Platforms and business model

Business Model

In the most simplistic definition, business model is about how a business goes about making money. Typically, the discussion is concerned with the ways in which information, resources, suppliers, and buyers are organized.

The traditional model is somewhat of a black box where information and resources are processed and suppliers and buyers are aligned for input and output, respectively. Traditional manufacturing companies such as GE would be a good example. Even in the hi-tech arena, this is the norm until recently. For example, Oracle hires programmers, upgrades its database and services offerings, then sells to users.

The benefit of the traditional model is that a company has decent control over its destiny since it controls the direction and resources. The drawback, however, is that there are significant competitive barriers when you want to move away from what a company has traditionally done into a new space or a new way of doing things.

Platforms

Business models for tech firms, most pronounced in software, have been shifting to the concept of platforms in recent years. Instead of seeing a linear value-chain, these companies compete on the ability to connect supply and demand, like a platform. Beyond the ability to foster transactions, what makes a platform robust and successful is the ability to create a virtuous cycle whereby participation by one group can increases participation by the other group(s).

Examples of Multi-Sided Platforms

Prof. Andrei Haigue of Harvard Business School has been exploring the notion of multi-sided platforms in great depth. In his Note on Multi-Sided Platforms (MSP), here are a few examples of MSP.

• E-commerce sites like Amazon mediates between buyers and sellers
• Search engines like Google mediates between online advertisers and users
• Social media sites like Facebook mediates between users, advertisers and third-party application developers