A new study co-authored by CEIBS Professor of Operations and Supply Chain Management Zhao Xiande offers valuable insights for entrepreneurs and enterprises looking to grow a platform business. Through case studies that explore how service innovations drove the evolution of four large Chinese business-to-business platform companies, the researchers show how three types of platform service innovation — product innovation, process innovation, and business model innovation — affect value co-creation activities and the network effect over the course of a platform’s evolution. Network effect is a unique feature of platform businesses, and is critical for their growth. Using the popular Chinese WeChat mobile platform as an example, as more of your friends use it, the more you will feel compelled to use it as well. The more users WeChat has, the more attractive the platform becomes to various businesses who want to reach its users. Stimulating this network effect is the primary aim of a platform company.

The researchers prepared case studies of Tencent, SJET, Zhubaijie and E-Coal, who are involved in digital content, crowdsourcing, manufacturing, and energy, respectively. Their studies involved conducting more than 20 in-depth interviews with 16 company executives over four years (from 2012 to 2016), and observing 15 workshops or meetings at the companies. They also collected data on the companies from third party and press reports. Their findings suggest that platform managers should select their strategic focus according to the stage of their platform’s development because different strategies are work best at different stages.  

The three main stages of a platform’s evolution and the strategies that work best for each according to the study’s results are as follows:  

Emergence: At this stage a platform is oriented towards building its infrastructure, and the researchers found that at this stage a platform will use its own resources and service innovations to trigger the network effect. For example all four of the companies in the study launched VIP member-customized services to attract users to join and use their platform. This compensates early users for the limited network effect benefits found at the early emergence stage of a platform. Giving direct subsidies to customers is another way platform owners stimulate the network effect at the early development stage. Some platforms also set up a reward system for users, to help strengthen their loyalty and sense of belonging to the platform. Service product segmentation and standardization which aims to guarantee the efficiency of suppliers and the matching efficiency of the whole platform can also be used to stimulate the network effect at this stage.

Expansion: A platform is oriented towards building relationships at this stage, and the researchers found that the strategies that worked best here include launching a recommendation/network marketing service; launching a supply chain financing service; creating an open process for new product development; integrating the supply chain process; and changing the cost structure. These service innovations are based upon the interactions of the platform participants and should be aimed at promoting their relationships.

Maturity: At this stage a platform is oriented towards building an environment for the platform ecosystem, therefore service innovations should be focussed on building up an ecosystem environment that provides more autonomy and power for participants. The four companies in the study all launched an entrepreneurial incubation service when they got to this stage. This can include introducing investors such as local governments and other institutions that can provide venture capital, office space, and other resources to start-ups on the platform. Some of the companies at this stage also created a new revenue-sharing model aimed at keeping smaller enterprises engaged by eliminating the platform service fee for them.

The results of the study can be found in the paper titled “The Influence of Platform Service Innovation on Value Co-Creation Activities and the Network Effect” which has been published by the Journal of Service Management. Prof. Zhao’s co-authors are Wenhui Fu and Qiang Wang. Read the paper here.