The Key Differences between the Classical and RBV Approaches to Strategy AND THE Platform-Ecosystem PERSPECTIVE
The purpose of this section is to clarify and illustrate the key differences between the traditional industry structure (Porter 1980) and resource- based views (RBV) of strategy (Barney 1991; Grant 2016) and the platform-based ecosystem model (Moore 1996; Iansiti and Levien 2004; Fransman 2010; Gawer 2009) and emphasise the limitations of the conventional approaches to strategy.
We will start by considering Porter’s (1980, 1985) industry structure approach that was analysed in Chapter 2 and has its routes firmly set in the industrial and manufacturing age. Porter’s strategic approach, using the Five Forces Framework (1980), is based upon supply-side economies of scale (Van Alstyne et al. 2016). In the manufacturing era, firms had massive fixed costs and low marginal costs which meant that they had to achieve higher sales than their competitors in order to lower the average unit cost of production. High scale enabled them to reduce prices - which in turn increased volume further - and this permitted more price cuts thereby creating a virtuous feedback loop that produced monopolies - hence Porter’s (1980) monopolistic rents were the source of competitive advantage.
In supply-side economies, firms achieve market power by controlling resources, increasing efficiency and fighting off challenges from the Five Forces. The goal, according to Van Altsyne et al., (2016) was to build a ‘moat’ around the business that protected it from rivals and channelled the competition towards other firms. However, the driving force behind the Internet economy is different. This is based upon demand-sideeconomies of scale that are also referred to as network effects (Van Alstyne et al. 2016: 58).
Van Alstyne et al., (2016: 58) also stated that these network effects were enhanced by technologies that created efficiencies in social networking, demand aggregation, app development and other phenomena that helped networks to expand. Therefore, in the Internet economy, companies that achieved higher ‘volume’ than competitors (attracted more platform participants) and offered a higher average value per transaction. Due to their larger networks, these firms were able to provide a closer match between supply and demand from the different sides of the platform (owing to their possession of larger and ‘richer’ troves of data). Subsequently, greater scale generated more value, which attracted more participants, which created even more value. This created another virtuous feedback loop that also produced monopolies. Van Alstyne et al., (2016: 58) suggested that network effects created Alibaba, which now accounts for 80 percent of Chinese e-commerce transactions; Google, which now accounts for 82 percent of mobile operating systems and 94 percent of mobile search and Facebook, the world’s most dominant social media platform which now has 1.6 billion users.
A key weakness of the Five Forces model (not emphasised in Chapter 2) is that it doesn’t factor in network effects (Eisenmann et al. 2006) and the value that this creates. Porter’s (1980) model views external forces as ‘depletive’ or ‘extracting’ value from a firm (Van Alstyne et al. 2016: 58) and therefore proposes building barriers against them (barriers to entry). However, in demand-side economies, external forces are normally ‘accretive’ and add value to the platform business. Consequently, the power of suppliers and customers that are considered threatening in a supply-side world become an asset in a platform world. Therefore, understanding when external forces may add or extract value in an ecosystem is a key aspect of platform strategy which also has to contend with competition from other platform ecosystems.
Moreover, in traditional businesses, the five forces are clearly defined and stable. For a steel manufacturer or an airline, the customers and competitors are well understood and the boundaries separating the suppliers, customers and competitors are clearly delineated. However, in platform-ecosystems the various boundaries can shift very rapidly and also converge.
We will now consider the relevance of the resource-based view (RBV) of strategy (Barney 1991; Grant 2016) and its appropriateness for the analysis of platform-based ecosystems (since this wasn’t covered in any detail in Chapter 2). According to Van Alstyne, Parker and Choudary (2016: 56-57), the emergence of platform-ecosystems has seen three types of shift occurring relating to traditional business models. These include a shift from resource control to resource orchestration; a shift from internal optimisation to external interaction and a shift from a focus on customer value to a focus on ecosystem value. We will now consider each of these in more detail.
The shift from resource control to resource orchestration is very important. According to the resource-based view (RBV) of strategy, an organisation gains an advantage by controlling valuable, rare and inimitable (VRIO) resources (Barney 1991) that are difficult to copy or to replicate. In onesided firms, these resources would include tangible assets such as plant, equipment and raw materials and intangible resources such as brands and intellectual property. With platforms, the resources that are difficult to copy or replicate are the external community and the capabilities that its members own and contribute. These may include cars (Uber’s transportation capabilities), rooms (Airbnb’s accommodation capabilities) or ideas and information (Google’s innovation capabilities). Therefore, the network of external producers and consumers becomes the main resource and capability.
The second important shift has been from internal optimisation to external interaction. Platforms, therefore, invert the firm, with the bulk of the value being created by the community of users (Parker et al. 2016: 11). Firms in the “old” economy organise internal labour and resources (Barney 1991) to create value by optimizing a linear chain of product activities from material sourcing to sales and service. Platform ecosystems, on the other hand, create value by facilitating interactions between external producers and consumers. This external orientation means that the platform firms also divest themselves of the variable costs of production (Rifkin 2014). The emphasis also shifts from controlling and dictating processes to persuading participants to join and contribute to the platform. Ecosystem governance, therefore, becomes an essential strategic skill and Gawer and Cusumano’s (2002) four governance levers, discussed earlier in the chapter, are relevant in this respect.
Finally, Van Alstyne et al. (2016) identified a shift from focusing on customer value to a focus on ecosystem value. Traditional one-sided businesses featured in established strategic models always sought to maximise the lifetime value of individual customers of products and services. These customers always appeared at the end of the linear process illustrated in Fig. 4.1. Platforms, on the other hand, set out to maximise the total value of a growing ecosystem based on a feedback process that is circular and iterative in nature.