A platform strategy is a holistic approach that fosters interactions and transactions among diverse users, facilitating a dynamic ecosystem of value exchange. Although the term platform is often used broadly, we use it specifically to indicate products, services, standards, or tools that enable partners, customers, users, and the platform owner to collectively create value.

Whereas a traditional product follows a linear path from supplier to customer, a platform is multisided, with owners orchestrating interactions between two or more parties. The power of platforms lies in their network effects: As more producers and consumers join, marginal acquisition costs decline and the value for the platform and its participants increases exponentially (see Figure 2). This, in turn, attracts more participants. These network effects typically result in "winner takes most" market dynamics, raising the barrier to entry after a segment's platforms reach a certain level of scale and success.

Figure 2

Successful platforms deliver exponential value increases as they scale up

A critical step in formulating your platform strategy is to understand how and where you can play. Your first big decision is whether to create your own platform or, instead, find the right balance between partnering with an existing platform, competing without a platform, and simply taking protective measures against platforms. For those that choose to launch a new platform, we believe there are four distinct types:

A key takeaway is that platforms do a lot more than simply connect different parties. Development platforms make it easier and faster to build new applications. Exchange platforms remove counterfeits and provide useful consumer analytics. Content platforms make it easier not only to create content, but also deliver it to the target audience. Standards remove a sector's barriers to entry and help third parties work together.

Before launching a platform, companies have a lot of questions to consider. The first one is, "Should we even create a platform?" This can sometimes get lost amid the excitement and hype but, before diving in, successful platform owners conduct an honest assessment of whether they have the right resources, talent, and competitive position to succeed. A winning platform requires:

• Good timing, so the company enters the game after market trends have sufficiently matured but before a competitor gets too far ahead to catch up with them.
• A truly distinctive value proposition to capture the hearts and minds of users on all sides.
• A new operating model that allows the organization to rapidly test ideas, adapt based on what it learns, and scale up the platform with minimal friction.
• Large, sustained investment to build the platform and seed its various sides until it has gained sufficient momentum to achieve "escape velocity."

In short, platforms can present a massive opportunity, but the margin for error is small. Do you have what it takes?

Successful platforms typically follow a five-step path of constant iteration (see Figure 3).

Winning platforms start with the customer. Good technology matters, of course, but a more important predictor of success is whether the company can recognize a customer need and imagine a new way for a platform to serve this need better than what currently exists. This gut check is especially important for companies that want to convert an existing product into a platform business. Leading companies invest in detailed research into target customers, look for their unmet needs and expectations, and quantitatively validate how well the proposed platform would stand out from competing offerings.

Next, developers define a handful of capabilities through which the platform can truly set itself apart. These can be physical (capital infrastructure, supplier network, talented staff) or digital (company brand, data analytics expertise, app development skills). The key is to focus on capabilities that overlap with both the organization's strengths and customers' areas of greatest need.

Leading platform developers zero in on the points along the ecosystem's value chain that their organization is well-positioned to control. These might be areas that foster close relationships with customers, serve as essential links in growing markets, or allow the platform to capitalize on shifting business boundaries and profit centers. An example of this in a physical product is the heating element in an electric kettle. While it makes up a small portion of the kettle's cost, the heating element is difficult to replicate and critical to the product’s appeal to consumers. That means most of the kettle's profit goes to the company with the engineering prowess to develop and own the heating component.

At this stage, the platform owner has critical choices to make about the structure and boundaries of the platform. Should the network be completely open to anyone or have strict standards for who can contribute? How much participant data should be shared and with whom? The trick is to find the right balance between speed of innovation and growth (generally, a more open platform) and the level of quality control needed to maintain the platform’s reputation (a more closed platform).

In the rush to build and scale up a platform, the owner might overlook a key piece of the foundation: IT infrastructure. By their nature, successful platforms grow quickly, so the digital platform architecture needs to be ready from day one to handle "hyperscale" growth. This means having modular IT infrastructure and capabilities that can easily connect to one another in a digital, seamless way.

Successful companies design their platforms to continuously improve. They establish key metrics to track their core transaction, such as the number of rides taken in a ride-sharing app, then design feedback loops to test assumptions and quickly adjust. All of this is done with an eye toward creating a "flywheel" of network effects that will help the platform scale up.

Starting a new platform can feel like a "chicken and egg" situation. Producers won't join if consumers aren’t on the platform, and consumers won’t join if there's no one providing goods or services. Leading platforms find creative ways to "seed" the initial participants on all sides of the platform. In some situations, the platform owner supplies the early apps or content to attract the first consumers, as Sony did when launching PlayStation with exclusive games, or Google by first building internal apps for its Android operating system and offering them for free. In other situations, the platform owner subsidizes users through discounts or rewards to persuade them to try the platform.

From there, it's about making sure the participants become active members of the community. Exchange platforms prioritize providing a simple, intuitive digital interface; capturing and acting on customer feedback; and communicating with their emerging community. Application platforms, meanwhile, focus on winning the hearts and minds of third-party developers. Leading platforms offer a range of financial incentives, training and support, and minimal bureaucratic barriers to participation.

An Agile mindset is critical at this stage. There’s no shame in starting with a narrowly focused platform with a small user base; in fact, this is preferable. Once the platform owner has a group of 'super users' who love the platform, the owner can pinpoint why they love it, invest in those attributes, and add more of what early users want, even if it wasn't what the platform owner expected.

Salesforce demonstrated how a customer relationship management (CRM) software company could become a platform. The cloud-native, web-based provider allowed third-party developers, and later customers, to build their own apps to integrate with Salesforce's CRM offerings. A freemium model, close ties to (and investments in) third-party developers, and other moves transformed what could have been a "me too" cloud model into a genuine platform.

And it's not just tech companies that are winning with platforms. John Deere, the nearly two-century-old tractor manufacturer, launched a digital agribusiness platform, MyJohnDeere, in 2012. This product integrates data from equipment sensors with third-party data on crop characteristics, soil conditions, weather, and more to help farmers better manage their fleets and fields and increase productivity. John Deere developed the platform’s initial applications and data in-house to establish a minimum standard of quality and give users more incentive to join. The company later opened up the platform to be a hub for third-party applications. These innovations have deepened John Deere's relationships with customers and strengthened its core equipment business, ultimately helping the company to nearly triple its market capitalization since 2011.

Once a platform gains momentum and begins to rapidly add participants, it enters into a delicate dance: When and how should it start making money, and how can it do so without disrupting the platform's growth?

The race to win "critical mass"—the inflection point at which network effects kick in—can take many forms: campaigning for big customers, pushing for exclusive deals, bundling the platform with existing offerings, or acquiring competing platforms. Sony's Blu-ray video players won the standards battle against HD DVD in part by bundling Blu-ray playback capabilities in Sony's PlayStation 3 video game consoles.

As for how to monetize your platform, two factors hold the key: value and timing. A careful assessment of how much each participant values the platform will inform key decisions about which business model to apply and how much to charge. Some platforms attracted early participants with subsidies that they subsequently reduced. Others used a simple consumption-based model.

Timing is particularly delicate: Attempt to monetize too early and you may scare off potential users, hampering growth and opening the door for competitors. Wait too long and you miss out on the cash flow needed to scale the platform and risk accelerating your burn rate. It's a challenge for incumbents and start-ups alike, as the latter are racing against bankruptcy, and the former are often pressured by shareholders to deliver a return on the platform investment.

Facebook, which recently changed its corporate name to Meta, initially prioritized scale over monetization. It invested in features to engage users, such as status updates and the ability to tag people in photos, and it has continuously refined the product based on what attracts users and deepens engagement. The company made an early decision to generate revenue through advertising, rather than subscriptions, which it determined would have led to an exodus of users. It launched its advertising platform in 2007, following three years of exponential growth during which it surpassed 50 million monthly active users. By 2012, Facebook reached 1 billion monthly active users, $5 billion in revenue, and a profit of more than $1 billion.

Organizations with platforms that meet their initial goals often look to new frontiers. Expanding the platform’s scope risks the organization spreading itself too thin, but leading companies have found a repeatable approach to moving into additional arenas at a manageable clip.

Not surprisingly, it starts with understanding users' needs and scouting new ways to serve them. Leading platforms also analyze the strategies of soon-to-be competitors in related sectors and geographies. Once they are ready to launch new platform offerings, the owner can take advantage of its existing customer access and control points to get a fast start out of the gate. Leading platform owners recognize that they don't have to do everything themselves. They seek partnerships and acquisitions to add the capabilities needed to grow the platform. Partnerships can be a good choice when companies don't have the expertise to build the capability internally, lower-cost alternatives are required, or speed to market is paramount. Capabilities that are highly strategic or linked to platform control points, however, are good candidates for acquiring or building in-house. The expansion might also require an evolution in the platform's operating model to manage the additional complexity.

As platforms reach the expansion stage, regulation emerges as a key consideration. Platform-powered companies are drawing more regulatory scrutiny due to their size, blurring of traditional business boundaries, and business models that raise questions about data privacy and sovereignty, not to mention national security. Leading platforms are responding by supporting users, engaging more with regulators and governments, forming industry associations, and crafting strong governance for their business models.

Grab demonstrates how platforms can create a repeatable model for expansion. It began as an app for hailing taxis in Malaysia and later shifted to on-demand ride-hailing of private drivers. The company distinguished itself from global competitors and served the needs of local customers with features such as cash payments to better support the many riders and drivers who don't have bank accounts. Grab quickly established operations in seven additional countries in Southeast Asia, maintaining a hyperlocal strategy with local staff and offerings specific to local needs and dynamics. It has since moved into food delivery, travel planning, advertising, digital payments, and financial services. In some cases, Grab has turned to dealmaking to execute its vision more quickly, such as acquiring Uber's Southeast Asia operations and forming a joint venture with Singtel to offer digital banking services across the region.

Platforms are redrawing industry boundaries. Not every company will own a platform, but platforms will likely affect every business in some way. Therefore, companies that decide not to own a platform will have to develop a strategy to compete with platforms, partner with them, or defend against them—in many cases, all at the same time (see Figure 4).

Even if a company chooses to partner with a platform, it behooves them to protect the business by mitigating strategic risks. The company might want to avoid ceding customer data to the platform, for example. In some cases, defending against platforms might call for exploring legal and regulatory options.

As platforms disrupted the traditional retail model, Nike invested in deeper, more direct relationships with customers, often built on distinctive experiences. For example, the company launched the SNKRS app to give users exclusive access to trendy products and content, such as articles and livestreams from influencers. Nike has also struck partnerships with platforms such as Apple, with whom it launched the Nike+ iPod sports kit in 2006 and, 10 years later, a special Nike-branded version of the Apple Watch. Over the past decade, Nike more than doubled its global sales, and its direct-to-consumer sales grew from 16% to 39% of total sales, a figure it expects to rise to 60% by 2025.

As these examples make clear, senior leaders can't afford to ignore the rise of platforms, no matter their industry or business model. The good news is that they have a range of options for how to respond to this profound shift in market dynamics and customer behavior. The not-so-good news is that time is of the essence: Those who hesitate may find their options are quickly reduced along with their prospects. Leading companies are moving fast to identify the platform strategy that's right for them and taking bold steps to turn that vision into reality.