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New Strategies for the Platform Economy SPECIAL COLLECTION STRATEGY New Strategies for the Platform Economy To reap the rewards and avoid the risks, companies exploring a platform business model must look carefully at their partnerships and growth strategy. Brought to you by: SPRING 2021 NEW STRATEGIES FOR THE PLATFORM ECONOMY SPECIAL REPORT 1 9 17 Competing on How Healthy Is Your Platform Scaling, Platforms Business Ecosystem? Fast and Slow THE DOMINANT DIGITAL PLATFORMS are now among the world’s most phases. At each stage, there are specific early valuable — and most powerful — companies, leaving a huge swath of organizations forced indicators to look for that point to potential to play by their rules. In this new competitive environment, businesses need new ways to failure. Tracking the appropriate metrics gain advantage despite platforms’ constraints and market clout. And businesses seeking to for each stage and being alert to red flags create successful platform ecosystems find that while the rewards can be great, the helps businesses pivot to a new approach or likelihood of failure is high. This special report examines the challenges faced by both limit their losses. platform owners and participants. Platforms aiming for market dominance have typically prioritized rapid growth. The asymmetries in power and infor- attention from U.S. and European regulators, However, Max Büge and Pinar Ozcan have mation between platform owners and the whose scrutiny of dominant platforms’ found that scaling quickly is not the right businesses reliant on them have implications practices may lead to shifts in the prevailing strategy in all circumstances: Pursuing fast for the traditional levers of competitive balance of power. growth in markets where regulatory risk strategy, argue Donato Cutolo, Andrew Given the rich rewards for developing a and complexity are high can lead to setbacks Hargadon, and Martin Kenney. The authors successful platform, it remains an attractive or failure. With governments increasingly show how the usual tools that businesses digital strategy, despite the high risk of focused on investigating and reining in employ to differentiate their offerings and failure in what has been typically a winner- platforms’ power, we may well see an gain competitive advantage can be blunted takes-all game. Ulrich Pidun, Martin Reeves, increase in the number of markets with such by platform operators, and they suggest and Edzard Wesselink analyzed more than challenging regulatory environments — and ways that businesses can better protect 100 failed digital ecosystems and found possibly a more cautious approach to their interests. They also point to increasing that ecosystems typically develop over four platform expansion. — Elizabeth Heichler SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW i NEW STRATEGIES FOR THE PLATFORM ECONOMY: COMPETITION COMPETING ON PLATFORMS Companies must find new competitive strategies to succeed on dominant internet platforms. BY DONATO CUTOLO, ANDREW HARGADON, AND MARTIN KENNEY he dominant online platform companies are now dynamics and risks intrinsic to platform-controlled markets. And the most valuable companies in the world, and their they must develop strategies that leverage a platform’s resources growing power over other organizations is enabling while mitigating its power over them. them to rewrite the rules of business strategy. In the past decade, digital platforms have pro- How Platform Power Is Transforming Tfoundly reorganized markets and industries and redefined the Competitive Strategy dynamics of value creation and competition.1 They have created In early January 2019, after sealing a deal with Apple to sell more of its marketplaces that have spawned an enormous number of platform- products, Amazon sent a letter to small businesses selling refurbished native startups.2 And as these have grown and prospered, existing Apple products on the Amazon e-commerce platform. It read, in part, businesses have felt compelled to join the platform economy, view- “You are receiving this message because you are currently selling … ing participation as necessary for growth and even survival.3 Apple or Beats products. Your existing offers for those products will To date, most attention to platforms has focused on under- soon be removed from Amazon’s online store in the United States.” standing their advantages over traditional industrial structures As one reseller said, “Since 2011, I have sold over a million dol- and how to replicate platform successes. However, the vast major- lars of iPods on Amazon and this is going to severely impact me ity of companies will not own platforms but, rather, will and my family.” increasingly depend and compete on them. To do so effectively, For many resellers, the agreement between Amazon and Apple platform-dependent businesses must recognize the power spelled the end of their businesses and livelihoods. And this SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 1 THE RESEARCH The authors drew upon in-depth discussions and interviews with entrepreneurs in the U.S. and Europe, and ongoing research into the rise of the platform economy and the impact of platforms on entrepreneurship. Their work is also informed by engagements as advisers to businesses and investors on their platform strategies, and to government organizations on regulating the platform economy. LISA HENDERLING/THEISPOT.COM existential threat is not confined to small busi- customers while providing customers with a broad nesses. Discussing Google’s ability to favor its own range of easily searchable offerings. For sellers and travel platform in search results, Expedia’s CEO advertisers, entry costs are low. For buyers, there are said the internet was “littered with the bodies of none. The platform’s goal is to capture the largest companies put out of business by Google.” market share relative to other platforms — a This is a new, harsh competitive environment winner-takes-all strategy that achieves a near-mo- that nearly every business eventually will confront nopolistic position. as the platform economy matures.4 On these terms, a platform’s success comes when it An online platform’s success is predicated upon effectively owns the market and can “tax” all transac- providing sellers with a large base of potential tions that run through it. For example, Apple and SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 2 NEW STRATEGIES FOR THE PLATFORM ECONOMY: COMPETITION Google take 30% of all revenues earned in their app quickly respond. According to a report from stores; Etsy takes 20 cents per item listed, as well as 5% Coresight Research and DataWeave, Amazon more of the transaction cost (including shipping), and fees than tripled the number of its own house-brand from its payment-processing system (which sellers are products from 2018 to 2020, to more than 23,000 required to use). YouTube takes 45% of the advertis- offerings that now compete with other products on ing revenue generated by its content creators. As the site. Amazon (and other platforms) can upend game-maker Epic Systems argued in its recent legal traditional forms of strategic differentiation simply complaints against Apple and Google, their fees are by identifying and replicating product features, nonnegotiable, regardless of how much revenue flows prices, market position, and whatever else can make through an app.5 Other companies, including Spotify its own products more competitive and attractive. and even Microsoft, appear to be joining the criticism And the same complex, often opaque, algorithms of the stringent rules that app store owners impose. that connect online buyers and sellers can be mas- The fee controversy is only the tip of the iceberg. saged by platforms in ways that can produce sudden Platforms have almost godlike powers. They are drops in sellers’ search rankings and sales. gatekeeper, rule maker, judge, and jury. For busi- nesses dependent on a platform, this creates a The Risks of Platform Dependence dangerous situation. The platform is motivated by Given increasing evidence that platforms are likely to traditional business goals: It wants to grow revenues use their enormous powers for their own benefit, and profits and increase its market power. Just as im- businesses need a clear understanding of the implica- portant, it is constantly experimenting and evolving tions of operating on a platform in order to avoid unilaterally in ways that are beneficial to itself. The becoming subordinate entities.6 Competing effec- businesses transacting on it can only accept the plat- tively in these markets requires businesses to form’s rules, adapt to them strategically, or exit. recognize the ways platforms limit the control they In other words, a platform’s power dramatically have over the three sources of competitive advantage. constrains the freedom businesses possess to devise Platforms limit construction of a unique value and pursue competitive strategies. Since the 1980s, proposition. Developing a company’s value propo- our understanding of strategy has been dominated sition and presenting it to a target customer segment by Michael Porter’s definition of the sources of is core to competitive strategy. But for many plat- competitive advantage. To Porter, good competitive form-dependent businesses, the unique attributes strategy creates unique value for a particular set of and presentation of their offerings online (such as customers (in
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