The Power of Platform Businesses: How to Create Value
Did you know that in late 2018, the total market value attributed to platform economics, including Facebook, Amazon, Airbnb, and Alibaba, was estimated at $7 trillion (Inside IBM Research)? And that is projected to expand to nearly one-third of all global commerce by 2025?
Building a platform is not an easy task and a lot of corporations are exploring this opportunity. It all starts with deciding whether to build your own platform or participate in the existing one.
The best person who can tap into the greatest possibilities of platforms and teach us how to develop a platform strategy is Asma Shabab, a Digital Business & Innovation Strategy Consultant at IBM. Asma works at the intersection of strategy, customer experience, and technology to help companies become players in an AI-powered economy.
Vuk Zlatarov: There are a lot of digital platforms out there, native digital platforms that are describing this era behind us, like Facebook, Amazon, Alibaba, and so on. But for the start, can we unpack that — when we say digital platform, what do we mean by that?
Asma Shabab: Absolutely. And I think that’s just so important to clarify, because if you just go online as a layman, right, you’re going to find a lot of terminologies around ‘platform’ that it just gets confusing.
When we talk about the digital platforms or digitalization, generally, it’s really about a massive change in the way companies were built or the companies started interacting. So if we go back to the 1970s, it was supply-side economics, right? There were companies such as the oil company or the electricity company, they would produce a lot of stuff. And then they would just expect people to come. Same things like the Ford motor company, right? Build something, people are going to come. But then in the 1990s, when the internet came and then we had these digital-native companies come into existence, a lot of the conversations then became: how do I serve my audience and end customer through digital means? And it became a lot about the experience. And then the situation changed. The situation changed to such that if there is a demand for my product, I’m going to continue building it. And I’m going to continue to look at how customers’ needs are to figure out what my product roadmap is going to be.
Now in the past, so in the 1990s, we saw a lot of digital native companies come into existence, such as Facebook or Amazon, and Alibaba. Until now what we realize is that they are gaining a lot of value from the world. They’re able to sell more, they’re able to offer a lot of services. So essentially what is now happening is that larger companies, incumbents — older companies are now starting to realize the importance of creating these platforms. And to be able to create more value for their end customers. Now let’s ask a question. How would we actually define a platform?
Platform is a business model that facilitates the exchange of values between two and more end-users or stakeholders. So if I unpack it from a Facebook point of view, it’s a platform, and it’s an exchange of value between people who are using it, perhaps ad companies, perhaps small businesses. So there’s an exchange of value happening, the same thing with Alibaba. So Alibaba is a digital platform and what is that exchange of value happening? So this exchange of value is putting in against small companies, trading companies, and matching them with buyers as well.
Now let’s step back a little and then look at what are the different kinds of platforms or different kinds of models that exist. So you’re going to find models such as Airbnb model or the Uber model, where it is largely an ecosystem-defined model, where you are matching people together from your ecosystem. You’re bringing in people who’ve got a great capacity of houses and you’re matching with people who actually are looking for places to stay. And then it kind of grows as well, right? You start looking at the data you have, starting to understand what customers want and you build on those services. On the other side, you’ve got product-specific or industry-specific platforms such as Facebook. So Facebook is a media company. It opens its data and then people are starting to build on that and offer services. So there are different ways to define platforms. But ultimately, it’s the exchange of values between different kinds of end-users.
Vuk Zlatarov: I think that was a perfect introduction to the topic. So what happened is that Facebook, Amazon, Alibaba, Airbnb, Uber… they are all digital natives. So they are technology-first companies. They were founded, although I’m not sure if Mark Zuckerberg saw it coming at the time or any of them, but they were born and then they phase this exponential growth over the previous 30 years. At the moment those are the most valuable companies in the world, if not the most valuable. So there are all of these other major, good-to-great companies and we’re looking at them like — what happened here? And it took some time for them too, to accept what’s going on. But you can’t just build a digital platform. Are there any examples of digital platforms built by established incubants? Are there any examples of leading digital platforms?
Asma Shabab: Absolutely. I’ll share a couple, but let me also explain a little bit about where the rest of the driving force came — yes, all of these companies, these digital native platform companies, such as Facebook and Google, they started getting a major chunk of the market share. Now, another thing was happening simultaneously — customers, or end-users starting to be more in control. Now they’ve got digital access to all of these different services. So that means that if previous incumbents used to think that my audience is mine alone and the barrier to cross over and accepting their organization is high, no more it’s true. So the barriers to reach your end customer is different.
Customers now want 24/7 accessibility. They want you as a company and as a government to be spot on and available all the time.
They want to be able to access you, even if they’re not in a physical space, even if they are perhaps in their room, in their bed, they want to be able to access you. So all of these customer behavior considerations were playing a great role as well. Companies started to realize we need to change our game. A couple of great examples that I’m actually seeing is, and both in the industrial space, as well as in consumer spaces, is General Motors. Now, GM was a car manufacturer. They created a platform called OnStar platform, and it converts the car into a platform by instrumenting the car. Even in Dubai, approximately a couple of hours are spent on the road pre-pandemic. So you’ve got a captive audience sitting in the car. And they’ve created a platform that not only serves different services to these customers — for example, telling them what are the nearest locations that you can get your fuel in, but they started to understand what are the different values drivers are looking at and bringing in different apps, which became in-vehicle apps. So for example, being able to order grocery, to book a service online. They’ve converted the car into the platform, and they’re thinking along those lines.
Another great example is Cemex. Cemex is a major cement manufacturer based out of Mexico. And they started to build their Cemex Go platform. They’re not only providing digital services to their customers all over the world, but they started creating this expert network. So basically companies that are a part of or subscribed to their platform, can access other expertise all over the world that they might want to tap into. So that becomes a platform play as well. In addition, one of the great things about platform businesses is their ability to respond to changing things that are happening in the macro environment. So when the pandemic hit, Cemex Go was able to really get in touch very quickly with the customers and give them point of views and information on where is their cement in the whole supply chain. So they were able to connect with the customers really quickly as well. We’re really starting to see big companies understanding the importance of these platforms.
Vuk Zlatarov: So understanding the importance of platforms and the opportunity is probably the easiest step. We have to focus on it, but making it happen is a completely different beast. I am curious about the GM and other platforms that you mentioned. Are these the platforms that are actually generating revenue for them, and actually becoming on the growth stage, or these are still at the early days of concept realization?
Asma Shabab: So I wouldn’t be able to comment about their revenues and what kind of profitability they’re raking in. But one thing we need to understand about the platform play is, and this also comes back to a question, should we even pursue that strategy? The reality is that especially for big companies, pursuing a platform strategy is a big investment. They need to completely transform their business model, not to mention what cultural impact and change impact it has. And if you’re looking at a platform design in a way that you want multiple industry players to be a part of it, you need to convince these people to get on board. You need to co-create solutions with them. You need to have the right infrastructure, whether it’s cloud, or whether it’s artificial intelligence, to make sure that you’re using the data right.
To be a successful platform company, essentially you need to realize what is the value that you want to create. What is that friction you want to address.
So again, if you look at Apple Pay, it was based on a very small friction that Steve Jobs wanted, and I don’t know if you remember the video that they played in their keynote — it was a woman just looking for a card, scrambling through and wasting time trying to find where her credit card is. And they just wanted to remove that friction.
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Vuk Zlatarov: That makes complete sense. The reason why I asked the previous question is that there’s a big difference how all of the current platforms started and became what they become . Very often, and even throughout The Change Officer series talking with other people in innovation, we concluded that throwing money at the problem is not going to solve it. How do you decide, should you join forces with some of these platforms, start on your own, or completely drop the idea — where do you start?
Asma Shabab: Right. I think this is where companies need to step back. And like I mentioned, figure out the value that they want to provide. Now, the reality is that platform companies have a lot to win because studies show that by 2025, platform economy is going to constitute $60 trillion or one third of the whole global economy. This is where the conversation becomes important. Do I become a platform or do I participate in a platform?
Becoming a successful platform is not an easy thing. It requires investment. It requires understanding the value and elements that you’re going to put forward.
And there’s no one way that says that I’m just going to create a platform or I’m going to participate in the platform. Companies can actually also do both. And if you look at what happened during the pandemic, The Dubai Mall worked with Noon and Namshi, which are the platforms to bring in and provide their shops to have digital interfaces .
So The Dubai Mall tried to participate in another platform, but again, it was the pandemic that made Dubai Mall take the step. But again, I’m pretty sure that Dubai Mall is now looking at building their own platform strategy. And it becomes really interesting for malls, because I think that malls are the old school physical version of digital platforms, because they were that space that would bring in end users, they would bring in the shops. So for them not to be digital, not to be a digital platform is probably like one of the best bets. But coming back to the point, there are definitely a lot of considerations companies need to make, but it’s never an on-and-off decision. At the end, do you see a way that you’re evolving? Do you see your value elements evolving? Do you have the appetite to have that flexibility that as you develop your platform, you might not be focused on the specific industry that you’re working in?
For example, look at Careem. Careem started with being a ride hailing app, and now it’s introducing so many different products and services that are traditionally not in the realm of their own industry. So you’ve got to have that appetite and we see that happening.
Vuk Zlatarov: And going back to the setting of the goals, you need to be clear on what you want to achieve. If you are to pursue an opportunity of becoming a major global digital platform, say from the Middle East, what are the capabilities that this organization needs to have in order to increase the chances of eventually even thinking about becoming a major platform?
Asma Shabab: I think that it’s important to just highlight a couple of benefits. Why do companies want to be a platform business? We know that it’s going to bring in a lot of value and a lot of impact to the bottom line. But a couple of things is that A: digital companies are able to respond very quickly and aggressively to the market changes. That’s important, as we saw in the pandemic, that companies who were platforms were able to better manage or react to the situation.
The second is that if you are a digital platform business, once you’ve done your major fixed costs, you keep on adding new services. So your scope becomes really, really high — the number of services and also your core investment once done, you scale as much as you want. The incremental cost of adding a user to your platform is very negligible. So keeping all of these benefits in mind, if we talk about the capabilities, you need to have investment. The second is that you need to have the appetite. Also you need to have a good data and AI engine in place. Because the whole conversation, when it comes to enhancing your services or identifying the value elements is going to be based on data. It’s going to be based on an AI play.
You need to constantly be in check with what your customers are doing to be able to identify growth and opportunities.
Vuk Zlatarov: So say that we put all this in place, that we have raised strategy, we build the platform. Most of this currently leading global platforms are growing based on the network effect. First of all, you can shed a little light on what the network effect is. And then tell me, is this something that can be orchestrated, or this is something that happens?
Asma Shabab: So Network effect means that as your number of users increase for any company, the value of your product and services increases and the most simplest and easiest way to explain it is to look at the telephone. When the telephone was created, one person had it, and it had zero value because that individual had no one to talk to. But as more and more people started getting a telephone, the value started increasing. And it’s the same thing with Facebook. If you just had two friends on Facebook, it wasn’t that fun. You could just chat with them on an SMS, but as you know, more and more people started using Facebook, so the value increased.
Network effects is one of the core and most important things when we talk about platform businesses.
So coming back to the definition that I used, a platform just facilitates the direct interaction or exchange of value between different parties. And the more services that you have, the more users appreciate it as well. So let’s take Uber or Careem as an example — the more drivers you have, means that there’s more availability for people to get on that platform. Which would mean that there’s less waiting time for an Uber, which means that if there’s so much economies of scale, then the ultimate cost of a ride also decreases. And I think that on a lot of levels when we look at the value of these companies, one of the core things that investors ask is: how many users do you have in your platform? So not only does the value increase for the ultimate business, but I think the bottom line also increases because the more people you have, the more insights you have, the more data you have to be able to build onto that business.
Vuk Zlatarov: Where do you start? How do you design network effect? Is this something that can be orchestrated?
Asma Shabab: So I was reading this book called Matchmakers, and it’s all about multi-sided network effects and multi-sided platforms. And they say that the most difficult things for the platform companies was to get users on their platform. But once they start the ball rolling, it became really well. I think that if you are a serious player in multi-sided markets or just an ecosystem player, network effects need to be orchestrated, but there are also by design because I don’t think that platforms can be exclusive from network effects. I think both of these concepts need to work in an integrated manner.
Ultimately you can orchestrate network effects, but youneed to make sure that the value you’re providing makes sense for the customers. And there’s no one way, you can introduce something, and it might not take. This is why you need to constantly have those feedback loops with the customers and the users to figure out what is that value. But ultimately if your value is right, network effects should grow organically.
Vuk Zlatarov: So we explained what the digital platforms are. We’ve established and understanding what the capabilities required. So for anyone out there, within the organizations who can think about pursuing these kinds of opportunities, where do you start to look for the chance to grow a digital platform? How do you recognize the opportunity?
Asma Shabab: The answer is simple. It just requires a little bit of digging.
Go to your end-users and figure out what exactly is the friction in their lives. And this is something that startups do really well. Small startups are built on this: let’s figure out how to make art, for example, more accessible to people. I think that the core is just really go to your end-customers and have a conversation on what’s keeping them up at night.
Even if it’s small things that you might think are trivial. Just making things easy for customers is a really great way to consider your first step towards a platform. It comes back to the same point, for example, customers want accessibility 24/7 accessibility. This is why most of our governments now are becoming platform governments because they know that just having a government office is not enough.