Why are Digital Platforms so Powerful?

The days of the pipeline business model, so famously represented by Henry Ford’s assembly line, are truly numbered. Right now, the digital platform is the preferred business model for seven out of twelve of the world’s largest companies. Social platforms like Facebook and video platforms like YouTube have more users than there are people in China and India, the world’s most populous countries. They are also hands-down the world’s fastest growing companies – team collaboration application, Slack, took only 1.25 years to get to a $1 billion valuation!

So what makes digital platforms so powerful?

Their open infrastructure

Microsoft Windows and the iPhone App Store are two well-known examples of open systems that allow software developers to create new products, that add more value to the user experience, on top of their ecosystems. WordPress grew to be the largest content management system on the Web due to its open source nature and plugin architecture that permits third party developers to expand its functionality to cater for new user needs.

They are peerless matchmakers

Platforms are phenomenal at linking people, companies, and resources in almost unlimited permutations. Social platforms like LinkedIn allow you to connect with peers and thought leaders, apply for jobs, get headhunted, and follow the latest news about your professional interests from just one profile. Retail platforms like Amazon and Alibaba connect consumers with an almost endless array of peer reviewed products, while crowdsourcing platforms like Uber and Airbnb also use reviews and ratings to connect users and service providers. There are even knowledge platforms like StackOverflow and Quora that connect seekers of information with topic experts. And we all know how Tinder works.

They cross industry verticals and geographical borders with ease

Amazon operates 15 country-specific sites and dabbles in everything from ebooks, consumer electronics, and on demand video streaming, to cloud computing and even a grocery delivery service. Although Chinese conglomerate Tencent mainly operates in mainland China, it runs everything from social networks, web portals, online games, payment systems, instant messaging services such as QQ, the WeChat mobile chat service, and has an investment stake in a myriad of fintech, e-commerce, IT, advertising, renewable energy, AI, robotics, data, and other companies. Now if some of them can just sort out those niggling tax avoidance issues …

They can drive marginal costs down to almost zero

The architecture of platforms, especially software-as-a-service (SaaS) platforms, allows them to replicate their services in an almost unlimited, instantaneous manner and scale effortlessly across the globe at an extremely low marginal cost. These massive economies of scale are possible due to the low fixed costs of platforms like Uber and Airbnb, since they do not own the means of production, cars and accommodation respectively, but rely on what is known as the Collaborative Commons – a digital space where providers and users can share goods and services.

They leverage powerful network effects

The more people use a particular platform the more value is created for fellow users. For example, the more reviews are added to listings on TripAdvisor the greater the value for prospective travellers and guests. As more sellers started selling their goods on eBay, the increase in product numbers and ensuing variety created more value for potential buyers. Reaching critical mass (attracting enough users to ensure significant network effects) is one of the critical goals of platform development.

They are fertile ground for combinatorial innovation

As Google’s previous executive chairman and CEO, Eric Schmidt, has stated, “We’re at a point now where the combinatorial innovation, the ability to mix and match things together, is going to produce a very large number of new things that are very useful that other people will fight about.”

So instead of platforms like Facebook that created their whole ecosystem from scratch, we are now seeing a new generation of platforms that are using existing digital tools to scale even faster. Combinatorial innovation is to a great extent driven by collaboration and partnerships. This approach has seen Uber use Google Maps to track their drivers, with Google parent company, Alphabet, estimated to have a $3 billion stake in the ride sharing app.

So what do you do if your company is still stuck in a traditional business model that runs the risk of profit and revenue decline due to the activities of digital disruption? And let’s be clear here, setting up an ecommerce site for your business does not equate to an online marketplace aka platform.

According to research by management consultants, McKinsey, companies that follow an aggressive platform strategy that focuses on the value proposition on the demand side (enhancing the client and user experience) achieve better growth and revenue results than companies without a platform strategy. Here’s the crux as McKinsey so eloquently put in one of their articles on digital strategy,

Forward-leaning companies are immersing themselves deeply in the world of the attackers, seeking to harness new technologies, and rethinking their business models—the better to catch and ride a disruptive wave of their own.

At the center of all of this remains the value proposition for your clients. If you are not adding new value to their interactions with you, someone else will – that’s the nature of disruption.

If all of the above is still confusing to you, it may be time to go back to school and get up to speed with how the platform model actually works. And what better way than embedding yourself with an early-stage platform company that exposes you to real world strategies and go-to-market projects? An executive digital boot camp that offers such an immersive experience has been developed by events platform Eventerprise – book your place here.

And if you really want to start harnessing the power of digital platforms for your business, why not consider a partnership with an early-stage digitally-born company that can give you access to an entire global industry and its attendant audiences? Learn more about this opportunity.