Platform Ecosystem and Layered Molular Architecture

Platform Ecosystem and Layered Modular Architecture B-frontier Laboratory Hiroshi Takahashi

prologue • The end of industrial economy came with the end of the hegemony of a powerful intellectual tradition, namely the modularity of complex systems that draw on the work of Herbert A. Simon (1977; 1996). • Digital technology instigates a new type of product architecture: the layered modular architecture. …. Youngjin Yoo (2013) Youngjin Yoo, “The tables have turned: How can the information systems field contribute to technology and innovation management research? ”, Journal of the Association for Information Systems 14 (5), 227, 2013. 2

This presentation’s index is from Layered modular architecture Youngjin Yoo to Geoffrey Parker Platform Ecosystem MIS Quarterly, Volume 41, Issue 1, March 2017, Pages 255-266 3

What is Digitalization? • Digitization makes physical products – programmable, – addressable, – sensible, – communicable, – memorable, – traceable, – and associable. • Digitalization furthermore requires a firm to revisit its organizing logic and its IT infrastructures. 4

Key Characteristics of Digitalization The layers manifest 2 critical separations: (1) that between device and service because of reprogrammability (2) that between network and contents because of the homogenization of data. 3 unique characteristics: (1)reprogrammability, (2)homogenization of data, (3)self-referential nature of digital technology. 5

Digitalization emerges a four-layered modular architecture.  separation between network and contents  separation between device and service 6

Layered Modular Architecture is a hybrid between a modular architecture and a layered architecture 3 unique characteristics

Characteristics of Digital Innovation • The digital technology are fundamentally shifting the nature of innovation processes and outcomes. • Digital Technology Platforms • Distributed Innovations • Combinatorial Innovation • We will discuss about three aspects. Based on Y. Yoo et al., “Organizing for Innovation in the Digitized World ”, Organization Science, Vol. 23, No. 5, 2012, pp. 1398-1408 . 8

Digital Technology Platforms • Emergence of a platform as the central focus of the innovation • Firms now innovate by creating platforms rather than single products. • The platform and its modules form an ecosystem that includes heterogeneous actors. • Key innovation imperatives is how to design, build, and sustain a vibrant platform. 9

Implications of platform governance • Organizations must be designed to manage the delicate balance of control in the platform. When an organization exercises too much control over the platform, it runs the risk of driving out thirdparty developers. When organizations do not exercise any control, the platform becomes too varied and fragmented and it becomes less useful for both developers and customers. 10

Distributed Innovations • The use of information technology “democratized” the innovation process. • The locus of innovation activities is increasingly moving toward the periphery of organizations. • Firms are drawing on novel forms of organizing to harness creativity outside of the organization. Strong attention to the Distributed Agencies like developers outside the organization is focused. 11

Implications of distributed innovation • Innovation increasingly requires that others be enabled to innovate. • The enabling of others can be seen in the development of novel technological resources, such as open data, APIs ,and SDKs. • The coexistence of extremely specialized niche players and the “superstars” that quickly achieve global dominance is emerging as a result of their capability to integrate heterogeneous bodies of knowledge. 12

Combinatorial Innovation • The nearly limitless recombination of digital artifacts has become a new source of innovation. • Firms are creating new products or services by combining existing modules with embedded digital capabilities. Modules are most often designed without fully knowing the “whole” design of how each module will be integrated with another. 13

Implications of combinatorial innovation • Instead of the traditional S-curve diffusion model, the contagious spread of ideas in a social network context has gained increasing interest across different fields. • Given the advent of combinatorial innovations, ideas will not simply spread but will mutate and evolve as they spread. – Although the contagion model of diffusion of innovation implicitly assumes that innovation spreads but does not change. 【 Limitations of conventional innovation theory】 14

How Developers Invert the Firm? • The locus of value creation moves from inside the firm to outside. • Digital goods afford firms the chance to optimize spillovers. • The role of developers is at the center of the digital ecosystem. • A community of application developers has raised the possibility of promoting the rise of platform. 15

Reasons that developers are important in digital platforms • • • • malleability of the code low cost of investing in tools to develop code close to zero cost reproduction potential to profit from application successes • Developers can participate indefinitely for training, project selection, adjustment process provided by platform company. • As a result, developers will be key to platform expansion capabilities. 16

Relationship with Layered Modular Architecture • A relevant innovation is any digital application, including a product or service, that is produced by an ecosystem partner using core platform resources. • A platform can be conceived as Layered Modular Architecture . • We add the governance rules that organize the ecosystem. • The rate of innovation is the rate at which developers produces digital applications for the platform. 17

Apple iOS vs Google Android (1) • The more open system has the lower price. 18

Apple iOS vs Google Android (2) • The more open system grows faster. 19

Characteristics of Open Code • Open code produces significant knowledge spillovers. • Productivity of developers rises substantially with access to code libraries, especially if modules use the same language. • On the other hand, we lose opportunity to charge. 20

Correspondence to openness trade-off • If code is open, it is public and easily copied. • No one can charge for public code. • Openness has a benefit of increasing code spillovers and boosting innovation but a cost of decreasing ability to charge. • To balance these conflicting interests, the platform sets an exclusionary or noncompete period t during which developers can charge for their code. 21

Strategic issues related to openness (1) How much of the core platform should be opened in order to spur developer innovation? (2) How long developers should be allowed the right to benefit from sales on the platform before the platform absorbs those innovations into the core? 22

Limitations of existing platform theory • Little formal analysis has investigated broader platform business models…. Yoo et al. (2010) • Research on how platform governance affects ecosystem innovation is invited….. Tiwana (2013) 23

The One Trial • Platform openness study with a focus on how the openness decision at the firm level, the technology level, and the user level affects the overall market potential. 24

Tentative Results • Risk damps the spillover effect, consequently lowering the level of incentive for bundling. • Enlisting additional developers could compensate for technical risk and then maintain (or speed up) the bundling process. • σ( share of platform opened to developers) first increases and then decreases after a threshold level. ・・・related information is next page. 25

additional developers can be interpreted as increasing collaboration concave relationship between appropriability and openness (A precedent from another study) Laursen, K., and Salter, A. J. 2014. “The paradox of openness: Appropriability, external search and collaboration,” Research Policy (43:5), pp. 867–878. 26

Brief Summary • The study contributes to understand why external developers might cause a shift in the locus of innovation (i.e., inverting the firm). • Firms that pursue high risk innovations with more developers can be more profitable than firms that pursue low risk innovations with fewer developers. • The more developers, the shorter is the proprietary period t offered under an optimal IP policy. 27

Provisional guidelines for the future • A countermeasure has been introduced to influence developers' innovation by providing exclusive rights for a certain period of time to new applications. • Platform control varies dynamically depending on the number of developers, the situation and degree of inter-platform competition. • The delicate strategy at a radically different level from the conventional one is required. 28