Many companies choose to finance themselves using ad revenues and offer their products or services—from newspapers to software applications, television programs, and online search—free to consumers. Yet the emergence of ad-sponsored entrants in various industries poses significant threats to the incumbents in these markets whose business models are often based on subscriptions or fees charged to their customers. Faced with the threat from ad-sponsored entrants, incumbents must choose strategies to respond. HBS professor Ramon Casadesus-Masanell and University of Southern California professor Feng Zhu create an analytical framework to establish guidelines for incumbent firms facing these issues. The researchers consider four alternative business models: pure-subscription-based; pure-ad-sponsored; mixed-single-product; and mixed-product-line-extension. Analysis shows that the optimal strategic and tactical choices change dramatically in the presence of an ad-sponsored rival. This is the first study to provide a comprehensive analysis of the competition between a free ad-sponsored entrant and an incumbent that has the option of choosing different business models.
As most managers know, commercial firms may benefit from participating in open source software development by selling complementary goods or services. Open source has the potential to improve value creation because it benefits from the efforts of a large community of developers. Proprietary software, on the other hand, results in superior value capture because the intellectual property remains under the control of the original developer. While the straightforward rationale for "mixed source" (a combination of the two) is appealing, what does it mean for a business model? Under what circumstances should a profit-maximizing firm adopt a mixed source business model? How should firms respond to competitors' adoption of mixed source business models? And what are the right pricing structures under mixed source compared with the proprietary business model? In this paper the researchers analyze a model where firms with modular software must decide which modules to open and which to keep proprietary. Findings can be directly applied to the design of optimal business strategies.
To make our cities and communities smarter, we must become a little smarter ourselves, seeking information and an agenda to forge connections enabling collaboration, according to HBS professor Rosabeth Moss Kanter and IBM's Stanley S. Litow. Their vision is that someday soon, leaders will combine technological capabilities and social innovation to help produce a smarter world. That world will be seen on the ground in smarter cities composed of smarter communities that support the well-being of all citizens. This paper outlines eight challenges facing cities and the communities they encompass, based on experience in the United States. Kanter and Litow provide examples of practices and programs led by both government and nonprofit organizations, many technology-enabled, that point the way to solutions, and they conclude with a call for leaders to embrace an agenda for change.
How and when is price competition most significant among firms? This paper develops a theoretical framework for studying price competition between multiple firms. Two examples of markets that fit the description for study are software applications and videogames: There are thousands of software applications as well as games, and different users are interested in different applications and/or games. A given software or game user's tastes may overlap with another's, yet they may have nothing in common with a third's. Thus, although there is a sense in which competition is localized (any given firm competes only with firms whose brands are similar to its own), it is not clear how the fact that consumers are generally interested in purchasing multiple products affects the type of competition waged among firms.
It is common for two-sided platforms to deny participation to some potential customers, who would otherwise be willing to pay the platforms' access and/or transaction fees. Videogame console manufacturers such as Microsoft, Sony, and Nintendo, for example, restrict access to a select set of game developers and exclude many others by including security chips in their consoles, even though the latter would also be willing to pay the per-game royalties levied by the manufacturers. Apple routinely excludes certain application developers from its highly popular iPhone store. Professor Andrei Hagiu builds a simple model formalizing profit-maximizing two-sided platforms' choice of exclusion policies, which is fundamentally determined by a tradeoff between quality and quantity.
What is the optimal scope of operations for firms? This question has particular relevance for the U.S. hospital industry, because understanding the effects of focus and spillovers might help hospitals determine how they should balance focusing in a single clinical area with building expertise in related areas. While some scholars argue that narrowing an organization's set of activities improves its operational efficiency, others have noted that seemingly unfocused operations perform at a high level and that a broader range of activities may in fact increase firm value. This study by HBS doctoral student Jonathan Clark and professor Robert Huckman highlights the potential role of spillovers—specifically complementary spillovers—in generating benefits from focus at the operating unit level.
The prevention and treatment of a complex disease such as HIV/AIDS in resource‐poor settings presents enormous challenges. Many of the social and economic factors that make populations living in these settings vulnerable to HIV/AIDS such as poverty, malnutrition, and political instability conspire to create barriers to effective care delivery. Understanding how interventions are related to each other and how local socioeconomic factors influence them is critical to effective program design. The Care Delivery Value Chain (CDVC) looks at care as an overall system, not as a series of discrete interventions, and describes the activities required to deliver care, illustrating their sequence and organization. Government agencies, philanthropic organizations, and non‐governmental organizations can use the framework to improve HIV/AIDS care delivery.
Published in 2008
The innovation process is fraught with uncertainty. Managers often do not know ahead of time the ideal mix of individuals and skills needed to solve innovation-related problems. One way around this uncertainty is to have multiple paths, approaches, or designs explored at once. The "parallel search" principle can be used inside the firm just as it may be used more generally by pursuing "open innovation". However, having too many searchers attempting to solve the same problem can undercut the benefits if it leads to less effort and investment. The authors study the outcomes of 645 software development contests, conducted by a software outsourcing vendor, involving over 9,000 coders, to understand the relationship between parallel search and increasing competition and innovation.
Using case studies of Facebook, Tokyo's Roppongi Hills "mini-city," Harvard Business School, and TopCoder, a vendor of outsourced software products, Boudreau and Hagiu explore how multi-sided platforms (MSPs) regulate an industry ecosystem. An MSP is a platform that enables interactions between multiple groups of surrounding consumers and complementors. As the authors demonstrate, the regulatory role played in these cases by MSPs was pervasive and at the core of their business models. That regulatory role goes beyond price-setting and includes imposing rules and constraints, creating inducements, and generally shaping behaviors. These various non-price instruments essentially solve problems that could otherwise lead to market failure. The authors' analytical framework suggests a two-step approach for a platform owner: (1) maximize value created for the entire ecosystem, and (2) maximize the value extracted. "Platform Rules" is a chapter in the forthcoming book Platforms, Markets and Innovation, Gawer, A. (ed) (2009), Cheltenham, UK and Northampton, MA, U.S.: Edward Elgar.
It is crucial for firms that create and maintain platforms to select optimal levels of openness. Decisions to open a platform entail tradeoffs between adoption and appropriability, and opening a platform can spur adoption by harnessing network effects, reducing users' concerns about lock-in, and stimulating production of differentiated goods that meet the needs of user segments. At the same time, opening a platform typically reduces users' switching costs and increases competition among platform providers, making it more difficult for them to appropriate rents from the platform. This paper describes research on factors that motivate managers to open or close mature platforms.
Over the last two decades, an increasing number of industries have evolved from vertical integration to more horizontal structures where firms design and manufacture components that are later assembled by third parties for the final customer. In these horizontal industries, firms may be "complementors," rather than customers, suppliers, or competitors. Classic examples of complementors include Intel and Microsoft. Similar complementor relationships arise in industries such as communications, consumer electronics, automobiles, and health care. In these industries, complementor analysis may be as important as competitor analysis. The authors of this paper introduce competition into one side of complementor analysis, and suggest implications for managers, public policy, and the development of theory.
Companies often manage strategy in fits and starts, with strategy execution lost along the way. A new book by Balanced Scorecard creators Robert S. Kaplan and David P. Norton aims to make strategy a continual process.
Introduced by Harvard Business School professor Robert Kaplan and colleague David Norton, the Balanced Scorecard has been used by thousands of organizations to align business activities with the strategy.
To what extent do balanced scorecards provide useful information for testing and validating an organization's strategy? Numerous case studies of balanced scorecard implementations document their use in translating organizational strategies to objectives and measures, communicating strategic objectives to employees, evaluating the performance of business units, and aligning the incentives of employees across business units and functions. There has been comparatively little research, however, on the potential learning and feedback role of balanced scorecards. Analyzing balanced scorecard data from Store24—a privately held convenience store retailer in New England—during the implementation of an innovative but ultimately unsuccessful strategy, this study investigates whether, when, and how information about problems with the firm's strategy was captured in the multiple performance measures of its balanced scorecard.
Why do farmers continue to grow crops for local markets when crops for export markets are thought to be much more profitable? Answers may include missing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets, lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets. Ashraf and colleagues conducted an experimental trial with DrumNet, a social enterprise of Pride Africa, a nongovernmental organization, to evaluate whether a package of services can help farmers adopt, finance, and market export crops, and thus earn more income. This experiment was motivated by a recent push in development to build sustainable interventions that help complete missing markets.
Keyword auctions have become a critical source of revenue for Google and Yahoo!, among others. This new form of advertising has provided a new way for advertisers to reach customers. But advertisers also face the complex task of optimizing bids to increase their exposure while avoiding unnecessary costs. HBS professor Benjamin Edelman and colleagues analyzed a class of bidding strategies that attempt to increase advertiser utility under limited assumptions about other players' behavior. Under a strategy they call Balanced Bidding (BB), advertisers converge to the advertiser-preferred equilibrium—achieving stability of bids and reducing advertisers' costs relative to other possible outcomes.
Online forum now closed. For managers, sustainability can mean the integration and intersection of social, environmental, and economic responsibilities. The concept is admirable, says Jim Heskett, but does it also confuse managers entrusted with the bottom line? How should they make trade-offs? Jim sums up reader responses.
Published in 2007
Strategic interactions and the logic of competitive advantage in 2-sided markets are fundamentally different than in traditional, 1-sided markets. For instance, an investment that decreases a firm's costs may increase the profits of its competitors and decrease the profits of the firm undertaking the investment. Such surprising effects arise because of the possibility that 2-sided platforms may end up subsidizing the participation of 1 side. There are also important implications for antitrust scholars: tying and other practices that may appear as harming competition in 1-sided markets can in fact benefit competitors in 2-sided markets.
Many observers have argued that Chinese managers are particularly quick to diversify their enterprises. Fueled by robust economic growth and the scant enforcement of intellectual property rights that could serve as barriers to entry, Chinese companies appear to be aggressively expanding into new industries whenever economic opportunities appear to beckon. There is much anecdotal evidence to support this view. But because the Chinese economy is extraordinarily large and dynamic, it is difficult to know whether anecdotes reflect an underlying trend toward greater diversification. This paper provides systematic evidence about the scope of Chinese companies, and compares the data with the evolution of firm scope in 8 other large economies.
(Previously titled "Designing a Two-Sided Platform: When to Increase Search Costs?") Conventional wisdom holds that at the most fundamental level, market intermediaries exist in order to reduce search and transaction costs among the parties they serve and that they are more valuable the larger the cost savings they generate. This would seem to be true of both traditional, brick-and-mortar intermediaries (retailers, shopping malls, brokers, magazines, market exchanges) and "new economy" ones (Amazon, eBay, iTunes, Yahoo), all of which connect buyers and sellers of goods or services. However, many intermediaries, while providing the relevant information, seem at some stage of the process to do the opposite of reducing search costs—and by purposeful design rather than by accident. Retail stores, for instance, stack the products they carry so that the most sought-after items are hard to find and thereby induce consumers to walk along aisles carrying other products. This paper challenges the conventional wisdom that intermediaries create value by reducing search and transaction costs. It proposes a model that sheds light on the economic motivations that in some contexts may lead intermediaries to make it harder for the parties they serve—consumers and third-party sellers—to find each other.
It has been well documented that strong trust between a buyer and supplier provides many advantages, such as increased productivity. But according to new research coauthored by HBS professor Felix Oberholzer-Gee, trusting relationships can also have a negative side that managers must take into account.
Apple's continuing development from computer maker to consumer electronics pioneer is rich material in a number of Harvard Business School classrooms. Professor David Yoffie discusses his latest case study of Apple, the 5th update in 14 years, which challenges students to think strategically about Apple's successes and failures in the past, and opportunities and challenges in the future.
Established platform providers can be difficult to displace. This paper explores a path to platform leadership change that does not rely on breakthrough innovation or Schumpeterian creative destruction: a phenomenon the authors call "platform envelopment." In practical terms, envelopment entails one platform provider adding another platform's functionality to its own, and then offering a multiplatform bundle. Eisenmann and his colleagues describe a variety of envelopment attacks based on the relationship between the attacker's platform and its target's, and then discuss the economic and strategic motivations for each attack type.
The term "platform" is increasingly popular among executives today. Platforms, and multi-sided platforms (MSPs) in particular, serve the needs of interdependent constituents. Although MSPs have existed for centuries in the form of matchmakers and village markets, information technology has increased tremendously the opportunities for building larger, more powerful, and more valuable platforms. At the same time, by expanding the potential scope of platforms, information technology has also increased the number and complexity of factors, both economic and technical, that drive the strategic design of MSPs. Surprisingly, few companies rigorously analyze the underlying drivers of their MSPs, and the emerging business and economics literature on two-sided markets has not been very helpful in this direction, either. This article provides a general framework to help organize managerial thinking about MSPs.
Published in 2006
The Balanced Scorecard has proven to be a general and powerful performance management framework for units previously treated as profit and investment centers. The management control literature, however, identifies other organizational forms for decentralized units, including standard cost centers, revenue centers, and support units treated as discretionary expense centers. Starting from the example of a classic teaching case, Empire Glass Company, Kaplan explains how strategy maps and the Balanced Scorecard transform cost, revenue, and discretionary expense centers into strategic business units in their own right.
Many organizations suffer a disconnect between strategy formulation and its execution. The answer? HBS professor Robert S. Kaplan and colleague Andrew Pateman argue for the creation of a new corporate office.
Published in 2005
Yes, you understand your company needs to compete in emerging markets. But which country is the best fit for you? A Harvard Business Review excerpt by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha.
Industries are becoming more horizontal. Products that used to be designed and manufactured by a single firm are now produced by different companies that must coordinate activities. Here, the authors detail the relationship between Intel and Microsoft (both integral to PCs) and, using a mixed-duopoly model, analyze the dynamics of cooperation verses competition. They find that costs associated with complementary R&D, conflicts of interest in pricing, and the possibility of competitors all factor in the decision of when to cooperate or compete.
Organizations often fail to execute their strategy—failure rates may range as high as 60 to 90 percent. Successful companies align their key management processes for effective strategy execution. Creating a new corporate-unit level, the Office of Strategy Management (OSM), may help align management processes to strategy. The authors explain, among other topics, OSM core processes, desirable OSM processes, integrative processes, and positioning the OSM.
Published in 2004
Great firms can be undone by disruptors who analyze and exploit an incumbent’s strengths and motivations. From Clayton Christensen’s new book Seeing What’s Next.
International Business scholars often talk about history, but rarely take it seriously. The first generation of International Business scholars placed a high priority on evolutionary and historical perspectives and methodology, but little work these days grapples with the history of International Business or uses historical data to explore an issue. Jones and Khanna discuss new avenues for researching business groups in history and in contemporary emerging markets, resource-based and path-dependent theories of the firm, and foreign direct investment and development over time.
Microsoft, Wal-Mart, and eBay provide ecosystems in which other companies thrive or fail. But what are effective strategies for a small fish in a big pond? An excerpt from The Keystone Advantage by HBS professor Marco Iansiti and Roy Levien.
You have three potential innovations, but resources to develop just one. Here are diagnostics to help you make the best decision. From Strategy & Innovation newsletter.
Consumers hate price increases, but what is a company to do when material costs skyrocket? One answer: Think small. Professor John Gourville considers the alternative in this Q&A.
Why are joint ventures losing favor with transnational companies? Professor Mihir A. Desai discusses research that suggests globalization makes go-it-alone strategies pay off.
Many managers expect operations organizations to fulfill only a support role. But an effective operations strategy can give you a competitive advantage. An interview with professor Robert Hayes.
The metaphors of keystones and ecology help you think about your business environment, say professor Marco Iansiti and consultant Roy Levien. A Harvard Business Review excerpt.
Many strategies never take off for lack of honest discussion, say Harvard Business School's Michael Beer and co-author Russell A. Eisenstat. A Harvard Business Review excerpt.
Is a lean headquarters operation the key to success? How should headquarters design fit with corporate strategy? New research from professor David J. Collis has surprising answers.
Published in 2003
Should your global strategy optimize scale or exploit differences? HBS professor Pankaj Ghemawat suggests a mix-and-match strategy in this excerpt from Harvard Business Review.
In their new book, The Innovator’s Solution, HBS professor Clayton Christensen and co-author Michael E. Raynor propose four guidelines for developing a "disruptive growth engine." The problem: According to the authors, few organizations have been able to achieve more than one disruptive technology in their lifetimes. Why is it so difficult?
Can you predict a business disaster? In this Harvard Business Review excerpt, professors Michael D. Watkins and Max H. Bazerman outline the keys for disaster prevention: recognition, prioritization, and mobilization.
A company's decision on where to locate a facility must take more into account than simple labor costs, says Harvard Business School professor Michael E. Porter. The new Cluster Mapping Project, developed at Porter's Institute for Strategy and Competitiveness, reveals detailed patterns of growth, resources, and competitiveness in forty-one regional clusters in the United States.
Published in 2002
When to charge for a product or service can be more important than how much to charge, says Harvard Business School professor John Gourville. If you want to build long-term loyalty with customers, you better understand the difference.
Not every industry or company can benefit from performance-based pricing. But where there is a fit, PBP can be a powerful tool that merges the interests of buyers and sellers, says Harvard Business School professor Benson Shapiro.
Green can be good, says HBS professor Forest L. Reinhardt. In a recent reunion session for alumni, he outlined how environmentally-minded company policies can make good strategic sense for business. Here are some strategies you might consider.
It's not easy to transform a trusty but ailing old stalwart. In an excerpt from their book, Changing Fortunes: Remaking the Industrial Corporation, HBS professor Nitin Nohria and co-authors Davis Dyer and Frederick Dalzell discuss how General Motors and Kodak are attempting precisely that.
Published in 2001
Movement, balance, and leverage: Savvy executives use these principles to compete every day. In this excerpt from their new book Judo Strategy: Turning Your Competitors' Strength to Your Advantage, HBS professor David B. Yoffie and research associate Mary Kwak reveal five techniques of the masters.
Both companies successfully outmaneuvered bigger competitors to lead their markets. But can they still win when the rules have changed?
What's located at the crossroads of a sophisticated infrastructure—containing airports, railroads, and ports—and boasts a large potential workforce of consistently underemployed people? A typical inner city, of course. And, says Harvard University Professor Michael E. Porter; inner cities are already rewriting the map of competitive advantage.
In this, the second part of a two-part interview, HBS professor Michael Porter expands upon the message of his new book, Can Japan Compete?, and on the value of clearly defined strategies and open competition.
Not long ago, Japan was considered a competitive powerhouse with exemplary business practices that were admired and often copied, particularly in the West. What went wrong? In a new book, HBS professor Michael Porter and two coauthors take a closer look. [ Part 1 ]
