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Business models

With the advent of the Internet, a growing number of firms have abandoned conventional ways of doing business. They have adopted a new business model called “the platform”. The early adopters of the platform model - Amazon, Apple, Facebook and Google - have redefined how business is done and how value is created.

By way of background, a business model provides the basic template for how a business will compete in the marketplace. It defines what a business does and how it makes money doing those things. Put simply, a business model is the operating framework used by a company to generate revenue and make a profit from its operations. 

More formally, a business model reveals the way a firm converts inputs (raw materials, labour) into outputs (goods and services) to deliver a return to investors. Since the Industrial Revolution, companies have used this linear business model to create value, which is pushed out to consumers as an end product. Under the linear model, value flows in one direction. 

In contrast, companies today are increasingly using technology to transform their traditional linear business models into networked, platform models. A platform business model connects two or more third parties and allows them to interact with each other. The fundamental goal of the platform model is to facilitate collaboration.

The linear model represents a standalone way of doing business whereas platforms require companies to be team players. TV channels work on a linear model while YouTube is a platform model. The once mighty Encyclopedia Britannica utilises a linear model and has been overshadowed by Wikipedia which builds value using a platform model. 

A recent Harvard Business Review article offered this explanation:

In construction, a platform is something that lifts you up and on which others can stand. The same is true in business. By building a digital platform, other businesses can easily connect their business with yours, build products and services on top of it, and co-create value. This ability to “plug-and-play” is a defining characteristic of platform thinking.

Consider the market for smartphones. Nokia and Blackberry today are a shadow of their former glory. Their technology and products lag Apple and the Android ecosystem. But the triumph of Apple and Android is not from features and functions. It is from the app store on which external developers create value.

Using terminology coined by digital consultants, platform companies are referred to as “Network Orchestrators”. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate and co-create. Examples include Airbnb, Uber and eBay. 

Airbnb does not own a single hotel room, Uber does not own a fleet of taxi cabs and eBay does not operate retail outlets. But these peer-to-peer businesses allow anyone to become a hotelier, a taxi driver or a retailer. It’s called collaborative consumption and it’s made possible via the sharing economy which is underpinned by the platform business model. 

With businesses like Wikipedia, YouTube and Facebook, the user does all the work. Users write content, upload videos and share life experiences. As a result of this collaboration, Wikipedia has become the world’s largest repository of knowledge, YouTube is the world’s biggest video content library and Facebook is the world’s greatest warehouse of personal information. 

Unlike linear models, platforms do more than just manufacture and push things out - they allow consumers to create and share value. Facilitating interactions between multiple parties creates rapid scalability. With a market capitalization of US$700 billion, Apple is the planet’s most valuable company, not because it makes great devices, but because it has the best platform. 

Some believe that peer-to-peer lending platforms are set to transform the consumer lending industry. These platforms don’t lend their own funds but match borrowers directly with investors - so there’s no need for a bank in the middle. Like other platform businesses, everything is done online with loans approved within a few hours. 

It’s clear that digital platform business models are disrupting every industry and rapidly making the traditional linear business model obsolete. The new models are winning the hearts and minds of consumers with their customer-centric focus. In banking, as in other industries, the future belongs to those with business models that put the customer centre stage. 

 

Regards

Paul J. Thomas

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Posted Monday, 1 February 2016    View Comments 1 Comments    Make a Comment Make a comment  

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