New Strategies for the Platform Economy
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SPECIAL
COLLECTION
STRATEGY
New Strategies
for the Platform
Economy
To reap the rewards and avoid the risks,
companies exploring a platform
business model must look carefully at
their partnerships and growth strategy.
Brought to you by:
SPRING 2021
NEW
STRATEGIES
FOR THE
PLATFORM
ECONOMY
SPECIAL REPORT
1 9 17
Competing on How Healthy Is Your Platform Scaling,
Platforms Business Ecosystem? Fast and Slow
THE DOMINANT DIGITAL PLATFORMS are now among the world’s most phases. At each stage, there are specific early
valuable — and most powerful — companies, leaving a huge swath of organizations forced indicators to look for that point to potential
to play by their rules. In this new competitive environment, businesses need new ways to failure. Tracking the appropriate metrics
gain advantage despite platforms’ constraints and market clout. And businesses seeking to for each stage and being alert to red flags
create successful platform ecosystems find that while the rewards can be great, the helps businesses pivot to a new approach or
likelihood of failure is high. This special report examines the challenges faced by both limit their losses.
platform owners and participants. Platforms aiming for market dominance
have typically prioritized rapid growth.
The asymmetries in power and infor- attention from U.S. and European regulators, However, Max Büge and Pinar Ozcan have
mation between platform owners and the whose scrutiny of dominant platforms’ found that scaling quickly is not the right
businesses reliant on them have implications practices may lead to shifts in the prevailing strategy in all circumstances: Pursuing fast
for the traditional levers of competitive balance of power. growth in markets where regulatory risk
strategy, argue Donato Cutolo, Andrew Given the rich rewards for developing a and complexity are high can lead to setbacks
Hargadon, and Martin Kenney. The authors successful platform, it remains an attractive or failure. With governments increasingly
show how the usual tools that businesses digital strategy, despite the high risk of focused on investigating and reining in
employ to differentiate their offerings and failure in what has been typically a winner- platforms’ power, we may well see an
gain competitive advantage can be blunted takes-all game. Ulrich Pidun, Martin Reeves, increase in the number of markets with such
by platform operators, and they suggest and Edzard Wesselink analyzed more than challenging regulatory environments — and
ways that businesses can better protect 100 failed digital ecosystems and found possibly a more cautious approach to
their interests. They also point to increasing that ecosystems typically develop over four platform expansion. — Elizabeth Heichler
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW i
N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : C O M P E T I T I O N
COMPETING
ON
PLATFORMS Companies must find new competitive strategies to
succeed on dominant internet platforms.
BY DONATO CUTOLO, ANDREW HARGADON, AND MARTIN KENNEY
T
he dominant online platform companies are now dynamics and risks intrinsic to platform-controlled markets. And
the most valuable companies in the world, and their they must develop strategies that leverage a platform’s resources
growing power over other organizations is enabling while mitigating its power over them.
them to rewrite the rules of business strategy.
In the past decade, digital platforms have pro- How Platform Power Is Transforming
foundly reorganized markets and industries and redefined the Competitive Strategy
dynamics of value creation and competition.1 They have created In early January 2019, after sealing a deal with Apple to sell more of its
marketplaces that have spawned an enormous number of platform- products, Amazon sent a letter to small businesses selling refurbished
native startups.2 And as these have grown and prospered, existing Apple products on the Amazon e-commerce platform. It read, in part,
businesses have felt compelled to join the platform economy, view- “You are receiving this message because you are currently selling …
ing participation as necessary for growth and even survival.3 Apple or Beats products. Your existing offers for those products will
To date, most attention to platforms has focused on under- soon be removed from Amazon’s online store in the United States.”
standing their advantages over traditional industrial structures As one reseller said, “Since 2011, I have sold over a million dol-
and how to replicate platform successes. However, the vast major- lars of iPods on Amazon and this is going to severely impact me
ity of companies will not own platforms but, rather, will and my family.”
increasingly depend and compete on them. To do so effectively, For many resellers, the agreement between Amazon and Apple
platform-dependent businesses must recognize the power spelled the end of their businesses and livelihoods. And this
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 1
THE
RESEARCH
The authors drew upon
in-depth discussions
and interviews with
entrepreneurs in the
U.S. and Europe, and
ongoing research into
the rise of the platform
economy and the impact
of platforms on
entrepreneurship.
Their work is also informed
by engagements as
advisers to businesses
and investors on their
platform strategies, and to
government organizations
on regulating the
platform economy.
LISA HENDERLING/THEISPOT.COM
existential threat is not confined to small busi- customers while providing customers with a broad
nesses. Discussing Google’s ability to favor its own range of easily searchable offerings. For sellers and
travel platform in search results, Expedia’s CEO advertisers, entry costs are low. For buyers, there are
said the internet was “littered with the bodies of none. The platform’s goal is to capture the largest
companies put out of business by Google.” market share relative to other platforms — a
This is a new, harsh competitive environment winner-takes-all strategy that achieves a near-mo-
that nearly every business eventually will confront nopolistic position.
as the platform economy matures.4 On these terms, a platform’s success comes when it
An online platform’s success is predicated upon effectively owns the market and can “tax” all transac-
providing sellers with a large base of potential tions that run through it. For example, Apple and
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 2N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : C O M P E T I T I O N
Google take 30% of all revenues earned in their app quickly respond. According to a report from
stores; Etsy takes 20 cents per item listed, as well as 5% Coresight Research and DataWeave, Amazon more
of the transaction cost (including shipping), and fees than tripled the number of its own house-brand
from its payment-processing system (which sellers are products from 2018 to 2020, to more than 23,000
required to use). YouTube takes 45% of the advertis- offerings that now compete with other products on
ing revenue generated by its content creators. As the site. Amazon (and other platforms) can upend
game-maker Epic Systems argued in its recent legal traditional forms of strategic differentiation simply
complaints against Apple and Google, their fees are by identifying and replicating product features,
nonnegotiable, regardless of how much revenue flows prices, market position, and whatever else can make
through an app.5 Other companies, including Spotify its own products more competitive and attractive.
and even Microsoft, appear to be joining the criticism And the same complex, often opaque, algorithms
of the stringent rules that app store owners impose. that connect online buyers and sellers can be mas-
The fee controversy is only the tip of the iceberg. saged by platforms in ways that can produce sudden
Platforms have almost godlike powers. They are drops in sellers’ search rankings and sales.
gatekeeper, rule maker, judge, and jury. For busi-
nesses dependent on a platform, this creates a The Risks of Platform Dependence
dangerous situation. The platform is motivated by Given increasing evidence that platforms are likely to
traditional business goals: It wants to grow revenues use their enormous powers for their own benefit,
and profits and increase its market power. Just as im- businesses need a clear understanding of the implica-
portant, it is constantly experimenting and evolving tions of operating on a platform in order to avoid
unilaterally in ways that are beneficial to itself. The becoming subordinate entities.6 Competing effec-
businesses transacting on it can only accept the plat- tively in these markets requires businesses to
form’s rules, adapt to them strategically, or exit. recognize the ways platforms limit the control they
In other words, a platform’s power dramatically have over the three sources of competitive advantage.
constrains the freedom businesses possess to devise Platforms limit construction of a unique value
and pursue competitive strategies. Since the 1980s, proposition. Developing a company’s value propo-
our understanding of strategy has been dominated sition and presenting it to a target customer segment
by Michael Porter’s definition of the sources of is core to competitive strategy. But for many plat-
competitive advantage. To Porter, good competitive form-dependent businesses, the unique attributes
strategy creates unique value for a particular set of and presentation of their offerings online (such as
customers (in other words, differentiation). That search terms, product descriptions, images, and
uniqueness is derived from companies’ ability to product reviews) are dictated by the platform,
control three key sources of competitive advantage: whose goal is to allow customers to compare com-
a distinctive value proposition that is designed for a peting offerings easily. This can happen only if
particular set of customers and is delivered through products share common search terms and are pre-
a particular configuration of activities difficult for sented to consumers in nearly identical ways.
competitors to replicate. The more ways in which an Moreover, platforms can constrict strategic pric-
organization can differentiate its sales, services, ing flexibility. For example, Amazon punishes
features, production, distribution, design, and publishers on its Kindle platform selling at prices
marketing, the greater its ability to establish and lower than $2.99 or higher than $9.99 by halving
defend a strategic position. their revenues from 70% to 35% of the sales price.7 In
But platform owners don’t only reduce the setting this rule, Amazon believed it could sell more
degrees of freedom a company has over each of e-books and, just as important, discourage other on-
these sources of competitive advantage; at the same line booksellers from entering the market. While
time, they advance their own interests. pleasing customers, this slashed publishers’ margins.
For instance, the same reach that enables compa- Because the platform is always considering its
nies to find customers on Amazon enables the own interests, it can and will take actions detrimen-
platform to recognize growth opportunities and tal to the interests of its dependent businesses.
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 3When one is dependent on a platform, existential uncertainty is endemic,
exacerbated by the ever-present possibility that anything a platform-
dependent business can do can be blocked instantly and without warning.
For example, Apple Music, Spotify, and YouTube suffered severe damage and have no recourse in an
create playlists that include artists contracted to appeals process so capricious and opaque that one
multiple labels. These labels aren’t happy about law firm called it “Kafkaesque.” 8
seeing their artists grouped with (and therefore pro- Platform-dependent businesses lose room to
moting) another label’s artists. Amazon can bundle maneuver. Strategy theorists argue that when
products from as many vendors as it likes. Once that companies discover a profitable strategic fit, they
happens, and consumers see competing providers maintain their position through a unique
together on one screen, vendors are forced to com- configuration of activities that deliver added value
pete within categories and segments they have no to a defined set of customers. The more freedom a
power to define. They must attempt to differentiate company has in designing and configuring its
their offerings based on price (if they can), thin activities to enhance the customer experience, the
descriptions, and reviews (on an architecture de- more defensible its market position becomes.
termined by the platform) rather than their own Competing on platforms creates a heightened
strategic choices. risk that competitors will be able to imitate the su-
Platforms own the customer relationship. As the perficial details of those activities, including product
intermediary between the customer and the provider, descriptions, price points, and targeting the same
the platform controls the relationship: The seller search terms. At the same time, a platform may favor
knows only what the platform wants it to know. In some market participants over others, as Amazon
fact, most platforms actively prevent off-platform did when it chose Apple over Apple resellers.
contact between buyers and sellers, because that Benefiting from its godlike perch, the platform is
would create the potential for disintermediation. well positioned to recognize when innovative prod-
Instead, the platform enforces a fundamental asym- ucts or services represent a business opportunity.
metry in information about the customer in the The platform can then increase the commission it
platform’s favor. charges a seller or introduce a competing product
When one is dependent on a platform, existen- itself. Recent research shows that Amazon is more
tial uncertainty is endemic, exacerbated by the likely to enter market segments created by its third-
ever-present possibility that anything a platform- party sellers when those have proved successful.9 In
dependent business can do can be blocked instantly this sense, a platform may use its dependent busi-
and without warning. For example, if a market nesses as test beds to identify promising markets the
participant is flagged for an alleged rule infraction — platform can appropriate.
such as manipulating reviews — punishments can In one instance, Amazon employees accessed
include suspension, delisting, or a ban. This hap- data about a bestselling car-trunk organizer sold by
pened to a multimillion-dollar weapons accessory a third-party vendor; that data included its total
business on Amazon that was temporarily suspended sales, how much it paid Amazon for marketing and
after a rival hacked the business’s account and posted shipping, and how much Amazon made on each
fake five-star reviews so it appeared that the seller had sale. Amazon’s private-label arm later introduced
violated Amazon’s rules against buying favorable re- its own car-trunk organizer. Amazon denied that
views. According to the weapons business’s owner, its employees examined specific data, but it’s
the estimated sales loss for the company during the indisputable that Amazon possesses it.And it’s
suspension was about $150,000. Even when such de- indisputable that Amazon can feature its own com-
cisions are reversed, businesses may have already peting products more prominently. 10
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 4N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : C O M P E T I T I O N
After entering an attractive market first Fortnite, shows that an early investment in cross-
identified by a dependent business, a platform can platform availability was key to growing a larger
use its search algorithms to point potential custom- customer base. Although it launched in 2017 on
ers in the direction it prefers while adjusting its Xbox One with limited cross-platform support,
ranking algorithms to favor its own products or today it is available on Android, iOS, macOS,
services. A recent analysis by The New York Times11 Microsoft Windows, Nintendo, and PlayStation.
discovered that Apple’s App Store systematically In some instances, platform multihoming can
promoted its own offerings and ranked them ahead be simple. Entrepreneurs selling commodity
of ecosystem incumbents that had made the App products on Amazon can easily and inexpensively
Store successful in the first place. Ultimately, direct list those same products on eBay, Etsy, or Walmart
competition with an omniscient and all-powerful .com. Similarly, the cost to hotels of experimenting
platform makes it virtually impossible for an inno- with different online travel agencies like Booking
vator to defend its position against a predatory .com, Expedia.com, Hotels.com, and others is low.
platform partner. In contrast, porting apps from iOS to Android, or
vice versa, can be difficult and expensive because
Four Strategies for Thriving as a the apps must be modified.
Platform-Dependent Business Multihoming does require effort and time
Traditional assumptions about competitive strat- because each platform requires customization. It
egy are no longer valid in platform-organized also introduces the risk that a company may lose
markets, and in this new competitive landscape, the focus during the diversification process, thereby
strategies necessary for businesses to succeed have impairing its performance.12
changed. Channel multihoming. Even platform-dependent
We’ve identified four strategies that companies businesses can use different channels, such as a
can experiment with to leverage the resources the proprietary website or a brick-and-mortar store. If
platform provides while mitigating the tendency alternate channels are successful, a business can not
to become subservient to it. Organizations may only avoid the fees and limitations of platform mar-
consider the following responses, depending on kets but also enhance its value proposition through
their singular situations and needs. unique offerings and stronger customer relations
through perks like better service, loyalty programs,
1. CHANGE CHANNELS. Multihoming is a way to and promotions.
change the power dynamic by offering products or For example, online travel platforms prohibit
services in multiple sales channels. The goal is to hotels from offering lower prices on other channels
increase the business’s access to customers while im- or even on their own websites. But hotels can offer
proving its ability to protect its value proposition better cancellation policies or special packages (free
and reducing its dependence on a single platform spa treatments or tasting menus featuring regional
owner. Types of multihoming include the following: foods, for example) that are not available through
Platform multihoming. Offering goods or ser- the platform. These types of special offerings can
vices through multiple platforms can have significant be promoted in various ways and delivered through
benefits, especially when those platforms offer access owned channels such as a hotel’s website or at the
to different customer segments. For instance, the suc- front desk. This approach can allow hotels to
cess of Epic Games, the video game company behind cultivate different subgroups of customers, develop
Offering goods or services through multiple platforms
can have significant benefits, especially when those
platforms offer access to different customer segments.
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 5loyalty, and weaken the ties that bind them to the mood, and they can give those businesses a bird’s-
online travel platform. eye view of customer activities and preferences that
But channel multihoming presents a dilemma: they can use to guide that advertising and make it
How can a business extract value from the platform more effective. However, while investing resources in
channel without cannibalizing its other channels or, platform advertising can boost revenue, that high-
conversely, undermining its enormous platform level view is not granular; the company purchasing
traffic and business? the advertising receives only the information the
One response is to differentiate strategically and platform chooses to share.
clearly between channels. For example, travel-book The business challenge is to develop marketing
publishers have placed their high-demand products strategies that leverage the platform to strengthen
on the Kindle e-book platform but have sold their one’s own brand without increasing one’s dependence
most profitable books through the physical print on it. For example, Hootsuite, Marriot International,
channel only, in hopes of attracting direct buyers and and Patagonia, among others, are using Instagram to
retaining the higher profit margins for themselves.13 promote their values and corporate cultures as much
Another strategy is to use channel multihoming as (if not more than) their offerings. And platforms
to offer customers higher levels of customization. can be used to showcase new products and services
For instance, the U.K. company Chilly’s Bottles sells before making large investments by testing market-
reusable water bottles both on Amazon and on its ing concepts through low-cost online advertising,
website, but only the Chilly’s Bottles website offers launching free apps in app stores, or conducting
customers the opportunity to have bottles engraved low-volume experiments on Amazon. It is possible
with their name. to leverage platforms in creative ways while mitigat-
Platform multiplexing. Sellers and content pro- ing lock-in or overdependence.
viders can adopt the different tools available from
various platforms to develop new value propositions, 3. PLAY THE ALGORITHM GAME. Whether a
reach new customer segments, or build new organi- business’s goal is to raise its visibility, gain more re-
zational capabilities that would not be possible on views, or improve its search rankings, it’s necessary
any single platform. Companies can use different ad- to game the system of algorithms that govern the
vertising platforms to experiment with the relevance, platform. That does not mean breaking rules but
quality, or keywords associated with their offerings. rather working them so they work for you. Many
They can also offer limited production runs via plat- consulting businesses have emerged to help
forms such as Instagram or Kickstarter to test new platform-dependent businesses leverage a plat-
products while finding new customer segments and form’s algorithms and regulations to improve
boosting brand awareness. Both startups and estab- customer engagement. They help them identify op-
lished companies such as Coca-Cola, General timal days and times to post on particular platforms;
Electric, Hasbro, and Lego have combined the mo- they design product names, keywords, descriptions,
mentum of multiple crowdfunding platforms to get and hashtags that will improve platform perfor-
low-cost and immediate feedback on new products mance; and they create engaging presentations to
or services. Some have registered sales even before make a company’s goods and services stand out.
production by using these platforms to promote The line between what platforms deem legiti-
projects and drive customer awareness.14 mate or illegitimate is often blurry.16 For example,
some companies have hired people to produce
2. USE THE PLATFORM TO MARKET YOUR- laudatory reviews on Amazon, a practice forbidden
SELF. Just as it has become necessary for businesses under its terms and conditions. Recently, Amazon
to transact on platforms, it is also critical for them deleted approximately 20,000 putatively fake re-
to market on them. After all, 47% of consumers views from its U.K. website following a Financial
begin their online product searches on Amazon.15 Times report on such activities. However, people
Platforms ensure that a company’s advertising and companies are constantly testing such rules
will be seen by customers when they are in a buying and sometimes develop new and effective tactics.
SLOANREVIEW.MIT.EDU SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 6N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : C O M P E T I T I O N
For example, specialized agencies have orchestrated Finding Your Balance
“giveaways,” through which platform-dependent on the Platform
businesses grow their Instagram followers by pay- Platform companies like Amazon and Google are
ing famous influencers for sponsorships, or even among the most valuable businesses in the world for
offering cash to new followers. In 2017, Domino’s good reason: They are able to take a cut of an increas-
created an Instagram giveaway, offering people a ing share of the world’s commerce. Governments must
chance to win $10,000 by following it and leaving a consider whether economies in which a few compa-
comment on the company’s profile. The post re- nies capture an ever-increasing share of the globe’s
ceived 25,564 views and more than 4,500 likes. wealth are healthy for enterprise. Indeed, in early
A platform’s attitude toward this sort of gaming October 2020, the U.S. House Judiciary Committee
varies based on whether the activity threatens its released a report criticizing Apple and other big tech-
power or degrades the user experience. For example, nology companies for stifling competition and
startup Rap Genius tried to game Google’s algo- innovation for their own gain. Later that month, the
rithms by launching a program to promote its users’ U.S. Department of Justice filed suit against Google,
blog posts if those posts included references to the accusing it of “unlawfully maintaining monopolies in
Rap Genius website. The result: Google manually the search and search advertising markets.”17
demoted Rap Genius to the sixth page of its search In addition to pursuing the strategies discussed
results — a deliberate and targeted punishment. above to mitigate the power of platforms, businesses
that depend on them can unite to increase the defen-
4. DIVERSIFY INCOME STREAMS. Establishing a sibility of their positions. In 2018, 582 antiquarian
successful presence on a platform can produce an book dealers from 27 countries pulled more than
enormous volume of traffic that can be leveraged to 3,700,000 books from AbeBooks, an Amazon
diversify income streams. This diversification can subsidiary, after the platform abruptly banned book-
take many forms. The first is simple product diversifi- sellers from a number of countries due to what it
cation on the platform. For example, Chinese said was the increasing cost and complexity (to it) of
electronics company Anker started selling replace- operating in those jurisdictions. After two days of
ment laptop batteries on Amazon in 2011 and protest, AbeBooks apologized and retreated.
became the most popular brand of portable battery Platform-dependent businesses can also engage
packs on the platform. It then diversified into smart- with their governments to argue for new regulatory
phones and wall chargers and now sells a wide variety frameworks to mitigate platforms’ power. In 2019,
of electronic accessories. Its success in building a an association of small and medium-sized Indian
strong brand enabled it to reach a level of customer retailers filed a complaint against Amazon.com and
awareness that mitigates the platform’s leverage. Walmart’s Flipkart platform for anti-competitive
In other cases, alternative channels provide diver- practices. A subsequent probe by the Competition
sification opportunities. Many YouTubers, having Commission of India resulted in a decision that
established their reputations on the platform, now re- barred Amazon and Walmart from selling their own
ceive income from making personal appearances, products alongside those of independent vendors.
endorsing products, publishing books, selling their The commission also mandated that the govern-
own lines of clothing or makeup, and engaging in ment must have access to the platforms’ source code
many other activities. Rovio Entertainment (creator and algorithms. Government action in platform
of the video game Angry Birds) not only introduced markets has also affected Airbnb, Facebook,
in-app purchases and advertisements as additional Microsoft, TikTok, and Uber. The only consistently
revenue sources but also expanded into merchandis- applicable advice for companies struggling with
ing and entertainment with The Angry Birds Movie. As platform policies is to stay involved. In other words,
this illustrates, new revenue streams can be developed you are either at the table or on the menu.
far outside the ambit of the platform and, if suffi- Even as companies pursue strategies to mitigate
ciently lucrative, can allow the business to become less platform power, that work must be ongoing as plat-
dependent on the platform upon which it was born. forms endeavor to neutralize those strategies. An
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 7N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : C O M P E T I T I O N
example of this arms race is YouTube’s acquisition 5. On Aug. 13, 2020, Epic Games’ popular multiplayer
of FameBit, a company that allowed content cre- online game Fortnite, which people could download
through Apple’s and Google’s app stores, rolled out an
ators to bypass YouTube and connect directly to update that violated the platforms’ terms of service by
brands to develop videos. With that move, YouTube allowing players to pay Epic directly, thereby avoiding the
effectively shut down that workaround. platforms’ 30% fee on all revenues generated. In
response, Apple and Google pulled the game from their
Every organization dependent on a platform (or stores. Epic has filed lawsuits against both.
considering becoming so) must be aware of the dan- 6. J. Rietveld, J.N. Ploog, and D.B. Nieborg, “Coevolution
gers and, from the beginning, understand its options. of Platform Dominance and Governance Strategies:
Every business must realize that on the other side of Effects on Complementor Performance Outcomes,”
Academy of Management Discoveries 6, no. 3
the screen, the platform’s strategists and computer (September 2020): 488-513.
scientists are accessing and analyzing ever-greater 7. R.D. Wang and C.D. Miller, “Complementors’ Engage-
reservoirs of data and leveraging more sophisticated ment in an Ecosystem: A Study of Publishers’ E-Book
algorithms to capture a greater portion of the total Offerings on Amazon Kindle,” Strategic Management
Journal 41, no. 1 (January 2020): 3-26.
value of the platform economy. But as we’ve shown,
8. J. Dzieza, “Prime and Punishment. Dirty Dealing in the
the companies that live on those platforms are not $175 Billion Amazon Marketplace,” The Verge, Dec. 19,
helpless, and there is an enormous amount of value 2018, https://www.theverge.com.
in the market — certainly enough for platform own- 9. F. Zhu and Q. Liu, “Competing With Complementors:
ers and platform-reliant organizations to share. An Empirical Look at Amazon.com,” Strategic Manage-
ment Journal 39, no. 10 (October 2018): 2618-2642.
10. “The Investigation of Competition in Digital Markets:
Donato Cutolo is a postdoctoral research fellow at
Majority Staff Report and Recommendations” issued in
the University of Bologna. Andrew Hargadon is the
2020 by the Subcommittee on Antitrust, Commercial,
Charles J. Soderquist Chair in Entrepreneurship at the
and Administrative Law of the Committee of the
Graduate School of Management at the University of
Judiciary of the U.S. House of Representatives, found
California, Davis. Martin Kenney is a distinguished
significant corroboration for an April 2020 Wall Street
professor of community and regional development at
Journal report on Amazon’s private-label product devel-
the University of California, Davis. Comment on this
opment practices, as well as substantial evidence of
article at https://sloanreview.mit.edu/x/62304.
such behavior in other cases.
ACKNOWLEDGEMENTS 11. J. Nikas and K. Collins, “How Apple’s Apps Topped
Rivals in the App Store It Controls,” The New York Times,
The authors thank John Zysman for helpful comments. Sept. 9, 2019, www.nytimes.com.
They also acknowledge support from the Ewing Marion
12. M.M. Tavalaei and C. Cennamo, “In Search of
Kauffman Foundation and the German Ministry of Labor.
Complementarities Within and Across Platform
Ecosystems: Complementors’ Relative Standing
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3. M. Kenney and J. Zysman, “The Rise of the Platform Violating Antitrust Laws,” U.S. Department of Justice,
Economy,” Issues in Science and Technology 32, no. 3 Oct. 20, 2020, www.justice.gov.
(spring 2016): 61-69.
4. M. Kenney, D. Bearson, and J. Zysman, “The Platform Reprint 62304.
Economy Matures: Exploring and Measuring Pervasive- Copyright © Massachusetts Institute of Technology, 2021.
ness and Power,” Socio-Economic Review, forthcoming. All rights reserved
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 8N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : P E R F O R M A N C E
HOW HEALTHY IS YOUR
HARRY CAMPBELL/THEISPOT.COM
BUSINESS ECOSYSTEM?
Paying attention to the right metrics and red flags will help leaders sidestep
the most common pitfalls in the four phases of ecosystem development.
BY ULRICH PIDUN, MARTIN REEVES, AND EDZARD WESSELINK
C
ompanies that start or join successful business eco- The seeds of ecosystem failure are planted early. Our new anal-
systems — dynamic groups of largely independent ysis of more than 100 failed ecosystems found that strategic
economic players that work together to create and blunders in their design accounted for 6 out of 7 failures. But
deliver coherent solutions to customers — can reap we also found that it can take years before these design failures
tremendous benefits. In the startup phase, ecosys- become apparent — with all the cumulative investment losses
tems can provide fast access to external capabilities that may be too in time, effort, and money that failure implies.2
expensive or time-consuming to build within a single company. Once Witness Google, which made several unsuccessful attempts to
launched, ecosystems can scale quickly because their modular struc- establish social networks. It invested eight years in Google+ before
ture makes it easy to add partners. Moreover, ecosystems are very shutting down the service in 2019. One reason for the Google+
flexible and resilient — the model enables high variety, as well as a failure was its asymmetric follow model, similar to Twitter’s, in
high capacity to evolve. There is, however, a hidden and inconvenient which users can unilaterally follow others. This created strong ini-
truth about business ecosystems: Our past research found that less tial growth but did not build relationships, which might have
than 15% are sustainable in the long run.1 fostered greater engagement on the platform. The downfall of
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 9N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : P E R F O R M A N C E
another Google social network, Orkut, was built in the ecosystem, as well as the ecosystem leader or
THE
into its unusually open design, which let users orchestrator. They need to be able to gauge growth in
know when their profiles were accessed by others. It RESEARCH terms of scale not only in ecosystem participation
turned out that users were uncomfortable with this but also in the underlying operating model. And
The authors built a
lack of privacy, and the network went offline in database of more than most critically, they need metrics that reflect the suc-
2014, 10 years after its launch. 100 failed ecosystems, cess factors unique to each of the distinct phases of
including B2C, C2C, and
Typically, ecosystems are assessed using two kinds B2B platforms; social ecosystem development.
of metrics: conventional financial metrics, such as networks; marketplaces; This article lays out a set of metrics and early
software solutions;
revenue, cash burn rate, profitability, and return on and payment, mobility, warning indicators that can help you determine
investment; and vanity metrics, such as market size entertainment, and whether your ecosystem is on track for success and
health care services.
and ecosystem activity (number of subscribers, worthy of continued investment in each develop-
clicks, or social media mentions). The former are not ment phase. They can also help you identify emerging
They compared the failed
very useful for assessing the prospects of ecosystems ecosystems with their issues and decide if and when you may need to cut
because they are backward-looking. The latter can successful counterparts your losses in an ecosystem and/or reorient it.
by industry using
be misleading because they are not necessarily linked systematic qualitative and
to value creation or extraction. They indicate the quantitative analysis. Four Phases in the Business
current interest in the ecosystem, and presumably its Ecosystem Life Cycle
potential, but may also reflect an ecosystem’s ability They studied the Our current research revealed that the growth of
development of all the
to spend investors’ money on marketing and other ecosystems and identified business ecosystems typically occurs in four phases.
growth tactics more than its ability to generate value. key success metrics and Each encompasses unique jobs to be done with cor-
red flags that are early
To improve the odds of success and mitigate the indicators of emerging responding success factors and thus also requires
high costs of failure, leaders must be able to assess challenges in each of the specific indicators and metrics for assessing ecosys-
four life cycle phases.
the health of a business ecosystem throughout its life tem health.
cycle. They need metrics that indicate performance In the launch phase, the focus should be on
and potential at the system level and at the level of developing a strong value proposition for all eco-
the individual companies or partners participating system participants (the orchestrator, partners, and
HOW TO TRACK ECOSYSTEM HEALTH THROUGH ITS LIFE CYCLE
LIFE CYCLE PHASES KEY SUCCESS METRICS RED FLAGS
Launch: • Number and engagement level of • Critical partners do not join the ecosystem.
Establish the ecosystem marquee partners • The wrong users subvert the value proposition of the ecosystem.
in the market, introduce it • Number and engagement level of • Opinion leaders start to leave the ecosystem.
to users, and prove the high-value customers • You frequently have to change your offering.
viability of the concept. • Customer feedback
Scale: • Number of new active customers • A persistent imbalance between participants on both sides of the
Increase the amount of • Number of new active partners market develops.
platform activity, expand • Number of successful transactions • Ecosystem growth reduces value for one side of the market.
the operating model, and • Increasing numbers of users misuse the ecosystem.
• Unit cost per transaction
grow toward profitability.
• Quality indicators begin to decline.
• The operating model complexity begins to rise.
Mature: • Churn rates of customers/partners • The engagement level of customers or partners declines.
Consolidate and defend • Revenue per customer • Early ecosystem adopters start to leave.
the ecosystem’s position. • Contribution margin per transaction • Aggressive copycats and/or niche competitors emerge.
• Retention costs for customers/partners • Partners begin to create competing platforms of their own.
• Acquisition costs for customers/partners • Successful ecosystems from other sectors expand into your field.
Evolve: • Share of revenue from new products • The orchestrator’s take rate from partners rises.
Continuously adapt, or services • Partners increasingly complain about predatory behavior.
advance, and reinvent • Customer satisfaction • Negative coverage in (social) media begins to accumulate.
the ecosystem. • Partner satisfaction • Legal actions against the ecosystem accelerate.
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 10customers) and on finding the right initial design. • What is the definition of success? What are the
After the ecosystem is established, it enters the primary milestones that you need to achieve to
scale phase, in which the key focus is to increase master the current life cycle phase and enter into
the number and intensity of interactions in the the next phase?
ecosystem and to decrease the unit cost of each in-
• What do you need to get right? What are the key
teraction. An ecosystem that has successfully scaled
factors that make the difference between success
enters the maturity phase, in which growth slows
and failure in this phase?
and focus turns to bolstering customer and partner
loyalty, and on erecting barriers to entry by com- • What are key success metrics? Which numbers
petitors. Once a defensible position is attained, the should you track to assess the performance of
ecosystem enters the evolution phase, in which the your ecosystem in this phase?
focus shifts to expanding the offering and innovat- • What are red flags? What are early warning indica-
ing continuously. tors that signal that your ecosystem may not be on
To assess ecosystem health in each of these the path to success, that you may have to change
phases, leaders need to ask and answer the follow- your initial design, or that you should shut it down?
ing questions:
PHASE 1: Launch must be large enough to justify the invest- Third, the orchestrator must determine
T
he goal in the launch phase is to ment required to establish it and attract the the proper level of openness for the ecosys-
establish the ecosystem in the partners needed to operate it. This ultimately tem and create the standards, rules, and
market by introducing it to users depends on the value that the ecosystem can processes to regulate access and decision
and proving the viability of the concept. To create for its customers and their willingness rights. Open ecosystems usually experi-
this end, the orchestrator needs to formu- to pay for it. To achieve this, the ecosystem ence faster growth, particularly during
late the value proposition and delineate must, for example, remove a substantial the launch phase. They enable greater
the initial structure of the ecosystem. This source of friction for customers or fulfill a diversity and encourage decentralized in-
work includes defining the activities and sizable unmet or new customer need. novation. Closed ecosystems allow for a
partners needed to deliver the value prop- Second, the orchestrator must motivate more deliberate design of the ecosystem
osition, the links among them, the roles the required participants to commit and and for greater control over business part-
and responsibilities of the different partic- contribute to the ecosystem. This is about ners and the quality of offerings.
ipants, and the design of the governance not only the sheer number of participants Finally, the orchestrator must decide
and operating models. We identified four but also the right participants (such as pop- how to charge for the ecosystem’s products
key factors that make the difference ular developers on a gaming platform) in and services, and determine how to share
between success and failure during the the right proportions (a balanced number the value created in ways that motivate
launch phase. of drivers and riders on a ride-hailing plat- participants to foster ecosystem growth.
First, the profit potential of the ecosystem form, for example).
Metrics: Many metrics can be tracked during the launch phase of • Number and engagement level of high-value customers. For a
your ecosystem, including marketing expenses, technology costs, gaming platform, this might be heavy users who buy add-ons to
revenues, funding, burn rate, total number of users, and media at- enhance play; for a B2B marketplace, it might be the largest com-
tention. But to assess ecosystem health during this phase and panies in target sectors; and for a social media platform, it might
evaluate the odds of success, we suggest focusing on the following be prominent opinion leaders.
three key metrics: • Customer feedback. This is measured based on quality ratings
• Number and engagement level of marquee suppliers. For ex- of the ecosystem’s products and services in comparison to
ample, a restaurant booking platform would want to track the competing offerings, or Net Promoter Scores in customer
number of subscriptions and reservations among the leading res- surveys. In this case, aggregated metrics should be augmented
taurants in key cities. with qualitative feedback from individual customers
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 11N E W S T R AT E G I E S F O R T H E P L AT F O R M E C O N O M Y : P E R F O R M A N C E
to understand the root causes of customer
Frequent changes sued by several record labels for billions of
satisfaction or dissatisfaction.
to the value dollars, and it had to install a strong copy-
right identification system and monetization
Red flags: If your scores on these three met- proposition suggest options for copyright holders.4
rics are strong and trending higher, it is likely that the ecosystem • Opinion leaders begin to leave the ecosys-
that your ecosystem is performing well in the is not sufficiently tem. In the DVD player war that started in
launch phase. If, however, any of the follow- compelling or that 2005, the HD DVD platform, developed by
ing red flags appear, your ecosystem may be it appeals to too Toshiba, Microsoft, and others, initially sold
veering off the path to success, and you may few customers. more players than the Blu-ray platform,
have to change your initial design or shut championed by Sony and Apple. However,
down altogether: the HD DVD camp had to concede defeat
• Critical partners do not join the ecosystem. after large film studios, including Warner
Better Place was founded in 2007 to provide an infrastructure for Brothers and Fox Searchlight Pictures, defected to Blu-ray.5
the efficient charging or exchange of electric car batteries. In this • T he ecosystem’s value proposition is changed frequently.
model, a buyer purchased a vehicle without a battery and paid a Frequent changes to the value proposition suggest that it is not
mileage-based monthly fee for leasing, charging, and exchanging it. sufficiently compelling or that it appeals to too few customers.
Better Place failed in 2013, after receiving more than $900 million in Club Nexus, created at Stanford in 2001, was the first college-
funding, because it was unable to secure the participation of auto- specific social network. It reached 1,500 members within six
makers, an essential group of partners in the ecosystem.3 weeks of its launch, but growth leveled off just as quickly. The
• The wrong users subvert the value proposition of the ecosys- network responded by adding new features, such as chat, email,
tem. YouTube was set up as a platform for people to share classified ads, articles, and events. However, the added complex-
personal videos, but in its early years many people used the plat- ity only made the platform more difficult to use, and the network
form to post illegally copied content. As a result, YouTube was soon closed down.6
PHASE 2: Scale of scale. Direct network effects occur of the ecosystem’s operating model to keep
W
hen ecosystems survive the when the value derived by users on one up with growing demand and realize econ-
launch phase, the focus of side of an ecosystem grows as their num- om i e s of s c a l e . Su cce s s f u l d i g i t a l
orchestrators shifts toward bers increase (such as social network ecosystems benefit from asset-light busi-
increasing the amount of platform activ- users). Indirect network effects manifest ness models, low-to-zero marginal costs,
ity, scaling the operating model, and when the value derived by participants on and increasing returns. However, the econ-
growing toward profitability. Two key fac- one side of an ecosystem grows with the omies afforded by supply-side scale can be
tors determine the difference between number of participants on another side limited by rising marketing, recruiting,
success and failure during this phase. (for example, drivers on a ride-hailing and technology expenses. As networks
The first factor is the ability to establish platform prosper as the number of riders grow, increased complexity and quality
and harness strong positive network ef- increases). control can drive up costs and diminish
fects that provide demand-side economies The second success factor is the ability economies of scale, too.
Metrics: To assess the extent to which your ecosystem is fulfilling • Number of successful transactions. Increasing the number
these success factors during the scale phase, we suggest that you of transactions is crucial because ecosystems create value for
focus on the following four key metrics: customers, partners, and orchestrators through transactions,
• Number of new active customers. Rapidly attracting new active not through media attention, number of registered users, or
customers to the ecosystem is the key to achieving scale on the click rates.
demand side. • Unit cost. Unit cost — that is, the average total ecosystem cost per
• Number of new active partners. Increasing the scope, diversity, transaction — must decrease during the scale phase in order for
and scale of the offering is an important precondition for appeal- ecosystem growth to provide value for all participants.
ing to new customer segments.
SPECIAL COLLECTION • NEW STRATEGIES FOR THE PLATFORM ECONOMY • MIT SLOAN MANAGEMENT REVIEW 12Red flags: In addition to these metrics, a number of early warning the platform, and in 2004 it was sold for just $7 million.8
signs may indicate that your ecosystem is not on track during the • Increasing numbers of users misuse the ecosystem. As OpenTable,
scale phase and that you need to adjust its design or governance the restaurant booking platform, scaled, the incidence of no-show
model: reservations grew along with it, alienating its restaurant partners. To
• A persistent imbalance develops between the number of partici- mollify them, the platform introduced a policy that banned users
pants on different sides of the market. U.S. fleet-card companies, who failed to show up or canceled reservations less than 30 minutes
such as Comdata (now owned by FleetCor Technologies) and Wex, in advance four times within a 12-month period.9
sought to orchestrate ecosystems that cut maintenance and adminis- • Quality indicators begin to decline. If the quality of an ecosystem’s
trative costs for the owners of truck fleets and drove business to truck offerings deteriorates during the scale phase, a downward spiral in
stops. But they found it hard to scale initially because they could not both supply and demand can develop. For example, social media
convince enough fleet operators to pay for the service. To resolve the platform MySpace did not require users to provide their real identity.
imbalance and attain profitable scale, the orchestrators changed As a result, the platform became littered with spam and attracted
their pricing structure from one in which truck fleets paid and truck inappropriate content, which, in turn, made it less attractive for
stops were subsidized to one in which truck stops contributed major brands to be associated with the ecosystem and ultimately
considerably more to revenues than fleets.7 contributed to its demise.10
• Ecosystem growth reduces value for one • Operating model complexity begins to rise.
side of the market. Covisint, an auction In the early days of the internet, Yahoo be-
marketplace in which automotive suppliers Orchestrators came a leading internet portal and search
bid for contracts from car manufacturers, need to find ways engine by manually curating and categorizing
quickly attracted $500 million in funding
to enhance the websites into topic areas. This operating
from five major automakers. But as the eco-
system reached the scale phase, it became
loyalty of ecosystem model worked well until the internet started
to grow exponentially and the number of
increasingly unattractive for suppliers: As participants, because websites exploded. It quickly became appar-
more of them joined the ecosystem, the competitors will ent that Yahoo’s model was not scalable, and
competition for contracts led to lower and increasingly try it was overtaken by Google and its automatic
lower winning bids. Suppliers abandoned to poach them. page-rank algorithm.11
PHASE 3: Maturity failure during the maturity phase. Second, orchestrators of mature eco-
I
n the maturity phase, the growth of First, the orchestrator needs to find systems must erect barriers to entry to
the ecosystem begins to slow because ways to enhance the loyalty of ecosystem defend their positions against incursions
its market is increasingly saturated participants, because competitors will by competitors and imitators. Digital eco-
and it has captured a substantial share. increasingly try to poach them. This is a systems require lower initial investments,
Now, management’s primary objective particularly dangerous threat when eco- and their network effects are weaker and
shifts to consolidating and defending the system participants can simultaneously can be more easily reversed than the physi-
ecosystem’s position. This can be challeng- join multiple competing ecosystems and/ cal network effects of, say, a railroad or
ing because competitive attacks can target or easily switch between ecosystems. For telephone network. To build barriers to
either the demand or the supply side of the example, restaurants and consumers often entry, orchestrators can harness network,
ecosystem. Moreover, mature ecosystems use more than one food-delivery plat- scale, and learning effects (such as using
must avoid complacency and continue form. To reduce this risk, orchestrators customer data and advanced analytics to
being the technology and innovation lead- can offer additional services to partici- continuously improve and personalize of-
ers in their industries. Two key factors pants and add user incentives, such as ferings) that are difficult for new entrants
make the difference between success and loyalty programs. to match.
Metrics: To assess ecosystem health during the maturity phase, or- percentage rates at which customers stop using an offering or part-
chestrators and partners should focus on the following five metrics: ners stop contributing to the ecosystem, are the most direct measures
• Churn rates of customers and partners. Churn rates, the annual of loyalty and performance vis-à-vis competing ecosystems.
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