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Digital Platforms – The Evolution of the Retail Segment

Now and then we come across discussions about new business models that emerge as a result of the digital transformation (or revolution), supported by the use of technologies that deal with massive amounts of data (artificial intelligence and machine learning), communications (5G), cryptography (blockchain), and the Internet of Things (IoT), which open up possibilities for creating new business models and technological solutions capable of helping us to solve previously unthinkable problems.

In the contemporary whirlwind of disruptive transformations, there is an innovative business model that is causing major changes in the retail segment. The multisided digital platforms (MSP), which use technology to connect consumers and organizations in interactive ecosystems, support the creation and the exchange of a huge diversity of products and services. Some examples of MSPs are well-known: Airbnb, Amazon, Alibaba, Uber, Facebook, and Twitter. The fundamental purpose of a platform is to consummate and orchestrate interactions between users and producers, facilitating the exchange of goods, services, or “social currencies”, without intermediaries. A textbook example is Amazon’s Kindle, which allows writers to publish and sell books directly, and sell it to the consumer.

The power of platforms has transformed economies and societies because they have lower operating costs than analog (or physical) companies, operate in an environment where there are no geographical barriers, and grow much faster. They are constantly evolving due to the dynamic ecosystem of transactions and connections created by the platform’s participants, the producers, and the consumers.

Although some platforms share similarities, it is possible to distinguish four basic types of platforms, following the concepts created by Chu (2019):

  • Developer platforms – these are operating systems and tools that allow developers to create products more efficiently. They are not visible to end-users because customers do not know the technology they are using when interacting with the platforms. They are companies such as Amazon Web Service (AWS), Wix, and WordPress.
  • Marketplaces platforms – these platforms are focused on allowing connections between supply and demand. They are “reliable platforms”, which allow two types of economic agents to trust each other to carry out transactions. They are companies such as Amazon, Airbnb, and Uber.
  • Product Extension platforms – these are platforms whose goal is to allow third-party application developers to enhance their product, making it more attractive to customers. A basic example is the iPhone – although it is a physical product, the ecosystem of applications created by the network of developers is the reason for the success of the platform.
  • Networks – in this type of platform consumers interact with each other and/or with the content of the platform both in transactional and non-transaction manners. Examples of networks are, LinkedIn, Pinterest, Yelp, Twitter, Facebook, and YouTube.

Traditional retailers were not left out of the transformational process created by multisided platforms because retailers developed their platforms or marketplaces. With the emergence of the internet, the traditional, old-style bricks-and-mortar store is no longer the main channel of the flow of products. Moreover, consumers became fundamental and active actors in the process of creating products and services through digital channels of relationship, a process called “co-creation”.

Retailers concluded that the strategies of pushing products to the market did not generate anymore the best results. The goal shifted to become a channel where the end customer could have a better consumer experience and also be able to generate important information for the producer. Retail is on its way to start a phenomenal transformation process towards digital platforms because the internet is accelerating the integration between the physical and digital channels.

Multisided platforms (MSP) and Traditional Retail

Since the beginning, the biggest difficulty for retailers has been connecting with buyers and selling their products at the lowest cost. The focus was inside the company, in the efficient management of the processes of a classic linear chain of value creation from end to end: manufacturer – wholesaler – retailer – end-customer. With the advent of new digital technologies, this linear supply chain has been redefined through digital platforms.

Currently. one we can buy products or hire services over the internet directly with the owner of the product or service through digital platforms, the so-called marketplaces, that provide a simple consumer experience through an ecosystem of services and features orchestrated by the platform owner. In this new market context, large retail companies face an enormous challenge: to learn to orchestrate dynamic collaborative connections and relationships with suppliers and customers, instead of fixed, standardized processes in a linear value chain. Two examples of companies that pursued digital transformations are in the next paragraphs.

Magazine Luiza (Brazil)

Magazine Luiza decided to adapt its business model by creating its multilateral platform called Magalu, inspired by the models of Amazon and Alibaba. What is special about Magazine Luiza’s platform? To attract retail partners to enter the platform, Magazine Luiza has developed a series of services for its suppliers to be able to upload and operate their virtual catalog. The Magalu team managed all delivery stages in a logistics process shared with the suppliers, to ensures that the quality of the delivery services. The acquisitions and strategic partnerships helped Magalu to diversify the portfolio of products sold through the platform, as well as ensuring the integration of online and offline channels. The marketplace uses cutting-edge technology to access to data generated by the network that will facilitate the suggestion of products and the improvement of the customers’ shopping experience.

Honestbee (Singapore)

Honestbee is a multilateral shopping platform based in Singapore. It solves the problem of people who do not have time or do not want to go to the nearby markets to do the day-to-day purchases of the house, such as food and toiletries. It is an on-demand purchase and delivery service that designates a freelance buyer to make the purchase on your behalf at the nearest supermarket and/or stores and deliver your order to your home.

As a multilateral platform, Honestbee connects the end customer who wants to make their purchases, the freelancer buyer and the store owner through the features and services offered to the platform’s participants: convenience for the end customer, job opportunity for the freelancer buyer and increase in the shopkeeper’s operating radius, bringing new clients to the business. Prices and delivery rules, such as charging delivery fees, are set by the shopkeeper.

Is Porter´s Framework still valid?

The internet economy has completely transformed the way we plan and think business strategies into platforms (or marketplaces). Porter’s five forces are still valid, but to the matrix of these forces, it is necessary to add a new force: the network effect, as explained by Alstyne, Parker, and Choudary (2019) in their work that addresses the differences between the pipeline business models and MSPs. The dynamics between these forces and how companies deal with them has completely changed, because, on platforms, the focus is on the outside, on orchestrating the network effect generated by the interaction of the participants so that everyone can receive value from these interactions. It is not a zero-sum relationship.

The beauty of the platform business model is that enterprises can play different roles, depending on which side you are at a given time or context. For example, if you are an Uber driver, at any given moment you can be a user of the transportation service as a passenger and vice-versa. The business models on digital platforms have enabled the creation of new forms of strategic and operational management bringing a level of complexity never seen before. Organizational boundaries are redefined as platform companies influence external ecosystems to create value in other ways. This will not stop and new disruptive transformations are happening at this moment through technology-based startups that bring new ways to solve recurring problems.

Markets are always moving and changing, but nowadays the transformation is faster and it can emerge in very different markets. Finally, it is necessary to understand that not every business needs to be digital because there are activities for which the physical presence is fundamental to the beginning or to the closing of a business transaction. Brands and companies are not eternal, but they can last for a long time if they can change and adapt to the new contexts of their markets.

Conclusions

Traditional retailers are being forced to review their business strategies and learn to orchestrate the demands and needs of various players in a digital environment, that is, a multilateral digital platform, in which the interaction between supply and demand is based both on data and in digital channels. Small retailers and merchants who do not have enough capital to invest in digital transformation processes (as Magazine Luiza in Brazil), or to find creative strategic paths (as Honestbee in Singapore). As a consequence, small retailers must focus on what they do best and outsource the complexity of managing digital processes to specialized partner companies, for example, marketplaces.

References:

CHU, Brandon (2019), Retrieved on April 22, 2020, from Mind the Product Blog, https://www.mindtheproduct.com/platform-management-by-brandon-chu/

Suggested literature:

KALTENECKER, Evodio. When Technology meets Strategy: Impacts of Industry 4.0 https://evodiokaltenecker.com/when-technology-meets-strategy-impacts-of-industry-4-0/

CUSUMANO, Michael A., & YOFFI, David B., & GAWER, Annabelle (2020). The Future of Platforms.  MIT Sloan Management Review. Retrieved on April 15, 2020, from https://sloanreview.mit.edu/article/the-future-of-platforms/

MICHEL and SAMEER (2016). The 9 Types of Software Platforms. Blog Platform Hunt. Retrieved on April 15, 2020, from https://medium.com/platform-hunt/the-8-types-of-software-platforms-473c74f4536a

VAN ALSTYNE, Marshall W., & PARKER, Geoffrey G., & CHOUDARY, Sangeet Paul (2016). Pipelines, platforms, and new strategy rules, by, Harvard Business Review” Harvard Business Review, Strategy: Retrieved on April 22, 2020, from https://hbrbr.uol.com.br/pipelines-plataformas-e-novas-regras-de-estrategia/

Evodio Kaltenecker, PhD, is an Assistant Professor at the International Business department of Tecnológico de Monterrey.

Marcelo Simoes, MBA, is the leader of B2B Business Development activities at E2GO and is the founding partner of Bridge Business Intelligence

Source of all images: https://www.pexels.com/, licensed under the Creative Commons Zero (CC0) license.

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