Staying PowerSix Enduring Principles for Managing

Strategy & Innovation in an Uncertain World(Lessons from Microsoft, Intel, Apple, Google, Toyota & More)

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June 2013

Michael A. CusumanoMIT Sloan School of Management

& School of Engineering

© 2013

cusumano@mit.edu

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1985 1991 1995

1998 1998 2002

2002 2004 2010

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Big Picture• Now in an age of innovation & commoditization, in both

products & services, multiple industries

• Long history, recently accelerated– Hardware: Mainframes to PCs, cell phones and other devices– Software: Mainframes to PCs, to free– Manufacturing: China’s prices becoming the world’s prices– Services: India’s prices becoming the world’s prices

– Value shift, from products to platforms and services

– Little room for error in strategy or operations!

Six “Enduring” PrinciplesNot original to me, but underlie my work and that of the

strategy and innovation fields over 25+ years

1. Platforms, Not Just Products

2. Services, Not Just Products (or Platforms)

3. Capabilities, Not Just Strategy

4. Pull, Don’t Just Push

5. Scope, Not Just Scale

6. Flexibility, Not Just Efficiency4

PRINCIPLE 1

PLATFORMS, NOT JUST PRODUCTS

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Platforms Examples

Types of Platforms • Product platform (internal): a foundation or set of common

components or services around which an organization can create a family of related products & services– Retail distribution platform: network of sales & marketing channels,

including physical outlets or web sites, through which an organization can bring together different buyers & sellers, and distribute a variety of products & services

– Supply-chain platform: network of relationships that brings together different firms who provide components (or “content”) that enables the platform owner to create new products or services

• Industry platform (external): Product platform opened to outside users & firms to use the foundation or common components to create complementary products & services that make the platform more valuable (ecosystem)

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Industry Platform Definition1. A foundation technology or set of components (could also

be services) used beyond a single firm, 2. That brings together multiple users or parties (“market

sides”) to use this foundation for a common purpose or to solve a common often systemic problem, and

3. Where value of the platform increases exponentially with (a) more users, and (b) more complementary products & services – ad infinitum (maybe).

– Various names: network or bandwagon effect, positive feedback loop, network externality

– Historical Examples: railroad, telegraph, telephone, electric power, radio, TV, VCRs, computers, browsers, etc.

Platform Ecosystem: Platform + Complements + Network Effects

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Platform(E.g., VHS player,

Windows-Intel PC, Apple iPhone,

Barbie doll)complementary product

complementaryservice

network effect

number of users

number of advertisers, content providers, channel partners, etc.

networkeffect

positive feedbackloop

Source: M. Cusumano, Staying Power (2010)

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Ongoing Platform Battlegrounds• Web Portals Yahoo, Google, MSN, AOL, etc.• Smart PhoneOS Google, Apple, RIM, Microsoft/Nokia• Digital Content Apple, Amazon, Google, Microsoft, etc.• Social Media Facebook, Google, Twitter, LinkedIn, etc.• Video Games Sony, Nintendo, Microsoft • Enterprise s/w SAP, Oracle, Microsoft, IBM, Linux• Micropayments Sony Felica, PayPal, Google, credit cards, etc.• Displays E-Ink, LCDs, Plasma• Power systems ICE vs. Hybrid, EV, Hydrogen FC

And many more platforms, or platforms within platforms, in smaller or emerging markets

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Networked Market

Side 1 Side 2 Sides 3+ ?

Platform Providers

* = subsidized Rivals – Proprietary

PC OS Consumers App developers* Windows, Macintosh

Online recruiting Job seekers* Employers Monster, LinkedIn

Yellow Pages Consumers* Advertisers AT&T

Web search Searchers* Advertisers Google, Yahoo, Microsoft

HMOs Patients* Doctors Kaiser, WellPoint

Video games Players* Developers Sony, Nintendo, Microsoft

Shopping malls Shoppers* Retailers Mall of America, Simon

Rivals – Shared

Linux Server Enterprises App developers IBM, HP, Dell

Wi-Fi equipment Laptop users Access points Linksys/Cisco, Dell

Realtors Assoc. Home buyers* Home sellers Real estate brokers

Gas engines Auto owners Gas stations Car makers

UPC Product makers Retailers IBM, NCR, Symbol Tech.

Source: adapted from Eisenmann, Parker & van Alstyne, HBR 2006

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AppsAdvertisers/Corporate Pages

Individual Users

Platform

Platform PartnersLogin with Facebook

The Argument• Winners in a platform market generally have the

“best” platform, not the “best” product!

– Best product? Hard to define & while good, usually not enough to win or dominate in a platform market

– Best platform? = (1) Open access & interfaces (but not too open). (2) Modular architecture (easy to build on, extend, evolve). (3) Compelling complements (usually result of most vibrant ecosystem).

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The Platform Strategy “Toolkit”Product, Platform, or Complement? – Key decisions, and

how to think about them

WTAoM – Framework to analyze the dynamics of platform markets & complements, estimate how much share is possible to win, and design initiatives to influence outcomes

The 4 Levers – Broad categories for implementing a platform leadership strategy: Firm Scope (make vs. partner); Technology (modularity, IP open vs. closed): External (ecosystem initiatives; Internal (dealing with conflicts of interest)

Coring & Tipping – How become essential or “core” to a new evolving platform? How encourage an existing market to adopt your platform when multiple platforms compete?

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Product vs. Platform Strategy?

Lever 2: Platform/Interface Technology

MainlyClosed

Mainly Open

Lever 1: Source of Key ComplementsMainly In-house Mainly Outside

Product-mainly strategy

Cisco router + IOS?

Red Hat (Linux)?

Betamax, Macintosh

First iPod & iPhone??

Microsoft Windows?

Intel microprocessor?

iMode?

Current iPhone, iPad?

iTunes, AppStore?

Apple: Before 2003 = Product-First Thinking After = Product + Platform + Services!

• Apple still had lower profits compared to Microsoft through 2011, but caught up in 2012! – Surpassed Microsoft in market value in 2010

– PC sales FLAT but less in other related industry segments

• What Apple did: Reinvented itself to link personal computers to consumer electronics & smart phones, & these to digital media & software distribution. Common platform for multiple products -- iPod, iPhone, iPad, Mac, iTunes, App Store, eBooks, iAds, et al.

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Microsoft AppleRevenues($million)

Operating Profits (%)

Market Value ($m)

Revenues Operating Profits (%)

Market Value ($m)

2012 $74,000 30.0% $235,000 $157,000 35.0 $413,0002011 70,000 39.0 247,000 108,000 31.0 425,000

2010 62,000 38.0 245,000 65,000 28.0 312,0002009 58,437 34.8 246,630 36,537 21.0 180,150

2008 60,420 37.2 149,769 32,479 19.3 118,4412007 51,122 36.2 287,617 24,006 18.4 74,4992006 44,282 37.2 251,464 19,315 12.7 45,7172005 39,788 36.6 233,927 13,931 11.8 29,435

2004 36,835 24.5 256,094 8,279 3.9 8,336

2003 32,187 29.7 252,132 6,207 (loss) 4,480

2002 28,365 29.2 215,553 5,742 0.3 4,926

2001 25,296 46.3 258,033 5,363 (loss) 7,924

“Winner Take All” (or Most) if…

1) Strong network effects between the platform and complements (direct or indirect)

2) Little differentiation among competing platforms (few niche opportunities or ways to be distinctive among competitors!)

3) Multi-homing rare (difficult or costly for users, app developers, or other players to use more than one platform as their “home”): MAKE THEM CHOOSE!

Ref: Eisenmann, Parker, and van Alstyne, Harvard Business Review (2006); Cusumano, Staying Power (2010) 18

Multi-Homing vs. Switching Costs

2 SETUPS + 2 ONGOING

1 SETUP + 1 ONGOING

Mono-homing

Switching

Multi-homing

2 SETUPS + 1 TERMINATION + 1 ONGOING

19Source: G. Parker

Why Did VHS Win 100% of the Consumer VCR Market?

Network effects? Differentiation? Multihoming?

1. Strong network effects? – Yes. VHS and Betamax incompatible. More open licensing of VHS led to more vendors, more prerecorded tapes, then more sales to users, ad infinitum

2. Little differentiation? – Yes. Initial difference in recording time, but soon eliminated. Same prerecorded tapes available. Quality better with Betamax but not better enough.

3. High cost of multihoming? – Yes. Machines were expensive in the 1970s and 1980s, so users chose one.

– Sony quickly drops from 100% market share to zero!

– Little first-mover advantage…Why?20

Why Did Windows Win 95% of the Desktop OS Market?

Network effects? Differentiation? Multihoming?

1. Strong network effects? – Yes. Many more apps for Windows; incompatibility of the Mac (modified recently with the switch to Intel chips & virtual s/w)

2. Little differentiation? – Yes, eventually. Growing similarity with the Mac; rivalry among PC manufacturers & low entry barriers brought PC prices down. Mac survived in a niche – desktop publishing & extreme ease of use, e.g. for schools

3. High cost of multihoming? – Yes. The Mac usually cost 2x a WinTel PC. Both are costly so users choose one.

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Why No Permanent Winner in Video Game Consoles?

Network effects? Differentiation? Multihoming?

1. Strong network effects? – Yes. With specific games tied to specific platform (Sony PlayStation, Nintendo Wii, Microsoft Xbox). Some games on multiple consoles & PCs.

2. Little differentiation? – No. Each vendor different. Also “hit” games or features vary by generation and vendor. Some games on multiple consoles & PCs.

3. High cost of multihoming? – No. Consoles relatively cheap. Often subsidized by makers. Serious game users buy more than one platform. Some games on multiple consoles & PCs.

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Will There Be One Winner (FB) in the Social Networking Market?Network effects? Differentiation? Multihoming?

1. Strong network effects? – Yes. Friends, colleagues, etc. Specific applications and some services, though weakening with cross-platform APIs.

2. Little differentiation? – No. Many small niche platforms or more focused, also many overseas. Yes –Facebook copying specialized features of others, and Google is pushing more cross-platform openness & applications.

3. High cost of multihoming? – Yes – individual users, and application developers for “closed” platforms. No – many people use multiple platforms, for different purposes.

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Platform Thinking:Implications for Managers

• Some markets like VCRs, PCs, smartphones, search, social media, etc. may seem like “natural monopolies” but not so. These markets do not evolve “by chance.” Companies INFLUENCE these markets by their strategic actions – and inactions!

• Long-term winners in platform competition generally have the best platform. Best product not enough – even with a Steve Jobs!

• Many product and service businesses can benefit from platform thinking as a way to build strategic partnerships!

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