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Platforms, Markets and Innovation

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Platforms, Markets and Innovation Edited by Annabelle Gawer Imperial College Business School, London, UK Edward Elgar Cheltenham, UK ��� Northampton, MA, USA

�� Annabelle Gawer 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009933404 ISBN 978 1 84844 070 8 (cased) Printed and bound by MPG Books Group, UK 02

v Contents Notes on contributors vii Acknowledgements xv 1 Platforms, markets and innovation: an introduction 1 Annabelle Gawer PART I PLATFORMS: OVERVIEW 2 The architecture of platforms: a uni ed view 19 Carliss Y. Baldwin and C. Jason Woodard 3 Platform dynamics and strategies: from products to services 45 Annabelle Gawer 4 The role of services in platform markets 77 Fernando F. Suarez and Michael A. Cusumano 5 How catalysts ignite: the economics of platform-based start-ups 99 David S. Evans PART II PLATFORMS: OPEN, CLOSED AND GOVERNANCE ISSUES 6 Opening platforms: how, when and why? 131 Thomas R. Eisenmann, Geo rey Parker and Marshall Van Alstyne 7 Platform rules: multi-sided platforms as regulators 163 Kevin J. Boudreau and Andrei Hagiu 8 Protecting or di using a technology platform: tradeo s in appropriability, network externalities, and architectural control 192 Melissa A. Schilling 9 Open platform development and the commercial Internet 219 Shane Greenstein

vi Contents PART III PLATFORMS: MANAGEMENT, DESIGN AND KNOWLEDGE ISSUES 10 Outsourcing of tasks and outsourcing of assets: evidence from automotive supplier parks in Brazil 251 Mari Sako 11 Platforms for the design of platforms: collaborating in the unknown 273 Pascal Le Masson, Benoit Weil and Armand Hatchuel 12 Design rules for platform leaders 306 Stefano Brusoni and Andrea Prencipe 13 Detecting errors early: management of problem solving in product platform projects 322 Ramsin Yakob and Fredrik Tell 14 The e ect of technological platforms on the international division of labor: a case study of Intel���s platform business in the PC industry 345 Hirofumi Tatsumoto, Koichi Ogawa and Takahiro Fujimoto Index 371

vii Contributors Carliss Y. Baldwin is the William L. White Professor of Business Administration at the Harvard Business School. She studies the structure of designs and their impact on the structure of industries over time. She is the co-author of Design Rules: The Power of Modularity, the rst of a pro- jected two volumes. Recent papers include ���Where do transactions come from? Modularity, transactions and the boundaries of rms��� (Industrial and Corporate Change, 2008), ���Exploring the structure of complex soft- ware designs��� (with A. MacCormack and J. Rusnak, Management Science, 2006) and ���How user innovations become commercial products��� (with C. Hienerth and E. von Hippel, Research Policy, 2006). Baldwin received a bachelor���s degree from MIT in 1972, and MBA and DBA degrees from Harvard Business School. Kevin J. Boudreau is an applied microeconomist and strategy researcher studying questions at the intersection of innovation, competition and organization. He teaches Strategy at London Business School. Kevin has a PhD from the Massachusetts Institute of Technology, an MA in Economics from the University of Toronto and a BASc in Engineering from the University of Waterloo. Stefano Brusoni is Associate Professor of Applied Economics at Bocconi University, Milan. He is Deputy Director of KITeS (Knowledge, Internationalization and Technology Studies) and coordinator of EMIT (MSc in Economics of Innovation and Technology). He obtained his PhD from the University of Sussex (UK) in 2002. His research interests include the division and coordination of innovative labour the organi- zational implications of modular design strategies and the analysis of knowledge production and distribution processes within and across rms. He has published his work in leading international journals such as Administrative Science Quarterly, Organization Science, Research Policy, Organization Studies, Economics of Innovation and New Technology, Industrial and Corporate Change, Journal of Evolutionary Economics, Journal of Management Studies and many others. Michael A. Cusumano is the Sloan Management Review Distinguished Professor of Management and Engineering Systems at the Massachusetts

viii Contributors Institute of Technology���s Sloan School of Management. He specializes in strategy, product development and entrepreneurship in the software busi- ness. He received a BA degree from Princeton in 1976 and a PhD from Harvard in 1984. He consults and speaks widely around the world and is currently a director of Patni Computer Systems, one of the largest IT services and custom software development rms based in India (NYSE: PTI, www.patni.com), and Eliza Corporation, a specialist in speech rec- ognition software applications, focused on healthcare (www.elizacorp. com). Professor Cusumano is also the author or co-author of eight books, including The Software Business (2004), Platform Leadership (2002, with Annabelle Gawer), Competing on Internet Time (1998, with David Yo e), Microsoft Secrets (1995, with Richard Selby), and Japan���s Software Factories (1991). Thomas R. Eisenmann is the William J. Abernathy Professor of Business Administration in the Entrepreneurial Management Unit at the Harvard Business School. He studies management challenges in platform-based businesses that exploit network e ects. Eisenmann received his DBA (1998), MBA (1983) and BA (1979) from Harvard University. His doctoral thesis examined factors driving consolidation in the US cable television industry. Earlier, Eisenmann worked at McKinsey & Company, where he was co-head of the Media and Entertainment Practice. Eisenmann is a member of the Strategic Management Journal editorial board, and is the editor of Internet Business Models: Text and Cases (McGraw-Hill/Irwin, 2002). Eisenmann is a member of the Board of Directors of Harvard Student Agencies, the world���s largest student-run corporation, and was a Director of OneMain.com, one of the ten largest US Internet service pro- viders prior to its acquisition. David S. Evans is Executive Director of the Jevons Institute for Competition Law and Economics, and Visiting Professor, University College London and Lecturer, University of Chicago Law School. He is a Managing Director of LECG, where he serves as an expert on antitrust matters in the USA and the European Community. He is also the founder of Market Platform Dynamics, where he serves as a business advisor to a number of pre-IPO (initial public o ering) stage platform-based businesses and a strategy consultant to established businesses. He has a PhD in Economics from the University of Chicago. He is the author of more than 90 articles as well as six books, including Invisible Engines: How Software Platforms Drive Innovation and Transform Industries (with Andrei Hagiu and Richard Schmalensee, 2006), which won the American Publishers Association Best Business Book of 2006 Award.

Contributors ix Takahiro Fujimoto is a Professor in the Graduate School of Economics at the University of Tokyo, a position he has held since 1998. He has also served as Executive Director of the Manufacturing Management Research Center at the University of Tokyo since 2003. Dr Fujimoto specializes in technology and operations management, as well as business administra- tion. He holds a Bachelors degree in Economics from the University of Tokyo (1979) and a PhD from Harvard Business School (1989), where he served as a Researcher following graduation and later as Visiting Professor (1996���97) and Senior Research Associate (1997). He has also served as Associate Professor on the Faculty of Economics at the University of Tokyo, Visiting Professor at Lyon University and a Visiting Researcher at INSEAD. Dr Fujimoto is the author of numerous publications focused on automobile manufacturing and business management. Annabelle Gawer is an Assistant Professor in Strategy and Innovation at Imperial College Business School, London. She is a leading scholar in high- tech strategy, and a pioneering contributor to the area of platform research. Her rst book, Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation (HBS Press, 2002, with Michael Cusumano), o ered a new understanding of the strategy dynamics in high-tech industries, ranging from computers and telecoms to electronics, and became a refer- ence in business and academia. The originator and editor of this collective volume, Annabelle is also extending her work on platforms to service indus- tries. Her research has been published in journals such as the MIT Sloan Management Review, the Journal of Economics and Management Strategy (with Rebecca Henderson), as well as in the Wall Street Journal. She is the Editor-in-Chief of the Journal of Strategic Management Education. Annabelle consults with major corporations in the USA and Europe. She has an MSc in Industrial Engineering (1992) from Stanford University and a PhD (2000) from the MIT Sloan School of Management. Shane Greenstein is the Elinor and Wendell Hobbs Professor of Management and Strategy at the Kellogg School of Management, Northwestern University. He is a leading researcher in the business eco- nomics of computing, communications and Internet infrastructure. He has been a regular columnist and essayist for IEEE Micro since 1995, where he comments on the economics of microelectronics. He is pres- ently writing a history of the rst decade of the commercial Internet in the USA. Greenstein is North American Editor for Information Economics and Policy, and Associate Editor for Economics Bulletin and the business/ economics section of the Communications of the ACM. He was administra- tive head of the Management and Strategy Department from 2002 to 2005. Greenstein received his BA from University of California at Berkeley in

x Contributors 1983, and his PhD from Stanford University in 1989, both in Economics. He also continues to receive a daily education in life from his wife and children. Andrei Hagiu is an Assistant Professor in the Strategy group at Harvard Business School. Andrei���s research focuses on multi-sided markets, which feature platforms serving two or more distinct groups of customers, who value each other���s participation. He is studying the business strategies used by such platforms and the structure of the industries in which they operate: payment systems, advertising supported media, personal computers, video- games, mobile devices, shopping malls etc. Andrei graduated from the Ecole Polytechnique and the Ecole Nationale de la Statistique et Administration Economique in France with an MS in Economics and Statistics, before obtaining a PhD in Economics from Princeton University in 2004. Before joining HBS, he spent 18 months in Tokyo as a Fellow at the Research Institute of Economy Trade and Industry, an economic policy think-tank a liated with the Japanese Ministry of Economy Trade and Industry. Armand Hatchuel is a Professor and Deputy Director at the Center for Management Science at Mines ParisTech, and was a permanent Guest Professor at the Fenix Center, Chalmers Institute, Gothenburg (1999���2007). His research focuses on the theory and history of management and design, in particular on innovative rms, design processes and collaborative research principles. In 1996, he proposed the C���K design theory, which was further developed with Benoit Weil and Pascal Le Masson. He has published several books and papers and is a member of international jour- nals boards and national scienti c boards in France and Sweden. In 1996, he was awarded a prestigious French award for his work in management and in 2003 he received the medal of the Paris School of Arts and Crafts for his work on design theory. He co-chairs the special group on Design Theory of the Design Society and is also a regular columnist on manage- ment issues for the French newspaper Le Monde. Pascal Le Masson is an Assistant Professor of Design, Project and Management at Mines ParisTech. His research focuses on the manage- ment of innovative design capabilities. This research program is motivated by issues raised by companies striving for growth by intensive innovation and the new theoretical paths opened by the most recent theories of design reasoning (C���K theory, Hatchuel and Weil, 2003). With Armand Hatchuel and Benoit Weil, his research unfolds in three main directions: the analysis of innovation techniques such as creativity, prototyping and user involvement processes the organization of design-oriented organizations and models of growth in design-based economies. Pascal has published several papers and

Contributors xi his rst book, Les Processus d���Innovation (2006) co-authored by Armand Hatchuel and Benoit Weil, is soon to be published in English. He is the secre- tary of the Design Theory Special Interest Group of the Design Society. Koichi Ogawa is a Professor of Intellectual Asset-based Management, Endorsed Chair, University of Tokyo, Japan. Professor Ogawa holds a doctoral degree in Electronics Engineering. He is the co-author of the paper ���Architecture-based approaches to international standardization and evo- lution of business models���, which received the second-prize Award from the International Electro-technical Commission (IEC) Century Challenge in 2006. He has been in charge of R&D and business development for 30 years at Fujitsu Ltd, Japan. His main elds of research were computer storage technology and, since 2004, the management of technology and the theory of product architecture. His articles have been published in jour- nals such as the Journal of Applied Physics, Journal of IEEE Transactions, Japan Journal of Applied Physics and the Akamon Management Review. He was one of the Japanese delegates to ISO/JTC1/SC23 as a chairman of a local working group, and contributed to international standardization of the 5.25 inch WORM and the 3.5 inch MO optical disk cartridge. Geo rey Parker is an Associate Professor of Economic Sciences at the A.B. Freeman School of Business at Tulane University and serves as Director of the Tulane Energy Institute. Parker has made contributions to the theory of network economics as co-developer of the theory of ���two-sided��� networks. Recent research includes multiple studies of the economics of business platform strategy, a cross-industry investigation of outsourced engineering projects, and a study of the performance of electric power markets. Parker���s research has been funded by grants from the National Science Foundation, the Department of Energy and multiple corporations. Parker received a BS degree from Princeton University, and MS and PhD degrees from the Massachusetts Institute of Technology. Parker���s work has appeared in journals such as Harvard Business Review, the Journal of Economics and Management Strategy, Management Science and Production and Operations Management. Andrea Prencipe is Full Professor of Management of Enterprise at the Faculty of Economics of the University G. d���Annunzio and Honorary Professor at SPRU (Science Policy Research Unit, University of Sussex). He holds a BA (with honor) in Economics and Commerce from University G. d���Annunzio, an MSc in Innovation Management from Scuola Superiore S. Anna, an MSc in technology Innovation Management and PhD in Technology Strategy from SPRU. He has been visiting scholar at Harvard Business School and Michigan Business School. His research interests

xii Contributors encompass strategic management of technological and organizational innovation, organizational learning in project-based organizations, and the implication of modular design strategies on the division and coordina- tion of labor, social capital and innovation processes. Andrea sits on the editorial board of Long Range Planning, Organization Science and the International Journal of Technology and Innovation Management. His work has been published in such journals as Administrative Science Quarterly, Industrial and Corporate Change, Journal of Management and Governance, Organization Science and Research Policy. Mari Sako has been Professor of Management Studies at Sa��d Business School, University of Oxford since 1997. From 1987 to 1997 she was Lecturer (then Reader) in Industrial Relations at LSE. Her research focuses on the connections between global strategy, comparative busi- ness systems and human resource management. Her books include Prices, Quality and Trust (1992), Japanese Labour and Management in Transition (1997) and Shifting Boundaries of the Firm (2006). She was a principal researcher for the MIT International Motor Vehicle Program (IMVP) during 1993���2006, working on modularization, outsourcing and supplier parks in the global automotive industry. More recently, as a Senior Fellow of the ESRC/EPSRC Advanced Institute of Management Research, her research projects included productivity and performance in business serv- ices, the role of lawyers in outsourcing, the impact of outsourcing on pro- fessions, and origins of the creation of shared and outsourced services. Melissa A. Schilling is an Associate Professor of Management at the Stern School of Business, New York University. She received her PhD from University of Washington in Seattle. Her primary research interests are in technological innovation and knowledge creation, with a particular emphasis on how networks and modularity in uence the innovative process and outcomes. She is the author of the text Strategic Management of Technological Innovation (McGraw-Hill/Irwin, 2004), and her research has been published in journals such as Academy of Management Review, Academy of Management Journal, Management Science, Organization Science, Creativity Research Journal and others. Fernando F. Suarez (PhD, MIT) is a tenured Associate Professor of Management at Boston University and currently serves as the Chair of the Strategy and Innovation Department. His research spans the areas of innovation and technology strategy, standards and dominant designs, information technology and exibility. His publications have appeared in leading journals such as Academy of Management Journal, Management Science, Strategic Management Journal, Academy of Management Review,

Contributors xiii Research Policy, Operations Research, Industrial & Corporate Change, Harvard Business Review and Sloan Management Review. Professor Suarez is the 2008���09 Program Chair of the Technology and Innovation Management (TIM) Division, Academy of Management, the largest organization of management scholars in the world. He has been a member of the Editorial Board of Management Research and a Representative-at- large of the TIM Division. He also serves on the Academic Board of ESE Business School in Santiago and has been active in both institutional and private entrepreneurial activities, having successfully launched an MBA program and a software company. Hirofumi Tatsumoto is an Associate Professor of International Business Management at University of Hyogo in Japan. He holds an MA in Economics from the University of Tokyo. His main area of research is strategic management, particularly in electronics, software and the semi- conductor industry. He is part of the research project on ���International Standardization��� of the New Energy Development Organization (NEDO), Japan. His research was published as chapters in the books Monodukuri Management, Economic Analysis of the Game Industry and Strategic Use of Consensus-based Standards, and he has published articles in the SEC Journal (accepted by IPA the Information-Technology Promotion Agency Japan), Organizational Science, the Journal of the Intellectual Property Association of Japan, and Akamon Management Review (all in Japanese). Fredrik Tell was awarded his BSc, Lic. Econ. and PhD degrees from Link��ping University, Sweden. He is a Professor of Business Administration at the Department of Management and Engineering at Link��ping University and is deputy director of the KITE (Knowledge Integration and Innovation in Transnational Enterprise) Research Group. He has previously been a lecturer at the London School of Economics and Political Science, UK, as well as a visiting research fellow at the University of Sussex, UK, and Stanford University, USA. Fredrik Tell���s main research interests include management of complex technologies and standards, organizational knowledge, innovation and industry dynam- ics, history of technology and business history. He has published articles and reviews in journals such as Business History, Industrial and Corporate Change, Management Learning, Organization, Organization Studies, Research Policy and Technology Analysis and Strategic Management. Marshall Van Alstyne is an Associate Professor at Boston University and Visiting Professor at MIT. He received a BA from Yale, and MS and PhD degrees from MIT. He has made signi cant contributions to the eld of information economics. He co-authored the rst proof that a market

xiv Contributors mechanism could reduce spam and create more value for users than even a perfect lter. As co-developer of the concept of ���two-sided��� networks he has been a major contributor to theories of network e ects. He designed and implemented one of the rst projects to measure the dollar output of individual information workers. This research has generated multiple patent applications and received numerous awards, including an NSF Career Award and four best paper awards. Articles or commentary have appeared in Nature, Science, Management Science, Harvard Business Review, The New York Times and The Wall Street Journal. Benoit Weil is a Professor of Design, Project and Management at Mines ParisTech. His research focuses on the rationalization of collective actions. He has created the Research Program on Design Activities with Professor Armand Hatchuel. Together they proposed a new theory of design rea- soning (C���K theory) accounting for the dual expansion of knowledge and concepts characteristic of innovative design. Deepening its foundations, they recently showed striking similarities between C���K design theory and set theory. He is now leading the Research Program on Design Regimes (funded by the French National Research Agency) to study, with Armand Hatchuel, Pascal Le Masson and Blanche Segrestin, the main features of innovative design regimes in several sectors. He has published several papers and books (the most recent one ��� Les Processus d���Innovation, 2006, co-authored with Armand Hatchuel and Benoit Weil ��� is soon to be published in English). C. Jason Woodard is an Assistant Professor in the School of Information Systems at Singapore Management University. His research explores the relationship between system architecture and competitive strategy, with a focus on software-intensive systems. He is especially interested in the role of architectural control in shaping the evolution of technol- ogy platforms. He studied business, economics and computer science at Harvard University, where he received a PhD in Information, Technology and Management in 2006. Prior to that, he was a technical evangelist for IBM���s e orts related to Java, XML and Linux. Ramsin Yakob was awarded his BSc from the University of North London, UK, his MSc from the School of Business, Economics and Law, Gothenburg, Sweden and his PhD from Link��ping University, Sweden. Both degrees were taken within the eld of International Business. He is currently an Assistant Professor at Link��ping University, Sweden. Ramsin Yakob���s main research interests are platform technologies, knowledge management, project organization and innovations. He has also worked as a consultant with the Royal Bank of Scotland, UK and at American Express, UK.