Jul 26, 2018 - 8 minutes read time
When is it possible for David to beat Goliath in the platform economy? On March 25 mighty Uber bowed out of Southeast Asia by selling its operation in several countries to local rival Grab. The news came as a surprise to many observers. Grab, which launched its service in 2012 with 40 drivers in Malaysia, came late to the ride-hailing game, only after Uber had established a formidable position in the United States. Three months after the sale, in June 2018, Toyota decided to pour $1 billion into Grab, in a bid to expand other offerings in the region including food delivery and electronic payments.
Uber’s setback in the international market, however, wasn’t its first. In 2016 the company sold its China operation to Didi Chuxing because of the fierce competitiveness of the local player. Uber had reportedly spent $2 billion over a two-year period trying to battle Didi. A year later, Uber admitted defeat in another region, selling its operation in Russia to Yandex.
This seems to be a strange situation. In the internet economy we often see winner-take-all dynamics playing out, meaning one company, or platform, rules a certain sector: Google dominates online searches, Facebook dominates social networks, Twitter has microblogging, Netflix has entertainment streaming, YouTube has video sharing, and Spotify has music streaming. But Grab versus Uber seems to defy this winner-take-all narrative. When and how can a smaller local player fend off a global giant? And what can Grab teach us about the future of platform businesses?
To venture capitalists and the financial market, no business model is more attractive than a platform. A platform is essentially a marketplace that connects the supply side (goods and services) and the demand side (people who want to buy them). For example, Uber and Grab link riders and drivers, Airbnb links hosts and travelers, and Amazon links shoppers and sellers. The spectacular growth of these businesses has been commonly explained by “network effects,” a common refrain among economists and academics. They argue that the value of a platform depends in large part on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, leading even more people to use it. And once a platform reaches a certain size, the thinking goes, it becomes too dominant to unseat.
But Grab’s triumph over Uber illustrates that size is more a consequence of success than the direct source of it. Any platform still needs to achieve a product-market fit to succeed in the long run. What works well in one country may fare badly in another, especially when the product being sold is a physical rather than a digital one. Uber, like all transportation services, has never and will never offer a product that’s composed purely of digital “bits,” as companies do in media (Netflix and YouTube), music (Spotify), or advertisements (Facebook and Google). When a platform strategy requires mixing the digital and the physical, the area of differentiation lies in service delivery in the physical world. And in the physical world, products can’t exist as an app, like Uber’s, that has only one version and is uniformly rolled out across the world.
This is a subtle but important distinction. As more sectors embrace a digital strategy — transportation, aviation, health care, energy, and so on — managers will find that a deep understanding of their market is still the most potent defense against competition. These sectors have never been, and never will be, composed purely of digital bits. Transportation, aviation, health care, and energy all require physical delivery, whereas media, music, and advertisement do not. What Grab has shown us is that there are sectors where digitalization favors the local players, or players who possess deep know-how about the specifics of their industries. Such knowledge is in fact the prerequisite to innovation.
Anthony Tan, cofounder and chief executive of Grab, saw that it was imperative to understand, appreciate, and build regional distinctions into a product. In the Philippines, where eight major dialects are spoken, Grab’s customer representatives speak the local dialects when someone calls them. Passengers can also text drivers through a chat feature with automated translation. These features are design elements that Uber never showed interest in seriously pursuing. And unlike Uber, which forces drivers to accept credit card payments in the name of “frictionless” transactions, Grab embraces cash. “We understood the taxi drivers’ need for daily income. We understood that a lot of people really use cash. We respect the hyper-local culture in places we operate,” Tan said. Credit card transactions may be frictionless in California; they are impractical for many drivers in the Philippines.
Grab’s success has come from other features, too: In Singapore, it lets users input numeric codes for nearby taxi stands in lieu of addresses. In other parts of Asia, where lack of trust and scanty safety records plague the taxi industry, Grab lets riders retrieve drivers’ police records through the app and share routes and license plate numbers with friends and family. The app also masks passengers’ phone numbers on the driver’s end as an additional safety precaution. Again, Uber never took the lead to pioneer such features.
In Indonesia, road congestion is endemic. Grab decided to offer rides on motorcycles, a service it called GrabBike. Thanks to this service, the company has surpassed Google in the efficacy of its route-planning suggestions in and around Jakarta: Tens of thousands of motorcyclists navigate back roads and side streets to avoid traffic, all the while sweeping up copious amounts of GPS data. Though none of these tweaks can be claimed to be a technological breakthrough, they have collectively helped Grab win over local consumers.
From this perspective, Uber’s ultimate mistake was letting its app stay largely unchanged. In other words, the initial innovations that made Uber dominant also left it vulnerable. What Grab has vividly illustrated is that local adaptation — the timeless advantage of traditional companies — is essential for platform businesses. Historically, some platforms haven’t embraced localization because the allure of quick scaling was too much to resist. But network effects don’t negate the importance of customization.
So if an indiscriminate rollout across geographic regions is becoming less viable, how can companies accelerate growth for the platform?
As improbable as it might seem, a role model for platform growth and customization can be found in a Japanese publisher. Recruit Holdings started out in the 1960s as an advertising company that published magazines for job seekers. (Today the company specializes in HR and recruitment services; among its acquisitions have been the U.S. job websites Indeed and Glassdoor.) Spurred on by the internet revolution in the early 2000s, the company added verticals such as real estate, the bridal industry, travel, beauty salons, and restaurants. But moving to digital publishing and simply being online had very little growth potential.
During this time, management noticed that proprietors who placed ads with Recruit often represented small businesses. Although fiercely independent, these entrepreneurs struggled with back-end administrative tasks. A beauty salon, for example, might get more reservations with Recruit’s online ad service, but most likely it would still rely on paper scheduling, done by hand, to avoid double-booking phone-in customers.
Over the next few years Recruit introduced several innovations to keep businesses using its platform. In 2012 it launched the Salon Board, a cloud-based platform for reservations and customer management. The platform was an instant hit among beauty salons, with the killer feature being an automated reply function that eased administrative burdens. A year later it announced AirREGI, a point-of-sale cash register that worked with smartphones and tables and was integrated with a cloud-based data management system. In 2014 the company unveiled AirWAIT, an app that streamlined the waiting process by allowing customers to queue virtually. In 2015 AirPAYMENT went live, eliminating the small-business headache of processing payments and managing cash.
“‘Why us?’ is always the main question. Is there any quality that will give us the upper hand?” Yoshihiro Kitamura, the president of Recruit, said to me. “If it doesn’t give us an upper hand, a Google app or Facebook plugin is enough to kill us. So, when evaluating business opportunities, we must ask, ‘Can we really do it better than everyone else?’”
Recruit Holdings thus offers an alternative strategy for platform growth, one where it’s less about geographic spread than about the depth of a chosen market. China’s WeChat has most evidently pursued this strategy. What was once a stand-alone messaging app is now seen as an indispensable mobile platform for making payments, booking doctor appointments, filing police reports, hailing taxis, accessing banking services, conferencing over video, playing games, and much more. WeChat is Facebook, Twitter, WhatsApp, Apple Pay, and Electronic Arts all wrapped up into one.
Amazon has similarly perfected this pursuit in the United States. It started off by selling books, CDs, and DVDs. Next came many more products, the Kindle, video streaming, and its audiobook company, Audible. When Amazon was building Alexa, its digital assistant, the company positioned it as a portal for consumers to access all of Amazon’s other services.
Both WeChat and Amazon began with basic offerings but gradually branched out to new areas that built on their initial relationships with customers in their largest home markets. There are early signs that Uber is also pivoting toward this strategy, include its increasing emphasis on Uber Eats, a food delivery service, in the remaining international markets where it operates.
As the world embraces digitalization in transportation, aviation, health care, and energy, it is increasingly unattainable to conquer international markets with the simple switch of an algorithm. It was possible for Facebook, Google, YouTube, and Twitter only because of the nature of their businesses, where digital bits are all they deliver. But for platforms that involve any physical offerings, the future is looking more traditional than the past.
Originally published on Harvard Business Review
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