Community Power

Volume 16 Letter 5

Anyone who’s attended a university business lecture has been subjected to Michel Porter’s Five Forces. If you were able to work in “bargaining power of suppliers”, “bargaining power of customers”, “threat of new entrants”, “threat of substitutes” and “competitive rivalry” into your university paper, profs would trip all over themselves to give you an A. In a recent HBR article authors Van Alstyne, Parker and Choudary [1] argue that although Porter’s five forces may still apply, there is a new world evolving where platform strategies are reshaping the way we do business. Here’s what a platform strategy is and why it’s important to you…

In 2007 Apple was still struggling. Steve Jobs had returned as CEO – the iPod had been launched but the real magic was yet to come with the launch of the iPhone. Back then big names like Nokia, Blackberry, Sony Ericsson, Samsung and Motorola had a strangle hold on the mobile phone market controlling 90% of the profits. Fast forward eight years and the Apple iPhone generated 92% of the world profits leaving most incumbents losing money. How did Apple do it? The short answer is they didn’t! They used others to do it for them – it’s called a platform strategy.

Rather than creating a phone, Apple created a platform where app developers could connect with consumers. As the number of Apps increased so did the number of app users thus driving demand for the iPhone. As of 2015, there are 1.4 million apps for the iPhone generating $25 billion in business for the App developers.

Lest you think platform strategies will not affect your business please reconsider. Alibaba and Amazon platforms have transformed how suppliers and consumers connect, upending consumer markets from books to building supplies. Airbnb now has more beds for rent than Marriott and Uber is redefining what a ride service is. Although still in its infancy GE is looking to own industrial B to B transactions with its Predix platform.

Michael Porter’s five forces model doesn’t account for the multiplicative effect of a network and the value that it can create. Indeed, the power of suppliers and customers in Porter’s model may not be a threat at all but rather an asset in a platform strategy. It’s imperative that companies understand the forces that can add or subtract value in their hemisphere. Here are a few things to consider in a platform strategy:

  1. Competitive advantage comes from building a network of suppliers and consumers.
  2. Focus is on the transaction. Uber, Amazon, Alibaba, etc. facilitate the transaction and ensure it goes smoothly – they don’t supply the product or content.
  3. Maximize the value of the ecosystem. This can mean subsidizing one customer to attract another.

Platform strategies are pushing Google into medical devices, Facebook into healthcare management, Apple into banking and GE into oil and gas and infrastructure. What were once stable slow moving industries – hotels, taxis, books, banking, music have been upended by new incumbents who have figured out a platform strategy and enlisted the help of others to upend the industry. For many of us who graduated before 2000 this is a different mindset. It’s not “if” a platform strategy will redefine your industry, it’s when and who will control it!

Traditional strategies of controlling and allocating scare resources still apply and must be developed. However, in every industry where a platform strategy has been introduced it has dethroned the market leader. The rules of strategy for a platform world are different – learn them “or begin planning your exit”.

1. For more reading “Pipelines. Platforms and the New Rules of Strategy – Scale now Trumps Differentiation” M Van Alstyne, G. Parker, S Choudary HBR April 2016 PP 54-6

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