25 May 2017

Blog: Managing digital intermediaries

Blog: Managing digital intermediaries

The Traditional value chain business model 

Value creation is a linear process going through many stages from input capital through the transformation process to yield capital output. The six capital input as defined by King IV is defined as financial, manufactured, intellectual, human, social and relationship and natural resources.

This traditional business model has many limitations and shortcomings especially when it comes to capacity.

Let’s take a bakery as an example. There is a limit to the number of cakes it can produce in a time frame because of limitations in the input capital needed. This business model also suffers from the law of diminishing returns where increasing the number of input capital will not significantly increase the number of outputs produced.

Adding more ovens will not increase the number of outputs unless other capital is increased. There will also be a limit on the number of cakes that can be sold due to geographic location of the bakery and the number of consumers within that area.

Doubling the size of the business will need extensive support staff and systems to be in place to manage the growing enterprise effectively capping the growth rate. The linear one-directional business model put emphasis on products and its value adding journey rather than the eco-system of value creation.

E-commerce Disintermediation model

The information age empowered consumers leading to total market transparency. Consumer demand to deal directly with producers increased. The internet delivered the perfect platform for a virtual market place for producers and consumers to interact.

Consumers are able to purchase the same goods at a reduced price while the producers could increase prices and margins.

However many producers found that they were ill-equipped to offer goods directly to the consumers incurring added costs such as packaging and transportation in small units, marketing, larger sales, admin and finance teams, customer helplines, quality e-commerce websites, some or all of which would previously have been borne by the intermediary.

To alleviate problems experienced by this e-commerce disintermediation model, re-intermediation in the form of new intermediaries appeared in digital format effectively giving birth to the digital platform economy.

The digital platform economy

Digital platforms create a launch pad for innovation. Generating an ecosystem driven by a digital platform where value creation is two-way and continues.

In our bakery example building an ecosystem around independent bakers and consumers and linking them together digitally would uncap the growth of that enterprise. Now thousands of bakers across geographical locations would have access to a much larger platform of customers with no real cap on expansion or growth rate. Capacity is built around the number of member bakers and the market around the geographical area of the bakers and the number of possible consumers on the platform. 

The platform essentially acts as a facilitator platform where consumers can shop and pay and producers can solicit consumers. This platform drives the ecosystem of the online bakery with continues value creation.

  1. The more bakers on the platform the more buyers will register with a wider choice and broader geographical area.
  2. The more buyers who register the larger the potential consumer base and therefor the more bakers want to join.

This causes perpetual growth caused by the network effect. Users will pay more for access to a bigger network, so margins improve as user bases grow.

Examples of digital platform economies are Facebook, YouTube, Uber, Airbnb, Alibaba, Netflix, eBay, Pnet, LinkedIn

Platform business models are driving a major macroeconomic shift. It is important to note that adopting platform business models does not mean abandoning existing business models. The existing business model will act as a solid base to support the platform.

Platform ecosystems play a strategic role in asset heavy, light and hybrid organisations. Each organisation will need a strategy around platform economies. They will either create their own platform, or become part of an ecosystem owned by other companies. Deciding to be an Uber or an Uber driver. The use of technologies to create platform business models is driving extraordinary growth opportunities in the digital economy.

Two-sided digital platforms

Two-sided platforms have two distinct user groups. One group acts as a buyer and the other as the seller. Both these groups can be seen as a customer to the platform owner acting as the intermediary. The organisation that creates the platform where two distinct groups can interact directly with each other is called a multi-sided platform (MSP).

Two-sided digital platforms create value externally with digital partners, acting as suppliers, and communities of users brought together by the MSP. The value created will increase with the scale of the network for the MSB and the user groups.

Benefits to each group demand economies of scale. Sellers prefer platforms with more buyers and buyers prefer platforms with more sellers. Pricing strategy becomes extremely important and many MSP’s offer access to their platform for free to one of the user groups normally the buyers. Adoption on one side of the platform will drive adoptions on the other side.

Adobe first offered both the PDF writer and reader at a cost. Only after Adobe made the reader freely available did the adoption of PDF format take off. The general rule is to subsidize the more price sensitive side and charge the side whose demand increased more. There is also another pricing rule to consider and that is to subsidise the side who adds the most value. YouTube is a prime example where the developer of content is not charged at all.

Conclusion

Market research in support of strategy needs to go beyond competitors, and their products or services.  Effort in researching business ecosystems and industry platforms that are rapidly maturing or about to be developed will go a long way in ensuring business relevance when developing a strategy.

Enlightened consumers started the digital trend so it will be foolish not to look at your customer’s total experience across industries and identify possible partners to collaborate with ensuring an end to end customer engagement ecosystem. Why is the customer buying a cake at the bakery? Can we link their other needs together in a single ecosystem?

Every organisation should develop a strategy around the digital platform economy and ecosystems. 

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