5a. Platforms, Competition, and Business Services Flashcards
Traditionally: Porter’s five forces
They have dominated the world of strategic thinking:
Entrants, substitute products, customers, suppliers, competitive rivalry in the industry
Based on the five forces come approaches such as horizontal (controls most or all of a specific product or service marketplace) and vertical integration (controls an entire value chain from raw materials to marketing)
Each of the five forces by Porter is a separate entity that must be managed independently. By contrast, in platform markets, a winning strategy blurs the boundaries among market participants, thereby increasing valuable interactions on the platform
The resource based view
Highlights the fact that a particularly effective barrier to entry is control of an indispensable and inimitable resource. A firm with such a resource is safe from new entrants who lack and cannot acquire the means to produce it
The resource-based view assumes that a firm must own or control inimitable resources. In the world of platforms, the nature of the inimitable resource shifts from physical assets to access to customer-producer networks and the interactions that result
Two new realities are shaking up the world of strategy:
- Firms that understand how platforms work can now intentionally manipulate network effects to remake markets, not just to respond to them. E.g., Uber and Airbnb shaping the industry of transport and hotel, and Amazon with self-publishing of books). Competition is no longer just a zero-sum game. Rather than re-dividing a pie or more-or-less static size, platform businesses often grow the pie itself
- Platforms turn businesses inside out, moving managerial influence from inside to outside the firm’s boundaries. A firm no longer needs to seize every opportunity on its own: instead, it can pursue only the best opportunities while helping ecosystem partners seize the others, with all partners sharing the value they jointly create.
Within the ecosystem, the lead firm negotiates dynamic trade-offs involving competition at three levels:
- Platform against platform: Strategic advantage is not based on the attractiveness of particular products or services but rather on the power of the entire ecosystem. E.g. Uber og Lyft
- Platform against partner: This is a delicate and dangerous move. It can Strengthen the platform, but at the expenses of weakening partners – a short-term gain that can lead to painful long-term consequences. E.g., Amazon selling same kind of products as its smaller merchants on the platform
- Partner against partner: two unrelated platform partners compete for positions within the platform ecosystem, as when two game app developers strive to attract the same consumers on the same console
Ownership vs. opportunity
The shifting horizons of managerial influence now make competition less signification for strategists than collaboration an co-creation (or co-opetition)
The shift from protecting value inside the firm to creating value outside the firm means that the crucial factor is no longer ownership but opportunity, while the chief tool is no longer dictation but persuasion
How platforms compete: 6 ways
- Preventing multihoming by limiting platform access
- Fostering innovation, then capturing its value
- Leveraging the value of data
- Redefining mergers and acquisitions
- Platform envelopment
- Enhanced platform design
How platforms compete (1): Preventing multihoming by limiting platform access
The resource-based emphasis on inimitable resources has its parallel in the world of platforms: Platforms seek exclusive access to essential assets. They do this in part by developing rules, practices, and protocols that discourage multihoming
Multihoming occurs when users engage in similar types of interactions on more than one platform.
Platforms seek to discourage multihoming since it facilitates switching – when a user abandons one platform in favour of another (e.g., using both Uber and Lyft, or both facebook messenger and WhatsApp)
How platforms compete (2): Fostering innovation, then capturing its value
Platform managers can build their businesses by, first, giving partners frictionless opportunities to innovate, the capturing some or all of the value created by acquisition or duplication
This leads to what we might call the platform-world variant of the resource-based theory of value: A platform business need not won all inimitable resources in its ecosystem, but it should seek to own the resources whose value is greatest
Less valuable, or more niche, resources can be ceded to ecosystem partners
This principle explains why platform managers need to keep a careful watch on new features or apps that appear on the platform (extension developers). The platform may seek to absorb the function of the innovative partner and the value it creates by acquisition (e.g., Facebook acquiring Instagram) or weaken the start-up by promoting competitors
How platforms compete (3): Leveraging the value of data
“Data is the new oil”. - Platform businesses can use data to improve their competitive performance in two general ways:
Tactically: Why Amazon now places the buy-it-now button at the top eight of a web page after altering the position and seeing the responses
Strategically: is broader in its scope. It seeks to aid ecosystem optimisation by tracking who else is creating, controlling value both on and off the platform and studying the nature of their activities
Better matches facilitated by enhanced data make both sides happier. - We also noted that solution providers can find clients by identifying unsuccessful user searches, reflecting the existence of potential clients in need of business solutions
Collectively, these new data tools create a formidable barrier to entry – a platform version of Porter’s competitive moat. If competitors don’t have the data, they can’t create value – which means they can’t create the interactions, which further limits access to the data
How platforms compete (4): Redefining mergers and acquisitions
Unlike a traditional pipeline company, a platform owner can delay an acquisition until it has observed how a partner transacts on the platform. This solves the traditional challenge of information asymmetry in M & A evaluation. Managing a platform lets you take the partnership for a test drive before signing a purchase agreement
The key question is whether the target company creates value for a user base that significantly overlaps with the one they are currently serving
Based on the fact that platform businesses don’t need to own all the critical assets as long as they have access to them in their ecosystems, platforms companies can pursue fewer M & A deals than many traditional firms feel compelled to do. They enjoy two benefits: Claiming a portion is far less risky than buying the partner, and it reduces the technological complexities.
With total purchase come integration. when a part or partner fails, a new one can be swapped in relatively easily. But when a part or partner fails in an integrated system, the whole system can grind to a halt
How platforms compete (5): Platform envelopment
Occurs when one platform effectively absorbs the functions – and user base – of an adjacent platform. An adjacent platform is one that serve similar or overlapping user bases. Hence, a new feature on an adjacent platform can be a competitive threat. The platform can choose either to provide a similar feature directly or to offer it indirectly via an ecosystem partner
An envelopment battle; which of the platforms will take over, the larger one typically wins (strong network effects). However, with superior value, the little one can win.
Platforms are able to respond quickly to threats, in comparison to pipeline businesses. And they need to - cause no victory is permanent
How platforms compete (6): Enhanced platform design
In some cases, superior platform design enables a platform to dramatically outcompete pre-existing rival (e.g. how viemeo managed to survive even though Youtube exists - despite serving an overlapping market. It differentiated itself through better hosting services, more valuable viewer feedback, no obtrusive pre-roll advertisements etc.
Winner-take-all market: The four forces that characterise the market
Winner-take all market can cause a sustainable advantage when a company has a dominant position within its industry for a decade or longer
- supply economies of scale: The greater the supply economies of scale, the greater the tendency toward market concentration e.g., in the auto industry
- Strong network effects: attracts more users to whichever platform is larger.
- High multihoming or switching costs: The cost of leaving the platform or multihoming (using more than one plastform for the same purpose). They tend to push a market toward higher concentration, dominated by fewer, larger companies. With low costs, late entrants can gain market share, and people tend to use more platforms (which is why Facebook and LinkedIn were able to gain market even with being late)
- Lack of niche specialization: When a particular set of users has distinctive needs or tastes, they can support a separate network, thereby weakening the winner-take-all effect. Hence, with no niche, winner-take-all effect occurs (explains the rivalry between Uber and Lyft, because they can become almost a monopoly due to lack of preferences from the users)
