Digital platforms are hot and here to stay. Tech companies have successfully exploited the platform phenomenon, but what does it mean for a traditional company? Where are the opportunities to leverage platform features and capabilities, and what does it mean for how you do business? Below, we summarize some key takeaways from our latest piece about digital platforms that every business leader should be thinking about.
Ask anyone “What are the most exciting companies today?” and the answer is likely to include names such as Airbnb, Alphabet (Google), Apple, Meta (Facebook)1, Netflix, and Uber. What these companies have in common, is that they all operate one or more digital platforms and use them to power their growth and market dominance. That platform structure has enabled these companies to grow and achieve market dominance at a rate that is almost impossible with traditional approaches.
However, platforms are not just for greenfield digital native companies and tech startups. In recent years, digital platforms have attracted the attention of a wide variety of established companies in different sectors, as well as stock market investors and policy makers.
Six questions to get business leaders started
1. What is a digital platform?
A digital platform is an intermediary that facilitates interactions between and among stakeholders such as consumers, application providers and partners. Viewed in this light, platforms themselves are not new. However, the unique and novel reach and scalability of digital technologies have turbo-charged the basic concept in a number of important ways that make them very compelling today.
2. What are the different types of digital platforms?
Digital platforms can be categorized in several ways. The first one the piece examines, is the number of sides: a platform can either be one-sided, with one type of participant(individuals on a social medium), or multi-sided, supporting multiple types of participants (for example developers, sellers, advertisers, consumers).
The second one is the scope. Digital platforms can be created for a variety of purposes, which define the scope and capabilities that need to be supported. In general, there are three canonical types of platforms: transaction, innovation and engagement platforms. In practice, any platform could have features and capabilities of more than one of these canonical types. However, understanding the priorities and goals of each type can help a firm focus on the right structure and development plan for a prospective platform. Download the full thought leadership piece for more in-depth information and concrete examples.
3. Why should you consider a digital platform approach?
Any company seeking to leverage platform opportunities needs to consider two key factors:
1. The potential to add substantial value to participants on multiple sides of a platform; and
2. The potential to create substantial network effects on multiple sides.
In a traditional company, customers value the company primarily based on its products and don’t really see or interact with other sides of the company. Similarly, suppliers value the company as a customer, and may not see or interact with any of the company’s customers.
The value of the company as a platform shifts the value proposition of the company from the inside to the outside. In other words, the value proposition of the company to each side is a combination of what it offers by itself and what it enables the other sides to provide. In the extreme case, the company’s value proposition shifts entirely to the latter component.
So rather than focusing on the value proposition of its products for downstream customers, the business must provide value in terms of the resources and capabilities of its participants. Furthermore, the assets of the company should be complementary to the assets of the providers it supports, rather than competitors or substitutes.
4. Where can my company find platform opportunities?
The settings in which platforms are most promising are characterized by what we call the three ‘Ns’:
- Numbers – The greater the number of current and potential participants on each side of the platform, the more promising is a platform.
- Networks – Market processes and information flows in traditional businesses are mostly vertical through the linear value system. Suppliers interact with producers, who interact with consumers. However, when there is potential value in facilitating network interactions on each side of an intermediary, platforms become more attractive.
- Needs – A defining feature of a platform is the set of core capabilities it offers to each side. The larger this set of core capabilities for each side, the greater is the potential for the platform to attract participation from that side. So if a firm is operating in a sector where the needs of different customers/consumers are very different, building a platform that can serve the entire set of customers/consumers can become difficult.
5. What is the right platform development approach?
As with many strategic initiatives, there are many ways to work towards successful platforms. Unlike many other initiatives however, platforms involve juggling multiple balls at once. For instance, there is a fundamental chicken-and- egg problem when developing a platform – the value proposition for each side of a multisided platform depends on the presence and participation of the other side.
One way to solve this problem is to build a strong value-added network in at least one side, which would benefit from same-side network effects. Another approach is to start essentially as a digital intermediary that brings together buyers and sellers. The initial value of this intermediary would be to enable and maximize cross-side network effects to build both sides. Once established, it can then enhance its platform capabilities by introducing features that motivate same-side interactions.
6. What are some key challenges to consider regarding digital platforms?
- Managing the community’s growth on each side;
- Managing the content growth. Platform operators can lose control of core features when the community on one or more sides grows very quickly;
- Managing the reputation and liability. It is key to really think through the core functionality of the platform in terms of its offering and responsibilities versus for versus what upstream providers and developers are doing;
- Motivating continued engagement and participation on all sides; customer acquisition is more expensive than customer retention;
- Evolving without alienating incumbent participants; as you build out your platform, you have to do it in a way that does not diminish value for the users on existing sides. This is particularly challenging when the platform operator offers products or services;
- Managing expectations regarding monetization; it is no easy feat.
Download the full thought leadership piece below: