How can platform businesses create sustainable competitive advantage?

Last month, BearingPoint brought 25 clients to the MIT Platform Strategy Summit that we sponsored in Boston. This insightful event brought together the world’s brightest minds to share experiences on platform-based business models. Many major developments in the field of platform strategy are taking place in Boston, and we were delighted to be part of it.

Reflections from the MIT Platform Strategy Summit

Over the course of the day we heard from digital start-ups and corporate who had transformed from a traditional pipes business to a platform. Their views mirror our own experience, that there is an enormous untapped opportunity. Research presented at the MIT Summit demonstrates that platforms beat pipeline businesses nearly every time. Here’s why:

• Reduced transaction costs – underscores every platform-based business model e.g. Uber has ultra-low cost of connecting asset owners (drivers) with those wanting access, when they want it (passengers). This enables very high volumes of what can be very small ‘exchanges of value’
• Frictionless business models – stripping out time, cost and opacity, increasing automation and making it easier for businesses to scale
• Network effects – developing an ecosystem generating the right type of interaction. This increases value per transaction and returns to scale as more parties connect and add capabilities to the platform, generating yet more network effect
• Two-sided markets – replacing the fixed linear value chain, platforms facilitate value creation for both sides (customer and suppliers), crossing industry silos and enabling disintermediation
• Outcomes – transitioning from competitive product markets to tailored and differentiated services and ultimately to outcomes – bundling broader partner ecosystem capabilities to meet the total customer with a world-class user experience. Think less 'mobile phone' and more ‘own the home’
• Insight – a key part of the platform business model is the capture, analysis and exchange of huge amounts of data, which can be mined to yield insight and innovate new services
• Access and governance – growth is about incentivising access via a fair reward system to rapidly expand network effect but controlling activities on the platform that would destroy value
• Open and standardized APIs is core – most e-payment and e-commerce platforms use open APIs to encourage access (network effect), innovation and expansion of services into parallel markets

In terms of key takeaways, here are two points that, for me, stand out from the rest:

Only own resources that have or enable exercise of market power

This is the re-telling of Michael Porter’s Competitive Strategy (note 1). In a model where there are fixed roles, the advantage comes from raising barriers to entry and controlling markets. Platform roles are constantly in flux; barriers to entry are levered up by removing friction, network effect, lowering transaction costs and innovation. Most platforms start with one service but then move quickly into adjacent markets or adjacent interaction types to drive network effect, new forms of value and exponential growth.

As a two-sided market, platforms must constantly balance the interests of the community it supports

In short, this means encouraging consumers by offering competitive prices but still taking into account the needs of producers (sharing value and encouraging participation), and governing this to remove those that would have a negative impact.

BearingPoint will be hosting its own event, Digital Ecosystem Management - Global Summit. Geoff Parker, a research fellow at MIT’s Initiative for the Digital Economy will be presenting, alongside 30+ other expert speakers. See the full line-up here.