Four Levers of Platform Leadership
Platform leadership is much sought after, but comes with a specific set of risks, tensions, and strategies. Platform strategies work best when products and services are interdependent and there are broad opportunities for innovation outside a core technology. In addition to innovating internally on their core technologies, platform leaders must stimulate and support innovation in the entire value chain.
Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation by Annabelle Gawer and Michael Cusumano
Using Intel, Microsoft, and Cisco as examples, Gawer and Cusumano describe the strategic choices that drive platform development. The authors portray strategic tension as a creative force which focuses decisions and moves platform leaders forward.
Becoming a platform leader is like winning the Holy Grail: Many seek it, but few achieve it. By definition, platform leaders who succeed can exert a strong influence over the direction of innovation in their industries and thus over the network of firms and customers–the “ecosystem”–that produces and uses complements.
But not all industries are suitable for platform leadership strategies.
The dynamics that make it possible occur only under certain conditions.
A fundamental condition is that the firm’s product has limited value when used alone but gains in value when used along with complements.
The realization that demand for one’s core product depends on an array of complements–and, therefore, that one’s destiny depends on the decisions and actions of others–is the starting point for thinking like a platform leader.
The increasing interdependence of high-tech products and services and the innovation being driven by more and more players create an environment in which platform leadership becomes an opportunity. As a result, companies must ask: who will be in charge of the platform and how will its technical integrity be maintained?; what mechanisms will the leader use to develop the platform?; and, how will the leader achieve or preserve market leadership? The overall strategy is to increase the pie for everyone, especially in cases where the platform leader owns a majority of market share and cannot grow substantively with single digit percentage points. A significant characteristic of platform strategy is the presence of a modular design for the product which allows innovation to occur at multiple levels of the architecture without threatening the overall integrity of the system. This provides opportunities for many companies to participate in advancing components and overall design. As each component gets better, the entire platform gets better. Sometimes a single component is the bottleneck and holds back the performance or functionality of the entire platform. Successful platform leadership requires an industry-wide vision and view that extends far beyond a single company.
In Platform Leadership, Annabelle Gawer and Michael A. Cusumano outline four sets of strategic choices that are part of platform leadership:
Determine the scope of the firm: Is it better to create product complements internally or let someone else do it? How far into the technology value chain should a firm extend?
Design the product with strategic intent: What degree of modularity is appropriate? Should product interfaces be open or closed? What information should be disclosed to other companies?
Shape relationships with external complementors: How can the company balance competition and collaboration with outside players? What’s the best way to create and sustain relationships with complementary product providers?
Optimize internal organizational structures: What processes and systems will allow the company to manage internal and external conflicts of interest most effectively? What’s the right way to resolve the tensions between industry players?
Scope of the firm
The decision of what complements to make inside and what to leave outsiders external firms is probably the single most important issue that platform leaders must decide–and keep deciding.
The decision encompasses choosing appropriate levels of investment in venture capital activities or acquisitions aimed at evolving the platform or helping the complements business
This strategic component involves deciding where in the technology stack you want to provide value. Being a platform leader requires supporting and stimulating innovation outside your core product. One challenge to achieving this goal is convincing other industry players that they should take your lead. Many firms are asked by the platform leader to develop products in advance of market readiness and knowledge about demand because the platform leader has not yet introduced their own products. Timing is often critical because smaller component providers likely have shorter ROI horizons than the platform leader who is frequently looking several years ahead.
The authors describe the evolution Intel went through as they moved from 100% focus on processor development to expanded leadership of the PC platform. When Intel developed their vision for the PC platform that supported their long term processor development, they increased the scope of their activities to peripherals and software systems that were previously outside their domain. At Intel, there was a “Job 1” (sell the main product line) and a “Job 2” (profit from complementary businesses) which created a frequent opposition of forces and interests. Frequently, the platform leader both defines and participates in the platform.
Strategic product design
The technical direction of the platform can be guided by a single firm or a group of firms operating as a standards body or consortium. Because no single company can provide the entirety of complementary functions required for a broad platform, complex ecosystems frequently evolve. The authors document Intel’s involvement in the development of two key standards USB and PCI bus and lessons learned along the way. One key consideration in this strategic area is the definition of the interface(s) between the platform leader’s core product and complementary products. As the interfaces expand and change, so too do the priorities and investments of the platform leader. There may be specific parts of the technology stack that are bottlenecks and hold back the entire platform from moving forward. In the case, the platform leader must often step in to develop, or invest in the development of, that component or area. Interface design and the level of modularity that the platform leaders includes in the platform architecture are key factors in how the ecosystem must be managed.
Relationships with complementors
In many cases, the demand for complementary products is uncertain and the platform leader must manage expectations and rationalize investments by third parties. Managing and cultivating platform provider relationships includes weaving collaborative relationships between competitive third parties, convincing complementors that your company is not a threat and has a viable vision, and deciding how much competition is healthy and safe. In order to maintain a healthy ecosystem, there must be profit at every stage in the ecosystem, and that goal must be orchestrated by the platform leader(s).
As part of platform development, it is necessary to reveal various proprietary details among a group of competitors. Handling this exchange of information and establishing trust is a critical task for platform leaders. Each company profiled in the book took a different approach to disclosing information and creating partnerships with third parties. Intellectual property management and licensing are key considerations in platform strategy. The authors describe this lever as balancing the opposing poles of control and consensus–to be an effective platform leader requires blending both approaches to evolve the platform over time. Maintaining the right set of incentives for complementary product providers is a critical goal for platform leaders.
In the video below, Michael A. Cusumano talks about his other book, The Business of Software:
This book is about platform strategy and the tensions and tradeoffs that go along with choosing to be a platform leader. Although the authors sing the praises of Intel, Microsoft, and Cisco, they vividly illustrate the difficulties, complexities, and mistakes each of these companies made in their pursuit of the platform leadership goal. The quotes from managers and leaders provide a detailed view of the decision making process and how strategies were implemented. The book illustrates that platform leadership is a double-edged sword–although there is great market power involved, the interdependencies are also daunting. Platform Leadership is a rich book with many relevant examples that provide details about strategic choices made by several major technology companies along with their stumbles and challenges.