Indian Business Environment

Dr Rajib Sarkar
July 8, 9 & 13 (Section A)
July 9 &13, 2021 (Section B)
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Platform Model of Business

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“Uber, the world’s largest taxi company, owns no
vehicles. Facebook, the world’s most popular media
owner, creates no content. Alibaba, the most
valuable retailer, has no inventory. And Airbnb, the
world’s largest accommodation provider, owns no
real estate. Something interesting is happening.”

- Tom Goodwin, Writer and Consultant

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In the Traditional Economy, Many Business
Models are Linear

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Digital Transformation from Linear to Non-Linear

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The Platform Business Model

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 The Platform Business Model (contd.)
 The factors affecting the growth and sustainability of platform firms (and
digital operating models generally) differ from those of traditional firms. In
this business model, the cost of serving an additional user is negligible,
which makes the business inherently easier to scale up.

 And because much of a platform based firm’s operational complexity is

outsourced to the service providers on the platform or handled by
software, bottlenecks to value creation and growth usually aren’t tied to
human or organizational factors—another important departure from
traditional models.

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The Platform Business Model (contd.)
 In the platform business model, the employees don’t deliver the
product or service—they just design and oversee an automated,
algorithm-driven operation. Lasting competitive advantage hinges
more on the interplay between the platform and the network it
orchestrates and less on internal, firm-level factors. In the platform
business model, the long-term success of a product or service
depends heavily on the health, defensibility, and dominance of the
ecosystem in which it operates.

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Many Companies are Hybrids that Combine
Platform and Linear Business Models

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Super Platforms and Bigtechs

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Ways Platform Business Models Monetize Value

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Rapidly Increasing Relevance

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 Platforms are a Significant Part of 7 of the 10 Largest Public Companies

Source: Wikipedia, This list is up to date as of March 31, 2021. Indicated changes in market cap are relative to the previous quarter.

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Platforms Increasingly Focus on Financial
Services in Emerging Markets

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Platforms Need These Key Functions to Build Their Networks

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Platforms are Homogeneous or Heterogeneous

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Types of Platforms

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Types of Platforms

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Key Features of Each Platform Type

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Classifying Platforms

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Classifying Platforms (contd.)

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The Network Effects

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 Network Effects
 Network effects are the incremental benefit gained by an
existing user for each new user that joins the network.
 The term network effect refers to any situation in which the
value of a product, service, or platform depends on the
number of buyers, sellers, or users who leverage it. Typically,
the greater the number of buyers, sellers, or users, the
greater the network effect—and the greater the value created
by the offering.
 “In other words, the willingness to pay, for a buyer, increases
as the number of buyers or sellers for the business grows,”
says Harvard Business School Professor Bharat Anand
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 Network Effect Example
 The phone is only useful if other people (users) also own a
phone. If only one person owns a phone, the value of the
phone network is zero, because they cannot do anything with
the network. If a second person owns a phone, then the first
person can call the second person, and if that’s beneficial to
them both, then the network has some value. If everyone
owns a phone (e.g. personal friends, government institutions,
service providers, and so on), then the phone network is very
valuable to all users.

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 Direct and Indirect Network Effects
 Not all network effects are the same. They’re often broken into two different
types: direct (same-side) and indirect (cross-side).

 Direct network effects occur when the value of a product, service, or platform
increases simply because the number of users increases, causing the network itself
to grow.

 Social media platforms primarily benefit from direct network effects because the
service's value grows as a direct result of attracting more users. Example:
WhatsApp.

 Indirect network effects, on the other hand, occur when a platform or service
depends on two or more user groups, such as producers and consumers, buyers
and sellers, or users and developers. As more people from one group join the
platform, the other group receives a greater value amount. This is best illustrated
by the e-commerce and ridesharing companies like Flipkart and Ola.
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Moat

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Competitive Advantage (Moat) Arising out of Network Effect

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 Why are Network Effects Important to Understand?

 The underlying principles of network effects imply that the business,

website, or platform with the highest market share will be more successful
in the long run. This means that its market share is likely to grow more
substantially. For this reason, markets in which network effects play a
major role are often referred to as winner-takes-all markets.

 “Companies that can leverage or exploit network effects often experience

rapid rates of growth,” Prof. Bharat Anand says. “Not just that: Once you’re
ahead, you tend to stay ahead. Your demand keeps growing even faster as
you get bigger.”

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Network Effect Creates Exponential Value from Growth

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The Platform Scale in India : The B2C Advantage

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Change in the Strength of Network Effects
 The strength of network effects can change over time.
Windows is a classic example. During the heyday of personal
computers in the 1990s, most PC applications were “client
based,” meaning they actually lived on the computers. Back
then, the software’s network effects were strong: The value of
Windows increased dramatically as the number of developers
writing apps for it climbed, topping 6 million at the peak of its
popularity.

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 Change in the Strength of Network Effects (contd.)

 By the late 1990s Windows seemed entrenched as the leading

platform. However, as internet-based apps, which worked
across different operating systems, took off, the network
effects of Windows diminished and barriers to entry fell,
allowing Android, Chrome, and iOS operating systems to gain
strength on PCs and tablets. Mac shipments had also begun to
rise in the mid-2000s, increasing more than five-fold by the
end of the decade. This turn of events illustrates that when an
incumbent’s network effects weaken, so does its market
position.

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The Need for Large Scale Means Platforms Must Reduce
Friction and Use Network Effects Strategically

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 Why Some Platforms Thrive and Others Do Not?
How network Properties Can Trump Platform Scale?

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 Why Some Platforms Thrive and Others Don’t
HBR Jan-Feb 2019, by Feng Zhu and Marco Iansiti

 In the digital economy, scale is no guarantee of continued success. After all, the same factors
that help an online platform expand quickly—such as the low cost of adding new
customers—work for challengers too. What, then, allows platforms to fight off rivals and
grow profits? Their ability to manage five aspects of the networks they’re embedded in:

 network effects, in which users attract more users

 clustering, or fragmentation into many local markets
 the risk of disintermediation, wherein users bypass a hub and connect directly
 vulnerability to multi-homing, which happens when users form ties with two or more
competing platforms
 network bridging, which allows platforms to leverage users and data from one network
in another network
When entrepreneurs are evaluating a digital platform business, they should look at these
dynamics—and the feasibility of improving them—to get a more realistic picture of its long-
term prospects

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 Network Clustering
 The more a network is fragmented into local clusters—and the more
isolated those clusters are from one another—the more vulnerable a
business is to challenges. Consider Uber. Drivers in Boston care mostly
about the number of riders in Boston, and riders in Boston care mostly
about drivers in Boston. Except for frequent travelers, no one in Boston
cares much about the number of drivers and riders in, say, San Francisco.
This makes it easy for another ride-sharing service to reach critical mass in
a local market and take off through a differentiated offer such as a lower
price. Indeed, in addition to its rival Lyft at the national level, Uber
confronts a number of local threats. For example, in New York City, Juno
and Via, as well as local taxi companies, are giving it competition. Didi
likewise faces a number of strong contenders in multiple cities.

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 Risk of Disintermediation
 Disintermediation, wherein network members bypass a hub
and connect directly, can be a big problem for any platform
that captures value directly from matching or by facilitating
transactions. Imagine that you hire a house cleaner from a
platform like Urban Company and are satisfied with the
service. Would you really go back to Urban Company to hire
the same person again? If a user has found the right match,
there’s little incentive to return to the platform. Additionally,
after obtaining enough clients from a platform to fill his or her
schedule, the house cleaner won’t need that platform
anymore.

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 Vulnerability to Multi-Homing
• Multi-homing happens when users or service providers (network “nodes”) form
ties with multiple platforms (or “hubs”) at the same time. This generally occurs
when the cost of adopting an additional platform is low. In the ride-hailing
industry, many drivers and riders use both, say, Ola and Uber—riders to compare
prices and wait times, and drivers to reduce their idle time. Similarly, merchants
often work with multiple group-buying sites, and restaurants with multiple food-
delivery platforms. And even app developers, whose costs are not trivial, still find
it makes sense to develop products for both iOS and Android systems.

• When multi-homing is pervasive on each side of a platform, as it is in ride hailing,

it becomes very difficult for a platform to generate a profit from its core business.
Uber and Ola are constantly undercutting each other as they compete for riders
and drivers.

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 Network Bridging
In many situations the best growth strategy for a platform may
be to connect different networks to one another. In any platform
business, success hinges on acquiring a high number of users
and amassing data on their interactions. Such assets can almost
invariably be valuable in multiple scenarios and markets. By
leveraging them, firms that have succeeded in one industry
vertical often diversify into different lines of business and
improve their economics. This is a fundamental reason why
Amazon and Alibaba have moved into so many markets.

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 The Platform Manifesto
1. The ecosystem is the new warehouse
2. The ecosystem is also the new supply chain
3. The network effect is the new driver for scale
4. Data is the new dollar
5. Community management is the new human resources m
6. Liquidity management is the new inventory control
7. Curation and reputation are the new quality control
8. User journeys are the new sales funnels
9. Distribution is the new destination
10. Behavior design is the new loyalty program
11. Data science is the new business process optimization
12. Social feedback is the new sales commission
13. Algorithms are the new decision makers
14. Real-time customization is the new market research
15. Plug-and-play is the new business development
16. The invisible hand is the new iron fist

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