New book from MIT’s Sloan reveals principles that made the world’s most valuable firms

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CAMBRIDGE, MA–Digital platforms, which include the likes of Microsoft, Apple, Amazon, Alphabet (Google’s parent company), Facebook, Uber, and Airbnb, have recently become dominant forces in many marketplaces.

These companies are enormously valuable—several temporarily surpassed the trillion-dollar mark in value. They are also extraordinarily powerful. How did this happen in such a short amount of time? How have a small number of firms come to exert such influence over our lives and the economy? And how should government regulators, as well as competitors, respond?

These questions are the subject of a new book, The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power (Harper Collins), co-authored by Michael A. Cusumano, the Sloan Management Review Distinguished Professor of Management at MIT’s Sloan School of Management. Cusumano and his co-authors, Annabelle Gawer of the University of Surrey and David Yoffie of Harvard Business School, offer a timely investigation into the emergence and ascendancy of these digital juggernauts.

“The rise of digital platforms has been one of the most important financial news stories of the past quarter century,” says Prof. Cusumano. “Our book attempts to explain how we got here and distill the technological and business factors that have helped these companies become such powerful players in shaping the global economy, the future of work, and the political world we now face.”

The authors began their study by analyzing 20 years of data on the performance of publicly listed platforms compared to non-platform companies in the same markets. They found that while both types of firms had the same level of sales, platforms were more productive, more profitable, and more valuable compared with their non-platform counterparts.

The authors divided all platforms into two types: innovation platforms, which rely on third-parties to create complementary products and services that make the platform more valuable (such as smartphone apps or third-party Airbnb services); and transaction platforms, which bring together two sides of a market (such as buyers and sellers). Hybrid companies, such as Amazon, Apple, Google, Tencent (WeChat), and several others, combine the two types.

The number of successful platform businesses that survive and become public companies is relatively few, according to Prof. Cusumano. “There are a lot of failures. Our data shows that although some platform businesses can grow extraordinarily fast, most lose extraordinary amounts of money,” he says. “What’s more, platform-izing a bad, low- profit business, like taxis or groceries, does not make it a good business.”

The book goes on to analyze how to build an innovation or transaction platform or create a hybrid strategy. The authors also discuss how traditional companies can learn to compete with digital platforms. In addition, they explain how platform thinking and ecosystems are emerging in new areas, such as self-driving cars, voice-controlled home-AI devices, gene editing, and even quantum computing. The book’s goal is to help managers and entrepreneurs build platform businesses that can stand the test of time and win their share of battles with both digital and conventional competitors.

The book examines the role governments should play in rethinking data privacy laws, antitrust, and other regulations that could rein in abuses from these businesses. “Regulation is a complicated issue—these are very large, complex companies that operate in many different markets,” says Prof. Cusumano. “It’s clear, however, that there is going to be more regulation and these companies are going to be subject to the same rules as other corporations. But platforms must not wait for governments to create a new set of rules that may or may not work for them; they must regulate themselves first.”

The authors’ call for self-regulation has critical implications for the kinds of managers that platform companies will need in the future. Platform companies must “expand their strategic visions and definitions of success,” says Prof. Cusumano.

“We hope the company executives and board of directors at top platform companies, as well as leaders in government and academia, will recognize that the next generation of leaders must have a deeper understanding of how platforms and digital technologies can impact the global economy and society. The true business of platforms has to extend beyond sales, profits, and market values.”

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