Platform Leadership

Platform Leadership is a new concept in strategic management, introduced by Annabelle Gower and Michael Cusumano in their book , “Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation,” HBS Press, 2002. Platform leadership enables companies to exert influence over the direction of innovation that is taking place in their industry, thus extending their weight over the network of firms and customers involved with the industry.

In the initial phase of many industries, the early movers tend to develop most of the components necessary to make the products. But later, specialized firms typically emerge to develop different components. Along with components, evolve platforms, which consist of various components made by different companies. Some companies become platform leaders. They ensure the integrity of the platform by working closely with other firms to create initial applications and then new generations of complementary products.

“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.” Platform Leadership, Annabelle Gawer and Michael A. Cusumano.

Authors explained a framework called the Four Levers of Platform Leadership, that managers can use to design a strategy for platform leadership or make their existing strategy more effective.

  1. Scope of the Firm: This lever addresses what the firm needs to consider for deciding what it wants to do inside and what it wants to encourage others to do outside.
  2. Product Technology: This lever deals with decisions that platform leaders need to make with regard to the architecture of their product and the broader platform. How much modularization should there be in the design? How much information should they disclose about interfaces or subsystem interdependencies? Should they make licenses easily available or is patent and intellectual protection necessary?
  3. Relationships with External Complementors: This lever focuses on how collaborative and how open platform leaders need to be with other key players and/or potential competitors within the industry.
  4. Internal Organization: This lever is important for helping platform leaders decide how to use their internal organizational structures and processes to manage external and internal conflicts of interest and priorities more effectively.

Platform leaders create interfaces to entice other firms to use them to build products that conform to the defined standards and therefore work efficiently with the platform. It is in the interest of a platform leader to stimulate innovation on complementary products. The more people who use these complements, the more incentives there are for producers of complements to introduce such products. This in turn motivates more people to buy or use the core product, stimulating more innovation, and so on.

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.

Standards wars are an integral part of platform strategies.  What matters is overall performance. The platform need not be superior to the competition in all product features.  Neither was Windows, (particularly the early versions), technically superior to the Macintosh, nor were Matsushita’s VHS video recorders superior to Sony’s Betamax.  But in each case, the network as a whole delivered more.

Defining the architecture of a system product is a powerful way to raise entry barriers for potential competitors. A potential competitor to Intel not only has to invent a microprocessor with a better price-performance ratio but also rally complementors and Original Equipment Manufacturers (OEMs) to adapt their designs to this component.  This would obviously involve huge switching costs.  Platform leaders must also be able to maintain architectural control over its platform, by making an ongoing assessment of their existing capabilities and the direction in which the industry or technology is evolving.

Platform leaders need to pursue at least two objectives simultaneously. First, they must try to obtain consensus among key complementors with regard to the technical specifications and standards that make their platforms work with other products.  Second, they must control critical design decisions at other firms that affect how well the platform and complements continue to work together through new product generations.

A platform leader must play the role of industry enabler by encouraging innovations that improve the platform. The platform leader sometimes has to make decisions that might hurt some partners, even if they have been complementors in the past.  Platform leadership, when combined with complementary innovation has the ability to produce win-win situations for the platform leader, complementary product manufacturers and finally customers.

To gain the trust of third parties, platform leaders must act and be seen to act fairly.  They need to establish credibility in technical areas where they want to influence future designs or standards. They must make potential complementors feel comfortable that the decisions are being taken in the interest of the whole industry. Successful platform leadership requires an industry-wide vision and view that extends far beyond a single company.

Platform leaders usually emerge through the mechanisms of the marketplace, rather than through some magical process. A high market share and a high degree of innovative capabilities alone do not suffice. A platform leader must have the vision and the organizational capabilities to engage complementors to innovate and improve the platform.  Such a vision is grounded in the belief that the power of a system is greater than the sum of its parts.

For example, Cisco became a platform leader because it provided a major part of the infrastructure hardware and also software behind the Internet. Cisco was to Internet-based networking as Intel was to microprocessors and Microsoft was to PC software. The company’s prime strategy was to allow an `interoperable networking’ between Internet routers and other types of networking and communications technologies. However, unlike Intel and Microsoft, Cisco faced many competitors in its area of business and the strategy it adopted to be a platform leader was to `acquire’ and `assimilate’ its competitors and substitutes.

External Links:

  1. The Elements of Platform Leadership (MIT Sloan)
  2. How Companies Become Platform Leaders (MIT Sloan)