By Yusof Seedat, Director for Growth Markets (APAC, MEA, LATAM, Russia, Turkey) at Accenture Research
The unparalleled growth of the digital economy has put it on course to account for 23 percent of the world’s economy and expected to grow at a rate of 8.3 percent to 2020. As this growth continues unchecked, digital platform business models represent a fast increasing proportion of the overall total. The rewards that this offers are astounding – the top 15 public ‘platform’ companies already represent more than $2.6 trillion in market capitalisation worldwide, and they’re attracting this unprecedented level of capital investment through the value creating power of their platform ecosystems and digital assets.
However, our research on assessing platform readiness indicates that South Africa is yet to capitalise on the opportunity presented by the platform economy, ranking low compared to other G20 nations.
What makes digital platform business model special?
The model allows companies to create entire ecosystems that do much of the work to grow the company and help drive strategies. Such platform-based business models fundamentally change how companies can do business and the key distinction of these models is proliferation of connectivity and the growing power of data and data analytics. The network effects that grow the platform exponentially with each new transaction has magnified the benefits accruing to all participants. PokémonGO fits this example perfectly, the presence of ubiquitous platforms such as Google’s Android and Apple’s iOS, led to its massive hype that spread rapidly, leading to a near doubling of Nintendo’s valuation.
While tech companies and the born digital have successfully mastered platform strategies, the opportunity is open to every company in every industry. Even small enterprises are well placed to benefit from the large-scale marketplaces that platforms offer. And they are also well positioned to establish platforms of their own. After all, it is largely due to platforms that the most successful start-ups have reached $1 billion valuations after just four years when, on average, Fortune 500 companies have taken twenty years to do so.
Barriers to entry
However, barriers to entry are becoming higher as large platform players expand geographically or into adjacent market sectors, shift from business-to-consumer to business-to-business (examples include Airbnb, Booking.com and Uber), or develop offline-to-online models that move them from online channels to physical stores (like Amazon, DHgate or Paytm).
African specific constraints ranging from the limitations caused by poor physical infrastructure, payment systems impediments as cash still dominates due to low financial inclusion, to deficits of stable governance and logistics further challenge growth of platforms. Also, less tangible aspects such as talent to run platform businesses and creating consumer trust need to be considered.
So while digital platforms can disrupt and dominate markets to create communities of enormous scale, delivering compelling customer experiences and offering new forms of innovation and value creation, the reality is that most new platform businesses will fail, in fact our research shows that as few as 10 percent of new start-ups focused on digital platform business models will become profitable independent entities in the coming years unless they acquire a new mindset and business approach.
South Africa not yet “platform ready”
Within sub-Saharan Africa, the highest density of digital platforms are located in South Africa. Platform operations vary by industry, for example, Takealot, a large e-commerce platform or M-Pesa mobile money. Yet the largest platforms in South Africa do not sufficiently leverage the digital opportunity compared to platforms in other markets particularly US and China. We created a benchmark called the Platform Readiness Index which measures 16 G20 countries on a number of factors including the size and savviness of their digital population, the extent of its digital talent and the strength of its wider entrepreneurship culture.
We also measured the degree to which companies are willing to share intellectual property and ideas in a spirit of open innovation, the quality of their technology infrastructure and their ability to support home-grown technologies. The agility and flexibility of market regulation on issues such as data privacy, data portability and cybersecurity was also measured. South Africa ranks 14th out of 16 G20 countries on the Platform Readiness Index and is expected to remain in this position by 2020 assuming status quo, that is, if no interventions are made to strengthen the driving factors.
Factors dragging South Africa’s scores down include weak digital users and savviness demonstrated by relatively small customer base and low utilisation of internet channels to transact online. Limited availability of STEM graduates and low technology preparedness pulled down by small R&D spend of $2 billion and a moderate level of ICT assets (8% of total assets in South Africa vs. 15% average in G20 countries) further adds to the challenges impacting platform development growth. Finally, around policy and regulation South Africa ranks low for its cyber security regulation.
Creating the environment and successful business model
SA does however benefit from a relatively more open innovation culture and should therefore focus on improving the levels of entrepreneurship, specifically technology entrepreneurship, and supportive policy & regulation that would substantially help raise the country’s readiness to embrace platforms.
Government must engage with business leaders to advance a range of policies that can create a rich enabling environment for digital platforms such as prioritising data protection standards, designing regulations with digital platforms in mind, encouraging cross-border electronic trade, investing in digital infrastructure and education for SMEs.
In addition to fostering a supporting enabling environment, players need to create a dynamic platform ecosystem that enables businesses to achieve critical mass.
Five factors are key to sustain critical mass in digital platforms, which use new technologies to create large scale markets of customers and service providers:
- Proposition:Create differentiated platform services that extend beyond the point of transaction; and that support both customers on the demand side and service providers on the supply side.
- Personalisation:Target customers through tailored experiences across all channels, using customer data to anticipate needs and offer bespoke experiences.
- Price:Apply new pricing models, such as pay-as-you-go, ‘freemiums’, and subscription pricing to respond to peak demand.
- Protection:Embed trust at the heart of the platform, using both prevention and compensation techniques to attract customers and differentiate the platform.
- Partners:Scale the platform rapidly by identifying digital partners – such as app developers and payment service providers – who can enrich the platform experience and fulfil customer needs.
The shift underway from the linear, resource-heavy, producer-driven industrial model to the demand-driven, multi-sided platform model is both profound, irresistible and filled with benefits if managed well by all stakeholders. As we look to the future, we see no signs of slowing down and should expect the platform phenomenon to disrupt all while also stimulating the birth of many new ones. Digital platform ecosystems are the foundations for new value creation and therefore will play a key role in transforming economies globally.