3 Benefits of the Platforms Business Model
3 Benefits of the Platforms Business Model
Platforms like Amazon and Alibaba have pushed the boundaries of capitalisation and left leaders of incumbent businesses wondering where this business model fits into their digital transformation journeys.
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Incumbent businesses have two choices when it comes to platforms, either join forces with an established one or create their own platform. While both routes come with their own risks, ignoring this business model is the riskiest.
Working with global platforms to extract the benefits of scale. Signing on to another organisation’s platform can help kickstart participation. But they also pose risks like making it difficult for businesses to differentiate themselves as many others are using the same tactic. Also, there’s no guarantee that the platform owner won’t move in on the business of its partners.
3 Benefits of Building Your Own Platform
Platforms are no longer just the purview of digital naive businesses. However, digital natives are more likely to own a platform (43%) compared to incumbents (23%). Traditional companies like Daimler, Nike and Unilever have all launched their own platforms.
In many industries, the platform business model became so prevalent that businesses launched their platforms as a defensive play. But studies have shown that organisations that launch platforms as an offensive strategy—about one in five platforms—made a much bigger impact.
The top three benefits of launching a platform are:
Boost in Revenues
Any type of platform strategy — whether launching a company-owned or a third-party platform or cooperating or competing with a global platform — can enhance earning over the benchmark level of not participating in a platform.
According to McKinsey, companies that adopted the platform model were able to boost annual earnings before taxes by 1.4%, whereas companies without a platform saw only 0.3% gains. McKinsey estimates that over a five-year period, platform players may capture an additional 10% in EBIT growth.
Companies that have the first-mover advantage stand to gain even more, and companies that joined cooperative arrangements gained slightly more than those operating their own platforms.
More Cooperation, Less Competition
Many organisations have already chosen to participate in the platform business model operated by third parties or by joining global platforms rather than building their own.
More than 56% of businesses have a platform strategy in place, 34% choose to cooperate with other platforms, and 22% choose to compete.
Cooperating with other platforms has emerged as the preferred path of platform adoption. Because when operating a platform on their own, organisations can face steep competition.
Whereas collaborating offers greater market strength through the complementary products and services the ecosystems offer.
But for companies that offer a very narrow product range, joining a global player can greatly improve their reach to new customers.
Redefining Value Proposition for Greater Market Share
The platform business model allows businesses to redefine their value proposition to their customers by collaborating with other businesses. This enables them to offer more value and comply with the demand side of the platform.
Organisations have the ability to enrich their products with information, social content, or connectivity, leading to a better experience for their customers.
McKinsey has found that demand-driven platform plays, when combined with an offensive digital corporate strategy, are strongly correlated with superior financial performance — about 6-7% more in EBIT earnings and revenues.
For most businesses, a platform strategy, whether company-owned or in conjunction with other businesses or global players, is becoming a competitive necessity.
Sign up for the Oxford Digital Disruption and Platforms Programme to learn about the platform business model and the risks and opportunities they bring incumbents and digital-native businesses.
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