Platforms and Innovation

Oxford Handbooks Online

Platforms and Innovation

Annabelle Gawer and Michael Cusumano
The Oxford Handbook of Innovation Management
Edited by Mark Dodgson, David M. Gann, and Nelson Phillips

Print Publication Date: Jan 2014 Subject: Business and Management, Innovation, Technology and
Knowledge Management
Online Publication Date: Oct DOI: 10.1093/oxfordhb/9780199694945.013.014
2013

Abstract and Keywords

This chapter analyses the role that platforms can play in innovation, and their implications for innovation
management. It offers a definition of the term ‘platform’, as well as a classification of different types of platforms
(internal platforms, supply-chain platforms, and industry platforms). It highlights the fundamental economic and
strategic concepts associated with platforms. The chapter clarifies the similarities and differences between the
economic conception of platforms as double-sided markets subject to network effects and that of platforms that
stimulate “open” innovation by complementors within innovative ecosystems. It also clarifies the role of
technological architecture and interfaces in platform innovation. It also examines major cases of platform
leadership and innovation challenges that companies face as markets, technologies, and competition evolve.
Finally, it reviews some of major remaining issues for future research on platforms and innovation management.

Keywords: platforms, innovation, complementors, supply chains, double-sided markets, open innovation, systems, interfaces, ecosystems,
technological architecture, network effects

Introduction

THIS chapter is about the role that platforms can play in innovation and their implications for innovation

management. First, we define the term ‘platform’ and consider why this concept is important. Second, we discuss
the different types of platforms as well as basic economic and strategic concepts associated with them as identified
by researchers working in the field. Third, we examine a few major cases of platform leadership and innovation
challenges that companies face as markets, technologies, and competition evolve. Finally, we review some of
major remaining issues for future research on platforms and innovation management.1

The Importance of Platforms

Platforms exist in a variety of industries, especially in high-tech businesses driven by information technology.
Microsoft, Apple, Google, Intel, Cisco, ARM, Qualcomm, EMC, and hundreds if not thousands of other firms, small
and large, build hardware and software products as well as applications, and provide a variety of services, for
computers, cell phones, and consumer electronics devices. All these firms and their ‘ecosystem partners’
participate in platform-based innovation (see Chapter 11 by Autio and Thomas). Even non-technology products,
such as the Barbie doll, can be considered platforms for innovation in the sense that hundreds of firms license the
rights to make clothing, accessories, and toys, or publish books, that rely on the Barbie brand name and enable
children to play with each other and trade these accessories. The more users who adopt the platform, the more
valuable the platform becomes to the owner and to the users because there are increasing incentives for more
firms to join the ecosystem and add their own complementary innovations.

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 Platforms and Innovation

As platforms and associated innovations have become increasingly pervasive, researchers have focused on the
phenomenon, resulting in several distinct academic literatures all using the term ‘platform’. We see this in the new
product development and operations management field (e.g. Meyer and Lehnerd, 1997; Simpson et al., 2005). The
term is widely used in technology strategy (e.g. Gawer and Cusumano, 2002, 2008; Eisenmann et al., 2006). It also
appears in industrial economics (e.g. Rochet and Tirole, 2003; Evans, 2003; Armstrong, 2006). Usage and
meaning of the term often differs, however, which suggests that there are different types of platforms and,
therefore, different ways that platforms can impact the innovation process.

Major Themes and Research Findings

Internal Platforms

The first popular usage of the term platform seems to have been in the context of new product development and
incremental innovation around reused components or technologies. We refer to these as internal platforms in that
a firm, working alone or with suppliers, can build a family of related products or sets of new features by reusing the
components. Wheelwright and Clark (1992), for example, describe how these kinds of internal ‘product platforms’
can meet the needs of different customers simply by modifying, adding, or subtracting different features. McGrath
(1995), Meyer and Lehnerd (1997), Krishnan and Gupta (2001), and Muffatto and Roveda (2002), all define
platforms as a set of subsystems and interfaces that form a common structure from which a company can
efficiently develop and produce a stream of derivative products. Robertson and Ulrich (1998) propose an even
broader definition, viewing platforms as the collection of assets (i.e. components, processes, knowledge, people,
and relationships) that a set of products share. In the marketing literature, Sawhney (1998) even suggests that
managers should move from ‘portfolio thinking’ to ‘platform thinking’, which he defines as aiming to understand the
common strands that tie the firm’s offerings, markets, and processes together, and exploit these commonalities to
create leveraged growth and variety.

This literature has identified, with a large degree of consensus, several potential benefits from designing and using
internal platforms as a basis for creating new products: savings in fixed costs, efficiency gains in product
development through the reuse of common parts and, in particular, the ability to produce a large number of
derivative products with limited resources, as well as flexibility gains in product design. One key objective of
platform-based new product development seems to be the ability to increase product variety and meet diverse
customer requirements, business needs, and technical advances while maintaining economies of scale and scope
within manufacturing processes—an approach also associated with ‘mass customisation’ (Pine, 1993).

The empirical evidence indicates that, in practice, companies have successfully used product platforms to control
high production and inventory costs, as well as reduce the time to market. Most of the research is about durable
goods, whose production processes involve manufacturing, such as in the automotive, aircraft, equipment
manufacturing, and consumer electronics sectors. Some of the companies most frequently associated with module-
based product families include Sony, Hewlett-Packard, NDC (Nippon Denso), Boeing, Honda, Rolls Royce, and
Black & Decker.

In particular, we can think of internal platforms as promoting both efficiency (economies of scale and scope in
design, engineering, and manufacturing) as well as incremental or modular innovation (new types or varieties of
products and features derived from existing components and technologies). Simpson et al. (2005) in particular
pursue this idea when they distinguish between platforms used to develop module-based product families and
platforms used to create scale-based product families. A common example is Sony, which built all of its Walkman®
models around key modules and platforms. It used modular design and flexible manufacturing techniques to
introduce more than 250 models in the United States alone in the 1980s (Sanderson and Uzumeri, 1997). In
addition, Hewlett Packard successfully developed several inkjet and LaserJet printers around modular components
that reused many of the same manufacturing and assembly processes (Feitzinger and Lee, 1997). NDC made an
array of automotive components for a variety of automotive manufacturers using a combinatorial strategy that
involved several different modules with standardized interfaces. For instance, it was able to make 288 different
types of panel meters from seventeen standardized subassemblies (Whitney, 1993).

Scale-based product families are developed by scaling one or more variables to ‘stretch’ or ‘shrink’ the platform

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 Platforms and Innovation

and create products whose performance vary accordingly to satisfy a variety of market niches. Platform scaling is
a common strategy employed in many industries. For example, Lehnerd (1987) explains how Black & Decker
developed a family of universal motors for its power tools in response to a new safety regulation: double insulation.
Prior to that, Black & Decker used different motors in each of their 122 basic tools with hundreds of variations.
Rothwell and Gardiner (1990) describe how Rolls Royce scaled its RB211 aircraft engine by a factor of 1.8 to
realize a family of engines with up-rated, de-rated, and re-rated Shaft Horse Power and Thrust. Sabbagh (1996)
relates how Boeing developed many of its commercial airplanes by ‘stretching’ the aircraft to accommodate more
passengers, carry more cargo, and/or increase flight range.

Automobile manufacturers often use a common platform for different products, either across models with similar
quality levels, or across multiple models with different quality levels. An automobile platform generally consists of
the core framework of cars, including the floor plan, drive train, and axle, which can be stretched in both width and
length. Examples of platform sharing across products with similar quality levels include Mitsubishi, which shares a
common platform between its Endeavour and Galant models, and Honda which shares a common platform between
its CR-V and Civic (Rechtin and Kranz, 2003). Automobile manufacturers can also share a common platform across
multiple products with different quality levels. For example, Toyota uses a common platform for its Landcruiser and
Lexus LX 470, and Honda uses a common platform for its CR-V and Acura RDX (Anonymous, 2006; Rechtin and
Kranz, 2003). Naughton et al. (1997) also relate how Honda developed an automobile platform to make a ‘world
car’ after failing to satisfy Japanese and US markets with a single platform.

Simpson et al. (2005) also report that in the automotive industry, platforms enable greater flexibility between plants
and increased plant usage—sharing underbodies between models can yield a 50 per cent reduction in capital
investment, especially in welding equipment—and can reduce product lead times by as much as 30 per cent
(Muffatto, 1999). In the 1990s, firms in the automotive industry that used a platform-based product development
approach gained a 5.1 per cent market share per year, while firms that did not lost 2.2 per cent (Cusumano and
Nobeoka, 1998). In the late 1990s, Volkswagen saved $1.5 billion per year in development and capital costs using
platforms, and they produced three of the six automotive platforms that successfully achieved production volumes
over one million in 1999 (Bremmer, 1999, 2000). Its platform group consist of the floor group, drive system, and
running gear, along with the unseen part of the cockpit—and is shared across nineteen models marketed under its
four brands Volkswagen, Audi, Seat, and Skoda.

The literature also identifies a few fundamental design principles or ‘design rules’ that appear to operate in internal
product platforms, in particular the stability of the system architecture, and the systematic or planned reuse of
modular components (Baldwin and Clark, 2000; Baldwin and Woodward, 2009). It also recognizes a fundamental
trade-off couched in terms of functionality and performance: the optimization of any particular subsystem may
result in the sub-optimization of the overall system (Meyer and Lehnerd, 1997). In this sense, platforms may tend to
promote only incremental innovation or have a constraining effect on innovation.

Supply-Chain Platforms

A supply-chain platform extends the internal platform concept to a set of firms that follow specific guidelines or
rules to supply intermediate products or components to the platform leader or the final product assembler. A major
potential benefit for innovation is that a firm with access to a platform supply chain can go outside its internal
capabilities to find more innovative components or technologies. It may also find these components or technologies
at lower cost than it could produce itself. At the same time, a firm may have less control over the components and
technology, which can have its own negative consequences. Managers therefore need to balance the pluses and
minuses of going outside the firm for components or new technologies versus developing them internally, much like
common discussions of make versus buy in vertical integration strategy.

Supply-chain platforms are common in assembly industries, such as consumer electronics, computers, and
automobiles. For example, Renault and Nissan (as members of the Renault-Nissan alliance) have developed a
common platform for the Nissan Micra and the Renault Clio, and they reduced the number of platforms they used
from thirty-four in 2000 to ten in 2010 (Tierney et al., 2000; Bremner et al., 2004). Szczesny (2003) reports
platform sharing between Ford Motor and Mazda. Porsche and Volkswagen use a common platform for Porsche’s
Cayenne and Volkswagen’s Touareg, where the former is more luxurious than the latter. Sako (2009) discusses
supply-chain platforms in the context of automotive supplier parts in Brazil. Other studies on supply-chain platforms

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 Platforms and Innovation

include Zirpoli and Becker (2008), Zirpoli and Caputo (2002)—both in the automotive industry—Brusoni (2005), and
Brusoni and Prencipe (2006) in aerospace.

The objective of these platforms is similar to internal product platforms, that is, to improve efficiency and reduce
cost. The most obvious benefits come from reducing the variety of parts to design, maintain, and manufacture.
Other benefits can include increases in product variety at minimal cost as well as access to new sources of
innovation.

The main design principles for supply-chain platforms are very similar to those for internal platforms: the systematic
reuse of modular components, and the stability of the system architecture, or at least the interfaces to the different
subsystems. However, supply-chain platforms can create a specific set of challenges for managers. In particular,
divergent incentives between the members of a supply chain, or of an alliance, are not uncommon. Even internal
product platforms can involve a trade-off between optimizing the performance of subsystems and optimizing the
performance of the overall system. In a supply-chain platform, even though there are several actors that may have
divergent objectives and incentives, there is usually a clear hierarchy, with bargaining power resting with the final
assembler.

Important insights from recent research on this subject of supply-chain platforms have come from Sako (2003,
2009) on modularity and outsourcing; Doran (2004) on the transfer of value-added activities within modular supply
chains; and Zirpoli and Becker (2008) on the negative consequences of knowledge erosion that may accompany
extreme forms of outsourcing along a supply chain. There are links between these literatures as well to other
research on inter-firm modularity (Staudenmayer et al., 2005), the limits of modularity as a design strategy (Brusoni
and Prencipe, 2001), and industry architecture (Jacobides et al., 2006; Pisano and Teece, 2007).

Industry Platforms

Industry platforms are products, services, or technologies that are developed by one or more firms, and which
serve as foundations upon which a larger number of firms can build complementary innovations, again, in the form
of specific products, related services or component technologies. There is a similarity to internal platforms or
supply-chain platforms in that industry platforms provide a foundation of common components or technologies, but
they differ in that this foundation is ‘open’ to outside firms. The degree of openness can vary on a number of
dimensions—such as degree of access to information on interfaces to link to the platform or utilize its capabilities,
the type of rules governing use of the platform, or cost of access (as in the form of patent or licensing fees). In
general, despite different degrees of openness, various products and technologies serve as industry platforms: the
Microsoft Windows and Linux operating systems, Intel and ARM microprocessors, Apple’s iPod, iPhone, and iPad
along with the iOS operating system and iTunes and the Apple App Store, Google’s Internet search engine and
Android operating system for smartphones, social networking sites such as Facebook, LinkedIn, and Twitter, video-
game consoles, and even the Internet itself. So too do credit and debit cards. But a key distinction between supply-
chain platforms and industry platforms is that, in the case of industry platforms, the firms developing the
complementary innovations—such as applications for Windows or the Apple App Store—do not necessarily buy or
sell from each other. Nor are they usually part of the same supply chain or sharing patterns of cross-ownership,
such as Toyota with its major component suppliers.

The first research on industry platforms and their innovation ecosystems generally focused on computing,
telecommunications, and other information-technology intensive industries. For example, Bresnahan and
Greenstein (1999), in their study of the emergence of computer platforms, analysed platforms as a bundle of
standard components around which buyers and sellers coordinated their efforts. West (2003) defined a computer
platform as an architecture of related standards that allowed modular substitution of complementary assets such as
software and peripheral hardware. Iansiti and Levien (2004) called a ‘keystone firm’ the equivalent of what Gawer
and Cusumano (2002, 2008) referred to as a platform leader, that is, a firm that drives industry-wide innovation for
an evolving system of separately developed components. Gawer and Henderson (2007) described a product as a
platform when it is one component or subsystem of an evolving technological system, when it is strongly
functionally interdependent with most of the other components of this system, and when end-user demand is for
the overall system, so that there is no demand for components when they are isolated from the overall system.

These studies suggest several generalizations with regard to how industry platforms affect competitive dynamics

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 Platforms and Innovation

as well as innovation at industry level, with implications for managers. Positions of industrial leadership are often
contested and lost when industry platforms emerge, as the balance of power between assemblers and component
makers changes. And, at the same time, industry platforms tend to facilitate and increase the degree of innovation
on complementary products and services; so called ‘complements’, produced by ‘complementors’. The more
innovation there is on complements, the more value it creates for the platform and its users via network effects,
creating a cumulative advantage for existing platforms: as they grow, they become harder to dislodge by rivals or
new entrants, the growing number of complements acting as a barrier to entry. The rise of industry platforms raises
complex social welfare questions as well regarding the trade-offs between the social benefits of platform-
compatible innovation, versus the potentially negative effects of preventing competition on overall systems.

As for internal and supply-chain platforms, industry platforms tend to be designed and managed strategically, to
further the competitive advantage of the platform leader or owner. However, there are important differences: in
particular, industry platform leaders aim to tap into the innovative capabilities of external firms, which are not
necessarily part of their supply chain. While there are some obvious links with the work of Chesbrough (2003) on
open innovation, recent research on platforms has highlighted the complex trade-offs between ‘open’ and ‘closed’
(Eisenmann, Parker, and Van Alstyne, 2009; Greenstein, 2009; Schilling, 2009; see also Chapter 22 by Alexy and
Dahlander). And beyond the choices about opening or closing intellectual property, platform leaders tend to
strategically facilitate and stimulate complementary third-party innovation through the careful and coherent
management of their ecosystem relationships as well as decisions on design and intellectual property (Cusumano
and Gawer, 2002; Iansiti and Levien, 2004).

Gawer and Cusumano (2002) highlight how managers of platform firms need to pay particular attention to the
governance of platforms, which requires a coherent approach using four distinct levers. The first lever is firm
scope: the choice of which activities to perform in-house vs. which to leave to other firms. This decision is about
whether the platform leader should make at least some of its own complements in-house. The second lever is
technology design and intellectual property: what functionality or features to include in the platform, whether the
platform should be modular, and to what degree the platform interfaces should be open to outside complementors
and at what price. The third lever covers external relationships with complementors: the process by which the
platform leader manages complementors and encourages them to contribute to a vibrant ecosystem. The fourth
lever is internal organization: how and to what extent platform leaders should use their organizational structure
and internal processes to give assurances to external complementors that they are genuinely working for the
overall good of the ecosystem. This last lever often requires the platform leader to create a neutral group inside the
company, with no direct profit-and-loss responsibility, as well as a ‘Chinese wall’ between the platform developers
and other groups that are potentially competing with their own complementary products or services. Taken
together, and dealt with in a coherent manner, the four levers offer a management template for sustaining a
position of platform leadership.

Again, however, we can see platform leaders both encouraging and constraining innovation. As described in
Gawer and Cusumano (2002), Intel separated internal product or R&D groups that might have conflicting interests
among themselves or clash with third-party complementors, such as chipset and motherboard producers. The
latter relied on Intel’s advance cooperation to make sure their products were compatible. When Intel decided that
these chipset and motherboard producers were not making new versions of their products fast enough to help sell
new versions of microprocessors, Intel started making some of these intermediate products itself to stimulate the
end-user market. But it still kept its laboratories in a neutral position to work with ecosystem partners.

In contrast, Microsoft claimed not to have such a wall between its operating systems and applications groups
despite potential conflicts. Microsoft also insisted that ‘integration’ of different applications, systems, and
networking technologies (such as embedding its own Internet browser, media player, and instant messaging
technology into Windows) was good for customers because it improved performance of the overall system. There
is some truth to this, and it is one reason why it is often held that the user experience with the far more integrated
Macintosh system is better than the Windows–Intel PC experience. But Microsoft leveraged the market power of
Windows and its other platform, Office—which by the latter 1990s had evolved into another set of services and
tools used by various companies to build their own desktop application products—to influence the direction of the
software business and, in some ways, constrain innovation as well as competition.

It is not illegal in itself to have a monopolistic market share, often considered to be around 70 per cent. Apple has

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 Platforms and Innovation

this position with the iPod and iTunes as well as the iPad in its product categories. Intel has surpassed this level with
desktop microprocessors and Cisco with basic Internet routers. But it is illegal to utilize a monopoly to harm
consumers and competitors, such as through predatory pricing or contracts that impede competition. It is also
illegal to use a monopoly in one product market to enter an adjacent market and thereby restrain competition.
Microsoft committed this violation when it bundled Internet Explorer with Windows and did not charge extra for it, as
well as pressuring PC makers not to load Netscape Navigator on their machines—essentially destroying Netscape’s
browser business and reducing competition in this market. Microsoft argued that the browser was an integral part of
Windows. But Microsoft also sold or distributed the browser as a separate product, as did Netscape and several
other companies, so this argument made little sense. Antitrust enforcement in the United States, Europe, and Asia
has frequently forced Microsoft to adjust its behaviour, though usually too late to make much difference in the
current market (Cusumano and Yoffie, 1998; Cusumano, 2010).

The design principles or ‘design rules’ of industry platforms also overlap somewhat with those for internal and
supply-chain platforms. In particular, the stability of the architecture of the platform is still essential. There are,
however, important differences. In contrast to what happens for internal and supply-chain platforms, in industry
platforms, the logic of design is inverted. Instead of a firm being a ‘master designer’ (and it was always the
assembler in previous contexts, that conceived of and designed an end-product, to later modularize it and
dispatch various modular tasks to other groups or firms), here we start with a core component that is part of an
encompassing modular structure, and the final result of the assembly is either unknown ex ante, or is incomplete.
In fact, in industry platforms, the end use of the end-product or service is not pre-determined. This creates
unprecedented scope for innovation on complementary products, services, and technologies—and in general for
innovation on the nature of complementary markets. The situation also poses the fundamental question of how
incentives (for third parties) to innovate can be embedded in the design of the platforms. This leads to another
design rule for industry platforms: the interfaces around the platform must allow outside firms to ‘plug in’
complements, as well as innovate on these complements and make money from their investments.

There are also specific strategic management questions that arise in the context of industry platforms. For
example, Gawer and Cusumano (2008) argue that not all products, services, or technologies can become industry
platforms. To perform this industry-wide role and convince other firms to adopt the platform as their own, the
platform must (a) perform a function that is essential to a broader technological system, and (b) solve a business
problem for many firms and users in the industry. Nor is it clear how firms can transform their products,
technologies, or services into industry platforms, or how a platform leader can stimulate complementary
innovations by other firms, including some competitors, while simultaneously taking advantage of owning the
platform.

One particular challenge for innovation dynamics is that platform leaders or aspirants must navigate a complex
strategic landscape where both competition and collaboration occur, sometimes among the same actors. For
example, as a technology evolves, platform owners often possess the opportunity to extend the scope of their
platform and integrate into complementary markets. This can create disincentives for complementors to invest in
innovation in these complementary markets. For example, Farrell and Katz (2000) identified the difficulty for
platform owners not to squeeze the profit margins of their complementors. Gawer and Henderson (2007) show how
Intel’s careful selection of which complementary markets to enter (the connectors) while giving away
corresponding intellectual property allowed the firm to push forward the platform–applications interface, thereby
retaining control of the architecture, while renewing incentives for complementors to innovate ‘on top of’ the newly
extended platform. Another challenge is that, as technology is constantly evolving, the business decisions about
the technology or design decisions have to be taken in a coherent manner. This is difficult to achieve since these
decisions are often made by different teams within organizations. Hence, to make the whole greater than the sum
of the parts, we can see the need in many complex systems industries for one firm or a small group of firms to act
as a ‘platform leader’ (Gawer and Cusumano, 2002).

Platform Dynamics: Network Effects and Multi-Sided Markets

Perhaps the most critical distinguishing feature of industry platforms compared to internal company platforms or
supply chains is the potential creation of network effects. These are positive feedback loops that can cause the
value of the platform to grow at exponentially increasing rates as adoption of the platform and the number of

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 Platforms and Innovation

complements rise. These network effects can be very powerful, especially when they are ‘direct’ (sometimes
called ‘same-side’) between the platform and the user of the complementary innovation and reinforced by a
technical compatibility or interface standard that makes using multiple platforms (‘multi-homing’) difficult or costly.
For example, Windows applications or Apple iPhone applications only work on compatible devices. Facebook users
can only view profiles of friends and family within their groups. The network effects can also be ‘indirect’ or ‘cross-
side’, and sometimes these are very powerful as well. These occur when, for example, advertisers become
attracted to the Google search engine because of the large number of users. Companies can also innovate in
business models and find ways of charging different sides of the market to make money from their platform or from
complements and different kinds of transactions or advertising (Eisenmann et al., 2006).

There may be some limits to the power of network effects, however. Boudreau (2012), in a study of ecosystems for
mobile computing and communications platforms, has found that, while there is a positive feedback loop to the
number of complementors, this positive impact does not perpetuate itself infinitely. Too many complementors at
some point seem to discourage additional firms from making the investment to join the ecosystem.

In parallel with the strategy literature, some researchers in industrial organization economics have begun using the
term ‘platform’ to denote markets with two or more sides, and potentially with network effects that cross different
sides. Such a ‘multi-sided market’ provides goods or services to several distinct groups of customers, all of whom
need each other in some way and rely on the platform to mediate their transactions (Evans, 2003; Rochet and
Tirole, 2003, 2006). For example, advertisers need Google to access the select group of users whom they want to
reach through their targeted ads positioned alongside the users’ Google search results. While the concept of a
multi-sided market can sometimes apply to supply-chain platforms as well as industry platforms, it does not entirely
conform to either category.

There are important similarities between industry platforms and multi-sided markets. Among the similarities are the
existence of indirect network effects that arise between two different sides of a market when customer groups must
be affiliated with the platform in order to be able to interact or transact with one another (Caillaud and Jullien, 2003;
Evans, 2003; Rochet and Tirole, 2003, 2006; Armstrong, 2006; Hagiu, 2006). At the same time, though, not all
multi-sided markets are industry platforms as we describe them in this chapter. The literature on double-sided
markets helps us understand the ‘chicken-and-egg problem’ of how to encourage access to a platform for distinct
groups of buyers or sellers. Double-sided markets, where the role of the platform is purely to facilitate exchange or
trade, without the possibility for other players to innovate on complementary markets, seem to belong to the
supply-chain category. A multi-sided market that stimulates external innovation could be regarded as an industry
platform. However, while all industry platforms function in this way, not all multi-sided markets do. For example,
dating bars and websites, a common example used in the literature, can certainly be seen as double-sided markets
since they facilitate transactions between two distinct groups of customers. But there need not be a market for
complementary innovations facilitated by the existence of the platform.

The Challenges of Platform Evolution and Change

Platform leaders supported by a global ecosystem of complementors and strong network effects should be more
difficult for competitors to dislodge than companies focused on standalone products more subject to competition
based on fashion or price. Even the best firms, however, face a potential challenge perhaps best described by
Clay Christensen as The Innovator’s Dilemma (1997): success ties a firm to its existing customers, technology
base, and business model, and this fact makes it difficult to change, even though the technology must evolve or it
will likely become obsolete. As new platform wars emerge around mobile phones, video games, cloud computing,
and social networking, this section highlights some practical lessons from four well-known cases of platform
leadership where companies have experienced this type of innovation dilemma.

IBM: Successful Evolution to Software and Services

IBM created the first global platform in the modern computer era, based on the IBM 360 mainframe software and
family of compatible computers, introduced in the mid-1960s. Antitrust initiatives pressured IBM to release
information to independent maintenance providers. This eventually led to an ecosystem of hardware ‘clone’
makers led by Amdahl and Fujitsu as well as software product and service companies focused on IBM customers.

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 Platforms and Innovation

But IBM had the deepest knowledge of its market. It had sold early electronic computers since the early 1950s and
for decades before that dominated in electro-mechanical tabulating machines and other office equipment. In the
2000s, IBM still dominated the mainframe business and undertook pioneering work in high-performance computing.
After the introduction of personal computers in the 1970s and 1980s, however, enterprise computing has evolved
to a much more heterogeneous world of machines and software of different shapes and sizes.

By 1980, a few key IBM executives had realized that a platform shift was occurring and the company introduced its
own personal computer design in 1981. The operating system and microprocessor turned out to be the two key
components of this new PC platform, and IBM ceded control over these elements to its supply-chain partners,
Microsoft and Intel. This is a case where a supply-chain platform evolved to become an industry platform but under
the control of the key suppliers, not the original platform architect and leader. After absorbing billions of dollars in
losses, IBM developed a new strategy under CEO Louis Gerstner, hired from RJR Nabisco in 1993, when it became
the champion of ‘open systems’ (Linux, Java, the Internet, ubiquitous computing, and the cloud). Gerstner and his
successors also sold off commodity hardware businesses and rebuilt the company around services and
middleware that helped customers better utilize different platform technologies (Gerstner, 2002).

The lesson here for innovation management is that platforms will evolve and the leader of one generation may lose
control over the next, especially if the platform evolves from a hardware-driven system to one more based around
software and services. All is not lost, however, if the erstwhile leader has distinctive capabilities that keep it linked
to customers and able to recreate a competitive advantage. In the IBM case, this involved decades of experience
that helped the firm understand the data-processing needs of enterprise users and other large organizations. This
is where the firm kept its focus. The shift in platforms away from the mainframe and the loss of control over the PC
were very damaging financially, but these changes created a new beginning for a new IBM with a much greater
focus on software and services.

JVC and Sony: a Struggle to Evolve Beyond Hardware Platforms

In the 1970s and 1980s, video-cassette recorders (VCRs) became the highest volume consumer electronics
product as everyone with a television set became a potential customer. Although Sony won the race to create the
first viable home device, Japan Victor Corporation (JVC) ended up as the market winner. Several Japanese firms
had studied the technology of a US company, Ampex, in the late 1950s, which sold machines to broadcasters. Both
JVC and Sony found ways to miniaturize and improve the technology for the mass market, beating their rivals in
Japan, the United States, and Europe. Sony introduced the Betamax product in 1975 and JVC countered with the
VHS in 1976. By 1978 VHS had passed Betamax in sales. It became a global platform as JVC licensed the VHS
technology widely, allowing other companies such as RCA and GE to influence feature development (mainly
recording time), and cultivating a large set of outside firms for video content licensing and distribution. Sony may
have built a better product and was first to market, but it did not cultivate ecosystem partners as well as JVC did. In
the 1980s and 1990s, JVC became a multi-billion-dollar company, based mainly on its VHS platform. It gradually
diversified from audio and video to computer storage products, but never dominated another market. In 2008, JVC
merged with another Japanese audio equipment producer, Kenwood.

Sony had broader technical skills and greater resources than JVC, but still lost this particular platform contest as
JVC accumulated more licensing partners and distributors of pre-recorded tapes. The Betamax episode caused
Sony managers to cooperate better with other firms in next-generation digital video standards as well as the
PlayStation platform for video games, and its Blu-ray format for DVDs. Nevertheless, Sony failed to grasp how new
software and networking technologies would change future platforms for consumer electronics. The success of the
Walkman, for example, introduced in 1979, was not replicated. Nor did Sony evolve the Walkman into a networked
device for digital content, such as Apple did with the iPod and then the iPhone and iPad. JVC also never repeated its
VHS success once networking and digital technologies came to dominate the consumer electronics market.

The lesson here for innovation management is again that platform leaders need to evolve their platforms as
technologies and markets change, even when they are highly successful with their present businesses. This
means creating a flexible organization that can exploit a current platform advantage while learning how to move on
to the next generation of technologies and business models. JVC could have done better after the VCR era had it
evolved its skills more quickly from analogue to digital technology, and then to networked systems and hardware
driven by software, rather than software driven by hardware. Sony faced the same challenges and, with much

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greater resources, fared only slightly better. By 2012, although it still made Walkman multimedia devices as well as
PCs, smartphones, and video-game consoles, and owned its own music label and movie studio, Sony was still
searching for hit hardware products. It always seemed to find itself trailing in the newer platform markets that were
more focused on networking capabilities, software skills, and third-party content.

Google: Thinking Broadly about Platforms and Business Models

Google’s platform was initially the Internet, with a product that improved on prior search engine technology. But
Google also made its platform nearly ubiquitous on PC desktops as a downloadable and free toolbar that other
companies could embed in their own websites. It then built an Internet portal, with email, maps, applications,
storage, and other services, to complement and feed users into the search engine. Google monetizes its
leadership position by selling targeted ads that accompany searches, but it continually looks for profitable activities
from organic growth and acquisition. The company quickly appreciated the value of mobile devices, for example,
so it bought and then refined the Android operating system (which is based on Linux) and created the Chrome
browser to facilitate mobile computing (and mobile searches as well as advertising). Google is now the largest
smartphone operating system provider.

At the same time, Google has not done everything right. It was late in mounting a challenge to Facebook, with
Google Plus. Its coalition of partners aiming to gain access to more social networking and social media content has
been slow to create cross-platform applications and sell more search and advertising.

The management lesson here is that platform leaders should force themselves to think broadly about how to evolve
their platforms and business models while extending their technical and marketing capabilities. Platforms are often
useful because they can evolve and attract different types of innovations that complement the initial core
technology and functions. The platform owner as well as its ecosystem partners can introduce these innovations.
Google has always focused on search, but computing has evolved from the desktop to mobile devices as well as
applications and content that reside within open (such as the Internet) and closed (such as Facebook) networks.
Google evolved far beyond the desktop. Moreover, Google has challenged the modus operandi of the computer
industry, that is, proprietary technology and license fees. Its software platform for mobile phones and other devices
such as Netbooks and tablets is both free and technically open. It will be difficult for companies that charge for their
technology and do not have large advertising income—such as Apple, Microsoft, and Nokia—to beat free and open
access.

Microsoft versus Apple: A Contrast in Vision and Capabilities

Some platform leaders, despite the awareness that change is occurring, still find it difficult to evolve much beyond
their original platform technologies and business models. This is especially clear when we contrast Microsoft with
Apple.

Steve Ballmer, Microsoft’s CEO since Bill Gates became its chairman in 2000, was often criticized for not being able
to move much beyond the PC platform. Indeed, at the time of writing, Windows desktop and server and the Office
suite still account for nearly 80 per cent of Microsoft’s revenues and almost all its profits. Ballmer was under
particular pressure because Microsoft’s share price had been stagnant for more than a decade (although this was
also true of Intel, Cisco, Nokia, and a host of other high-tech firms). And arch-rival Apple, despite the small (but
rising) global market share of the Macintosh personal computer, and despite its near bankruptcy only a few years
ago, was growing at 50 per cent a year and surpassed Microsoft in market value during 2010. Apple grew so fast
because it had become a major player in consumer electronics as well as mobile phones and the distribution of
digital content and software products. On the strength of its high-margin digital service platforms (iTunes, App
Store, and iCloud), Apple could aspire to match or surpass Microsoft in profitability, even though reproducing digital
bits is much less costly than reproducing hardware boxes.

For most of its history, Microsoft has remained the most profitable of the high-tech giants, including Apple and
Google. It survived radically disruptive technological transitions and daunting business-model challenges
(character-based to graphical computing, the Internet, Software-as-a-Service and cloud computing, mobile
computing, and social networking). It survived antitrust scrutiny and violation. Microsoft continues to rely on the
enormously profitable gross margins of the packaged software business, but change has been occurring, albeit

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 Platforms and Innovation

slowly. Billions of dollars in losses (‘investment’) from MSN and Bing over some fifteen years has prepared Microsoft
for the online world and cloud computing funded by advertising revenue. The technical failure of the launch of its
Vista operating system in the early 2000s has caused it to break up Windows into smaller, more manageable
technological chunks, which can also help deliver new Internet and cloud-based services. The Windows Azure
cloud offering and Software-as-a-Service versions of major products have had good receptions in the marketplace
and appear to be competitive, though not dominant, offerings for the future. Microsoft’s acquisition of Skype in
early 2011 is intended to help it integrate new technologies into the old platform by gaining access to new
customers as well as better Internet voice and video technology. Its alliance with Nokia to take over its future
smartphone software, and an earlier alliance with RIM to take over the search business on the Blackberry
smartphones, were conceived in the same way.

The lesson here is that great success in platform leadership and associated revenue streams can be a mixed
blessing. It can promote as well as constrain innovation. Bill Gates’s major mistake (in the late 1990s) was probably
to insist that Microsoft remain a Windows company, rather than become a broader platform company and move
quickly into new technologies and new markets. Microsoft engineers tried to integrate Windows into the new
platforms, the Internet, and then mobile phones, rather than create new optimized software systems that could link
the new platforms back to Windows. Windows on the desktop has, of course, been exceptionally profitable. It is not
hard to understand why Gates and Ballmer were reluctant to cannibalize this business. Personal computers has
been a slow growth industry for several years, however, and Microsoft’s slow growth in sales and stagnant market
reflect the realities of its limited vision and capabilities.

Apple, by contrast, was never wedded to the original Macintosh platform, which never caught on at the industry
level and failed as a business in the 1980s and 1990s. Apple later replaced the first Mac OS with NeXT software,
which was based on UNIX. But Apple did remain wedded to its remarkable capabilities in user interface design and
visionary product innovation. Those skills are the basis for Apple’s business success with the iPod, iPhone, iTunes,
and iPad and its remarkable transformation into a global platform leader that also leads in product design and
innovation. Apple has moved far beyond the personal computer and now grows at the much faster rates of several
high-growth industries—smartphones, digital content distribution (music, video, books), and software product
distribution.

Issues for Future Research

Although various authors have been writing about theoretical concepts and case examples related to industry
platforms for the past two decades, there are at least three areas where we need more research: how platforms
form, how ecosystems form, and the impact of platforms and ecosystems on competitive advantage and survival.

we still do not understand, for example, if there is a common pattern or process to how most industry platforms
emerge and evolve. The economics literature has so far not tackled this question, as researchers tend to assume
that the platform already exists (as well as its associated markets on each ‘side’ of the platform). The literature on
technological change and competitive dynamics, and on organizational processes, could usefully address the
question of platform emergence and ecosystem creation as well. The classification of platforms offered in this
chapter may indicate that, under certain conditions, there could be an evolution from internal platforms to external
platforms. This hypothesis needs to be refined and tested, and we need to generate alternative explanations.

A related question is how do business ecosystems associated with platforms emerge and evolve? How often is this
a strategic process driven by managers or more of a random process driven by exogenous or chance events?
The networks approach from the organizational literature (see Brass et al., 2004 for a review), by bringing its
insights on network dynamics and field evolution (Powell et al., 2005) and strategic networks (Lorenzoni and
Lipparini, 1999; Gulati et al., 2000), is well-positioned to make significant contributions in this area (see also
Chapter 6 by Kastelle and Steen). In particular, recent work by Nambisan and Sawhney (2011), building on
Dhanaraj and Parkhe (2006), develops explicitly the link between platform leadership and orchestration processes
in network-centric innovation. The new institutional literature rooted in sociology offers concepts such as
legitimacy, collective identity, and institutional work, which can be useful to determine whether and how platform
leaders can successfully establish themselves as trustworthy brokers.

Finally, we need to improve our understanding of the impact of platforms on innovation and competition. In the

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 Platforms and Innovation

economics, innovation, operations, and strategy literatures, technological platforms are associated with a positive
impact on innovation. The positive effect stems from the fact that, by offering unified and easy ways to connect to
common components and foundational technologies, platform leaders help reduce the cost of entry in
complementary markets, and provide demand for complements, often fuelled by network effects. Platforms offer,
therefore, a setting where it is in the interest of private firms to elicit and encourage innovation by others. Concern
over the dominant positions that platform leaders such as IBM, Microsoft, Google, or Apple can achieve, however,
has raised awareness that platforms may have a potentially negative effect on competition and possibly on
innovation, especially non-incremental innovation.

Further theory development could examine the role of interfaces and architecture, and how platform design might
focus the attention of innovators onto specific trajectories of technological change (Dosi, 1982). These might take
the form of what Rosenberg (1969) called ‘inducement mechanisms and focusing devices’. It is possible that
platform leaders tend to successfully stimulate a certain kind of externally-developed innovation (that would
complement the platform), while aiming to discourage another kind of innovation (that would diminish the appeal or
the perceived value of the platform). This type of research would highlight the potential trade-offs between
innovation on modules or discrete products versus innovation on systems.

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Notes:

(1) . This chapter builds on Gawer (2009b) [‘Platform Dynamics and Strategies: from Products to Services’] and
Cusumano (2011) [The Platform Leader’s Dilemma].

Annabelle Gawer
Annabelle Gawer, Assistant Professor in Strategy and Innovation, Imperial College Business School.

Michael Cusumano
Michael A. Cusumano, Sloan Management Review Distinguished Professor of Management, Sloan School of Management,
Massachusetts Institute of Technology.

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