7/9/2022

The Revolution of Digital Platform Ecosystems

and the New Rules of Strategy

Trần Quang Huy, Ph.D.

Associate Professor of Business
Albright College
Reading, Pennsylvania, USA

July 11th, 2022

To be Discussed Today
• What is a digital platform business?

• How do digital platforms differ from traditional ‘pipeline’ counterparts?

• What make digital platforms successful?

• What make digital platforms vulnerable?

• What are important implications for teaching Strategic Management and

Entrepreneurship?

• What are some suggestions for research ideas in related areas (e.g., HRM,
marketing, international business, and higher education)?

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Lyft and Uber vs. Traditional Auto Makers

Market Cap in
Year Share Price (at
Company Date of IPO Share Price at IPO billions (at close,
Founded close, 07/08/2022)
07/08/2022)
$72
Lyft (LYFT) 2012 3/28/2019 ($62-$68 $13.40 $4.663
per share expected)
Uber (UBER) 2009 5/10/2019 $45.00 $22.34 $43.868
General Motors (GM) 1908 11/18/2010 $33.00 $32.31 $47.116
Ford Motor (F) 1903 01/17/1956 $63.00 $11.62 $46.710
Stellantis (STLA) 01/2021 $12.61 $39.505
Toyota Motor (TM) 1937 $156.76 $215.112
Volkswagen (VOW.DE) 1937 €134.46 €92.947

Source: www.finance.yahoo.com and other sources

Airbnb vs. Legacy Hotel Chains

Number of Total Revenues
Year Number of Number of
Company Rooms or 12/31/2021
Founded Cities Countries
Hotels (in billions)
Airbnb 2008 7M+ 100K+ 191+ $5.992
Wyndham Hotels
1981 8,092 66 $1.565
& Resorts
Marriott
1927 5,974 110 $13.857
International

Hilton Worldwide 1919 4,922 104 $5.788

Best Western 1946 4,196 $6.000 (approx.)

Source: Airbnb.com, Mergent Online, and other sources

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The Meteoric Rise of Platform Businesses

Traditional ‘Pipeline’ Business Models

• Achieve a competitive advantage by positioning the firm in an attractive industry or
industry segment protected by controlling competition (five forces model and strategic
group analysis, Porter 1980)
• Create value for customers by possessing a series of value-adding activities through a
linear value chain (Porter, 1985)
• Create and sustain a competitive advantage by controlling internal VRIO resources
(resource-based view of the firm, Barney 1991, Wernerfelt 1984)
▫ Valuable
▫ Rare
▫ Costly to Imitate
▫ Firm must be Organized appropriately to capture the value

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What We Typically Teach Strategy Students about Pipelines

• External environment
▫ General (macro): PESTEL model
▫ Industry: Five forces model
▫ Within industry: Strategic group model
• Internal environment
▫ Value chain as a sequence of step-by-step value-adding activities
▫ VRIO resources
▫ Accounting and finance conventional performance metrics
▫ Supply-side economies of scale
• Too much has been focused on zero-sum games!

External Environment of the Firm (1)

The PESTEL Model

Source: Rothaermel (2021)

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External Environment of the Firm (2)

Industry Analysis – The Five Forces Model

Source: Porter (1979, 1980, 2008)

External Environment of the Firm (3)

Within-an-Industry Analysis

Source: Peng (2014); Rothaermel (2021)

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Internal Environment of the Firm (1)

Source: Porter (1985); Rothaermel (2021)

Internal Environment of the Firm (2)

Source: Barney (1991); Rothaermel (2021)

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Internal Environment of the Firm (3)

• Traditional approaches to measuring and assessing
firm performance:
➢Accounting profitability:
o ROIC, ROE, ROA, ROR

➢Shareholder value creation:

o Total return to shareholders = Stock price appreciation + Dividends

➢Economic value creation:

o EVC = Maximum price customer is willing to pay (V) – Total cost (C)

Source: Rothaermel (2021)

(Supply-side) Economies of Scale

• Small firms have hard

time to compete
against large,
established players.

Source: Rothaermel (2021)

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What is a Platform Business?

• “A business based on enabling value-creating interactions between external producers and
consumers… provides an open, participative infrastructure for these interactions and sets
governance conditions for them… to consummate matches among users and facilitate the
exchange of goods, services, or social currency, thereby enabling value creation for all
participants.” (Parker, Van Alstyne, & Choudary, 2016, p. 5)

• “A business creating significant value through the acquisition, matching and connection of
two or more customer groups to enable them to transact.” (Reillier & Reillier, 2017, p. 22)

• Emerging in the wake of the personal computer, the Internet, and mobile communications
technologies, industry platforms “bring together individuals and organizations so they can
innovate or interact in ways not otherwise possible, with the potential for nonlinear
increases in utility and value.” (Cusumano, Gawer, Yoffie, 2019, p. 13)

Platform Business Is NOT New!

• Town squares (vs. Metaverse)

• Flea markets (vs. Amazon marketplace, eBay)

• Message boards (real ones, like the one outside Ha Noi Moi Newspaper Publisher vs. Twitter)

• Matchmakers (real people vs. Match.com)

• Payment services (credit cards vs. digital wallets such as Apple Pay, Samsung Pay, Moca, ZaloPay)

• Recruitment services (real headhunters vs. LinkedIn)

➢ We, however, will focus on DIGITAL platform businesses today!

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Two-sided Platform Businesses in Various Industry Sectors

Industry Side 1 Side 2 Platform Examples
Operating systems App developers Users Windows, MacOS, Android, iOS
Credit cards Merchants Card holders Amex, Visa, Mastercard, Discover
Retail Sellers Buyers Amazon, Alibaba, eBay, Etsy, Lazada, Shopee, Tiki
Communication, Social media, and Facebook, Twitter, LinkedIn, Instagram, Snapchat, YouTube,
Advertisers Users
Networking services Wikipedia, Google, TikTok
Video games Game developers Game players Nintendo, PlayStation, Xbox
Indeed, Monster, CareerBuilder, LinkedIn, Glassdoor,
Online recruitment Employers Job seekers
Handshake
Labor/professional services Service providers Service users Sittercity, Upwork, LegalZoom
Transportation Drivers Riders Grab, Lyft, Uber
Fundraising Fund Raisers Donors GoFundMe. Kickstarter, Indiegogo
Dating services Relationship seekers Relationship seekers Eharmony, EliteSingles, Match, OkCupid, SilverSingles, Zoosk
Hospitality and other local Landlords, local service Tenants, visitors, service Airbnb, Angie’s List, FourSquare, Nextdoor, PasGo,
services providers users TripAdvisor, Yelp
Food delivery Restaurants Consumers DoorDash, GrabFood, Grubhub, Uber Eats
Online education Course developers Learners Coursera, edX, Skillshare, Udacity, Udemy, Uversity (Chegg)
Event Registration/Management Event organizers Event participants Eventbrite, Ticketleap, Wild Apricot, Zoom
Source: Adapted and expanded from Eisenmann, Parker, & Van Alstyne (2006); Parker, Van Alstyne, & Choudary (2016)

A Brief Evolution of Platform Business Models

• Personal computer mass producers: IBM (1911), Intel (1968), Microsoft (1975),
Apple (1976)

• Internet software & services developers: Amazon (1994), Netscape (1994), eBay
(1995), Yahoo (1995), Google (1998), Tencent (1998), Alibaba (1999)

• Social media companies: Friendster (2002), MySpace (2003), Facebook (2004),

YouTube (2005), Twitter (2006)

• Billion-dollar start-ups (unicorns): Airbnb (2008), Uber (2009), Zoom (2011), Didi
Chuxing (2012), Grab (2012)
Source: Adapted & expanded from Cusumano et al. (2019)

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Platform Ecosystem

Source: Rothaermel (2021); adapted from Van Alstyne, Parker, & Choudary (2016)

Why Can Platforms Usually Beat Pipelines? (1)

• Platforms unlock new sources of value creation and resources
▫ Not only carrying zero inventory but employing ‘not-even-mine’ resources
▫ Uber, Airbnb, eBay, YouTube, Facebook

• Platforms scale more efficiently by eliminating gatekeepers

▫ Coursera, Upwork, Amazon’s Kindle direct publishing

• Platforms especially utilize the power of network effects

▫ To (quickly) reach a critical mass of users and grow further, possibly leading to a
winner-take-all market (especially when market entry barriers are high)

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Network Effects
• Demand-side economies of scale
• Can be same-side (e.g., Facebook, Dropbox)
or cross-side (e.g., Uber, Airbnb, Visa,
Zoosk)
• Can be positive or negative
• Positive network effects are the main
source of value creation and competitive
advantage for platforms

Source:
https://twitter.com/DavidSacks/status/475073311383105536

Why Can Platforms Usually Beat Pipelines? (2)

• Platforms use data-based and AI-driven
tools to create community feedback loops,
better customized/individualized
product/service recommendations, and
better deliver value to stakeholders
▫ Airbnb, Uber
▫ Threadless.com, Amazon.com, Wikipedia,
▫ Siri, Bixby, Google search engine

• Traditional business models are subject to

diminishing marginal returns to scale Source: Iansiti & Lakhani (2020)

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Why Can Platforms Usually Beat Pipelines? (3)

• Platforms use the Internet and mobile communications technologies to
connect with all stakeholders instantly and continuously → bring
customer service to the next level, better delivering value to
stakeholders
▫ DoorDash food delivery service provide real-time tracking details for both buyers
and shippers
▫ HP printers instant-ink functionality: never run out of ink (although this is not a
platform)

What Make Platforms Vulnerable? Why Can’t the Winner

Take All? (1)
• Weak network effects and low entry barriers → lower likelihood of a winner-
take-all outcome
▫ Facebook vs. Video game consoles

• Lack of differentiation and local adaptation/responsiveness and leaving open

niche markets
▫ Uber vs. Grab (in Southeast Asian markets)

• Fragmented small local markets vs. One large network clustering

▫ Craigslist vs. Airbnb

Source: Cusumano et al., (2019), Zhu & Iansiti (2019)

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What Make Platforms Vulnerable? Why Can’t the Winner

Take All? (2)

• Risk of multi-homing
▫ Users form ties with multiple platforms simultaneously (e.g., owning multiple game
consoles Xbox, Wii, PlayStation)

• Risk of disintermediation
▫ Users bypass a hub and connect directly
▫ Android/iOS vs. Nextdoor

Source: Zhu & Iansiti (2019)

What Make Platforms Vulnerable? Why Can’t the Winner

Take All? (3)
• Inability to detect and prevent fraudulent, criminal, abusive behaviors, quality
and safety issues because of not being able to utilize machine learning and AI
▫ Uber, Airbnb, Twitter, Facebook

• Limited curation because of not being able to utilize machine learning and AI
▫ Montser.com vs. LinkedIn and Glassdoor
▫ Craigslist vs. Facebook Marketplace and OfferUp

• Failure at solving the “chicken-or-egg” problem

Source: Beck & Libert (2018), Yu (2018), and other sources

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Implications for Teaching Strategic Management (1)

• Strategy should move
▫ from controlling unique internal resources, erecting competitive barriers, and optimizing
product/service offerings or internal processes
▫ to orchestrating external resources, promoting interactions in the ecosystem, and
engaging vibrant communities

• Innovation is no longer completely closed (in-house) but is created through

the contribution of ideas by all participants in the ecosystem
▫ Focus more on positive-sum games with possibilities of complements by partners

Implications for Teaching Strategic Management (2)

• Shift the focus from product thinking to platform thinking
▫ From traditional microeconomics / managerial economics with profit
maximization MR = MC at product, brand, or SBU levels to ecosystem-wide
consideration of benefits and costs and competitive dynamics (within and
between ecosystems)
▫ From a stand-alone product strategy → a platform strategy

• Focus on business model evolution/innovation

▫ Lowe’s
▫ GoPro
▫ MAXQDA

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Implications for Teaching Strategic Management (3)

• Governance and access: platform managers should
▫ Promote transparency across the entire platform
▫ Encourage participation of external partners

• Sustainable platforms are more than simple matchmakers but enable

participants to create new value and/or innovate new ways of creating value
▫ A transaction platforms → An innovation platform

• Use more platform-related case studies and qualitative (and mixed) methods
in research

Platform Architecture:
Lessons for Would-be Entrepreneurs (1)
• The core interaction – the “why” of platform design:
▫ The value unit (created by the producers): a room for rent on Airbnb, a good for sale on eBay,
a video on YouTube, a tweet on Twitter, a profile on LinkedIn, a listing of available car on Uber
▫ The filter: employed to select specific units that match the search terms and deliver them to
the consumer
▫ The participants: a user can be either a producer or consumer, or both

• Over time, new interactions can be added on top of the core interaction
▫ UberX(2012), XL, Black, Comfort, UberPool (2014), UberFRESH (2014) then rebranded as
UberEATS (2015), Uber for Business, Uber Freight
▫ Grab in Southeast Asian countries

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Platform Architecture:
Lessons for Would-be Entrepreneurs (2)

• Producers and consumers exchange:

▫ Information
▫ Goods and services: through the platform (e.g., Facebook, Twitter, YouTube) or
outside the platform (e.g., transportation services requested via Lyft, dinner
reservations made via OpenTable, PasGo)
▫ Currency (monetary via credit cards and bank accounts, views, following,
subscription, fame, reputation, etc.)

Performance Metrics
• Focus more on holistic, integrative frameworks:
▫ The balanced scorecard
▫ The triple bottom line

• Introduce specific metrics especially relevant to platforms:

▫ Startup phase: user commitment (growth rate of active users and active use ratio),
matching quality (sales conversion rate as the percentage of searches that lead to
interactions)
▫ Growth phase: frequency of producer participation, listings created, frequency of
consumption, searches, rate of conversion to sale, producer-to-consumer ratio
▫ Maturity phase: focus even more on new innovations and extensions by partners,
considering absorbing them

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Integrative Frameworks of Organizational

Performance Metrics

Source: Adapted from Kaplan & Norton (1993); Rothaermel (2021)

Interesting Research Topics (1)

• Marketing
▫ New ways to connect, serve, and understand your customers
▫ New ways for customers to find you and your businesses
▫ Customer loyalty and referral programs (in-app promotions,…)

• HRM and Leadership

▫ Motivating, leading, and orchestrating various ecosystem members
▫ Are Grab drivers simply its independent contractors or should they be considered its full-
time employees?

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Interesting Research Topics (2)

• International Business/Management
▫ The impact of institutions and national culture on the growth and longevity of business
platforms in different national markets around the world

• Ethics, Law, and Political Science

▫ How can governments and local authorities harness the power of platforms and make
them work more responsibly for individual citizens and the general society?

• Higher Education
▫ New ways to connect, understand, and serve your students → their new experiences
▫ New certificate- and module-based programs

References
• BambuUP. (2021). Vietnam Open Innovation Landscape Report.
• Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99-120.
• Beck, M., & Libert, B. (2018). A Platform Strategy Won't Work Unless You're Good at Machine Learning. Harvard Business Review Digital Articles, 2-5.
• Cusumano, M. A., Gawer, A., & Yoffie, D. B. (2019). The business of platforms: Strategy in the age of digital competition, innovation, and power. New York, NY:
HarperCollins Publishers.
• Eisenmann, T., Parker, G., & Alstyne, M. W. V. (2006). Strategies for two-sided markets. Harvard Business Review, 84(10), 92-101.
• Iansiti, M. & Lakhani, K. R. (2020, Jan-Feb). Competing in the age of AI: How machine intelligence changes the rules of business. Harvard Business Review, 61-67.
• Kaplan, R. S., & Norton, D. P. (1993). Putting the Balanced Scorecard to Work. Harvard Business Review, 71(5), 134-147.
• Parker, G. G., Van Alstyne, M. W., & Choudary, S. P. (2016). Platform revolution: How networked markets are transforming the economy and how to make them work for
you. New York, NY: W. W. Norton & Company.
• Peng, M. W. (2014). Global Strategy (3rd ed.). Mason, OH: South-Western, Cengage Learning.
• Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review(March-April), 137-145.
• Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: Free Press.
• Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press.
• Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.
• Reillier, L. C., & Reillier, B. (2017). Platform strategy: How to unlock the power of communities and networks to grow your business. New York, NY: Routledge.
• Rothaermel, F. T. (2021). Strategic Management (5th ed.). New York, NY: McGraw-Hill Education.
• Van Alstyne, M. W., Parker, G. G., & Choudary, S. P. (2016). Pipelines, platforms, and the new rules of strategy. Harvard Business Review (April), 54-62.
• Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), 171-180.
• Yu, H. (2018). For Some Platforms, Network Effects Are No Match for Local Know-How. Harvard Business Review Digital Articles, 2-6.
• Zhu, F & Iansiti, M. (2019, Jan-Feb). Why some platforms thrive… and others don’t. Harvard Business Review, 119-125.

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