platform businesses out of 10 form the most valued firms in the world today. 

There is a flip side to the success story of platform business models as we are witnessing failures of such firms at an alarming rate. There are clear patterns of failure if we look back on those cases and one must learn from it before creating a new model for launching. This model should be well thought out as we see that first movers have failed while later incumbents succeeded (Sidecar Vs Uber) and delaying too much could also be an issue (Internet Explorer Vs Chrome). So the product/ service on offer with a balanced focus on both sides of market with a right timing can pave the way for success. Commonsense pricing is the key to making profits.

There are 6 key reasons that emerged from past failures and must be planned well to overcome them for creating a successful business model-

-       Failure to manage the transparency / openness – too loose or too tight is dangerous.

-       Failure to engage developers – Developers look for “what is in it for me”.

-       Failure to share the value fairly – there should be win-win for all stakeholders. If one gets too much and other one is pressed thin, formula for failure.

-       Failure to balance on the right side – Attracting consumers over producers or vice versa.

-       Critical Mass is more important than making quick bucks – you can delay your money making until you get the critical mass for your platform.

-       Failure of imagination – failed to gauge the market trend, competition and new ecosystem being developed around your business.

Summary -

Platform business model can’t be created for just “feel good” or “me too” objective as it costs big money. Platform business requires a different skill and strategy to run when compared to traditional pipeline business. Platform business can do very well if planned skillfully whereas it equally is a bad choice depending upon the industry, customer segment and problem that is being solved by creating this new ecosystem.

Platform business offer convenience to consumers as well as suppliers. Starting a platform is easy, Attracting service providers and customers is the first challenge and sustaining the registered users as well as scaling it up is another area to watch. Multiple formats of the platforms are being experimented while this essay is written and we see huge success as well as failure stories. There is a need to carefully learn and plan for the new venture.

Platform cannot make a bad business into a profitable one. Platform business model is a way to offer a product and/ or service to the consumer and the key point is good product/ service and identification of the problem that is solved by this platform. Unless there is strong product/ service that solve an identified imbalance in the demand-supply market, the efforts are going to be futile and frustrating.

References:

-         https://www.researchgate.net/publication/261330796_Industry_Platforms_and_Ecosystem_Innovation

-         https://hbr.org/2019/05/a-study-of-more-than-250-platforms-reveals-why-most-fail

-         https://hbr.org/2016/03/6-reasons-platforms-fail

-         https://www.youtube.com/watch?v=A_G91QynhVk

-         https://mitsloan.mit.edu/ideas-made-to-matter/digital-platforms-high-valuations-high-risk-failure

-         https://www.wired.com/insights/2013/10/why-business-models-fail-pipes-vs-platforms/?