Platform Envelopment

Thomas R. Eisenmann; Geoffrey  Parker; Marshall  Van Alstyne

Article | Strategic Management Journal | December 2011

Platform Envelopment

by Thomas R. Eisenmann, Geoffrey Parker and Marshall Van Alstyne

Abstract

Due to network effects and switching costs in platform markets, entrants generally must offer revolutionary functionality. 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, combining its own functionality with the target's in a multi-platform bundle that leverages shared user relationships. We build upon the traditional view of bundling for economies of scope and price discrimination and extend this view to include the strategic management of a firm's user network. Envelopers capture 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.

Keywords: Market Platforms; Multi-Sided Platforms; Two-Sided Platforms; Business and Stakeholder Relations; Economic Systems; Development Economics; Business or Company Management; Business Strategy; Network Effects; Online Technology; Information Technology Industry; Technology Industry;

Format: Print

16 pages

Find at Harvard

Citation:

Eisenmann, Thomas R., Geoffrey Parker, and Marshall Van Alstyne. "Platform Envelopment." Strategic Management Journal 32, no. 12 (December 2011): 1270–1285.

Baroo CEO Lindsay Hyde was facing unrest from the board of her pet services startup in August 2017. One board member (and lead investor) was alarmed that Baroo’s growth was slowing while its appetite for funding was accelerating. Hyde wanted to hit the gas and continue expanding to new cities, which meant she needed to raise venture capital. How could she convince the board and potential investors that the business opportunities were too good to pass up and an infusion of capital could help her steer Baroo through the speed bumps?

Baroo CEO Lindsay Hyde must secure venture capital funding if she wants to save her pet services startup. If she is unable to finance a series A, she will need to sell or shut down.

In 2016, senior management at Moz, a venture capital-backed startup providing software tools for digital marketing professionals, must decide how to address a looming cash flow crisis precipitated by failed efforts to broaden its product line. Seattle-based Moz had originally focused only on search engine optimization (SEO) software. Aiming to accelerate growth, over the past three years the startup had launched products targeted at content marketers, social media marketers, and small local businesses. Adoption of these new products had been disappointing, and the resource drain and distraction of launching them had reduced the growth of Moz's core SEO product. Management was wrestling with whether to either: 1) shut down or sell the new products; or 2) double down on the new products, funding further investment in them by selling the core SEO business or milking it as a "cash cow."

Faculty & Research

Platform Envelopment

Abstract

Citation:

About the Author

More from the Author