PLATFORM LEADERSHIP

PLATFORM LEADERSHIP How Intel, Microsoft and Cisco Drive Industry Innovation Authors: Annabelle Gawer & Michael A.Cusumano Software Business Program 26.02.2003 Presentation prepared by: Yumin Dong, Lulu Zhang, Arto Ojala & Mark Dagnall

Presentation Outline • General Introduction to Platform Leadership • Case Study: Intel • Case Study: Microsoft & Cisco • Case Study: Palm & NTT DoCoMo • Case Study: Linux (Open Source Platforms) • Conclusions • Views of the book and topic area

What is a Platform Leader? • A Platform Leader is an organisation which has an objective to develop a network of complementor’s which can add value to one of its own products by developing innovative ‘add on’s’ which add value to the core product. • For a simple example think of a bakery, the core product may be a cake but to add value to it an external firm may supply chocolate or fruits to add value to the initial product. The bakery would be the Platform Leader as they are the ones driving the partners to provide added value products.

Platform Leadership: An Overview Platform Leader Complementors Consumers Complementors Complementors

Platform Leader Example: Microsoft – IBM / Sun - Microsoft • Microsoft’s MS-Dos was facilitated by IBM co-operation. By shipping Ms-Dos with IBM compatible pc’s Microsoft entered the market in a big way but continued to develop their platform to ensure they were always too far ahead for competitors to catch up. This initial strategy has lead to Microsoft’s sustained leadership with nearly all software products being compatible with Windows. • Sun’s Star office complies with Microsoft file extensions to ensure it is viable in the market because with no support for the platform leader i.e. Microsoft Office formats, Sun know they have no chance to gain any market share.

Platform Leadership Framework • The framework consists of four levers • Scope • Product Technology • External Relationships • Internal organisation • The levers are designed to enable managers to make an effective strategy for platform leadership or to enable a re-evaluation of an existing framework. • The framework is designed to take into account the circumstances of individual industries and the specific skills of an organisation.

Platform Leadership Framework: Lever 1 • Lever 1: Scope of the firm • Deals with what the firm does internally, and what it encourages others to do externally. • Is it better to concentrate efforts to internally develop complementary products or alternatively to rely on the market to produce them? • Can a balance be easily be achieved and what is the best approach?

Platform Leadership Framework: Lever 2 • Lever 2: Product Technology (architecture, interfaces, intellectual property) • Handles decision making of platform leaders and wannabes concerning the architecture of the product. • Decisions should be made as to the degree of modularity and the degree of openness the product will have as potential complementor’s can also easily become competitors.

Platform Leadership Framework: Lever 3 • Lever 3: Relationships with External Competitors • Concerned with defining the balance of collaboration in a relationship, i.e. how will the relationship be balanced, towards competition or collaboration? • Resolution of potential conflict should also be considered with this stage e.g. moving into a complementors core markets.

Platform Leadership Framework: Lever 4 • Lever 4: Internal Organisation • This lever allows platform leaders and wannabes to use internal structures for resolution of conflict. • Organisation of teams with similar goals into related groups regulated by one body. • Separate groups into distinct bodies in order to address potential conflict. • Effective communication is seen as an important facilitator of this lever.

Presentation Outline • General Introduction to Platform Leadership • >>Case Study: Intel<< • Case Study: Microsoft & Cisco • Case Study: Palm & NTT DoCoMo • Case Study: Linux (Open Source Platforms) • Conclusions • Views of the book and topic area

Intel Case • Key Points • Intel’s Rise to Platform Leadership • The story • Intel’s Strategic Principles for Platform Leadership • The Four Levers • Platform Leaders and Complementors • How Intel Manages Conflicts of Interest • Discussing

Key Points • Intel’s position and situation in the PC industry: • Intel is in the business of providing the engine for the PC…. That engine is doubling in capacity every 18 to 24 months, according to Moore’s law….What Intel really want is to ensure that the rest of platform goes with it…, everything around the microprocessor to be keeping pace and improving and scaling, so that the microprocessor can deliver its potential. • The strength of growing: • Intel grows by growing the entire pie, growing by getting new applications, by finding new users for the PC. Vividly: • “That use or application is important to me, and to do that well, I need to buy a new processor” • The key strategy issue: • How to encourage and direct the vast array of interrelated innovations that will make the PC system work better?

Key Points(cont.) • The characteristics and huge benefits of being a leader in the industry: • In some terms, industry leadership is often concreted by the industry standards and intellectual property • You can determine, or at least heavily influence the evolution of the industry. • Act as the first-mover in the markets, obtain the advantages of speed and timing

Key Points(cont.) • To achieve the leadership of platform, there are some strategic requirements of the company which we can get through the case of Intel: • A: Events and circumstances, as well as a keen understanding of what the firm can do, allow managers to develop a vision that they then try to make real by taking strategic actions. • Constant awareness about industry environment • B: Strategy development is an iterative, even messy process. This understanding preserves a role for visionary leaders circumscribe the nature and the impact of their actions in an environment where strategy is emerging from the interaction between the firm’s external and internal opportunities and actions to influence their environment. • Mediation and adjustment are vital regarding dynamic environment

Pull Push Key Points(cont.) • Ecosystem, orchestrate, complementor, competition, collaboration, balanced strategy • Capability stack of PC industry:

Intel’s Rise to Platform Leader • Intel’s problems: ( in the early 1990) • It was becoming increasingly difficult to grow demand for PCs. • At least two root causes to this problem: (background) • An increasingly obsolete PC architecture • ISA bus was very slow, which prevented other components of PC to deliver their potential, especially microprocessor, which was the key product of Intel. • The lack of industry leadership to advance the PC system (hardware and software) • The bus struggle between IBM and Compaq delayed the progress of developing the PC platform

Intel’s Rise to Platform Leader • Many companies had a stake in the PC design. No single supplier could evolve the overall system by itself, let alone overthrow overall system. • Intel’s primary business of developing microprocessor was a big growth industry. • A solution to the problem of the PC architecture was required to accommodate Intel’s future vision. • At that time, as the No.1 microprocessor maker, Intel had strength to do some changes of PC system that benefiting itself as well as the PC industry.

Intel’s Rise to Platform Leader • The Creation of IAL---Intel Architecture Lab • Goal: Architecture for the open computer industry • In detail: • Success depends on cooperation among key industry players. • Common understanding: PC industry needs to create new uses and thus new users for the PC. • Modular architectures with open interfaces between computers make it possible for many companies to participate in the innovation process. • Look at what people would want to do with the PC if it was as good as it could be; what was preventing the industry from delivering on that goal; not what Intel was doing, but what the industry limitations were.

Intel’s Rise to Platform Leader • A lesson and warning from the huge success of Compaq • In 1987, Intel tried to move the industry in a direction favorable to one of its new products: 80386 chip, with 32-bit flat address space. • IBM and Microsoft were unwilling to adopt it by their own reasons. • Compaq first commercialized the 386 chip with its Compaq 386 • Consumers came to believe that 386 was a Compaq brand • Conclusion: • Intel could not be insensitive to the dynamics of the industry. 80386 chip case was a good example of the motivations of possible adopters, OEMs, and complementors of the Intel chip. • Intel’s response: • Launched its famous “Intel Inside” marketing campaign to gain some recognition of consumers and thus increase its own bargaining power in its ecosystem.

Intel’s Rise to Platform Leader • PCI bus was a vital event in Intel’s transformation into a platform leader • In 1991, IAL’s first project: By sponsoring a change in the bus structure (PCI-peripheral component inter-connector) and providing a chip set that implemented these architectural changes in an actual product, Intel achieved its great transformation---platform leader • Process of this event was full of risks, indecisive, iterative and complex • Three factors guaranteed the success: • The technology of PCI is beneficial to the majority of PC industry • The coalition of IBM • The strong back by chip set and motherboard • Solving a common problem in a manner that will facilitate the realization of one’s future plan is a key part to platform leadership

Intel’s Strategic Principles For Platform Leadership • After the success of PCI bus project, Intel strengthened its platform leadership by careful strategic implementation, including three main roles: • Sponsor of systemic architectural innovation • Stimulator of external innovation on complements • Coordinator of industrial innovation that spanned across many firm’s boundaries • All these roles involved inevitably with four levers, which are: • Scope of the firm • Product technology • Relationship with external complementors • Internal organisation • These four levers are intertwined, they can’t be separated

Intel’s Strategic Principles For Platform Leadership • Outline: • Driving Systemic Architecture Innovation: • Intel’s system mindset • Building momentum around interface • Relinquishing royalties on IP • Using public forums to generate momentum and refine standards • Compliance workshops • Creating and distributing enabling tools • Stimulating Innovation on Complementary products • organisational structure and evolution • Coordinating Role • Conclusion

Intel’s Strategic Principles For Platform Leadership • Driving systemic architectural innovation • In the late 1990s, Intel sponsored several new initiatives, including AGP, FireWire, and USB. All these innovations benefited the PC performance, which manifested the progress of microprocessor, the key product of Intel • USB has a broader meaning to PCs, and eventually to Intel • The USB was a new interface linking a PC to external devices such as the keyboard, scanner, printer, and any new external device, which can stimulate new experience of PC, thus create new users of PC • All innovations lead to a modular architecture with open interfaces, which make it possible for many companies to participate in the innovation process

Intel’s Strategic Principles For Platform Leadership • Intel’s System Mindset: • How to improve the system performance and growth prospects for PC? • Sponsor interface standards • These interfaces became the technological mechanism for channeling external innovation, ensuring platform integrity through compatibility of complementary products, and creating an industrial consensus on platform technological evolution • A company can innovate in one layer and not worry about what is going on in other layers because we have interfaces on either side of them, thus break down the cost of innovation • Enable small companies, innovative companies make smaller investments and yet potentially win a large market share in a segment they can own. The most important issue is, the more of these companies that participate, the broader innovation we get.

Intel’s Strategic Principles For Platform Leadership • The benefit: • If Intel played a key role in designing those interfaces, Intel could help this ecosystem flourish, and position itself more firmly and perhaps permanently at its center • Raise the barriers to entry for any company that might want to compete directly with the Intel-sponsored, industry-backed architecture, for example by trying to introduce a new microprocessor standard that use different technical interfaces. • The challenges: • Vision about the evolution of the PC platform • Sense of the business opportunities for potential complementors • Involved difficult technical choices, the right place for being enough robust and lasting for a fairly longer time

Intel’s Strategic Principles For Platform Leadership • To achieve this goal, Intel adopted several ways, including: • Building Momentum around Interfaces • Lever 3: managing relationship with external companies • Relinquishing Royalties on Intellectual Property • Lever 2: product technology • Using Public Forums to Generate Momentum and Refine Standards • Lever 2 and Lever 3 • Compliance Workshops: The PlugFests • Lever 2 and Lever 3 • Creating and Distributing Enabling Tools • Lever 2 and Lever 3

Intel’s Strategic Principles For Platform Leadership • Building Momentum around Interfaces • Establishing strategic interest groups and gradually building momentum • Getting outside firms to support new standards requires time, patience and planning. • In early phase, Intel initiated relationships with a small group of outside firms and brought them together in strategic interest groups (SIG) • For PCI, there were five companies: Intel, DEC, Compaq, IBM, and NCR • For USB, there were seven companies: Intel, DEC, Compaq, Microsoft, IBM, Northern Telecom, and NEC Technologies • SIG Selection Rules: • Software: Microsoft • Hardware: IBM, HP, Compaq

Intel’s Strategic Principles For Platform Leadership • Reasons: • Have a long-term commitment to the new technology, lend credibility to SIG, and attract other firms to the new technology • Small group made fast decisions • In collaboration with SIG members, Intel designed the first features of the new standard • Even influential firms like Microsoft and Compaq tend to back Intel’s proposals because they had a chance to participate early in the design process and to influence the evolution of the standard

Intel’s Strategic Principles For Platform Leadership • Relinquishing Royalties on Intellectual Property • Intel did not require potential adopters of the interface specifications to pay any fees for use of that technology. • But Intel usually required companies to agree to reciprocal licensing, which created a zone of free IPs that covered technological areas in which several companies were involved. • Reason: Buses are enabling technologies • Interfaces exist to entice other firms to use them to build products that conform to the defined standards and thus work efficiently with the platform. • Enabling technologies channel and facilitate complementary innovation, reinforcing the architectural leadership of the firm that sponsored them

Intel’s Strategic Principles For Platform Leadership • Using Public Forums to Generate Momentum and Refine Standards • The goal was to create momentum in the industry for whatever standard Intel was trying to promote • Open up the discussions to larger public gatherings, including Development Forums and Implementors Forums. Through these forums, Intel brought together thousands of ISVs and IHVs, as well as the press and analysts. In some terms, the latter have a tremendous impacts on momentum. • Set up web sites that were used to the exchange of questions and answers about the standards Intel promoted. • The same thing done by Cisco, IBM, Microsoft, Sun, Linux, …..All industrial leaders----to GENERATE MOMENTUM

Intel’s Strategic Principles For Platform Leadership • Compliance workshops • Another type of forum that Intel relied on to refine a new standard and help companies develop prototypes was compliance workshops, “PlugFests” • The importance of compliance workshops: • “PlugFests” are lifeblood in trying to create these standards • Successful compliance workshops helped create legitimacy and popularity for a new standard because they demonstrated that companies were already committed to designing compatible products. They are key part of the process through which a new technology supported by one or a small group of firms gradually becomes a standard.

Intel’s Strategic Principles For Platform Leadership • Creating and distributing enabling tools • Another step for IAL to generate momentum and refine a new standard, with the cooperation of other Intel groups, was to create and disseminate technical tools that enabled companies to use the new technologies in product development. • Intel usually distributed tools like SDKs and DDKs (device development kits) by its Implementors Forums and Developers Forums, and trained people to use them. • The development and diffusion of these tools is costly. That has a similar economic logic like innovation on interfaces: by facilitating and channeling complementary innovation, these enabling tools reinforce the architecture leadership of the sponsored company.

Intel’s Strategic Principles For Platform Leadership • Driving Systemic Architecture Innovation: • Intel’s system mindset • Building momentum around interface • Relinquishing royalties on IP • Using public forums to generate momentum and refine standards • Compliance workshops • Creating and distributing enabling tools • Stimulating Innovation on Complementary products • organisational structure and evolution • Coordinating role • Conclusion

Intel’s Strategic Principles For Platform Leadership • Stimulating Innovation On Complementary Products • Three main activities: • To facilitate complementary innovation, typically discloses private information about the design of its products as well as computers containing prototypes of Intel’s upcoming chips • Send skilled engineers and savvy marketers to transfer technical expertise and share knowledge about the market • Make equity investment in third parties

Intel’s Strategic Principles For Platform Leadership • Organisation structure and organisational Evolution • Intel Architecture lab (IAL) • Worked as a catalyst, to be whatever it takes so that new applications emerge or new uses of applications emerge taking all of the CPU power Intel can produce • Content Group, including Developer Relationship Group (DRG) • Strive to establish good working relationships with external software developers • Microprocessor Product Group (MPG) • Not only defines what the microprocessors are, but also defines the market needs that Intel must address, and coordinates the collaterals for each new microprocessor launch • Intel management makes modifications to its internal organisation structure almost yearly regarding the changes

Intel’s Strategic Principles For Platform Leadership • Coordinating role: • To deliver some PC capabilities to the end user required coordination among different actors in the industry. • Since PC industry is an ecosystem, the nature of innovations required the cooperation of many companies in the PC industry. This required Intel, more precisely IAL, to take on the key role of coordinator and mediator among external companies. • This required time and patience. It typically required three to five years for Intel to fully establish a capability in the marketplace.

Intel’s Strategic Principles For Platform Leadership • Conclusion: • Throughout the review, for being a platform leader, the company needs to think about and implement four levers in a coordinated fashion. Some external constraints or strategic choices on some of the levers create specific options for the other levers. It is the internal consistency of the four levers taken together that can ensure a successful platform leadership strategy. • The decisions Intel executives made regarding to how to allocate internal resources to back up the platform leadership strategy belong to lever 4, but they are interdependent with other levers. Like Content Group and Intel Capital, they are also related to lever 1 and lever 3. • For example, in the case of USB Intel had to make decision about lever1 ---”what” to do within the company, and also about lever 4----”organisation support” -internal support structure

Platform Leaders and Complementors • How Intel Manages Conflicts of Interest? • Through the exploration one can say that the difficulties Intel faced are common obstacles on the path of any company attempting to pursue platform leadership. • Key factors: Trust and Tensions • The ability to convey a long-term commitment to cooperative relationship is essential for Intel to act effectively as a platform leader. • The important role of IAL: IAL has acquired a reputation as a trustworthy and relatively impartial broker of information between Intel and third parties. IAL is looking out for the good of the overall industry. • The role of IAL allows Intel to rally consensus among industry players while has a voice regarding how specific PC technologies and standards evolve.

Platform Leaders and Complementors • External tensions: • Intel managers want other companies to innovate, but they also want to preserve their abilities to diversify and potentially compete in complementary markets themselves. Especially, when Intel start to compete with current and former partners, suppliers, customers. • Internal tensions: • Job 1 refers to all activities aimed at strengthening Intel’s position as the leading chip maker. IAL is always doing Job 1. • Job 2 refers to activities aimed at building successful business in processor related technologies. Product Group often does Job 2 or explores new businesses, unrelated to processor, that might evolve to become new core business for Intel in the future. • These two Jobs often cause conflicts within Intel

Platform Leaders and Complementors • External conflicts: • Platform leader and outside companies have different objectives • Risk is too big or time horizons clash • Platform leaders lead on complementors • Platform leaders compete with complementors • The sources of conflicts: Friends or Foes? • Multiple roles, acting as the complementor, consumer and competitor at the same time is the reason of conflicts • What to do about conflicts? • Build a reputation for trustworthiness • Exert some restraints over scope of activities • Take a gradual, low-key approach • Keep implementation specifications “open” though not “free”

Platform Leaders and Complementors • Internal conflicts: • Related to differing strategies or time horizons among the various groups within the company • Assisting complementors conflicts with internal-product group • The conflicts between IAL and Product Group • New investments detract from the platform business • Intel Capital do Job 1 or Job 2? • What to do with conflicts ? • Acknowledge conflicts • Manage conflicts • Create a culture that encourage debates

Platform Leaders and Complementors • Economic Analysis of the Job 1 and Job 2 Trade-Off • Any company, platform leader or not, needs to be on the lookout for potential new business opportunities because demand may diminish in its own market • Counting on external firms to produce all necessary complements is not always feasible • Platform leader needs to be concerned about maintaining enough bargaining power with complementors • An issue is distribution of overall industry profits that is linked to the issue of bargaining power between the firm and its complementors.

Platform Leaders and Complementors • Strategy setting through confrontation and debate • Strategic long-range planning meetings • Product line business plan meetings • Cooperate communications • Internal organisation:separate group pursuing Job 1 AND Job 2 • keeping the IAL’s agenda separate from the product group’s agenda has worked internally as well as externally • Keep internal tensions alive: keep Job 1 and Job 2 • Conclusion: platform leaders need to balance multiple roles

Discussing…… • An addition to the book: • In the late 1980s, Intel consolidated its Intellectual Property position in microprocessor by terminating cross-licensing agreements with other companies and, more importantly, began extending its first-mover advantage over rivals by accelerating the rate of new products introduction. With 1994 sales of $9.85 billion, 1 billion more than the second largest producer, NEC. (“Sources of Industrial Leadership” by Mowery &Nelson) • Bundling sales: in 1999, Intel paid a fine of one anti-trust lawsuit proposed by U.S. Trade Commission; in 2001, EU Anti-Trust organisation conducted an investigation about Intel’s “Intel inside” campaign and ceased in 2002. • During the decrease of the desktop market and IT industry recession, Intel has entered the laptop and mobile technologies markets. • Centrino” is the first brand that bundled several products of Intel and will be introduced to the market in March 2003.

Discussing……(cont.) • “Centrino” included a new type of microprocessor called ”Bania”, which can longer the time of battery; one Intel’s chip set and several specific chips for wireless communications. The laptop manufacturer who adopts the whole Intel's hardware package can use the brand “centrino” and get large amount of agio, those only adopt microprocessor must use the brand of “Pentium M”. HP and Dell sued this unfair proposal but, accepted the whole hardware package • “Centrino” is Intel’s first kind of product excluding microprocessor, it has adopted the same business model as “Intel Inside” did • One PC manufacturer complained: “ we can get some better unbundled components….Intel is trying to enter system design further and further, and from the perspective of product design and create value for customer, Intel narrowed the free space of innovation.”

Discussing……(cont.) • Behind the brand campaign “Intel Inside” and the coming “Centrino”, is the thinking: standards and technologies would change and shift, but brand awareness would not. • Behind the collaboration and coalition in the industry is the ambition to try to provide a total solution and make the company transparent in order to provide seamless high-quality service to customer • By homogenizing the innovations by open standards and strategic coalitions as well as skillful complementors and partner management Intel aims at strengthen its own competitive capabilities and weaken the comparative strengths of the rivals

Products &Services technologies organisations Discussing…… management New challenge Intel has to face: The aligning of IBM and AMD ……..Better for customer, interesting for industry evolution…… Conclusion: Industry perspective company perspective Products&services markets technologies

Presentation Outline • General Introduction to Platform Leadership • Case Study: Intel • >>Case Study: Microsoft & Cisco<< • Case Study: Palm & NTT DoCoMo • Case Study: Linux (Open Source Platforms) • Conclusions • Views of the book and topic area

Outline • Microsoft & Cisco Introduction • Intel vs. Microsoft vs. Cisco in Four Lever Strategy • Microsoft • Microsoft Strategy • Platform Evolution • Representative Conflicts • Leverage of Platform • Microsoft’s Application Business • New Platform Strategy • Future Prospects--- Risks & Endeavors

PLATFORM LEADERSHIP