Professor Michael Cusumano from MIT Sloan School of Management was invited to give the lectures to 2018 Fudan IMBA students on 29th May. Professor Michael Cusumano specializes in strategy, product development and entrepreneurship in computer software, consumer electronics and automobiles industries. The lecture covers platform businesses: either Innovation platforms like Google Android, Microsoft Windows or Amazon Web Services which connect billions of internet users to other innovative apps or websites, or Transaction platforms such as Baidu Search, Facebook, PriceLine, Rakuten, Naver, TaoBao, WeChat or AirBnB, which connect buyers and sellers on a large scale.
Prof. Cusumano shared his observation with the students, "the truth is that platforms are everywhere, from digital devices to enterprise software, messaging, payments, web services and the Internet of Things. The most valuable firms in the world are platforms: Microsoft is almost worth $1 trillion, followed closely by Amazon at $900 billion, and Apple/Google at around $800 billion. In China, Alibaba and Tencent are worth around $400 billion."
There are four levers to platform strategy: scope, technology, external and internal. Product platforms are to be distinguished from industry platforms, which enable activities which would not have taken place without the platforms. The key part of his research concerns transaction platforms, innovation platforms, and hybrid companies (which have components of both platforms). All industry platforms bring together 2 market sides, generate network effects, and must solve a chicken-or-egg problem. They provide product functions and building blocks for the platform owner or outside firms to build complementary innovations that make the platform increasingly useful – the network effect, which is a self-reinforcing positive feedback loop.
Platform companies had similar sales as non-platform comparison samples, but with half the number of employees, much higher operating profits, market values and growth rates. However, only about 17% of all platform companies ‘survived’, and out of around 2000 companies only 43 are platforms.
The argument in brief is that not every market is ‘platform-izable’ but for a product business, if you can create more value from opening a product to 3rd-party complementary innovations then an innovation platform may be superior to a standalone product strategy, and for a service business if you can generate more value from connecting market sides (actors) rather than owning assets or producing a service directly, then a transaction platform may be superior to standalone services.
Building a Platform Business would involve steps:
1. Choose your market sides
2. Solve the chicken-or-egg problem
3. Design your business model
4. Establish and enforce ecosystem rules
After the platform is established, focus on charging the one side that is more interested in reaching the other! Microsoft (DOS) was able to overtake the Macintosh (GUI), and both Facebook and Airbnb were able to grow their networks with free access to end-users.
As for the chicken or egg problem, focus on creating standalone value for one side first, subsidize one or both sides, or bring on both sides simultaneously (or zig-zag). For example, Didi and Uber pay both passenger-users and drivers. In the case of Airbnb, both the landlord and renter pay some portion of commission to the platform.
The Winner Take All or Most (WTAoM) market structure is prevalent in WeChat, TaoBao, Android at 80% for mobile operating systems, and Amazon (>50% of online shopping in the USA). Partly due to strong network effects, and multi-homing is rare (e.g. WeChat as the only messaging home for most Chinese users). High barriers of entry also exist.
Amazon acts both as a store and a platform – as a store when it perceives that demand is steady and easily predictable, to earn high retailer margins, and as a platform when it decides that inventory risk is too high to manage.
Written by 2018 IMBA Calvin Chang
May 29th, 2019
