| Japan's Seasonal Factors Seasonal income flow & impact on consumer spending |
| Arbitrage & Consumers Law of "One Price" in consumer product markets |
| Japan Viewed from the Outside "Gai-jin," outsiders, views of Japan uncover new insights |
| Mobile phone usage habits -- Japan, China, U.S. JMR study finds culturally influenced patterns |
| Richard May -- interview on iTV Video clip -- marketing research trends in Japan now |
| Software-as-a-Service SaaS changes how you acquire software |
| MSM Strategy under Industrial Convergence -- Forming New Competitive Advantages |
||||
Presentation by Hisakazu Matsuda given at the JMR Next Vision 2007 Conference in Tokyo |
||||
| I would like to speak today about creating competitive advantage through multi-sided market strategies. In this discussion, I propose how to create new competitive advantages through multi-sided markets in an environment where industrial convergence is on-going. Based on a variety of discussions in the two years since meeting with Professor Andrei Hagiu and our actual hands-on experience and research, my presentation summarizes how to actually apply this multi-sided market mindset in the real world. Working for many years with Japanese ‘mono-zukuri’ manufacturers, I’ve come to understand exactly how important information, content and software are to manufacturers. However, manufacturers still struggle to effectively leverage these in their businesses. After thinking for a long time about how to take advantage of these assets, it became evident to me that the answer is multi-sided markets, or platform building. I would discuss today the following three elements. First I would like to talk about multi-sided markets, or why platforms are so important. Next, I'll talk about how to make a strong platform, and finally how to specifically adapt the platform business approach to each of your businesses. Outline of this talk: Introduction A Booming Economy yet Lower Profits Decisive Factors Impacting Operating Revenue Industry Convergence Renders Conventional Strategic Management Obsolete A Shift from Building Closed Proprietary Systems to Delivering Strong Platforms Fundamentals of Strong Platforms Leveraging Platforms to Shift to Highly Profitable Businesses Steps to Multi-Sided Markets and Industry Evolution Multi-Sided Shift of the Mobile Telephone Market Heterogeneous Multi-sided Market Competition through Diversification of the Mobile Telephone Market Revival Strategy for Mobile Device Manufacturers Multi-Sided Markets in Mature Businesses 5 Rules to Mastering Platform Competition |
||||
| I’ll state the conclusion first: businesses that are enjoying high profits today are businesses that are presenting strong platforms. This chart depicts data on the top 10 information appliance manufacturers (chart 1). Their revenue in 2005 was 51 trillion yen, which was approximately 10% of Japan's overall GDP, and grew 104% over the previous year. According to the 2006 business year outlook, revenues were 54 trillion yen, reflecting growth of 104% over 2005. Operating profits for 2005 are also up 117% compared to the previous year and growth of 111% was also forecast for 2006 lofting total stock market capitalization to 23 trillion yen.
Unfortunately however, the difference in profits is massive when compared to a company like Toyota. Toyota is bigger than even these ten information appliance manufacturers combined. Looking at operating profits, even Sharp expects to be able to grow 5.7% through 2006, but this is only half of Toyota’s growth. Toyota even beats Korea’s Samsung Electronic’s operating profit forecast for this period of 11.6%. In terms of stock market capitalization, Matsushita Electronic Industries is worth about 5.6 trillion yen, while Toyota comes in at 26 trillion yen and Samsung is worth 9 trillion yen. But these profit levels don’t even come close to the levels seen in the United States. For instance, Microsoft has annual sales of approximately 5 to 6 trillion yen. This is about the same as Fujitsu, but Microsoft’s operating profit is about 2 trillion yen. That’s an operating profit margin of 37%. Although direct comparison is of course impossible due to differences in Japanese and United States accounting practices, the disparity in operating profit margin is huge. Microsoft’s stock market capitalization is 33 trillion yen, which is even higher than that of Toyota. In this booming economy, even though Japanese firms are enjoying profit levels not seen since the days of the bubble, the important issue for Japanese companies is how to increase profits as information appliance manufacturers while supporting the 21st century economy. Let’s look at the mobile telephone handset market as a classic example of lackluster profits. (Chart 2) Even though mobile telephone handset shipments have quickly grown worldwide to 793 million handsets, Japanese manufacturers are rapidly losing share. They are exiting the world market because they are unable to increase profits. We must ask why this is happening. We reach the conclusion that it is because these firms are unable to deliver a strong platform. These are good economic times for Japanese manufacturers, but as mentioned in the introduction, the big question is how to generate high profits.
|
||||
According to the classic framework created by Michael E. Porter, there are two decisive factors to affecting profits. They are 1) the industry in which the firm chooses to compete, and 2) the firm's competitive position within that industry (Chart 3). From an accounting perspective, an enterprise's consolidated operating income ratio can be broken down into the rate of capital turnover and the sales operating income. The rate of capital turnover is determined by the industry in which a company chooses to compete. The company’s competitive position within that market influences the sales operating income. Therefore, if a company has low profits, it is either because it is competing in an unattractive industry or it has a poor competitive market position. If the competitive position in a mature industry is low, profits will of course trend lower.
Meanwhile, in order to improve competitive position within the selected market, companies must increase market share and attempt to create monopoly or oligopoly conditions in their favor. This can be achieved by expanding the differentiation advantage or the cost advantage. Companies in the United States have chosen this path. By following this strategy, P&G has regularly recorded 20% per annum growth. The basic mindset behind strategic management is to grow profits by first choosing the battlefield and then choosing the strategy. This basic mindset is still probably about 60% valid in today’s business environment. |
||||
However, this is no longer the case in cutting-edge industries and for information appliance manufacturers. Behind this change is the relentless progress toward industry convergence. In the case of so-called information appliance manufacturers -- broadcasting, communications and electronics -- are on the verge of converging into a single industrial entity.
Before today, the conservative "mono-zukuri" industry, the risky software industry and the content creation/broadcasting industry were completely separate. (Mono-zukuri firms -- literally, 'makers of things' - place utmost importance of craftsmanship that goes into producing useful, everyday goods.) “Mono-zukuri” firms and content companies have existed in completely different worlds. However, as digital technology has spread and became available as a common technology, these barriers are rapidly falling away. The barriers are also falling that had separated computers and mobile devices, televisions and mobile devices, or televisions and computers, and this is encouraging vertical specialization, or “vertical disintegration." In other words, the vertical integration and horizontal division of industry so prevalent in the past is being supplanted by the fusion of industries. It is for this reason that companies are finding it difficult to figure out which industry they belong to anymore. As the industry, or battlefield changed, so did the battle strategy (Chart 5). “Network externality” relationships began to appear, where benefits to all customers improve as the number of customers increases. This is an important keyword in modern market competition. Corporate cost structures are also changing, bringing the need to increase production and to strive for increased returns. The battlefield strategy, or the strategy to gain a marketplace competitive advantage, has indeed changed greatly.
|
||||
The reason that this strategy is effective in increasing profits is because the company is able to monopolize the market. If the market is monopolistic or oligopolistic, the supplier can control the price; therefore high revenues = excess profits. However, these monopolistic affiliated company systems are now collapsing in industries all around us. As consumers become more diverse and have more choices, monopolies are disappearing everywhere for regional retail, wholesale and manufacturing. The strategy of expanding dealings with retailers and a variety of wholesalers and manufacturers becomes more effective in addressing this customer diversification. The result is a collapse of market monopolies and the inability to control prices, and price competition arises which causes prices to fall to the marginal cost level. This market diversification removes the ability of suppliers to be able to create monopolistic conditions. This is the single biggest factor behind falling profits. With the loss of this strategy, the platform approach may be the best structure to deliver excess profits in diversified markets. |
||||
| A market is a tangible or intangible place where buyers and sellers can trade, based on price information. This is the simplest definition of a market, in a one-sided market world view. However, in order for buyers and sellers to trade with each other, they need not only price information but also a variety of rules and regulations to lower transaction costs and ensure the smooth completion of transactions. This is a role performed by "the platform." Platforms are indispensable foundations in modern markets, and those companies that deliver them will enjoy high profits. Exactly who provides platforms may depend on history and tradition. But there is no reason why platforms may not be provided by public institutions such as governments as well as by companies. Focusing only on the non-governmental, for-profit sector, we observe companies enjoying high profits based on delivering these platforms, and these platforms have an extremely large impact on their chosen market The impact on the market is due to the size of the “network externalities” and the “switching costs” of platform users. “Network externalities” refer to the establishment of a condition where “the more users there are, the greater the benefits for all users.” Examples of this include computer operating systems, game systems or DVD systems. The amount of available software or content increases as the user base increases, thereby increasing convenience for all users. Also, a user who wants to switch from one computer operating system, game machine type or DVD type to another has to pay not only the hardware replacement costs but also needs to consider a variety of other costs, such as the cost to learn the new system or to migrate data to the new system. These are “switching costs.” High switching costs make it harder for consumers to switch to other platforms and this increases the platform’s influence on the overall market. Once a platform has established these relationships, it can be called a strong platform. And, the entities that deliver these strong platforms enjoy high profits. Until now, markets traditionally had a one-sided aspect from the perspective of buyers and sellers, but in modern markets there is one more thing needed to make the connection between buyers and sellers. Leon Walras, called the founder of neoclassical economics, called this third element a "very dumb auctioneer.” Platforms could be regarded to be this “auctioneer.” Here are a few examples of platforms (chart 7). The chart shows Side 1, Side 2, the platform functions and tools, and representative providers. Looking at the ranks on the table from the perspective of the strength of network externalities and high switching costs mentioned earlier, companies able to create these relationships enjoy higher profitability and can be said to have stronger platforms.
|
||||
| There are examples of companies belonging to traditional businesses but having platform structures. A name appearing in discussions recently about platforms is Toyota, for example. Massive automotive industry concentrations exist in the cities of Toyoda and Kariya in central Japan. These concentrations are one side of the platform - the parts manufacturer side. The customer is the other side. Toyota manufactures automobiles by delivering a highly specialized industry regional concentration based on a platform of auto-manufacturing. This can be thought of an example of a platform. As an example of a platform for building a customer base, we have Wal-Mart. In the retail sector, Wal-Mart is the 500 pound gorilla. Wal-Mart’s business strategy is based on creating a platform that uses its location and access to manufacturers to link up with local consumers. By doing so, in the future Wal-Mart will likely evolve to be not just a medium for distributing manufacturers' goods to consumers, but will take on the role of a platform. This could greatly change the way that Wal-Mart makes money. It might not be a bad idea for all of you to consider designing your businesses in a similar fashion. When considering these kinds of platform businesses, the question arises of how to change strategy to become a highly profitable business (chart 8). One action in taking on the seemingly impossible task of changing the industry is for you to get involved in driving industry fusion. Instead of waiting for things to happen, take the reigns and start to shake up the industry players yourself. The next initiative you can take is to concentrate on your true strength, your core competency. These actions are extremely important for strategic leadership.
|
||||
| There are a few points to evolving the industry. First, customers tend to always want new things. They want beautiful, high resolution movies and games. This demand drives the creation of products such as the high-performance “Playstation 3” or the “Sony Bravia” with HDMI 1.3 connectivity. The strategy behind these products is to combine software and hardware. This is vertical integration (Stage 1). However, customers may eventually begin to want to enjoy other things in full-spec high definition, such as Nintendo’s popular “Brain Training” game. Devices with compatibility would be needed to achieve this. Manufacturers can make more money under these market conditions by focusing on just the hardware and making compatible devices, and so they begin to specialize (Stage 2). As users' hardware preferences change, vertical disintegration occurs, and software becomes more important than the hardware (Stage 3). Consumers buy personal computers not because they are drawn to the hardware, but because they want to view content or use the Internet. When the user preference shifts to software and content, software manufacturers gain more leverage. Nobody cares about the hardware anymore, and the relationship between hardware and software manufacturers is stood on its head. Eventually, platforms arise to deliver a diverse hardware to the diverse consumers, and the entity controlling the platform is the only one making money, not the equipment or software manufacturers (Stage 4). All industries could be said to follow a similar life cycle. As mentioned earlier, whoever has a strong platform at this time scores the strategic win and enjoys high profits. Theoretically, this results in greater benefit to society through providing greater added value to users and delivering value to customers. This has been shown to be the case in two-stage game theory research done by the social economics research team at our company. |
||||
More specifically, what kind of competition is occurring today? The competition is extremely complex but it can be easily understood from the following example based on the mobile telephone market (chart 9).
At first, NTT DoCoMo was basically a frequency wholesaler. When NTT DoCoMo was launched in 1998 it was basically just an air-time broker: it bought handsets from manufacturers, sold them to customers and then re-sold air-time to customers. The introduction of i-Mode changed everything. i-Mode enables users to browse information content and send and receive email from a mobile telephone. It has evolved to enable a variety of applications and content to be viewed on Java middleware. The introduction of i-Mode shifted the simple air-time wholesaling business into a platform business. NTT DoCoMo became significantly stronger because it successfully convinced content holders to make their content available on the “i-mode” platform. As more customers attracted more information content holders, and consumers’ perceived value of the “i-mode” network grew, these “network externalities” enabled NTT DoCoMo to rapidly increase its market dominance. However, KDDI’s “Brew” based software platform has turned the tables on its competitors. Application developers are able to keep development costs down by using the Brew software development environment. In the mobile telephone market, Java applications are developed separately to run on the proprietary chipsets of each mobile phone manufacturer which results in increased application development time and migration costs. This caused a significant delay in the introduction of applications such as GPS and “Chaku-Uta” music applications. Brew has helped KDDI to leapfrog ahead even though it had a s late start and was coming from behind i-Mode. In other words, by responding to the advanced and diverse demands customers make on mobile phones by providing a platform based on Brew middleware which is capable of efficiently delivering more applications and information content than the i-Mode platform, KDDI can be said to have advanced the multi-sided nature of the market by bringing application development firms to the front lines as new members of the multi-sided market. |
||||
| Currently, platforms are further diversifying and becoming more heterogeneous, and are undergoing complex and diverse competition. In the mobile telephone market alone, there are about 5 different layers of competition and this includes mobile video distribution. In addition to “One-Seg” and Qualcomm’s new “MediaFLO” offering, PC video downloads are also a factor in the mobile telephone market as substitutes. The “Edy” and “Suica" electronic money systems are also platforms in the mobile telephone market. Mobile music and PC music distribution platforms also exist in the mobile telephone market. This is expanding with platforms such as Napster, “Chaku-uta Full" and LISMO. Mobile telephones are coming closer to replacing personal computers for many activities. There is also the potential impact of the so-called Web 2.0. Google has the potential to completely turn the mobile telephone market on its head. Although there are currently problems with usage limitations, massive changes could occur if Google and the general Internet can be adapted to be easily used from a mobile telephone. Competition is occurring between widely different and heterogeneous platforms even in extremely diverse, complex, and one-sided markets. The current condition is one of not just hardware or content-based competition. It is not a case of being able to win by simply controlling the movie titles and then controlling the DVD format. The important message is that winning is not possible without a platform. So all this adds up to the fact that the competitive landscape is undergoing a substantial change. |
||||
| Even as diverse and heterogeneous platforms are growing in Japan, Japanese mobile device manufacturers are rapidly losing market share in the global marketplace. The Ministry of Internal Affairs and Communication has finally moved into action by launching an “International Competitiveness Committee." The important issue is how to regain global market share in the future. The answer depends on one’s competitive stance - such as mobile telephone manufacturer or communications carrier. In the past mobile device manufacturers and carriers had shared interests, but now their interests are in conflict. However, except for those countries where the use of mobile telephones is not widespread, there is little reason for Japanese domestic carriers to re-enter the global market when they have already been burned once before. Therefore, the revival strategy depends on whose interest takes priority, but if the interests of mobile phone manufacturers that have many employees are prioritized, there are four options. The first option is to destroy monopolistic (exclusionary) platforms. Mobile telephone manufacturers must work to segment and divide the market to create conditions where mobile devices will be accepted. In Japan, customers first choose a mobile carrier and then choose a mobile device (mobile device manufacturer), but in the United States, customers typically choose the device first and then choose a carrier. This is why Motorola is so strong in the American market. In order to weaken carrier-centric platforms, it may be necessary to reconsider the legal regulations regarding broadcasting and communications priorities. The second option is for manufacturers to take the lead in developing and introducing mobile devices that would increase customer value. It is necessary to not only dig down to discover the basic needs customers have of their mobile devices but also to develop and introduce complementary mobile devices. Through a complementary analysis method, we discovered that video is more instrumental in increasing customer value than music. However, the reality is that legal regulations in Japan and broadcasting and communications industry interests are being prioritized over customer requirements, which is limiting the development of attractive mobile devices for enjoying video. The third option is to create new platforms controlled by the device manufacturers. Specifically needed is the creation of multimedia platforms, both video and audio. For instance, personal sharing sites like YouTube and MySpace are popular in Japan as well as the United States. The market needs a platform that would enable consumers to actually enjoy sites like these. There are practical limitations to extensions of existing broadcast technologies such as One-Seg and it is may prove difficult to achieve through means such as “MediaFLO” alone. A platform that would enable consumers to enjoy YouTube content from their mobile phones would be probably be extremely popular. However, there is little incentive for those controlling existing mobile telephone businesses to create such platforms. The question is whether manufacturers can succeed in creating such a platform. From a technological perspective, there are several options for platform features or tools. The especially important point is to develop a platform that is separate from the interests of the carrier. The fourth option, and the most important, is to create a virtuous cycles. YouTube is a three-sided platform. The platform provider is YouTube Inc., while members belong to three different groups - content holders, viewers, and advertisers. YouTube provides a space for content-holders to store their content on the Internet, and provides an advertising opportunity for advertising sponsors by attracting many viewers. The only paying members are the advertisers. If content-holders upload interesting videos, more viewers will come. If more viewers come, more content-holders will come with more interesting videos, thus attracting even more viewers. This creates a positive feedback loop, or virtuous cycle. The key point is how to create conditions in which benefits to viewers using the platform grow as the number of consumers using the platform increases. For companies to re-enter the global market, they must create platforms that are respected and demanded by the world. NTT DoCoMo learned the hard way that Americans and Europeans were so easily convinced to use the i-Mode platform. There was little demand by Americans to view content or shop online from their mobile phones. Behind this difference in usage behaviors are the different usage scenarios in the United States and Japan. Most people in the United States move around by automobile, while Japanese usually commute to work on trains. Whatever the case, for Japanese manufacturers to increase their share in the future, they will need to embrace this kind of strategy development and create platforms that are the key to this strategy. The key issue for mobile device manufacturers will be how to lead with this strategy. |
||||
Let’s consider an example of a consumer goods manufacturer building a platform into its manufacturing business. There are primarily three ways to do this. The first is to improve product service value, second is make distribution systems more efficient, and third is to work to attract different (foreign) customers. Let us first look at improving product service value. The first perspective is to come to terms with how to increase our product’s service value. This is complementary analysis or, finding complementary products or services that further increase product utility. Menus or recipes are complementary to food products; functional nutritional information is complementary to beverages. The second perspective is to consider who is providing this information and content. It is important to bring onto your platform as members as many information content holders as possible who consumers trust. The third issue is how to bring on board the platform the various information content holders. The physical manifestations of the platform are the functions and tools that bring information content holders and customers together. The fourth to deal with is : how to identify and build in conditions that create positive feedback which equals building virtuous cycles. Next, is to increase switching costs. Sixth and finally is to handle what should be done to attract users to expand the platform as quickly as possible, the decisive factor in platform competition. It is necessary to design platforms that address all of the above perspectives. For manufacturers to win in platform competition, they must back away from being members of one-sided platforms offered by competitors, and adopt the mindset of taking an indirect approach to creating customer value by presenting their own platforms to customers. |
||||
The second rule is to bring information, content and service providers on board as platform members. Winning platforms take the strategy of keeping the lean meat while cutting away the fat, or, in the case of manufacturing, decisively differentiate. But this alone is not enough: do not settle for being “yet another” or “one of them” manufacturers, but instead, have the mindset of increasing value for customers to increase overall profits by leading though platforms. The third rule is to increase diversity of platform members in order to promote diversified or multi-sided markets. The platform will grow stronger as it evolves from a one-sided to a multi-sided market. If your company already has a platform, it is important to make this as multi-sided as possible. Conversely, the fourth rule is to realize that when there is a rival dominant platform, it is better to adopt a strategy to split or differentiate the market. When comparing the mobile telephone platform markets in Japan and the United States, it is clear that carriers in the United States have less control than here. In Japan, the carriers have overwhelming strength. From the perspective of Japanese manufacturers, the most effective strategy is probably one of decentralizing the platform as much as possible. Finally, the last rule is to understand that in the current environment in which industry fusion is occurring on a broad scale, it is necessary to always innovate and lead in multi-sided market competition and innovation. |
||||
Users are becoming more diverse and sophisticated in markets. Digital technology is becoming a common technology in virtually every market and Web 2.0 is just around the corner. Meanwhile, technology is becoming more pervasive and profits are decreasing. The following strategy is one answer that we at JMR propose to clients to help address the problem of falling profits. First, it is necessary to change the way of looking at the market and to redefine the market. By redefine, I refer to discovering multi-sided markets. High profits can be obtained by introducing and strengthening platforms into these discovered multi-sided markets. Strive to re-invest profits into technology to promote further innovation and further strengthen the platform. This is the multi-sided market strategy necessary to maximize customer value. This completes our NEXT STRATEGY presentation. In today’s changing market in which interest in consumer lifestyles is advancing and markets are diversifying, I hope you will agree that platform creation is an extremely important strategy key for manufacturers and service providers of all types.. Thank you for your attention. |
