Now that most companies are starting to rethink their business processes with the idea of digitization, a series of questions pop up: “Is our strategy still relevant? Can we be successful in the digital economy without changing our strategy? Or should we reconsider?” Digitization is commoditizing services, so companies need to think carefully about how they stay relevant, compete, and grow their business.
Platforms are shifting the economic paradigm
Ten years ago, at Macworld 2007 in San Francisco, Steve Jobs introduced the world to the iPhone as three products in one – “a widescreen iPod with touch controls, a revolutionary mobile phone, and a breakthrough Internet communications device.” That year, the mobile-phone market was controlled by five manufacturers: Nokia, Samsung, Motorola, Sony Ericsson, and LG. They controlled 90% of the industry’s global profits. By 2015, iPhone singlehandedly generated 92% of global profits, while only one of the former incumbents made any profit at all.
How can we explain the iPhone’s rapid domination of its industry? And how can we explain its competitors’ free fall? Nokia and the others had classic strategic advantages that should have protected them: strong product differentiation, trusted brands, leading operating systems, excellent logistics, protective regulation, huge R&D budgets, and massive scale. For the most part, those firms looked stable, profitable, and well entrenched.
Unlike the competitors, Apple exploited the power of platforms and leveraged the new rules of strategy they create. Platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.
Understanding this, Apple conceived the iPhone and its operating system as more than a product or a conduit for services. It imagined them as a way to connect participants in two-sided markets – app developers on one side and app users on the other – generating value for both groups. As the number of participants on each side grew, that value increased, a phenomenon called “network effects,” which is central to platform strategy. By January 2015, the company’s App Store offered 1.4 million apps and had cumulatively generated $25 billion for developers.
Sixth force: The new rule in strategy
How many powerhouses of the 20th century are still leaders now? Not many. What happened to the likes of Pan Am, Polaroid, and Blockbuster? Of 1955’s Fortune 500 firms, 88% are gone. As digitization transforms the economy, well-resourced incumbents in industry after industry are losing out to new entrants.
Traditional retailers that have entered the e-commerce space can’t compete with Amazon. Amazon’s market value increased 1,910% in the past 10 years, while the likes of Best Buy, JCPenney, and Macy’s have seen a 50% decline in market value.
Tesla is leading in electric-vehicle sales. And no taxicab consortium has been able to fend off Uber. Firms that fail to create platforms and don’t learn the new rules of strategy will be unable to compete for long.
Today, network thinking is the emerging economic order. This is in sharp contrast to industrial-era economies, in which ownership of physical or intellectual property stems from its development by a single enterprise. New business models emerge, where companies leverage other companies’ knowledge, assets, data, and market access to increase their value proposition to current and new customers. They are competing as an ecosystem. Tesla is partnering with Mobileye to launch driverless cars. Starbucks and Spotify offer a first-of-its-kind music ecosystem. It is a true sixth force in Michael Porter’s Five Forces model. But we can’t blame Porter for that. He came up with the Five Forces idea when Steve Jobs was soldering motherboards in a garage on Crist Drive, Los Altos, California.
How can you redefine and execute your strategy?
Do you want to understand what digital strategies work? How companies are using platforms to increase the switching costs of their customers? How they protect themselves against competition with technology? How companies have changed their business models to include recurring revenue? How they earn revenue before they incur costs? How companies successfully built platforms to collaborate with external parties? Learn how SAP can help you start your digital transformation journey.