LITMIR.BIZ

      Chapter 1

      Introduction

      There is a clear change in the success formulas of businesses. The strength of the largest industrial companies, such as Philips, Unilever or General Electric, used to be based on economies of scale on the supply side of the economy. These companies achieved their market power through managing resources, internally optimising processes and expanding their customer base using a competitive pricing strategy. Vertical integration and mergers and acquisitions ensured there was greater control across the entire value chain. Since the Industrial Revolution this has been the strategy for generating comparative competitive advantages. At the end of the last century, successful businesses still operated using a classical linear value chain, whereby a series of consecutive value activities was carried out and all production processes were controlled primarily from the company itself. For many years, the markets, both physical and local, were aimed at business-to-consumer (B2C) sales.

      Since the beginning of the 21st century, the basic strategic principles have changed. The fastest growing companies of this century, Google, Facebook, Apple, Uber, Alibaba and Airbnb, operate in a different way.

      These platform companies bring together supply and demand with efficient exchanges of value. But haven’t these types of companies always existed? After all, markets and shopping centres bring consumers in contact with traders, newspapers connect subscribers and advertisers, travel agents help tourists find suitable holidays and dating sites match singles looking for a partner. What has actually changed in the last few years is that information technology has greatly reduced the need for physical assets and has enabled these business models to develop to a global scale. The dating app Tinder has a worldwide online database of singles in contrast to local dating agencies. Uber and Didi in China don’t actually own any cars by themselves but connect consumers looking for a lift with drivers. Airbnb connects hosts and guests without possessing any rooms itself, thereby competing with, for example, Marriott hotel, which has extremely high overheads due to its ownership of hotels and employment of staff. Walmart has one of the best stock control and logistics operations, but Alibaba has significantly increased its value without having any inventory at all. As external producers are able to add value to the platform (supply), a comparable value proposition can be realised for the consumer (demand), without the platform company having any control over the production process. This is what makes platform companies so disruptive.

      How can we explain the rapid domination of these companies? In order to understand how the emergence of platforms has transformed competition strategies, it’s important to illustrate the differences between classic businesses and platform businesses.

      The driving force behind our network economy is now being created by generating economies of scale on the demand side of the economy, known as network effects. These network effects arise when users create value for other users. The larger the network, the richer the data coming from the online interaction between supply and demand, and the better the matching functionality of the platform, the more valuable the underlying platform is for users on both sides of the market. And this in turn will attract more users. The literature describes this phenomenon as the network effect. It enables platform companies to grow exponentially instead of linearly, the way traditional companies do. When a linear organisation gains a new customer, this results in just one additional business relationship, one extra transaction. In a platform organisation, on the other hand, a new consumer is able to enter into a business relationship with every single producer on that platform.

      The most important competitive advantage of a platform is the network of producers and consumers that creates value for one another and can exchange this value by means of the platform (Choudary, 2015).

      The emergence of business ecosystems and platforms represents a very recent development that has a considerable effect on traditional industries and product and service markets. Platform businesses differ significantly in terms of market potential, structure and management approaches compared with product and service businesses. The differences conflict with the traditional management assumptions, in particular regarding property and control. The growth in acceptance of platform business models is not only a challenge for established businesses but also raises questions regarding the instruments and techniques that are currently used for strategic decision-making and the underlying traditional value chain.

      The competition between businesses will change because customer behaviour is changing and because the technology is available.

      Those who believe in the future of the network economy and platforms and think they can boost their competitive strength by aligning themselves to these will find it easier to adapt and can help to bring about the shift in the entire sector. But those who do not believe in a future of networks or platforms and believe they will become victims of this new competition will fight against the change and lose their competitive edge. Depending on what the majority think and how customers will respond, companies that resist may very well disappear in a world in which networks and platforms assume power. Companies that are too frightened or rigid to change or aren’t really sure what to do will wait too long to carry out the necessary changes and suffer the consequences. They can take the initiative themselves and respond to the changes or become part of a platform. Joining a dominant disruptor is then an option for companies, if they aren’t able to do it independently or feel they are not able to fight against the new, large suppliers. It is then truly a question of bend or break.

      The future remains open for the time being. The answers to the changes depend on our choices. Our future will be determined by the manner in which we deploy and use technology. These choices will be made in a world that is inherently in flux and ever-changing and will be formed, at least to a certain extent, on the basis of the unpredictable technological changes and how we respond to them. In short, the changes in the market depend on how the customers adopt the new developments and how new market structures are accepted.

      Networks, such as platforms, increase the competition for traditional suppliers and make it more transparent. This has consequences for both customers and suppliers. Customers will benefit from not only more suppliers and products from which they can choose but also from the transparency. The suppliers have a higher turnover because they are able to sell more due to a stronger marketing strategy and new propositions such as home deliveries. Customers have more information about their order and a better overview of what is on offer as well as the prices. Factors such as saving time, freedom of choice and speed of delivery are very important when it comes to attracting customers, and so platforms and networks try to keep the information up-to-date. They want to aim their communication specifically at the individuals they target using all sorts of algorithms in order to retain the loyalty of and provide service to businesses and customers. Through a platform, suppliers are able to benefit from the appeal of the network, the customer loyalty and the joint approach to the market. This not only saves costs but also immediately increases the competitive strength (the network effect). Collaboration is the basis for the future.

      Shift 1: Competitive Strengths are Used in the Platform Business Model

      Platform businesses facilitate the interactions between producers and consumers, whereby the greatest part of the value is created through this network of external users of the platform. The focus in terms of strategy thereby shifts from internal optimisation to a maximisation of external interaction.

      Shift 2: From Ownership to a Coordination of Resources

      The resource-based view focuses the attention of the management on the company’s internal resources

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