Background Research For Strategic Decisions
March 17, 2018
How Platforms Change Competition
In the world of platforms, the nature of competition is being transformed. Companies find themselves struggling to make sense of new competitive threats posed by the unexpected, often counter-intuitive rivals.
Educational book publisher Houghton Mifflin Harcourt doesn’t fear McGraw Hill, as much as it fears amazon. Broadcaster NBC worries less about ABC than it does about Netflix. Appliance maker Whirlpool fears General Electric and Siemens less than it fears Nest, the maker of smart home monitoring and control devices that is rapidly becoming a key element in the emerging “Internet of Things.” And the social network Facebook was less worried about a rebooted Myspace than about Instagram and WhatsApp – which is why it bought them.
What has changed is not simply the types of competitors but the very nature of the competitive battle. The result is a series of seismic upheavals that are making one business landscape after another unrecognisable. We’re not speaking only of the dramatic DISRUPTIONS produced by the advent of platform businesses in traditional marketplaces. We’re also referring to the dramatic competitive battles being waged within the world of platforms. Between platform companies – with results that are often startling even shocking.
It is probably safe to say that the $25 billion initial public offering of shares in Alibaba Group in September 2014 – the largest IPO in history was one of the most unexpected business stories of the decade.
Westerners who had not obsessively followed the world of e-commerce has never heard of the company. Those who had were mainly familiar with it through its connection with the floundering Yahoo, which owned a significant stake in Alibaba. Much U.S. coverage of the Alibaba story was vaguely dismissive, treating the company’s amazing growth and impressive size as fluky results of the sheer vastness and parochialism of the Chinese market and the impact of government protectionism.
A 2010 story in the New York Times was typical. Reporter David Barboza acknowledged Alibaba as one of the fast-growing local firms that are making huge profits” through online sales. But in the future, Barboza wrote, “China’s Internet market could increasingly resemble a lucrative, walled-off bazaar, experts say. Those homegrown successes …could have trouble becoming global brands.” Barboza quotes one analyst as predicting, “When the Chinese companies go out of China, they will find that they fail to understand their competitors as well as they did when they were competing in China.”
By the summer of 2014, with Alibaba’s U.S. stock debut just weeks away, U.S. business analysts were singing a different tune. In Businessweek, Brad Stone warned of the “Alibaba invasion” and explained how the Chinese giant was suddenly posing the first ever significant threat to the U.S. domination of the Internet. Stone recounted how Alibaba had outcompeted eBay in China, had become a huge source of of Chinese goods for businesses around the world, had successfully opened the chinese consumer market for global companies such as Nike and Apple, and was quickly building the infrastructure to challenge Amazon and eBay in their own home market the U.S.
Stone concluded, “China’s Web entrepreneurs are positioning themselves to compete in – and win – the race to build the first truly global online marketplace.”
In most traditional industries, such a rapid emergence from relative obscurity to global leadership would be virtually impossible. Glancing back at business history, we see that it took American business in industries like steel and heavy machinery decades to overtake once dominant rivals in Britain and Germany. After world war two, Japanese upstarts required three decades to seize leadership roles into auto making and electronics from industry leaders in the U.S. But Alibaba today has the potential to outstrip companies like eBay and Amazon a decade or so after entering the battle for platform marketplace dominance.
How did it happen?
As with most big business stories there are many contributing factors and elements in the Alibaba saga, including the strategic insights of CEO Jack Ma, the explosive growth of China’s middle class, and, yes government imposed restrictions on foreign companies operating in China, which give Alibaba a bit of space to grow without being crushed by American competitors. But the swiftness of Alibaba’s ascension is largely a function of the new realities of platform competition.
Explosive network effects and strong economies of scale enabled this relatively new company to expand SO RAPIDLY on the stage of international commerce. Alibaba.com one of five major businesses operating under the corporate umbrella, allows companies around the world to source goods, products, and parts from Chinese manufacturers. One London cosmetics maker marvels that, through Alibaba.com, “I have access to hundreds of suppliers at my fingertips.” Conversely Tmall, another Alibaba subsidiary, sells foreign goods to millions of Chinese consumers, bypassing the country’s traditional broker system, which slowed imports and added layers of paperwork and cost. One U.S. shoe retailer says Alibaba “has compressed the whole middle layer of of retail.” The result is a near-frictionless cross border trading that connects thousands of merchants with millions of customers- a phenomenon scarcely imaginable before the advent of a platform.
Furthermore, Alibaba is shrewdly leveraging another enormous competitive strength of platforms – the ability to seamlessly incorporate the resources and connections of outside partners into the activities and capabilities of the platform. For example, to expand its ability to offer U.S. goods to Chinese consumers, Alibaba has now forged a partnership with ShopRunner a U.S. based logistics company in which Alibaba owns a stake. ShopRunner already has arrangements with U.S. brands including Neimans Marcus and Toy ‘R’ Us that enable Alibaba to ship American products to customers in China in two days.
Back in the nineteenth and twentieth centuries, it took decades and vast investments in retailing, warehousing, product testing, management, printing, shipping, service, and fulfillment, systems for Sears, Roebuck to make itself into an America’s merchant.
Today, a platform business like Alibaba can assemble the capabilities of dozens of preexisting entities and swiftly become a contender for title of merchant to the world. And, of course, Alibaba’s chief rivals for the crown are other platform companies Amazon and eBay. Such is the world competition that the rise of platforms has brought.
But to fully understand how the rise of the platform is transforming the nature of the competition, we need to reexamine the traditional concepts of competition that have dominated business thinking for decades – and that business people still take for granted
Stay tuned for the actual strategy.