How Large Enterprises are Embracing Digital Platforms

The development of the Internet network and the proliferation of personal computers, smartphones, and other IoT devices have led to the emergence of numerous digital platform companies. Platform companies have rapidly grown to have an overwhelming amount of content and user base through their digital services. They are also valued by capital markets at higher multiples than traditional stand-alone product and service providers. According to a study by the French company Mirakl, while it took Hilton Hotels nearly 93 years to provide 610,000 rooms, the space-sharing platform Airbnb grew to offer 650,000 rooms in just four years through its sharing model¹. Amazon has grown to a market capitalization larger than the combined market capitalization of major retailers such as Target. It is also said that about 60% of the startups called unicorn companies (privately held companies with a market capitalization of $1 billion or more) that have often been talked about in the past few years are platform-based companies².

Digital Transformation and Platform Businesses

Platform businesses were originally not limited to Internet services, but also include marketplace businesses that match consumers with products and tenants in department stores and shopping malls, payment agency businesses that increase convenience for customers as the number of member stores increases, and agency businesses that serve as intermediaries between hotels and transportation services and prospective travelers. The more member stores there are, the more convenient it is for customers to use. The services and scale of such platform businesses are diverse, ranging from huge platforms such as Amazon, Alibaba, and Google to small-scale matching sites, and they continue to evolve as digital technology advances and infrastructure becomes less expensive. As digital technology continues to evolve and infrastructure becomes less expensive, new digital platforms are constantly being created.

In Japan, major companies have extensively discussed the launch of new platform businesses and the transformation of existing businesses into platforms as one of the most important management issues. In Japan, several mega-platforms have been created mainly by tech companies such as Rakuten, Yahoo! In addition, the "Transparency and Transparency of Specific Digital Platforms" and the "Transparency and Transparency of Digital Platforms" are also being discussed. In addition, the "Act on Improvement of Transparency and Fairness of Specified Digital Platforms" was promulgated on June 3, 2020, and although the law only applies to a few major companies in Japan, digital platform provider companies are currently the focus of increasing attention from various quarters.

The recent evolution and widespread adoption of edge computing, AI, and other advanced technologies are expected to enable the analysis, management, and control of previously hard-to-acquire offline data. This is also likely to facilitate the emergence of platform businesses that provide new services by combining online and offline data. OMO (Online Merge with Offline) and smart cities are examples of such businesses. In addition, as the digital economy expands globally, the development of digital platforms will become an even more important business theme not only for tech companies, but also for large traditional companies. As the digital economy expands globally, the development of digital platforms is expected to become an even more important business theme, not only for tech companies but also for large traditional companies.

Value of digital platforms in commerce

There are various definitions of a digital platform, but I believe that a digital platform is "a business model that creates a new market economy by using digital technology to significantly reduce the costs and lost opportunities associated with transactions and communication among multiple groups, such as buyers and sellers, and by providing additional services that utilize data. We believe that this is a "business model that creates a new market economic sphere by providing additional services using data. The key issues to be addressed by platforms are: (1) diminishing transaction friction by improving convenience, (2) network effects as the number of platform participants and content increases, and (3) additional services and monetization through the use of data.

1. diminishing transaction friction by improving convenience 2.

According to the Ministry of Economy, Trade and Industry's "Market Survey on Electronic Commerce," more than 70% of B2B transactions in Japan (approximately 353 trillion yen) are currently not conducted online, indicating that there is still much room for improving the convenience of business-to-business transactions through digital platforms. A use case that is easy to understand is that business negotiations and contract procedures, which used to be mainly conducted by telephone, e-mail, fax, and paper, will now be conducted via Web services and online applications. Even in the B2C and C2C markets, there have been more than a few cases where market transactions that were generally thought to be already online, such as flea market apps, have been restructured as smartphone-first UX, creating a new market worth several hundred billion yen. Such large market creation is not only a matter of good or bad UI design or UX design of digital services, but often occurs along with a major paradigm shift in devices and back-end systems, which is one of the reasons why IoT and VR are attracting attention these days.

2. Network effects and increasing returns due to scale.

The network effect (or network externality) is an important aspect of digital platforms. For example, in the case of payment services, as the number of merchants and users increases, the convenience of payment, remittance, and debit transactions increases dramatically, and KPIs such as user retention rate and LTV (Life Time Value) tend to increase even if no special functions are added or services are improved. In the case of e-commerce sites, for example, the more products a site sells, the more reasons users have to visit the site regularly and the more reasons they have to make purchases together, and SEO (Search Engine Optimization) tends to become stronger in proportion to the number of contents posted. In addition, SEO (Search Engine Optimization) tends to become stronger as the number of contents posted on the site increases, and as a result, it can be expected to attract more customers via search engines. In addition, in the aforementioned flea market apps, not only does the number of sellers increase with the number of products, but the ratio of sellers who purchase products in flea market apps with their sales proceeds (seller-buyer conversion rate) is reasonably high, creating a stronger network effect than on regular trading platforms. This is a feature of the app.

3. Additional services and monetization through data utilization.

For digital platform operators, the ability to acquire, analyze, and utilize data on all business transaction processes and user behavior is a major advantage. Data can not only be used to improve platform services and add new functions, but can also be opened up to third-party operators for use in ways that enhance the convenience of digital platform participants. For example, in e-commerce malls, data can be easily linked to external systems such as OMS (Order Management System), inventory coordination systems, and WMS (Warehouse Management System) via APIs and FTP servers, thereby reducing the workload of store operators. In recent years, efforts have been made to reduce the workload of store owners. In recent years, an increasing number of platforms such as Shopify are building app marketplaces for third-party vendors, creating new monetization methods in addition to data sales and advertising revenue.

Digital platform business undertaken by major companies

Large companies in the Japanese manufacturing and other industries have been predominantly engaged in pipeline/stand-alone businesses that manage robust distribution value chains established by their own groups and major business partners, and have produced countless superior products and services as a result of these improvements. If a digital platform can be joined to the traditional vertically integrated value chain to expand the company's customer network and peripheral services, it is possible to build a stronger ecosystem in terms of profitability, growth, and stability than in the past. In Japan, in particular, there are many large companies in the manufacturing, wholesale, and intermediary industries, and B2B business transactions are still conducted via e-mail, telephone, fax, and other methods of information transmission. The current situation is that

In the future, there will be more opportunities to consider the risks associated with domestic and international competitors and startups pursuing platform strategies in their business areas. Once the transaction mechanism is established within the digital business sphere built within the platform, it will not be easy to regain the business opportunities lost to platforms, as the aforementioned network effects and switching costs will increase the barriers to entry. In addition to mega-platformers such as GAFAM (Google, Amazon, Facebook, Apple, Microsoft) and BATH (Baidu, Alibaba, Tencent, Huawei), there are also unicorn companies that have raised tens of billions of yen from venture capitalists in just a few years since their establishment. In recent years, there has been an increase in the number of corporate venture capital firms and LP investments in major venture capital funds. This is one of the reasons for the recent increase in the formation of corporate venture capital firms and LP investments in major venture capital funds.

On the other hand, there are a number of hurdles to building a digital platform, such as the chicken and egg problem. Not only does it take a considerable amount of money to attract customers and acquire content, but it also takes time to build trusting relationships with industry partners and platform participants before the networking effect described above is fully realized. In addition, the differentiation of digital services that can be completed only via the Internet is becoming more intense these days, and there are more and more cases where data linkage and operational expertise with operational assets such as stores, warehouses, and factory facilities are required. In the digital platform business, large tech companies with software implementation and financial strength are not necessarily at an advantage. Therefore, traditional large companies that have accumulated tangible assets such as hardware, factory equipment, and real estate, as well as intangible assets such as intellectual property (IP), business partner networks, and brand value over a long period of time, will have a relative competitive advantage in the digital business as well. In the digital business as well, we expect to see an increase in the number of cases.

A clear example of a company that has recently succeeded in strengthening its own ecosystem through digital platforms by leveraging its strengths in hardware and IP is the Nintendo Switch. Nintendo has strengthened its digital platform strategy by launching a device-independent, cross-platform strategy and opening a marketplace called Nintendo Switch Online, and as a result, the digital share of software sales has grown to 42% by FY2022. As of October 2021, the percentage of software sales accounted for by digital platforms was 42%. As of October 2021, there were more than 32 million paying online accounts for 90 million hardware units sold, or about 36% of the total hardware units purchased, and the company has succeeded in attracting a wider range of customers, from children to seniors³. The company has also succeeded in attracting a broader range of customers, from children to seniors ³. Although Nintendo was featured here as a case study in the B2C domain, it is not uncommon for functions and user interfaces that have been popularized in the B2C domain to be used in the B2B domain as well. We expect to see an increase in the number of digital platform projects by major companies, both B2C and B2B, in the future.

Conclusion

In the digital transformation of Japanese companies, "defensive DX" such as business efficiency improvement and process reform is leading the way, but "offensive DX" such as drastic reform of customer contact points and business models like digital platforms are expected to increase in the future. (Information-technology Promotion Agency, Japan) surveyed more than 500 companies and found that only 10.5% of Japanese companies answered that they "are engaged in digital business and have a low level of understanding of digital business sales," which is low compared to 49.1% of U.S. companies. This indicates that there is still much room for growth⁴. According to data from the Statistics Bureau of the Ministry of Internal Affairs and Communications, the sales of major corporate groups in Japan total 795 trillion yen (4,809 companies), and the expected economic effect of such corporate groups creating digital platform businesses that leverage their existing business distribution and traditional strengths is expected to be quite large^{5 ^5}. As the digital transformation of major companies moves into a more concrete and practical phase, we hope that this article will help in the planning and improvement of digital business strategies.