Technological enterprises and companies that started in the digital age, such as Google, Alibaba, and Amazon have understood the power of digital technologies. However, most of these companies’ disruptive innovations are not services or products, they are in fact the platforms that form the foundation for these products and service. This is called a platform-based business model and it changes the way how companies can do business. It results in a system that does much of the work to grow the company (quickly) by itself.
The three main reasons for the success of these platform-based business models are:
- Network effects: This exists when two user groups (in most cases, consumer, and producer) generate network value for each other, resulting in joint benefits that increase demand-side economies of scale. The network effects of these platforms, with increasing connected transactions and users, push value creation.
- Distribution power law: Platform business models enable a much larger scale. This is done by allowing third parties to sell products in the long tail, avoiding diminishing returns usually associated with these products. E.g. Amazon is able to offer books very specifically tailored for a niche market that would never be sold in regular book shops.
- Asymmetric growth: This is the principle of driving demand for their core market through complementary markets, by subsidizing these, or even offering them for free, to users. An example of this is Adobe offering their PDF readers for free to its users. Because of the resulting increased use of Adobe’s pdf reader, producers are willing to pay more to be able to distribute PDF files.
Accenture’s Technology Vision 2016 names platform economy as one of the key trends to watch. It mentions that every company will, eventually, need a platform strategy. They will need such a strategy not only for the growth of their business, but also to be able to fight off the platform-based competition.
Sources:
Technology Trends 2016 – Accenture Technology Vision. Retrieved September 26, 2016, from https://www.accenture.com/us-en/insight-technology-trends-2016
