Sunday, May 8, 2016

Platforms, a business model (2)

A long long time ago Michael Porter wrote Competitive Strategy a book that has been used as the bible of strategy.
Porter’s model identifies five forces that affect the strategic position of a particular business: the threat of new entrants to the market, the threat of substitute products or services, the bargaining power of customers, the bargaining power of suppliers, and the intensity of competitive rivalry in the industry. The goal of strategy is to control these five forces in such a way as to build a moat around the business and thereby render it unassailable.
Thus, when a firm can erect barriers to entry, it can keep competitors out, and entrants with substitute products cannot storm the castle. When a firm can subjugate suppliers, competition among them weakens their bargaining power so the firm can keep its costs low. When a firm can subjugate buyers by keeping them relatively small, disunited, and powerless, the firm can keep its prices high.
In this model, the firm maximizes profits by avoiding ruinous competition for itself but encouraging it for everyone else in the value chain. Advantage is found in industry structures that create a protective moat—one that enables the firm to segment markets, differentiate products, control resources, avoid price wars, and defend its profit margins.
For decades, companies have studied the five forces model and used it to guide their decisions about which markets to enter and exit, what mergers or acquisitions to consider, what sorts of product innovation to pursue, and what supply chain strategies to employ.
Now platforms add a new perspective,
Enter platforms. Many of the insights embodied in the five forces, resource-based, and hypercompetition models remain valid, but two new realities are now shaking up the world of strategy.
First, firms that understand how platforms work can now intentionally manipulate network effects to remake markets, not just respond to them. The implicit assumption in traditional business strategy that competition is a zero-sum game is far less applicable in the world of platforms. Rather than re-dividing a pie of more-or-less static size, platform businesses often grow the pie (as, for example, Amazon has done by innovating new models, such as self-publishing and publishing on demand, within the traditional book industry) or create an alternative pie that taps new markets and sources of supply (as Airbnb and Uber have done alongside the traditional hotel and taxi industries). Actively managing network effects changes the shape of markets rather than taking them as fixed.
Second, platforms turn businesses inside out, moving managerial influence from inside to outside the firm’s boundaries. Thus, a firm no longer needs to seize every new opportunity on its own; instead, it can pursue only the best opportunities while helping ecosystem partners seize the others, with all partners sharing the value they jointly create.13
These two new realities add a dramatic layer of complexity to business competition. Platform strategy resembles traditional strategy much the way three-dimensional chess resembles the traditional game.14 Within the ecosystem, the lead firm negotiates dynamic tradeoffs involving competition at three levels: platform against platform, platform against partner, and partner against partner.
These are excerpts from the book "Platform revolution" a must read if you want to understand what's going on in value creation in a connected world. In chapter 12 you'll find some comments on health sector, very succint and general.

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