How to turn a traditional business into a platform-based success

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Mauro F. Guillén, Zandman Professor of International Management, The Wharton School, University of Pennsylvania, USA & Srikar Reddy, Managing Director and Chief Executive Officer, Sonata Software Limited and Sonata Information Technology Limited

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The experiences of successful digital businesses such as Amazon, Airbnb, WeChat, Didi, Uber, Spotify or Expedia have implications for both consumer markets and the digital transformation of businesses across a wide spectrum of industries. These platform-based business models have four characteristics in common: they are open, scalable, connected and intelligent. Their success is largely due to their focus on a two-sided platform and the creation of a holistic business that skews a siloed approach.

Traditional businesses, because of the legacy they have in terms of business models and technologies, have struggled with their digital transformation when compared with born-digital companies. Is it possible to learn from platform-based companies?

Spanish firm Inditex, for example, opened its first Zara store in 1975. In the following four decades, this vertically integrated apparel manufacturer and marketer expanded throughout the world into more than 120 countries with 10,000 physical stores. Any company undergoing such dramatic brick-and-mortar expansion might be at risk of failing to adapt quickly enough to the digital revolution. In the apparel and footwear retail sector, about 9% of the dollar value of sales take place over the internet, with this growing at 24% a year; traditional channels are growing at less than 4%.

Inditex decided a decade ago to transform its entire value chain, not just the retail end of it. It invested heavily in an integrated platform covering relationships with suppliers, factory management, distribution logistics and sales. The benefits have been diverse: more efficient inventory management and logistics, faster customer feedback and overall optimization of assets. As an integrated platform, Inditex capitalizes on omnichannel sales, including physical stores, department store corners, catalogue sales, telephone sales, online stores, mobile apps and a social media presence. By 2019 about 14% of all sales were digital in the markets in which it had already rolled out this strategy.

The lessons from Inditex and other companies indicate a logical sequence of steps when it comes to best practices in digital transformation:

We will now examine the hypothesis a platform-based digital transformation strategy is, in general, more successful than adopting a more siloed approach to digital transformation.

A successful example is an established retailer in the cosmetics retailing space, whose business was affected by pure-play online retailers and retailers with more aggressive online strategies and a mixed product and service offering. The retailer had many legacy retailing systems for different functions resulting in no real-time, single view of clients, product information or inventory, which led to not being able to run online and physical operations effectively.

To deal with the different business challenges, it planned to adopt individual technologies for its marketing, commerce, supply chain and so on. A platform-based strategy, looking at the business holistically, was recommended to help the company understand different stakeholders and how to engage with them more effectively, while not losing sight of the legacy data of clients which was its biggest asset. This platform approach was designed using the legacy data first to create a data infrastructure and then building the operating platforms connected to the data platforms. While the implementation took five years, significant benefits have already been obtained thanks to better client engagement using the data infrastructure.

Another retailer in fashion retailing with legacy infrastructure who wanted to digitally transform itself to get better client engagement and more efficient supply chains implemented best-of-breed independent digital technologies and solutions to address data, customer engagement, inventory planning and digital commerce strategy. While this solved individual business process challenges in the short-term, it created a business model and infrastructure that were not in sync. This led to a situation in which the company was unable to respond to market demands quickly enough owing to the lack of a connected, intelligent and scalable platform-based strategy. The business has now embarked on adopting such a platform.

These cases show that the platform strategies pursued by digital pure-play companies can be successfully transferred to those with legacy systems. Platforms will continue to play a key role in the digital transformation of traditional businesses for a long time to come.