Talk @ London Business School for the Goshal Startegy Conference – London, May 2012

1. ORCHESTRATING THE ECOSYSTEM IN
THE RACE FOR THE MARKET:
How platforms build and expand their
ecosystem overtime
Carmelo Cennamo
Sumantra Ghoshal Conference
London Business School, London
14th May 2012

2. The phenomenon
Competition between incompatible technology platforms
• Technological standards battles (Suarez, 2004)
• Fierce competition to win the market (“winner-take-all”) (e.g., Eisenmann et al.
2006; Schilling, 2002)
Platform: interface mediating distinct but interdependent groups of
users that transact on the platform to obtain value (Evans, 2003;
Hagiu, 2005; Rochet & Tirole, 2003, 2006)
The market race unfolds through accumulation of co-
specialized assets (complementary applications) and
users installed base
Ghoshal Conference, LBS © C. Cennamo 5/14/12

3. Platform Markets: examples
Ghoshal Conference, LBS © C. Cennamo 5/14/12

4. Study’s Focus
Platform’s complementary applications
Platform-level explanatory factors
Impact of platform’s (orchestration) capabilities on
platform system evolution
Ghoshal Conference, LBS © C. Cennamo 5/14/12

5. Econ lit. (Two-sided markets)
System evolution driven by (indirect) network effects (e.g.,
Armstrong 06; Caillaud & Jullien 03; Clements & Oashi 05; Eisenmann et al. 06; Hagiu 05, 09; Rochet & Tirole 03, 06)
Users Installed
Base
Higher-level Platform Platform
mechanisms System Performance
– Market Share
Complementary
Applications
Platform-level
mechanisms
Aggressive Pricing
Royalties structure-fees
Feedback
effect
Ghoshal Conference, LBS © C. Cennamo 5/14/12

6. Technology lit.
System evolves according to waves of (platform technology)
innovation (e.g., Schilling 02, 03; Sheremata 04; Suarez 04, 05;Venkatraman & Lee 04; Wade 95)
Technological Technological Technological
Selection Bandwagons Dominance
Regime of
Users Installed
appropriability Base
Switching costs
Platform Platform
Characteristics Performance
System
technological field
Social dynamics
Complementary
Applications
Platform-level
mechanisms
Technological superiority
Licensing–Timing–Marketing
Ghoshal Conference, LBS © C. Cennamo 5/14/12

7. Gaps
Paucity of analysis on platform-level mechanisms
How to “build” a competitive ecosystem?
Platform system positioning?
What about the ecosystem evolution (i.e., the race competition per se)?
...closing the gap
• Managing relationships with complementors (Boudreau, 10; Cennamo & Santaló, in
press; Gawer 2010; Gawer-Cusumano 2002;Yoffie-Kwak; 2006)
• Learning and internal R&D (Gawer-Cusumano 2002; Hill 1997; Schilling 2002, 2003)
• Industry-Platform evolution (Jacobides et al. 2006; Ozcan-Eisenhardt 2009)
Ghoshal Conference, LBS © C. Cennamo 5/14/12

8. The model
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9. Contribution
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10. Hypothesis 1
(+) Variety
In-house development
Complementary
capability
Applications
Firm-specific (dynamic) capability that help appraise new tech & mkt trajectories,
deliver quality innovation, keep relevant a firm’s valuable assets (Ambrosini & Bowman 09;
Helfat 97; Lavie 06; Rothaermel & Hess 07; Teece 07)
• Reduce tech & mkt uncertainty (shadow entry barrier); trigger initial demand (Hill
97; Sheremata 04)
• Improve quality, facilitate investments in specialized assets (Rothaermel et al. 06)
Ghoshal Conference, LBS © C. Cennamo 5/14/12

11. Hypothesis 2
(+) Variety
Network Orchestration
Complementary
capability
Applications
Ability to engage, manage & leverage competences of external developers to elicit
complementary innovation (Cusumano & Gawer 02; Dhanaraj & Parkhe 06). “Capacity to shape the
ecosystem” (Teece 07:1320)
1) Facilitate share of info & knowledge to maximize innovation output (Dyer & Singh 98; Kogut
00)
2) Manage innovation appropriability to enhance potential for value creation (Hagiu & Yoffie
09; Gawer & Henderson 07)
3) Foster network dynamic stability (growth) by envisioning/structuring roles &
interdependencies of developers (“ecosystem architecture”) (Jacobides et al. 06; Ozcan &
Eisenhardt 09; Gawer 10)
Ghoshal Conference, LBS © C. Cennamo 5/14/12

12. Hypotheses
In-house development
capability
H1a (+) H2a (+)
In-house development
capability H1 (+)
Variety
Complementary
H2 (+)
Network orchestration Applications
capability
H3a/b (+)/(–)
Network orchestration
x In-house development
Ghoshal Conference, LBS © C. Cennamo 5/14/12

13. Empirical setting - Methods
US Videogame Industry (1995-2008)
• Monthly obs. on each console and game-titles supplied to it (sales, intro date,
producer etc....)
• Data from NPD research group and specialized website
Panel model, fixed effects + 2SLS to account for unobserved individual effects
and endogeneity issues
Control variables: users installed base; games portfolio scope; platforms av. age; #
rival platforms; generation-year dummies (time trends effects)
Ghoshal Conference, LBS © C. Cennamo 5/14/12

14. Findings
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15. Findings
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16. Implications
Ecosystem architecture:
orchestration capability + vision about industry architecture
• Need for design and control over trajectory of ecosystem evolution
• Balance platform’s WTA incentives with those of external providers of
complementary apps/content
• Envision & shape interdependence between ecosystem & industry
architecture for competitive advantage
• coevolution of platform’s capabilities and network effects
Multidimensional game!
Ghoshal Conference, LBS © C. Cennamo 5/14/12

17. Implications
Industry Architecture
Platform traits Ecosystem Architecture Platform Competition
• Firm History • Strategic
Customers maneuvering
• Vision Base
• Capabilities (tech & • Strategic positioning
orchestration) • Management of
Complementors/ expectations
• Strategic objectives
Applications • Network effects &
lock-in
Ghoshal Conference, LBS © C. Cennamo 5/14/12

18. !
T h a n k Y o u
carmelo.cennamo@unibocconi.it
www.unibocconi.eu

19. !
T h a n k Y o u
carmelo.cennamo@unibocconi.it
www.unibocconi.eu

20. Variables
∆ Applications variety: ln(Xt/Xt-1), where X = # game titles (Cottrell & Nault 04)
In-house development: % in-house game titles > 75th percentile of title sales
distribution (robustness: # in-house games) (Corts & Lederman 09)
Network orchestration: ∆ producers platform embeddedness (Venkatraman & Lee 04);
∑i(Pji,t)2; Pji = proportion of platform j’s titles released by developer i.
Generation evolution pace: ln(St/St-1); S=sales all new generation platforms
Ghoshal Conference, LBS © C. Cennamo 5/14/12

21. Correlation statistics
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22. The Market-Race
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