Sustaining Complement Quality for Digital Product Platforms: A Case Study of the Philips Hue Ecosystem

Innovation in a digital world increasingly revolves around open platforms that consist of a core technology and a large variety of complementary products developed by an ecosystem of independent complementors. The platform ecosystem literature has mainly focused on indirect network effects arising from the quantity of complements, with little attention to the quality of complements, despite the importance of quality for the complementary value that drives platform ecosystems. Because digital products are malleable and dependent on the ever‐evolving ecosystem, we advance a relational and dynamic conceptualization of complement quality. Drawing on a systematic, in‐depth qualitative case study of the Philips Hue connected lighting platform and its complementary third‐party apps, we study how and why complement quality is sustained over time. By analyzing apps and their updates, we developed a process model that explains pathways through which complement quality is enhanced, maintained, or deteriorates. Changes in the platform core, changes in other ecosystem elements, and idiosyncratic connections by users result in expanding affordances, materializing glitches, and emerging obsolescence. Without further action, glitches and obsolescence lead to deteriorating quality. Joint action of complementors, platform owners, and users is needed to act upon affordances, glitches, and obsolescence, in order to maintain integrity and enhance functionality. This paper contributes to the literature on innovation in platform ecosystems by explaining the dynamic and relational nature of complement quality in a digital platform ecosystem and showing the interdependence of ecosystem members (the triad between platform owner, complementors, and users) in sustained development efforts.     

Stakeholder value appropriation: The case of labor in the worldwide mining industry

Research Summary : We evaluate how the value appropriated by employees varies in response to an exogenous shock to the price of the firm's product and how this variation depends on institutional and ownership structures. Institutional and ownership structures that favor employees can influence firms’ location decisions and shareholders’ incentives to invest. Using data from the main copper mines in the world, we show that the value appropriated by employees rises in response to an exogenous increase in the price of minerals. Our results indicate that the magnitude of the increment in the value captured by employees is larger in stated‐owned companies, when labor regulations promote productivity‐based payments, when wages are determined through a centralized bargaining process, and when regulations associated with hiring and firing are more flexible. Managerial Summary : We show how labor regulations and state ownership affect the value appropriated by employees when there are exogenous changes in the price of the firm's products. Since the value generated by a firm is distributed among different stakeholders, a higher appropriation of value by employees results in lower appropriation by another party. Therefore, by changing the distribution of value, managerial decisions about location and entry could be affected. For instance, shareholders of firms with positive future expectations about the prices of their products might prefer to enter markets in which salary negotiations are not centralized or where partnership with the local government is not mandatory. Overall, our analysis calls for the consideration of the external environment when evaluating value appropriation by different types of stakeholders.     

Motivation matters: Corporate scope and competition in complementary product markets

Research summary : We argue that a pure capabilities‐based view does not accurately explain the competitive dynamics of increasingly common settings in which firms act as both complementors and competitors. We propose that the Awareness‐Motivation‐Capability framework is more appropriate for these settings. We derive predictions from both a pure capabilities view and the AMC framework, and test those predictions in the U.S. auto leasing market, in which the leasing subsidiaries of car manufacturers directly compete with the same independent lessors who provide complements to the manufacturers. Although our results are consistent with capabilities playing an important role, motivation appears to be a critical factor explaining the competitive dynamics of the market. Managerial summary : Firms that compete with business units owned by larger corporate parents face additional considerations. Such subsidiary competitors can be motivated by broader corporate considerations, shifting their objectives, and consequently, their strategic actions. Expecting subsidiary competitors to pursue business unit profitability can mislead managers toward pricing, product mix, or market entry errors. We present an important example from consumer finance, where independent auto lessors, such as Bank of America (BoA), compete with captive leasing subsidiaries like Ford Motor Credit (FMC). Since FMC is motivated to subsidize and support vehicle sales for its manufacturer parent, a cost advantage is not enough for BoA to dominate the market. Understanding broader corporate motivations of competitors helps managers anticipate competition levels in potential markets, thereby improving decision‐making and performance. Copyright © 2015 John Wiley & Sons, Ltd.     

Firm non‐market capabilities and the effect of supranational institutional safeguards on the location choice of international investments

Research Summary : We investigate the extent to which firms rely on supranational institutional safeguards versus their non‐market capabilities to offset the risks of investing abroad. We argue that firms with non‐market capabilities are insensitive to supranational institutional safeguards when choosing the location of their international investments. We show that supranational agreements between an investor's home and host nation, operationalized as bilateral investment treaties (BITs), increase the likelihood of investment, but there is substantial firm heterogeneity with respect to this relationship. Firms with various forms of non‐market capabilities are not sensitive to BITs, whereas other firms are more likely to invest under BITs. We advance the understanding of how firm non‐market capabilities can substitute for supranational institutional arrangements in addressing risks associated with host country institutional weaknesses. Managerial Summary : The risk of expropriation is one of the main concerns companies have when investing abroad. Because of this, many countries implement bilateral investment treaties (BITs) to safeguard foreign investments, alleviate foreign investor concerns, and promote investments. We show that only those companies without political competence or political connections favor countries with BITs when choosing where to invest. Companies with political competence or political connections, on the other hand, ignore BITs and apparently rely on their ability to influence governments whenever their foreign investments face expropriation threats. As a result, politically connected or competent companies can enter markets most of their competitors lacking these capabilities shy away from. They can, therefore, do business in environments in which they face less competition.     

Little Fish in a Big Pond: Legitimacy Transfer,Authenticity, and Factors of Peripheral Firm Entry and Growth in the Market Center

Research summary : How do peripheral firms compete and secure future growth? Building on literature in strategy and organizational theory, we test a model of peripheral entry and growth in the mainstream market segment. Using data from 289 craft breweries over 11 years, we find evidence that niche producers are increasingly entering the mainstream market and competing with market‐center firms. We identify two mechanisms contributing to these actions: legitimacy transfer and cognitive claims of authenticity. As hypothesized, imitation of niche products by macro breweries facilitates craft beer entry into mainstream markets. Moreover, two authenticity‐based identity codes are found to reliably influence craft brewery growth: a local identity (i.e., operating in one's local market) and a product proliferator identity (i.e., offering a more diverse set of products) . Managerial summary : How can small niche firms compete with larger, more established organizations? By examining the rapidly expanding craft beer industry, this study explores how craft breweries are able to both enter the market space of these larger competitors and secure sustained patterns of growth. Specifically, we highlight two factors influencing the success of craft breweries. First, as major beer producers mimic niche products (i.e., faux craft beer), smaller niche firms are allowed to enter the market by exposing the typical consumer to the tastes of craft beer. Second, craft breweries enjoy increased success if they (a) emphasize the local elements of their company, and/or (b) offer a larger number of products . Copyright © 2017 John Wiley & Sons, Ltd.     

Unpaid crowd complementors: The platform network effect mirage

Platforms have evolved beyond just being organized as multi‐sided markets with complementors selling to users. Complementors are often unpaid, working outside of a price system and driven by heterogeneous sources of motivation—which should affect how they respond to platform growth. Does reliance on network effects and strategies to attract large numbers of complementors remain advisable in such contexts? We test hypotheses related to these issues using data from 85 online multi‐player game platforms with unpaid complementors. We find that complementor development responds to platform growth even without sales incentives, but that attracting complementors has a net zero effect on on‐going development and fails to stimulate network effects. We discuss conditions under which a strategy of using unpaid crowd complementors remains advantageous. Copyright © 2014 John Wiley & Sons, Ltd.     

Do Low‐Price Guarantees Guarantee Low Prices? Evidence from Competition between Amazon and Big‐Box Stores

It has long been understood in theory that price‐match guarantees can be anticompetitive, but to date, scant empirical evidence is available outside of some narrow markets. This paper broadens the scope of empirical analysis, studying a wide range of products sold on a national online market. Using an algorithm that extracts data from charts, I obtain a novel source of data from online price trackers. I examine prices of goods sold on Amazon before and after two big‐box stores (Target and Best Buy) announced a guarantee to match Amazon's prices. Employing both difference‐in‐difference and regression‐discontinuity approaches, I robustly estimate a positive causal effect of six percentage points. The effect was heterogeneous, with larger price increases for initially lower‐priced items. My results support anticompetitive theories which predict price increases for Amazon, a firm that did not adopt the guarantee, and are consistent with plausible mechanisms for the heterogeneous impact.     

Investigating Adoption of Free Beta Applications in a Platform‐Based Business Ecosystem

Planning new product development (NPD) activities is becoming increasingly difficult, as contemporary businesses compete at the level of business ecosystems in addition to the firm‐level product‐market competition. These business ecosystems are built around platforms interlinking suppliers, complementors, distributors, developers, etc. together. The competitiveness of these ecosystems relies on members utilizing the shared platform for their own performance improvement, especially in terms of developing new valuable offerings for end users. Therefore, managing the development of the platform‐based applications and gaining timely end‐user input for NPD are of vital importance both to the ecosystem as a whole and to the developers. Subsequently, to succeed in NPD planning developers utilizing beta testing need a thorough understanding of the adoption dynamics of beta products. Developers need to plan for example resource allocation; development costs; and timing of commercial, end‐product launches. Therefore, the anticipation of the adoption dynamics of beta products emerges as an important antecedent in planning NPD activities when beta testing is used for gaining end‐user input to the NPD process. Consequently, we investigate how free beta software products that are built upon software platforms diffuse among their end users in a cocreation community. We specifically study whether the adoption of these beta products follows Bass or Gompertz model dynamics used in the previous literature when modeling the adoption of stand‐alone products. Further, we also investigate the forecasting abilities of these two models. Our results show that the adoption dynamics of free beta products in a cocreation community follow Gompertz's model rather than the Bass model. Additionally, we find that the Gompertz model performs better than the Bass model in forecasting both short and long out‐of‐sample time periods. We further discuss the managerial and research implications of our study.     

Big losses in ecosystem niches: how core firm decisions drive complementary product shakeouts

This study examines shakeouts in the context of business ecosystems. Market turbulence generated by core firm decisions in competing differentiated ecosystems can generate financial losses and exit for complementary niche market firms. I develop hypotheses predicting which niche markets will suffer larger losses and be more susceptible to shakeouts, and how core firm decisions will drive complementor performance and survival. I then apply these hypotheses to brand‐based differentiated ecosystems in the automotive industry, where networks of suppliers, customers, and complementors surround car manufacturers. More specifically, I study the complementary niche market of automotive leasing, where manufacturers sway leasing markets through product change, entry, and subsidization. To test the hypotheses, I use a proprietary dataset of 200,000 individual car leases between 1997–2002 to identify how manufacturer product design and niche market entry drive complementor losses and exit. These data allow a unique opportunity to understand how the strategic choices of core firms can have substantial and often devastating effects on niche markets in their ecosystem. Further, the results suggest how the dynamic capabilities to adapt to core firm behavior might improve performance for certain niche market complementors. Copyright © 2008 John Wiley & Sons, Ltd.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

Constraints in acquiring and utilizing directors' experience: An empirical study of new‐market entry in the pharmaceutical industry

In this study we provide evidence that firms considering entering new markets are more likely to appoint directors with experience in those markets; and subsequently, we show that directors' market experience increases the likelihood of new‐market entry. Moreover, we explore the presence of constraints in both, acquiring experienced directors and utilizing their experience. Specifically, we find that experienced directors are less likely to join firms with financial restatements in the recent past as well as firms with a lower status than the firms where they currently serve. In addition, we find that interlocking directors' experience is less likely to lead to new‐market entry for firms that lack new‐product development experience and that exhibit a high level of market overlap with interlocked firms. Copyright © 2013 John Wiley & Sons, Ltd.     

Surviving the gales of creative destruction: the determinants of product turnover

Innovative industries are often characterized by rapid product turnover. Product longevity may be driven by both a product's position within a market as well as its position within a firm's larger product portfolio. However, we have little understanding of the relative importance of these factors in determining product turnover and how they interact as an industry evolves. Although researchers have invested substantial effort in analyzing firm survival and turnover, there are far fewer studies of the determinants of product survival and turnover. We use hazard rate models and count regression models to describe the behavior of firms and their products with a new and detailed database on the laser printer industry. We show, first, that competition and market structure variables have a large impact on both speeding product exit and delaying product entry. Second, there is some evidence that firms that have maintained a high market share for a number of years keep their products on the market longer than those with lower market share. Finally, firms with high innovative capacity tend to enter markets frequently, but withdraw their products at average rates. Firms with strong brands tend to introduce few products and withdraw their products slowly. With these findings, the paper links product entry and exit decisions to the broader literature on firm strategic and product management. Copyright © 2006 John Wiley & Sons, Ltd.     

Exploring Mediating and Moderating Influences on the Links among Cycle Time,Proficiency in Entry Timing,and New Product Profitability*

Development cycle time is the elapsed time from the beginning of idea generation to the moment that the new product is ready for market introduction. Market‐entry timing is contingent upon the new product's cycle time. Only when the product is completed can a firm decide whether and when to enter the market to exploit the new product's window of opportunity. To determine the right moment of entry a firm needs to correctly balance the risks of premature entry and the missed opportunity of late entry. Proficient market‐entry timing is therefore defined as the firm's ability to get the market‐entry timing right (i.e., neither too early nor too late). The literature has produced divergent evidence with regard to the effects of development cycle time and proficiency in market‐entry timing on new product profitability. To explain these disparities this study (1) explores the mediating roles of development costs and sales volume in the relationships among development cycle time, proficiency in market‐entry timing, and new product profitability, respectively; and it (2) explores the moderating influence of product newness on the relationship between development cycle time and development costs and that of new product advantage on the link between proficiency in market‐entry timing and sales volume. The results from a survey‐based study of 72 manufacturers of industrial products in the Netherlands suggest that development costs mediate the relationship between development cycle time and new product profitability and that sales volume mediates the link between proficiency in market‐entry timing and new product profitability. In addition, the findings indicate that new product advantage strengthens the positive relationship between proficiency in market‐entry timing and sales volume. The results provide no evidence for a moderating effect of product newness. These results have important implications because to maximize new product profitability managers need to distinguish between costs and demand side effects of development cycle time and market‐entry timing on new product profitability. Keeping this distinction in mind should help them to better determine the relative profit impact of investments in cycle time reduction or improved entry timing. Moreover, the findings suggest that highly advantaged products that enter the market at the right time may have a highly attenuated sales volume. It also implies that new products with lower advantage may have very little leeway in hitting the “sweet spot” in market. The message is that “doing the right thing” (i.e., to develop a highly advantaged new product) may be at least as important as correctly balancing the risks of premature entry and the missed opportunity of late entry.     

Perfect timing? Dominant category,dominant design,and the window of opportunity for firm entry

The optimal time to enter emerging industries is a key concern in strategy, yet scholars struggle to create a theoretical foundation that can integrate conflicting empirical findings. We incorporate categorical dynamics to industry life cycle theory to enhance existing entry timing theories. We introduce the concept of a dominant category—the conceptual schema that most stakeholders adhere to when referring to products that address similar needs and compete for the same market space—linking it to the dominant technological design and entry‐timing advantages. In particular, we propose the existence of a window of opportunity for firm entry that starts with the emergence of the dominant category and ends with the emergence of the dominant design. © 2013 The Authors. Strategic Management Journal published by John Wiley & Sons Ltd.     

Platform envelopment

Due to network effects and switching costs in platform markets, entrants generally must offer revolutionary functionality to win substantial market share. We explore a second entry path that does not rely upon Schumpeterian innovation: platform envelopment. Through envelopment, a provider in one platform market can enter another platform market, and combine its own functionality with that of the target in a multi‐platform bundle that leverages shared user relationships. Envelopers capture market share by foreclosing an incumbent's access to users; in doing so, they harness the network effects that previously had protected the incumbent. We present a typology of envelopment attacks based on whether platform pairs are complements, weak substitutes, or functionally unrelated and we analyze conditions under which these attack types are likely to succeed. Copyright © 2011 John Wiley & Sons, Ltd.     

The dynamics of industrial organization

This paper introduces the special issue of The Review of Industrial Organization on ‘The Dynamics of Industrial Organization’. What binds these papers together is a focus on markets in motion—the process by which new firms enter an industry, either grow and survive, or else ultimately exit out of the industry. In contrast to more traditional static analyses, the concern of these papers is identifying where do firms come from and what happens subsequent to their entry. Influences of geographic as well as product space are found to exert an influence on the dynamics of industrial organization.

     

Technology Strategy in a Software Products Company

An overly narrow focus on core competencies and technologies may cause a firm to miss market opportunities. On the other hand, a firm's ongoing success depends on its ability to recognize and nurture the technologies necessary for the continual refinement and extension of its product families. This process of product renewal requires effective management of technological innovation, which in turn requires a clear understanding of the technological basis for a product family–that is, the product platform from which derivative or follow-on products are created. Using a software company as an example, Marc H. Meyer and Luis Lopez present a method for understanding the relationship between the nurturing of core technologies and the evolution of a product family. At the foundation of this method is the concept of a product platform–the core technologies that are common to all members of a product family. In other words, a platform provides the basic technological architecture for a series of derivative products. From an initial platform, a product family can evolve in two ways: through platform extensions or platform renewals. Platform extensions may involve changes to existing subsystems or the addition of new subsystems without altering the primary subsystems and interfaces in the existing design. Platform renewal is the redesign of a product to create an entirely new platform. To provide a basis for evaluating the effects of the software company's allocation of R&D expenditures, the authors created a product family map that differentiated between platform improvements and derivative product developments. Using the product family map, they examined R&D budgets and identified the allocation of spending among the core technologies embodied in the firms's products. The visual presentation of the product family maps and core capability investments were particularly useful for helping company management understand and learn from the consequences of past decisions. The analysis of the product family maps and R&D expenditures also provides a guideline for future decision-making. Specifically, to achieve desired amounts of technical and commercial leverage, successive product platforms in a product family must provide both balance and strength in the embodied core technologies. For market applications involving more than one core technology, a firm must pursue a balanced, inclusive technology strategy. In such cases, overemphasis on one core technology typically results in poor market performance.     

Internet companies' growth strategies: determinants of investment intensity and long‐term performance

To exploit first‐mover advantages, pioneers may be motivated to amass customers before rivals enter the market. Likewise, when they enjoy increasing returns due to network effects, static scale economies, or learning effects, companies have incentives to invest aggressively in growth. This paper presents econometric analysis of factors that determined the intensity of Internet companies' investments in growth, and analyzes the long‐term performance consequences of such investments. Results indicate that first movers spent significantly more on upfront marketing than non‐pioneers. Contrary to expectations, however, firms in markets that exhibited increasing returns did not spend more on their early customer acquisition efforts than other sample companies. Although the typical sample company did not earn positive long‐term returns, heavy early investments in growth were nevertheless economically rational. In most cases, reducing marketing outlays would have worsened a bad outcome, consistent with an inverted ‘U’ relationship between long‐term returns and upfront marketing spending. Thus, the typical sample company invested in marketing, ex ante, at levels close to those that would have maximized returns, observed ex post. Copyright © 2006 John Wiley & Sons, Ltd.     

Building product diversification through contractual R&D agreements

Firms engage in contractual R&D agreements for several reasons, including product innovation motives, firm performance goals, and technological diversification. This article demonstrates that firms also might enter into external collaborations to penetrate new markets. This study therefore explores both the effects and the strategic risks of contractual R&D agreements and their related knowledge structures for a firm's capacity to diversify into new markets. Drawing on a novel panel data set obtained from 102 Fortune high‐tech firms, the authors demonstrate that strategic alliances enable knowledge‐integrated firms to penetrate new businesses; however, these organizations should be cautious about engaging in licensing‐in agreements, which have negative effects on product diversification.     

Entering new markets: The effect of performance feedback near aspiration and well below and above it

Research summary : This study draws on the resource‐based view and the behavioral theory of the firm to gain new insights about the effect of performance relative to aspiration level (i.e., performance feedback) on the decision to enter new markets. Results show an inverted U‐shaped relationship between performance both below and above aspiration level, and the probability of firms to enter new markets. That is, when firms are well below or well above their aspiration level, they significantly change their behavior. This article develops a theoretical framework to clarify and organize these findings. Managerial summary : This study examines the effect of performance feedback, and particularly, large discrepancies between firm performance and aspiration level on the decision to enter new markets. It provides support to the role of performance feedback in affecting the decision to enter new markets, a factor that has received relatively little attention in the extensive literature that has examined the inducements of such moves. Results show that, as performance falls below or rises above aspiration, a firm's probability of entering new markets increases up to a certain point after which this relationship decreases. This shows that the tendency to enter new markets is different for firms that are in the neighborhood of aspiration level compared to those that are well below or above it. Copyright © 2016 John Wiley & Sons, Ltd.