Networks, platforms, and strategy: Emerging views and next steps

• Date: 01 January 2017
• Published date: 01 January 2017
• Author: Arati Srinivasan,David P. McIntyre
• DOI: http://doi.org/10.1002/smj.2596

Strategic Management Journal

Strat. Mgmt. J.,38: 141–160 (2017)

Published online EarlyView 17 November2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2596

Received 29 April 2014;Final revision received17 May 2016

NETWORKS, PLATFORMS, AND STRATEGY:

EMERGING VIEWS AND NEXT STEPS

DAVID P. MCINTYRE*and ARATI SRINIVASAN

Department of Management, School of Business, Providence College, Providence,

Rhode Island, U.S.A.

Research summary: A substantial and burgeoning body of research has described the inuence

of platform-mediated networks in a wide variety of settings, whereby users and complementors

desire compatibility on a common platform. In this review, we outline extant views of these

dynamics from the industrial organization(IO) economics, technology management, and strategic

management perspectives. Using this review as a foundation, we propose a future research

agenda in this domain that focuses the on the relative inuence of network effects and platform

quality in competitive outcomes, drivers of indirect network effects, the nature and attributes of

complementors, and leveraging complementor dynamics for competitive advantage.

Managerial summary: In many industries, such as social networks and video games, consumers

place greater value on products with a large network of other users and a large variety of

complementary products. Such “network effects” offer lucrative opportunities for rms that can

leverage these dynamics to create dominant technology platforms. This article reviews current

perspectives on network effects and the emergence of platforms, and offersseveral areas of future

consideration for optimal strategies in these settings. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

In today’s economy, businesses are increas-

ingly characterized by competition among

platform-mediated networks in which network

users— individuals or rms— desire compatibility

and interaction (Eisenmann, Parker, and Van

Alstyne, 2011). As a result, a variety of products

such as video games, enterprise software, and

online social networks are organized around plat-

forms, which facilitate transactions among rms

that and/or individuals who may not have been

able to transact otherwise (Eisenmann, Parker,

and Alstyne, 2006; Evans and Schmalensee, 2008;

Gawer, 2009; Hagiu, 2005; Rochet and Tirole,

Keywords: platforms; network effects; complements;

technology standards; ecosystems

*Correspondence to: David P. McIntyre, School of Business,

Providence College, 1 Cunningham Square, Providence,

RI 02918, U.S.A. E-mail: dmcinty2@providence.edu

Copyright © 2016 John Wiley & Sons, Ltd.

2006). For instance, video game consoles such as

Microsoft’s Xbox and Sony’s PlayStation serve as

platforms for which complementary game titles are

developed by third-party developers and played

by end users. Similarly, SAP provides a platform

for software developers to connect with enterprise

business clients. Though platform-mediated net-

works are often associated with high-technology

industries, they manifest across a wide array of set-

tings, including shopping malls, stock exchanges,

single-serving coffee makers, real estate bro-

kerages, and health maintenance organizations

(HMOs).

The fundamental premise of platform-mediated

networks is that users place a higher value on plat-

forms with a larger number of other users (Cen-

namo and Santalo, 2013). The increased value that

accrues to network participants is contingent on

the number of other users in the network with

whom they can interact (Eisenmann, 2007; Farrell

142 D. P. McIntyre and A. Srinivasan

and Saloner, 1985; Katz and Shapiro, 1986). For

instance, the value of online social networks such

as Facebook and LinkedIn increases with the num-

ber of participants on the site. In addition, enhanced

value to users may manifest indirectly when they

anticipate that platforms with more users will also

offer a greater variety of complementary prod-

ucts and services (Evans, 2003; Rochet and Tirole,

2003). In tandem, these direct network effects (via

a large number of users with whom to interact)

and indirect network effects (via the availabilityand

variety of complements) can foster the emergence

and persistence of dominant platforms, and thus,

strong competitive positions for their sponsoring

rms (Bonardi and Durand, 2003; Eisenmann et al.,

2011).

The dynamics of platform-mediated networks

have received signicant attention from industrial

organization (IO) economics, technology man-

agement, and strategy perspectives. Economists

have sought to explain the existence of direct and

indirect network effects in diverse settings, and the

subsequent emergence of dominant platforms (for

instance, Parker and Van Alstyne, 2005; Shapiro,

1999). The technology management stream has

focused largely on platform sponsors, particularly

how they can attract third-party complementors

to stimulate indirect network effects (Eisenmann,

2006; Evans, Hagiu, and Schmalensee, 2006). This

stream characterizes platforms as technological

architectures (Gawer, 2014) on which platform

sponsors and complementors seek to innovate.

In contrast, strategic management scholars have

emphasized the emergence and persistence of com-

petitive advantage in these settings. Competitive

advantage arises when rms offer greater value

to customers at a lower cost than rivals (Besanko,

Dranove, and Shanley, 1999; Hoopes, Madsen, and

Walker, 2003; Peteraf and Barney, 2003; Porter,

1985). In platform-mediated settings, competitive

advantage is strongly dependent on the ability

of platform rms to stimulate value co-creation

with their network of complementors (Adner and

Kapoor, 2010) and exploit the ensuing positive

feedback dynamics (Katz and Shapiro, 1986). As

such, strategic management research has focused

on concepts such as platform leadership (Gawer

and Cusumano, 2002; Gawer and Henderson,

2007) and strategic interactions with comple-

mentors (Cennamo and Santalo, 2013; Kapoor

and Lee, 2013), while also examining strategic

choices around leveraging an existing installed

base of users (Afuah, 2013; Fuentelsaz, Garrido,

and Maicas, 2015).

While these three streams of research have vastly

enhanced our understanding of networks and plat-

forms, many studies across these perspectives have

been limited to single-industry settings or narra-

tive cases, thus limiting more robust and general-

izable implications. Therefore, it is our contention

that additional studies integrating these different

strands of research are needed to better under-

stand the genesis and maintenance of competitive

advantage in the context of platform-mediated net-

works. We address this issue by developing a future

research agenda that is broadly organized around

ve key questions. First, what contextual factors

determine the strength or intensity of direct net-

work effects, and how can they be assessed? Rather

than creating a strict dichotomy between markets

where network effects occur and those in which

they are absent, we hope to understand how net-

work effects manifest differently across an array

of settings, and their subsequent inuence on com-

petitive dynamics and market outcomes. Second,

what is the role of platform quality in inuenc-

ing outcomes among competing platform-mediated

networks? This question becomes critical as plat-

form rms often have to deal with competing

objectives— entering a platform-mediated market

early to increase their chances of capturing early

market share and potentially sponsoring a dominant

platform versus delaying entry in the hope of releas-

ing a higher-quality product or service (Schilling,

2002). Third, how can indirect network effects be

conceptualized to better understand their impact on

platform competition? Extant research is ambigu-

ous regarding the impact of the sheer number of

complements on platform success, rather than other

strategies that platform providers can leverage for

competitive advantage.Fourth, how do complemen-

tor attributes inuence the nature and extent of their

support for a platform? The perspective of comple-

mentors, and their incentives to link with a specic

platform, is an often overlooked but important area

of research. Fifth, how can platform rms lever-

age complementor support for competitive advan-

tage? This is a critical question for rms hoping

to garner the support of third-party complemen-

tors as platforms continue to evolve and transcend

traditionally-dened industry boundaries.

By elaborating on the themes around these ques-

tions, we aim for greater integration and extension

of the three dominant perspectives on strategy and

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 141–160 (2017)

DOI: 10.1002/smj