The main objective of this bachelor thesis is to try to identify how cultural differences might affect the running of platform-based businesses in Russia and China. Moreover, this thesis attempts to offer a rationalization for bringing up new businesses in the respective countries. Aspects such as the main driving forces behind the imbalance faced today between the two respective markets will be investigated and its possible link to the respective culture will be discussed.
The rise of the internet in the 1990s changed the business world to a great extent. A wave of new business models overtopped the economy, one of them the so-called platform-based business model. A platform-based business connects the customers directly with the traders, operating as a modern middleman. Especially C2C markets, consumer-to-consumer marketplaces, where the platform operates as a middle-man between two independent private parties, have increased in popularity. However, since then, a world without platform-based businesses seems unimaginable, as this business model affects all markets, including B2B, business to business, and B2C, business to consumer. Corporations like Amazon, Google, Facebook, and Alibaba are just a few of examples to illustrate the impact this business model created on everyday life. Especially to Millennials and Gen-Z, these companies serve as an attractive labor source and their outputs are used by them on a daily basis. Although the impact of this business model is universal, there are cultural distinguishing factors regarding expanding these businesses among countries. The thesis at hand tries to investigate the cultural differences in expanding a platform-based business in China and Russia.
Table of Contents
Table of Figures
List of Tables
List of Abbreviations
Executive Summary
1 Introduction
1.1 Realization
1.2 Objectives of the Thesis
1.3 Non-Objectives of the Thesis
1.4 Research Questions:
1.5 Methodology
2 The Platform-based Business Model
2.1 The Evolution of Platform-based Businesses
2.1.1 The Roots in Ancient History
2.1.2 The Accessibility of the Internet to Consumers
2.1.3 The Dot-com Bubble
2.1.4 The Financial Crisis
2.1.5 The Impact of Covid-
2.2 Platforms as a Business Model
2.2.1 The Four Columns of the Core Transaction
2.2.2 The Four Core Functions of Platforms
2.2.3 Platform Types
2.2.4 Exchange Platforms
2.2.5 Maker Platforms
2.2.6 The Power of Using the Network Effect Right
2.2.7 Modern Monopolies
2.3 The Importance of Platform-based Businesses in the 21st Century
2.3.1 Financial Drivers of Platform-based Businesses
2.4 Summary of the Platform-based Business Model
3 Current Market Analysis of Platform-based Businesses
3.1 Current Market Situation in the United States of America
3.2 Current Market Situation in China
3.3 Current Market Situation in Russia
3.4 Summary of the Current Market Analysis of Platform-based Businesses
4 Cultural Analysis
4.1 The Reasoning behind choosing both - Hofstede and GLOBE
4.2 Hofstede Model
4.2.1 Comparing and Contrasting China to the United States of America
4.2.2 Comparing and Contrasting Russia to the United States of America
4.2.3 The Main Differences between China and Russia
4.3 GLOBE Study
4.3.1 Comparing and Contrasting China to Russia
4.4 Summary of the Cultural Analysis
5 Applying the Cultural Analysis to the Current Market Situation
5.1 Applying the Cultural Analysis of the Current Market Situation in China
5.2 Applying the Cultural Analysis of the Current Market Situation in Russia
5.3 Compare and Contrast China to Russia
5.4 Summary of Applying the Cultural Analysis to the Current Market Situation
6 Discussion and Conclusion
7 Appendix
7.1 Definition of the Used Terms:
8 List of References
Table of Figures
Figure 1: Differentiation of Platform Types (Moazed and Johnson 2016, p. 44)
Figure 2: Hofstede's Dimensions for China and the United States (Hofstede Insights 2022a)
Figure 3: Hofstede's Dimensions for Russia and the United States (Hofstede Insights 2022b)
Figure 4: Hofstede's Dimensions for China and Russia (Hofstede Insights 2022c)
Figure 5: GLOBE Study for China and Russia (Global Leadership and Organizational Behavior Effectiveness 2020a, 2020b)
Figure 6: Hofstede's Dimensions for China, Russia and the US (Hofstede Insights 2022d)
List of Tables
Table 1: The market-leading corporations in the investigated industries in the US, China and Russia
Table 1: The market-leading corporations in the investigated industries in the US, China and Russia
List of Abbreviations
B2B Business to Business
B2C Business to Consumer
C2C Consumer to Consumer
IPO Initial Public Offering
JV Joint Venture
SME Small and Medium-sized Enterprises
Executive Summary
Platform-based businesses have accompanied mankind since the upcoming of trade among humans. Modern platforms have their roots in ancient bazaars and antique marketplaces, where seller and buyer got together for exchanging goods. From thereon, the importance of platforms has increased steadily over the centuries (Casson and Lee 2011). It was ultimately for the invention of the internet and its accessibility to the public that platforms skyrocketed to the corporations they are today. This moment marked a turning point for the platform-based business model, as the potential of new consumers and producers for the platform seemed all of a sudden limitless (Simakov 2020). In less than three decades, companies with this business model have risen to the top of the economy and according to Szmigiera (2021), six out of seven of the largest corporations in the world by their market capitalization are platform businesses. Johnson and Moazed (2016) assume this trend of platforms to outperform other business models to continue in the upcoming decades.
However, since the upcoming of the internet, not all platform-based businesses thrived alike, as only the most resilient companies with a well-defined business system and superior value proposition survived the crises the last two decades provided them with (Hale and Thakur 2022). This phenomenon could be recognized in the dot-com bust, the financial crisis and the recent Covid-19 pandemic. It is ultimately for these challenging times that some companies had been able to outgrow their fierce competition and reach a monopoly status in their home country. This so-called winner-takes-it-all phenomenon is quite common among platform-based businesses (Bican et al. 2021).
By having analyzed the current situation of the platform economy in the United States of America, China, and Russia, the following situation has been identified: Each country is home to a national monopoly that leads the market in its respective platform category. In this research, five platform categories have been examined: search engines, social networks, online food delivery services, gaming platforms, and e-commerce marketplaces. However, one exception could be recognized, namely the e-commerce market in Russia. The high fragmentation of this marketplace might be due to the missing logistical infrastructure and the lack of government funding in the e-commerce sector (Adisa et al. 2018). Furthermore, cultural characteristics might be responsible for this situation, such as the high uncertainty avoidance that demonstrates change aversion of Russian citizens (Hofstede, Hofstede and Minkov 2010).
The evaluation of the cultural differences between the United States, China, and Russia according to Hofstede’s dimensions and the GLOBE study, revealed a plausible cultural impact of expanding platform-based businesses. The studies identified that the Chinese and American population appears to be innovation-driven, success-oriented, and equipped with an entrepreneurial mindset that fuels the flourishing economy and focuses on globalization (Dorfman et al. 2004; Hofstede, Hofstede and Minkov 2010). It might be predicted that Russian platform monopolies will expand internationally as well, however, probably at a rather slower pace, especially when considering the recent economic events and sanctions imposed on the Russian economy. Furthermore, it may be anticipated that due to the bureaucratic challenges and society’s uncertainty avoidance, fewer Russian entrepreneurs found platform-based businesses in comparison to Chinese and American businessmen (Dorfman et al. 2004; Hofstede, Hofstede and Minkov 2010).
1 Introduction
The rise of the internet in the 1990s changed the business world to a great extent. A wave of new business models overtopped the economy, one of them the so-called platform-based business model (Johnson and Moazed 2016). A platform-based business connects the customers directly with the traders, operating as a modern middleman. Especially C2C markets, consumer-to-consumer marketplaces, where the platform operates as a middleman between two independent private parties, have increased in popularity. However, since then, a world without platform-based businesses seems unimaginable, as this business model affects all markets, including B2B, business to business, and B2C, business to consumer. Corporations like Amazon, Google, Facebook, and Alibaba are just a few of the examples to illustrate the impact this business model created on everyday life (Johnson and Moazed 2016). Especially to Millennials and Gen-Z, these companies serve as an attractive labor source and their outputs are used by them on a daily basis (Barhate and Dirani 2022). Although the impact of this business model is universal, there are cultural distinguishing factors regarding expanding these businesses among countries (Johnson and Moazed 2016). The thesis at hand tries to investigate the cultural differences in expanding a platform-based business in China and Russia.
In order to illustrate the reasoning behind having chosen a comparison between Russia and China, the current market situation in the respective countries has to be explored. Nowadays, countries that have a more established e-commerce sector tend to be dominated by a couple of companies, the so-called “Big Players”, with, in the norm, one clearly-defined market leader (Bican et al. 2021). In the U.S., 63% of e-commerce sales are generated by the top five players, with Amazon alone accounting for almost two-thirds of it in 2017 (Adisa et al. 2018). Likewise in China, the top five companies by market share account for 83% of all online sales, with Alibaba capturing a share of 57% in 2017 (Adisa et al. 2018). In contrast to that, the Russian market appears to be highly fragmented with the top five businesses accounting for only 33% of the total market. Yandex Market has the biggest share of 16%, followed by Ozon with 9%, Wildberries with 7% and finally Alibaba’s Tmall with 1% ( Melkadze 2020).
It is ultimately for this alteration that an analysis between the cultural differences of expanding platform-based businesses in China and Russia has been investigated. Other factors for my personal interest in the chosen countries are the following: I have done a double-degree semester abroad in Moscow, Russia, where I acquired a profound understanding of the Russian market and its consumer behavior. My interest in China is tightly linked to the country’s enormous economic growth within the last four decades, its booming internet economy and my intention of an international career that attracts me to this nation (Baodong et al. 2021). In addition, I study both languages –Chinese and Russian, which once more underpins my personal tie to the investigated countries.
1.1 Realization
At the beginning of this thesis, the evolution of platform-based businesses and their importance in the twenty-first century are outlined. Thereafter, the term platform-based business model is explained and illustrated by using examples. Here, a distinction is drawn between so-called exchange- and maker-platforms, which mainly differ in the regard the users interact on the respective platforms (Johnson and Moazed 2016). Subsequently, the current situation of platform-based businesses in the investigated countries, China and Russia, is analyzed and compared to the United States of America. The reason for choosing exactly this comparison is that the USA has been the forerunner in platform businesses and therefore probably offers the most well-known reference, as their platforms are renowned around the whole world (Galloway 2018).
In the next chapter the cultural background is examined in order to explore possible cultural differences that might have led to the current market situation. For this, the Hofstede model and the GLOBE study serve as reference tools.
Once the cultural analysis has been conducted, the findings will be applied to eventually discuss possible links to the current market situation in the respective countries. By being aware of the present situation of platform-based businesses in the United States of America, China, and Russia and combining this knowledge with the cultural differences among these nations, possible reasons behind the expansion of platform businesses might be suggested. In the end, these findings are compared and contrasted.
Finally, an interpretation of the findings is provided, and a possible future outlook will be given, referring to how this disparity might develop within the next twenty years of the 21st century.
1.2 Objectives of the Thesis
The main objective of this bachelor thesis is to try to identify how cultural differences might affect the running of platform-based businesses in Russia and China. Moreover, this thesis attempts to offer a rationalization for bringing up new businesses in the respective countries. Aspects such as the main driving forces behind the imbalance faced today between the two respective markets will be investigated and its possible link to the respective culture will be discussed.
However, the purpose of this thesis is manifold, since it also aims to provide a more profound understanding of how the platform-based business model has evolved, and to show its importance in the twenty-first century. Additionally, an outlook to estimate the future trends will be assumed, however, no certain statements for forthcoming developments are given.
This thesis may be seen as a general overview of platform-based businesses with regards to the Chinese or Russian culture. The reader is provided with potential cultural challenges a business might face when expanding to the Chinese and/or Russia market.
1.3 Non-Objectives of the Thesis
Having clarified what the objectives of this thesis are, the focus now lies on what this thesis will not cover. First of all, this thesis does not provide companies with a certain market entry strategy, but rather an analysis of the current situation with a potential outlook for the future. Furthermore, an in-depth analysis of certain companies is not to be expected, as this would not be of assistance when investigating the research questions. Although the financial statements of the big players in the American, Chinese and Russian market is touched, it is not to be confused with a detailed financial, strategic or economic analysis of any of those companies, as this is not of assistance to the research objective.
Furthermore, there are certain limitations to be considered. As platform-based businesses changed considerably within the last few decades, the future outlook given in this thesis at hand may differ vastly from the actual development (Simakov 2020). In this ever-faster changing world only a prediction can be made but no definite assertion. Moreover, identifying the most objective research papers focusing on the performance of platform-based businesses in China and Russia is challenging.
1.4 Research Questions:
In order to grasp the concrete topics that will be tackled, the following research questions have been raised:
- How did platform-based businesses evolve?
The rise of platform-based businesses goes hand in hand with the development of the internet and its accessibility to consumers (Simakov 2020). This question is meant to clarify decisive factors for this development and cover central milestones that might have led to the current market situation.
- How do platform-based businesses vary between Russia and China?
Russia and China are distinguishable in numerous aspects, such as geography, demographics, political regime, etc. This question should clearly state the current divergent elements of platform-based businesses between the two investigated countries.
- What is the cultural link to the difference of the current market situation in China and Russia?
Once a clear picture of the differing rudiments is drawn, the cultural variable is added. This question investigates the role culture might contribute to the market discrepancy.
1.5 Methodology
To fulfill the objectives of the thesis and to answer the research questions, secondary research will be used.
The secondary research is based on a literature review of scientific papers on platforms such as ScienceDirect, EBSCO, and Google Scholar. Additionally, online sources and books are used for the completion of the bachelor thesis, as well as reports involving the market situation of platform-based businesses in the investigated nations.
Furthermore, the usage of reliable databases, such as Statista, helps to analyze the current market situation by offering trustworthy information about the markets in the respective countries. Another factor that is important for a reliable research in this field is using contemporary literature. Therefore, the majority of research papers and books used for this bachelor thesis have been published after 2018. However, when researching events that occurred in the past, such as the financial crisis of 2008, older literature may have been used. When considering statistics from Statista, the majority of the research is published in the year 2022.
2 The Platform-based Business Model
This chapter focuses on three different segments. The first part depicts the evolution of platform-based businesses, relevant milestones and turning points. The second part of this chapter deals with explaining the platform-based business model. In order to convey its meaning, the theory is undermined with practical examples of platform-based businesses from different industries. Finally, the third part tries to evaluate the business model’s importance in the 21st century.
2.1 The Evolution of Platform-based Businesses
It is a common misconception that platform-based business is limited to modern tech-companies (Casson and Lee 2011). Actually, this is far away from the truth, as the business model dates back to the beginning of trade in and among ancient human societies. Early bazaars in Persia or Roman auction houses are just two of the countless examples of how platforms transformed trade already millennia ago (Casson and Lee 2011). However, the importance of platforms in everyday life and their rising impact is strongly tied to the development of technology and accessibility to the internet (Simakov 2020).
2.1.1 The Roots in Ancient History
The origin of markets and marketplaces reaches back to when humans first engaged in trade. The earliest evidence is mainly archaeological and comes from Babylon and the early Middle Eastern and Mediterranean empires (Casson and Lee 2011). From thereon, markets spread to Europe. Substantial documentation survived from the eleventh century onward, when towns with markets were established across Western Europe. Marketplaces were located at centers of consumption and transportation hubs, as well as close to religious institutions and locations that attracted considerable crowds of people (Casson and Lee 2011).
Markets can be either formal or informal. Formal markets are marked by transparent transactions, governed regulations, and clear opening hours. Trust between transactors is based upon trust in the system, rather than personal relationships. In contrast, an informal market can be based at any convenient place, such as the street corner or the doorstep, and tends to be small and dependent on personal trust (Casson and Lee 2011).
Between the twelfth and fourteenth century, a rapid expansion of formal markets for local products was complemented by a similar growth in the number of fairs providing outlets for longer distance and higher-value trade (Casson and Lee 2011). Fairs were normally held on an annual basis and also served as social occasions. However, the importance of formal markets and fairs should not be overstated, as it has been suggested that during any part of the medieval period less than half of all commercial transactions passed through formal markets and fairs (Casson and Lee 2011).
This growth of markets continued steadily from the fifteenth through to the seventeenth century. There were periods of brisk expansion, related to the extension of credit and the growth of international and interregional trade, but there were periods of stagnation as well, due to wars, famines, and political instability (Casson and Lee 2011). Furthermore, newspapers began circulating in the seventeenth century, which represented an unprecedented platform connecting producers with their content users (Casson and Lee 2011).
Major developments in retailing occurred in European cities throughout the eighteenth century as fashionable consumer goods became available and incomes rose. At that time, shops were increasingly well furnished, and advertising was used to promote the latest fashions. Markets continued to be essential components of urban economies, wholesale markets grew, and middlemen took on an increasingly important role (Casson and Lee 2011).
However, the advent of mass production required a more efficient retail system than small shopkeepers or public markets and fairs could offer. Therefore, with rising consumer demand, a greater volume of products, and newly invented goods, department stores were conceived. From the later nineteenth century onward, these stores opened in the largest European cities (Casson and Lee 2011).
From this point in time, the development of supermarkets, convenience stores, wholesalers, etc., proceeded steadily. Especially the industrial revolutions boosted the development of new kinds of stores that connect buyers and sellers (Casson and Lee 2011). Another major incident arose with the invention of radios and televisions. These inventions enabled a strong development of content for so-called maker platforms (Casson and Lee 2011).
2.1.2 The Accessibility of the Internet to Consumers
The rapid expansion of platform-based businesses and especially the history of electronic commerce is tightly connected to the evolution of information technology, more specifically to the advances of the internet (Simakov 2020). On April 30th, 1993, the world-wide-web was launched in the public domain and was accessible to private consumers (Simakov 2020). Although this moment is often conceived to be the start of e-commerce, Goncalves et al. (2017, p. 131) cite: “Nevertheless, (Galinari et al., 2015) advocate that e-commerce has its first phase on the 1970’s, when e-commerce was restricted to operations among large corporations which established among themselves private communication networks and, by means of electronic fund transfer systems, which electronically made financial transactions and document exchanges.” However, in the 1990s, particularly small and medium-sized companies (SMEs) benefited decisively from this new opportunity: ”It moves organizations beyond the physical constraints of their traditional distribution channels and creates a world wide virtual community in which small and medium sized companies can compete with large enterprises.” (Chi and Kiang, p. 157).
According to Simakov (2020), the evolution of e-commerce can be divided into five different phases. The first stage deals with “the formation of e-commerce as a form of innovative entrepreneurship” and spans from 1969 to 1995 (Simakov 2020, p. 80). During this period, the internet infrastructure has been established, which gave rise to opportunities for the spread of e-commerce. This includes aspects, such as the creation of online payment systems and data security (Simakov 2020). The second stage spans from 1995 to 2000 and is marked by the foundation of today’s big players in the industry: Amazon, Alibaba, eBay, etc. It is the phase of “ ensuring the global presence of e-commerce as a form of innovative entrepreneurship ” (Simakov 2020, p. 80). The third stage is about “ensuring the reduction and optimization of e-commerce costs as a form of innovative entrepreneurship” (Simakov 2020, p. 80). This phase longed from the year 2000 to 2005 and includes developments, such as “increasing the efficiency of advertising costs by the progress of advertising services” (Simakov 2020, p. 80 – 81). Just to mention one of the countless examples, Google AdWords appeared at this time on the market. The period from 2005 to 2010 is marked by the emergence of novel innovative solutions and increasing competition. Main events were the foundation of new platforms that found ways to personalize their offer to consumers. Examples of this are platforms such as Etsy and BigCommerce (Simakov 2020). The last stage ranges from 2010 to the presence and deals with increasing the speed of transactions and convenience of interactions between seller and buyer. Especially the emergence of advanced online payment systems and the formation of social networks as platforms to obtain information about goods and services mark this period (Simakov 2020). Furthermore, during that phase, customer research appears to differ: By taking advantage of the latest means of electronic interaction, companies are able to get detailed information about the needs of each individual consumer and automatically offer specialized and customized offers (Simakov 2020). A great advantage that e-commerce provides for B2B transactions is the decreased processing time that enables online companies to keep lower levels of storage, thus reducing management costs and overhead maintenance. Another benefit stated by the authors is the quick adjustment to market conditions, which means it becomes possible to customize promotions and sales for individual clients (Chi and Kiang 2001).
2.1.3 The Dot-com Bubble
As outlined above, e-commerce started to grow steadily from 1995 onwards, with the founding of companies like Amazon and eBay (Simakov 2020). After the US National Science Foundation lifted its ban on commercial enterprise operations via the internet in 1995, new businesses came into existence (Bouwman, Preissl and Steinfield 2004). A few years later, in 1999, solely about a year prior to the detrimental dot-com bust, global e-commerce reached about $150 billion (Ofek and Richardson 2003).
2000 marked an essential year since the bubble blew up, which ended the era of unchecked growth in internet-based companies. Problems responsible from this explosion were the companies going bankrupt within only months after being officially listed on the stock market and panicking investors. As a result thereof, the Nasdaq, the American stock exchange, displayed a sharp decrease by 78% throughout 2002 (Bouwman, Preissl and Steinfield 2004). The chief trigger of the dot-com crash was the rise and fall of technology stocks. Due to the growth of the internet and the possibilities and opportunities it brought along, investors decided quickly to invest their money into promising startup companies. Due to the influx of money they received, startups were enabled to go public – even though they were lacking an appropriate and promising business plan or product (Bouwman, Preissl and Steinfield 2004).
It was a disaster for investors and companies alike, nevertheless, some winners rose out of the dot-com bust. Only companies resilient enough to survive the crash managed to remain in the industry. Amazon and eBay are examples of such organizations that are strongly represented in the e-commerce industry in North-America and Europe. In Asia, Alibaba, China´s biggest e-commerce player, experienced an upward trend, which led to a considerable growth of China’s digital market, which attracted attention throughout the world (Bouwman, Preissl and Steinfield 2004). It is noteworthy that the largest form of e-commerce at the end of 2002 was in the business-to-business (B2B) market, with transactions exceeding $850 billion, which is thrice as much as in the business-to-consumer (B2C) market (Fauska, Kryvinska and Strauss 2013).
2.1.4 The Financial Crisis
The global financial crisis in 2008 represents for many experts the worst market disturbance since the Great Depression in the year 1929. The crisis was initiated in the housing market in the United States and spread rapidly to the financial markets (Aghaie, Ghadami and Mohammadkhan 2010). Being victim to a domino effect, many other industrialized economies around the world were troubled by its outcomes and almost every industry has been affected by its consequences. Among the socioeconomic impacts was an increasing unemployment rate, as a result of companies trying to cut back on costs in order to survive the crisis (Thalassinos and Thalassinos 2018).
E-commerce in the business-to-consumer market was not insusceptible to the effects of the financial crisis and experienced vastly declining sales.According to the authors Aghaie, Ghadami and Mohammadkhan (2010), online retail sales were about $32.4 billion in the first quarter of 2008, before the crisis, which represents a growth of 13.4% in respect to the same period a year before. However, it did not take long for the crisis to emerge, and overall online retail sales plummeted, which lead to a decline in 2008. This negative trend even worsened in the upcoming year, in 2009. Statistics reveal the negative effect of the financial crisis on the online retail industry (Aghaie, Ghadami and Mohammadkhan 2010). A downward spiral initiated, as less credit was available within the economy, which abridged e-commerce spending, as people preferred to save and reduce their expenditures. This behavior led to falling consumer confidence and sentiment (Thalassinos and Thalassinos 2018).
However, as some companies managed to thrive out of the dot-com bust and establish themselves in a market-leading position, some businesses flourished through the financial crisis (Hammond 2020). The focus now lies on companies in the B2B sector, where one business system sells goods and/or services to another business system (Rajaraman 2000). Data service companies experienced minimal damage and their revenues were predominantly unaffected throughout these times of uncertainty. Some individual industries, such as IT, even experienced an increase throughout the financial crisis in 2008 (Hammond 2020). So, for instance TeamLogic IT, a company that offers IT solutions and consulting services to smaller businesses. However, also certain businesses in affected industries managed to increase their business during 2008 and 2009, like Netflix. Product innovations and partnerships with companies such as Xbox enabled the platform to thrive through the crisis. Even Citigroup, a company operating in the financial services industry, managed through effective marketing strategies to grow steadily immediately after the recession in 2008 (Notta and Vlachvei 2015).
It is important for thriving companies and troubled businesses alike to learn from a crisis and ensure the same mistakes will not happen again in the future (Broens 2014). According to Broens (2014), many companies changed their management procedures decisively after surviving the financial crisis in 2008. So, for instance, nearly half of the companies interviewed reduced their payment periods in order to get paid faster and 60% became stricter in business processes. Furthermore, half of the participating managers stated that as a result of the crisis, they now spend more time on credit report data from banks (Broens 2014).
2.1.5 The Impact of Covid-19
The coronavirus crisis probably represents one of the most challenging times in the last decades. It cannot be assimilated with the financial crisis, as the so-called “key dimensions” differ (Johnston and Mora Cortez 2021). One of the key dimensions is the focus of the crisis. During the financial crisis businesses were the main victims, however, Covid-19 affects each individual directly (Johnston and Mora Cortez 2021). Furthermore, the cause differs. According to Hammond (2020, p. 2), “The 2008 crisis was caused by systemic problems in the financial system rather than by an ‘external’ shock.” Another aspect is temporality, as the longevity of Covid-19 is unknown. The financial crisis offered some degree of predictability, whereas for the pandemic human beings most likely have to adapt to this kind of virus, which presumably is here to stay (Johnston and Mora Cortez 2021). Furthermore, as a result of the pandemic, everyday life was completely turned upside down, whereas the financial crisis disrupted normality minimally. Moreover, the operational deployment of businesses depended in 2008 on the market performance, whereas today it depends on the cases of infected people within a country (Johnston and Mora Cortez 2021).
However, it is erroneous to assume that all businesses were harmed similarly, as certain platform-based businesses experienced an unprecedented rise (Abdelrhim and Elsayed 2020). The Covid-19 pandemic played a pivotal role in accelerating digital adoption in the industry, as most B2B companies moved the majority of their business to a digital model in order to continue operations. Research suggests that this adaptation happened quickly, as 90% of B2B companies had already switched to a virtual sales model only one month into the pandemic (Alfonso et al. 2021). Global B2B e-commerce skyrocketed due to the pandemic: Since 2015, an average market growth of approximately 11% was the norm, until the market increased by astonishing 24% in 2020. While the global business-to-business e-commerce accounted for roughly $8.8 trillion in 2016, it is expected to soar to over $35 trillion by the year 2025, with the Asia-Pacific region accounting for the biggest share of roughly 80% (Mehta and Senn-Kalb 2021, p. 17).
The shift to online shopping, as direct contact had to be curtailed, boosted e-commerce and platform-based businesses’ sales worldwide (Johnston and Mora Cortez 2021). Amazon’s sales increased from $351.4 billion in 2019 to $583.4 billion in 2021 and the company’s market capitalization more than doubled, from $850 billion to over $1.71 trillion ( Coppola 2021a; Szmigiera 2021). Besides e-commerce, platforms that enable digital communication increased in significance, so for instance Zoom. The company’s revenue rose by 817% in only two years. Zoom’s revenue was $330.5 million in 2019 and nearly reached $2.7 billion in 2021 and the organizations market capitalization increased from $24.2 billion to $65.4 billion within the given time frame of two years ( Lionel 2022a, 2022b, 2022c). This remarkable growth can be explained by the urge to communicate digitally. It was one of the fastest growing platforms with over 740 million mobile app downloads in the year 2020 alone (Ceci 2022).
Experts believe that this change in consumer behavior is not temporarily. Many consumers are now aware of the increased convenience of purchasing goods online and most probably will not return to the pre-pandemic status-quo (Serhan 2020). Also, many universities and businesses recognized the chances and opportunities that arise with remote work and now the term “hybrid work” is becoming increasingly popular. Experts are convinced that this crisis has far more long-reaching effects on consumer behavior than any other crisis had in the history of humankind (Serhan 2020).
2.2 Platforms as a Business Model
After having explored the history of this business model and its most significant milestones, the model as such is described. Fundamentally, a platform-based business generates value by enabling a smooth transaction between multiple independent parties (Srinivasan 2021). Platform-based businesses can be found in every market and they enable users and resources to connect and by that, they create large and scalable networks. Thereby, resources and users can be accessed on demand. Platform-based businesses do not – as opposed to regular businesses – take care of inventory and do not directly create products. They function as the middleman between seller and buyer. As stated above, users of those markets are enabled to interact and transact (Srinivasan 2021). It is important to mention that a platform´s success is considerably affected by the “network effect”: The more people participate in a system, the higher is the worth for each participant (Srinivasan 2021). One of the countless examples of networks that heavily depend on this effect are social media platforms, such as Instagram and Facebook (Laudien and Täuscher 2018). The way Facebook took advantage of the network effect will be outlined in more detail in the subchapter “2.2.6. The Power of Using the Network Effect Right”.
When explaining the term “platform”, it is important to clearly state that it is not just about a mobile app or a webpage, but the whole system behind the software that connects buyers and sellers. Through a platform business model, a smooth transaction between seller and buyer is enabled and in order for the business to be successful, this transaction process needs to be repeated several times by the users in order to generate value for both parties involved (Srivivasan 2021).
2.2.1 The Four Columns of the Core Transaction
The transaction between producers and consumers basically constitutes of four different pillars, the first of which is called “create”. As platforms do not create inventory or content on their own, they must incentivize external producers to act (Johnson and Moazed 2016). What these producers create is the platform’s inventory. This represents the starting point for a platform. Neither would eBay be able to offer products without any sellers, nor could Uber offer its services without its drivers. If producers stopped their input, the platforms’ value would vanish (Johnson and Moazed 2016). The second pillar is called “connect” and describes the need that one user requires to take the incentive and start the exchange. Which user group initiates the exchange varies depending on the platform. On Amazon, for instance, users scroll through the site, while on Kickstarter the project’s creator act. In each case, one user must take the first step to initiate the transaction (Johnson and Moazed 2016). The third aspect is to “consume” and deals with the users extracting value from the platform. On social network sites users consume content, such as videos and pictures. In the context of marketplaces, such as Amazon and Uber, the consumption refers to the listings within the platform and not to the product and service itself (Johnson and Moazed 2016). The final pillar is named “compensate” and describes the process of consumers creating value for the producers to complete the transaction. This mostly happens in the form of a monetary payment, as consumers pay for a purchased Amazon product or a service of Uber. However, on social networks, the exchange comes in non-monetary value – namely through likes and views (Johnson and Moazed 2016).
These are the four pillars that constitute the core transaction and the ultimate goal for any platform is to design a repeatable process that will create value (Johnson and Moazed 2016).
2.2.2 The Four Core Functions of Platforms
Besides those four columns that establish the core transaction, platform-based businesses possess four core functions. The first of which is “building the audience”. At the beginning it is central for a platform to acquire the critical mass on both sides, the consumers as well as the suppliers (Johnson and Moazed 2016). The critical mass describes “The point where the value of the network exceeds the cost of joining for most users. Once a network reaches sufficient size, its network effects starts to pull in new users and growth takes off.“ (Johnson and Moazed 2016, p. 320). Once a platform surpasses this benchmark, it has to “connect and match the users” in the best possible and most convenient way. This means that the right consumers need to be connected with the right producers in the right fashion. The platform has to facilitate the transactions and interactions in the best possible way. The third core function describes “providing core tools and services”. This means that tools and services must be created that support the core transaction by removing the entry barriers, lowering transaction costs, and ultimately making the platform more valuable over time by taking advantage of the gathered data (Johnson and Moazed 2016). Finally, the fourth function is about “creating rules and standards”. This point ultimately deals with ensuring legal and ethically virtuous behavior for all users. Guidelines have to be set that govern which behavior is allowed and encouraged on the network and what is strictly forbidden and discouraged. The platform has to set rules and standards that apply to all its users equally (Johnson and Moazed 2016).
2.2.3 Platform Types
Within the platform-based business model, there are various types that can be categorized according to their main characteristics: the way the platform transacts value among the users (Johnson and Moazed 2016). One kind concentrates on decreasing transaction costs, so for instance Uber. By providing their users with the underlying infrastructure, platform based businesses allow their users to come up with content themselves. Content platforms such as Instagram and development corporations, so for instance iOS, are examples of the latter. When comparing these kinds of platforms that empower their users to create videos, code, etc., to platforms like Amazon and Uber, that focus on facilitating a direct value exchange, the difference becomes obvious (Johnson and Moazed 2016). Furthermore, these two platforms, exchange and maker, differ in the regard of interaction among users. On exchange platforms one-to-one interactions take place, while on maker platforms the matching intention is one-to-many (Johnson and Moazed 2016). The matching intention describes: “The maximum number of units of an item that a producer can exchange at a given time.“ (Johnson and Moazed 2016, p. 321). This idea will be illustrated further in the upcoming sub-chapters.
In the graphic below, the various subcategories of exchange and maker platforms are depicted, together with renowned business examples. In this picture, the subcategory “development platforms” is broken down into three smaller increments. As going into this difference in further detail does not add any value to this thesis, the three respective “development platforms” are treated as one.
2.2.4 Exchange Platforms
These platforms create their value by exchanging something among the users. It can be differentiated among seven different kinds of exchange platforms, according to the type of transaction (Johnson and Moazed 2016). A service marketplace, such as Uber, offers a service – specifically connecting a driver with someone who requires a cab service. The most common type of exchange platforms is a product marketplace, such as eBay or Amazon, where a physical product is transacted. Payment platforms, such as PayPal, create value through monetary payments. Investment platforms, on the other hand, transact an investment as the name itself already gives away. Such platforms enable the exchange of money for financial instruments, such as loans. Examples for such platforms are AngelList or Prosper. A social networking platform´s goal is to facilitate and strengthen digital social interaction. Examples for this segment are Facebook and Twitter. However, this category is to be distinguished from communication platforms, such as WhatsApp and Skype that offer one to one direct social communication. The last subcategory for exchange platforms is social gaming platforms that enable a gaming interaction involving multiple users, so for instance Minecraft (Johnson and Moazed 2016).
As mentioned above, on an exchange platform a one-to-one interaction takes place. Let this be illustrated with an example: Imagine a product is available on the auction platform eBay. Once the auction is over, the product is not available anymore. Even when the seller has numerous copies of the same item, the matching intention is always 1:1, as each product can only be sold one time to one buyer. It is exactly for this phenomenon that a differentiation to maker-platforms is made (Johnson and Moazed 2016).
2.2.5 Maker Platforms
In order to enable the users to establish software, create videos and codes, these platforms offer the required tools and infrastructure to the users and, thereby, generate value (Johnson and Moazed 2016). Here it can be distinguished between content and development platforms. The transaction for content platforms, such a YouTube, is like the name reveals a piece of content. This can range from a text article to photos and videos. For development platforms, the value transaction is a software program, so for instance Android and iOS (Johnson and Moazed 2016).
The striking differences to exchange platforms is that maker platforms are not limited to one-to-one interactions but enable a one-to-many interaction. To illustrate that idea, YouTube represents the perfect example, as there is a nearly infinite number of people who can watch the same video, even multiple times. When shifting to operating systems and apps it is the same. As opposed to selling products on eBay, where the matching-intention is one to one, the matching-intention is one-to-many if a product – in this case an app or a piece of content – is made available to an audience by broadcasting it (Johnson and Moazed 2016).
2.2.6 The Power of Using the Network Effect Right
The network effect describes the phenomenon that makes a platform increasingly useful and valuable as more users join it. With more and more users joining a network the number of possible unique connections rises exponentially. The higher the number of consumers on a platform, the higher the value to the producers and vice versa. This means that after gaining the critical mass, growth leads to more growth in a continuous upward loop (Jerath, Jiang and Srinivasan 2011). However, it is interesting to examine how to start the network effect efficiently. Research suggests that most network effects start locally (Jerath, Jiang and Srinivasan 2011; Laudien and Täuscher 2018). Facebook started off as being a network only accessible to Harvard students. Steadily the social network spread to other Ivy-League universities. Although advertisers pressured Mr. Zuckerberg to expand to larger educational institutions, he stayed focused on the universities where the majority of students asked Facebook for access. As a result thereof, whenever Facebook opened its gates to students from a new college, the usage skyrocketed. Taking advantage of this strategy enabled Facebook to capture approximately 85% of all college students in the United States by the end of 2005, with 60% of them using the network daily. Facebook then offered limited access to high school students and continued this approach until 2006, when it finally opened for all users. By the end of 2008, the network had 150 million users (Jerath, Jiang and Srinivasan 2011). Today, 14 years later, Facebook has 2.94 billion monthly active users ( Statista Research Department 2022a). This might eventually represent one of the most successful implementations of a network-effect strategy. However, Facebook is not the only corporation that succeeded with the network effect. Uber followed a similar approach when expanding. Uber started in San Francisco and focused on building up a dense network in this city before moving to a new one, where they had to reiterate this process from scratch (Laudien and Täuscher 2018). When analyzing the key success factors of platforms taking advantage of the network effect, starting locally appears to be one of them (Jerath, Jiang and Srinivasan 2011; Laudien and Täuscher 2018).
2.2.7 Modern Monopolies
With the rise of platforms, a winner-takes-it-all economy was established. Since a platform-based business expands through growing networks, solely a small number of companies will dominate an industry as the market matures. Naturally, strong competition amongst businesses is the result of such a process (Bican et al. 2021). To illustrate this idea, the product marketplace in the United States of America and in China serve as example. In the U.S., over 63% of e-commerce sales are generated by the top four players, with Amazon alone accounting for almost half in 2017 (Adisa et al. 2018). Likewise in China, the top four companies by market share account for nearly 84% of all online sales, with Alibaba controlling over 57% in 2017 (Adisa et al. 2018). This noticeable dominant market position of Alibaba may be explained by the company defeating its strongest competitor eBay in 2004. This example illustrates the idea of a winner-takes-it-all economy. When eBay was defeated, it did not just settle for the second position, but pulled out of the Chinese market entirely (Johnson and Moazed 2016). Bican et al. (2021) argue that such fierce battles among competitors have become a hallmark of platform capitalism and continue today.
The result of such fights is a strong winner-takes-it-all dynamic (Bican et al. 2021). Another example of this phenomenon can be seen in the smartphone operating systems industry, where iOS and Android possess more than 90% of the market. Their closest competitor being Windows Phone has a market share of less than three percent (Johnson and Moazed 2016). However, this monopoly of a highly dominant player extends to nearly every platform-based market, so for instance to search engines, social networks, social gaming platforms, as well as to classifieds and online food delivery services (Adisa et al. 2018).
2.3 The Importance of Platform-based Businesses in the 21st Century
Being aware of the development and progression of platform-based businesses, their influence on individuals’ everyday lives in the 21st century is recognizable. These organizations assert market dominance that is comparable to monopolies of the 19th and 20th century, corporations such as Standard Oil and U.S. Steel (Johnson and Moazed 2016). However, their business model differs decisively. Monopolies from the past succeeded by their effective price-based competition or their single access to certain resources (Rahman and Thelen 2019). These new big players, however, differentiate by their capacity to take advantage of huge amounts of data which enables these organizations to operate as market makers and critical intermediaries (Rahman and Thelen 2019). As the world develops further and becomes more and more connected, it appears to be less important what a company owns and more which resources it is able to connect to. Google and Amazon, as examples for modern successful platform-businesses, render themselves valuable by establishing networks, as opposed to accumulating massive amounts of resources within their corporate offices, as the monopolies from the 20th century did. This means that nowadays, success is achieved by building an external network in addition to their own business model, not, however, by investing and aggregating internal resources (Rahman and Thelen 2019). To phrase this idea according to Johnson and Moazed (2016), platforms become industry leaders because of the value they create by connecting their users and not because of what they own. In the modern world, connection trumps ownership (Johnson and Moazed 2016).
Nevertheless, this change does not indicate that platform-based businesses replace preceding corporate forms entirely, but rather that platforms are an enhancement of those previous models (Rahman and Thelen 2019). To illustrate this idea with an example a reference to the business model of Uber is provided. The foundation of Uber’s business model is the taxi industry. However, what Uber differentiates is an efficient cost- and labor-cutting scheme, which evades ordinary employment contracts and therefore avoids huge upfront investments in resources. So, Uber does not hire their drivers and equip them with a car, but offers automotive drivers access to people who need a lift and then charge a fee for their connection service (Rahman and Thelen 2019).
An integral success pillar for platform-based businesses is the strong loyalty of their customers. For platforms to succeed, regularly returning and consuming customers are required. However, since the value-proposition of modern platforms is highly compelling, consumers turn into loyal customers by default (Rahman and Thelen 2019). Referring again to the example of Uber, consumers prefer spending less waiting-time and money on their Uber ride compared to taking a conventional cab. Customers prefer Amazon over retailers and other e-commerce stores, as their order is delivered reliably within a maximum of two days and without a fee, just by the push of a button. In order for platform businesses to thrive and outgrow their competition, an unmatched value-proposition is essential that automatically transfers users into loyal customers (Rahman and Thelen 2019). These customers then consume their services regularly and together with the platform’s offer manage their everyday life. Without social media platforms, such as Facebook and YouTube, without certain e-commerce stores like Amazon, or without service platforms, such as Uber or Airbnb, everyday life would be highly different for most individuals, as these platforms within their short time of existence changed people’s consumer behavior. This impact surpasses way beyond the presence, as these platforms shape humanity`s future vastly – as, for instance, the Metaverse illustrates (Rahman and Thelen 2019).
2.3.1 Financial Drivers of Platform-based Businesses
Research has depicted that investors favor platforms over linear businesses (Johnson and Moazed 2016). The value creation by linear businesses is established by selling the products down a supply chain. All the big players from the early twentieth century were linear businesses, such as General Motors, Walmart and Toyota. However, it appears that investors rather view platform-based businesses as the companies of the future (Johnson and Moazed 2016). According to Johnson and Moazed (2016, p. 74 – 75), platform-based businesses have ”an average revenue multiple of 8.9. In contrast, linear businesses are valued between two to four times revenue on average, depending on their business model“. These figures describe that investors view the future potential of platform-based businesses as more prosperous compared to those of linear businesses. Experts are convinced that this gap is widening over time, as platform businesses deliver faster growth, larger profit margins and a better return on capital (Johnson and Moazed 2016). Besides this development, the type of investors differs between the two business models: Patient investors, who do not urge for immediate results but are committed to the long run, are a key criterion for the success of platform businesses (Johnson and Moazed 2016). “As a result, since the early 2000s, platforms have quickly overtaken other business models at the top of the economy“, as stated by Johnson and Moazed (2016, p. 75). When looking at the largest companies in the world by their market capitalization in 2021, six out of seven are platform-based businesses ( Szmigiera 2021). This trend will most likely continue and the gap will probably broaden in the upcoming decades (Rahman and Thelen 2019).
2.4 Summary of the Platform-based Business Model
Platform-based businesses have accompanied mankind since the upcoming of trade among humans. Modern platforms have their roots in ancient bazaars and antique marketplaces, where a seller and a buyer got together for exchanging goods. From thereon, the importance of platforms increased steadily over the centuries (Casson and Lee 2011). It was ultimately for the invention of the internet and its accessibility to the public that platforms rose steeply to the corporations they are today. This moment truly marked a turning point for the platform-based business model, as the potential of new consumers and producers for the platform seemed all of a sudden limitless (Simakov 2020). In less than three decades, companies with this business model have risen to the top of the economy and according to Szmigiera (2021), six out of seven of the largest corporations in the world by their market capitalization are platform businesses. This trend of platforms to outperform other business models can be expected to continue in the upcoming decades and the gap to broaden (Rahman and Thelen 2019).
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- Quote paper
- Jakob Reisinger (Author), 2022, The Cultural Differences of Expanding Platform-based Businesses in China and Russia, Munich, GRIN Verlag, https://www.grin.com/document/1288346
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