Inactive, Shapeless and Resource Light: A Platform Business Model
【Conor Stuart／IP Observer Reporter】
Inaction, lack of definition and scarcity of resources as a business plan may not seem like a recipe for success, but those are exactly the three tenets that Professor Chen Weiru of the China Europe International Business School, introduced to attendees at a conference on platform business models recently in Taipei, which was sponsored by major banks, including Fubon Financial Holdings and the Bank of Taiwan amongst others.
Of the 100 biggest companies worldwide, the major parts of 60 are platform style internet companies. These include Google, Facebook, Groupon, Ebay, Baidu, Qunar.com, QQ, WeChat, UnionPay and Ant Financial. Seventy percent of unicorns (companies valued at over US$100 million) also use platform business models. One common feature of these platform businesses is that they grew to be influential companies worldwide in less than 10 years.
Lack of Definition
So why be “shapeless”? According to Chen, if you too readily define your company, this limits you to certain models. If you define yourself as a manufacturer for example, you may be limiting yourself in that role and you may miss out on opportunities as a distributor or something else as a result. A lack of definition also allows you to see past your own frustrations in an industry. For example, if you’ve already identified yourself as a manufacturer, you may be unable to see the sore points for consumers or distributors. Platform thinking involves agility and perception beyond the limits of traditional industry divisions.
One of the other participants at the conference, Ronald Yu, the founder of mobile valet parking app ‘Alfred’, suggested his company as an example of this concept. His initial business model was aimed at offering people valet parking on the go, in that if they were in the downtown area on a busy night and needed help to park, the company would send a staff member to park their car for them while they get on with whatever they have to do. This business model involved a lot of staff and seemed impossible to scale up, according to Yu. There was also a significant liability risk, in that, although no accidents occurred in the time the company was up and running, there was significant exposure on this front. Ronald and his co-founders weren’t afraid to change their company’s central purpose, moving from their initial model to a platform called “Parking Lot App” which provides information and navigation services, helping drivers find parking spaces near their destination at a reasonable price with up-to-the-minute information on most spaces, including curbside parking and parking lots.
Chen gave the example of how a real estate developer in China, CN Fantasia, had spun off a community services platform “Colorful Life”, which connects new homeowners with local services. Despite the lack of resources needed to maintain the platform (the spin off firm has no real assets and even its office buildings are rented), its market cap has always been higher than the mother company CN Fantasia Holdings, according to the CEO Pan Jun. Colorful Life now has 3 million subscribers and 2 million active users. It currently serves people spread across an area of 800 million m² in 2,500 developments in 21 provinces, four direct-controlled municipalities and 185 cities and by 2020, it is predicted that it will serve clients over an area of 2.5 billion m², with cloud users numbering 1 billion.
Chen also recalled suggesting to the head of KFC China that they sell their delivery services as a solution, instead of keeping them as an in-house advantage against other fast-food restaurants in China. A Chinese app developed by students called “Are you hungry” (E Le Ma?), has instead taken over the market. Established in 2009 by a group of university students, it now offers services in 2,000 Chinese cities, serving 1.3 million restaurants and 260 million users. The company is now valued at US$6 billion. However, with KFC’s know how, no doubt they could sell solutions to other restaurants or delivery services, given the sheer scale of the investment they have made over the years and the data that is available to them as a result.
Scarcity of Resources
As in the case of CN Fantasia Holdings, referenced above, a platform model can be asset light and still be competitive in the market. This point is essentially about keeping the need for resources relatively low through learning to adopt more creative approaches to business wherein many different parties, including manufacturers, distributors and end-users etc., form your client base, and all create data that you can harness to save labor. In this case, CN Fantasia Holdings sees the need of new homeowners or tenants to access local services near their homes and sees the need of local businesses and services to offer goods and services to these tenants or homeowners. The more the usership of the platform grew, the better quality the services offered, as different vendors would compete on the app.
Once more, Ronald Yu felt that his company had adopted this model in its transition. As mentioned above, the amount of staff needed for the valet parking services, given that one staff member could park a limited amount of cars over a defined period of time, meant that there was a limit to the scale of his operation and that it would be staff heavy. He slowly came to the realization that the information provision that had begun as a side venture was the new center of the business. He realized that he was able to use the data that he had generated to optimize information services, and the car owners themselves could help to provide data on car space availability for those areas in which there is no real-time data provision. Thanks to the navigation element of the app, he was also able to monitor the way people park and react to this in further provision of services.
According to Chen, the solution essentially lies in identifying the sore points throughout the entire industry and developing a comprehensive solution that resolves these.
He cited the example of the laundry services industry, which had previously been dominated by mom-and-pop style stores in China. Rongchang, a laundry outlet initially founded in 1990 had developed from one store to a chain of almost one thousand stores across China. As the company developed it attempted a franchise model, but the flaw was that this was aimed at these mom-and-pop stores, which meant operations were far removed from the user and that the stores had uneven service standards. Later the company founder shifted to a platform model, offering doorstep collection and drop-off services on the WeChat platform, working in cooperation with these mom and pop stores, converting them from front-end to value-adding services in the back end. The platform offered per item contracts for local people to facilitate this doorstep collection and drop-off, in addition to a regular workforce of delivery and pick up staff. The CEO of E Dai Xi, Lu Wenyong, has suggested that these part-time contracts are a good way to keep elderly people active and in touch with the community, as well as allowing them to earn a little money. As the company was offering solutions to competitors in its own industry, many of its potential clients suggested there was a conflict of interest. This is when the founder of Rongchang decided to sell off its own chain of stores, which made it asset light, but was actually an advantage in the long term, as they no longer had to operate stores.
Chen also stated that the emergence of the platform economy coincides with the onset of what he refers to as “the millennial mindset”. He states that whereas previous generations aimed to achieve on behalf of their company, and were dedicated to it, millennials are more about achieving for themselves as individuals.
In the internet era, platforms can be active 24 hours a day on a global scale. The data this generates should work for you. By this logic the more users generate data on your platform, the less work you will have to put in yourself. This will be even more the case with the onset of the Internet of Things era, when devices will all be capable of becoming data generators.
Chen attributes this to what he calls “the Internet effect”, in that, as opposed to traditional business models, the more people use a service the better it gets. User data helps to optimize the experience.
Traditionally the more people use something the less effective it gets, unless you increase manpower, such as the limit on Yu’s original business model in that one parking valet had a roof limit on the number of cars they could park per hour (it was four).
Another more creative example of harnessing this internet effect was the move by Didi Chuxing to give out vouchers to people that could only be used by others, similar to the vouchers used by Uber. This is a way of spreading service uptake organically, without having to pay a third party such as Google for advert placements.
Chen also pointed to navigation services and how fruitful these can be in terms of improving accuracy and the experience of the app through harvesting data from client behavior, such as data on congestion, estimated journey time, etc. Accuracy in this respect is far more likely to attract users than gimmicks like celebrity voices.
Beyond the Transaction
The platform model shouldn’t be confused with the idea of matchmaking a supplier with a buyer, as in this instance, you’re only serving as a one-time intermediary not a platform, said Chen. To become a platform you must go beyond a one-time connection making, otherwise you’re not useful beyond that one time. This continual contribution involves offering a comprehensive solution which resolves sore points in the industry from all perspectives.
Limits of the Platform Economy
As has been evident in the shift to platforms in China and elsewhere, the companies offering services are often no longer the providers of those services, and this does have some down points, in that quality is sometimes sacrificed. One example of this is the uneven quality of goods offered on Taobao when contrasted with bricks and mortar stores and services like AirBnB when compared with hotels and Uber when compared with taxi services. This can gradually be improved as rating systems are optimized, however.
Although Taiwan has made some headway in terms of opening up its regulations to allow for more flexible models that have already taken off in China and elsewhere, it still trails behind other countries in some regards. For example, the audience members who had been to China, expressed a certain amount of frustration that the largest taxi platform in Taiwan, Taiwan Taxi, has not adopted a similar scheme to that in China, whereby a driver’s rate of pay is often tied to customer ratings in China, in a similar way to the Uber rating system, which incentivizes customer-based services. The general manager of Taiwan Taxi, Joanna Lee, who was present at the conference, stated that the company was trying to incorporate ratings into its system in combination with proximity to the passenger, but that tying pay to ratings is not currently allowed in Taiwan. They are considering offering passengers a choice of taxis, with distance and rating as the differentials, however.
She also admitted to previous failures. One of these was her attempt to harness the other skills of her fleet of taxi drivers, such as plumbing, DIY and electrician work. This failed largely due to the liability that arose.
Chen suggested that traditional industries focus 20% on the development of platform models and 80% on their traditional business, warning, however, that in the platform era, you can either be a disruptor or be disrupted. He predicted that more platforms would emerge with the onset of the IOT era.