How Incumbents Respond Strategically to Emerging Digital Platform-Mediated Settings?: Analysis of Enterprise Software Vendors

Introduction

Cross boundary technologies such as the Internet, mobile, cloud computing and social media, have reduced the need of holding a physical infrastructure. This has given rise to platform businesses such as Amazon, Uber, or eBay. These platforms challenge incumbents by utilizing an ecosystem of actors that provide benefits to customers like cost reduction, convenience or complementary products and services. Thus, new business models emerge creating a new demand and traditional enterprises should transform in order not to lose market share. The digital enterprise transformation goes far beyond internal process optimization as they potentially induce drastic changes to organizational strategy, business models, and business processes and information systems that support value creation. Any of these changes is more painful in traditional enterprises that have established ways of doing things that may constrain their response. Venkatraman (2017) discusses some traps that prevent incumbents to recognize and size the opportunities posed by digital transformation. For example, historical competencies that worked in industrial-age economies but might run their course; or the reliance on networks of relationships without incorporating new relations that might bring value such as technological start-ups or digital giants. The literature reflects an increasing interest on platform concepts and is prolific on issues related with platform-based business models and strategies (Parker, Van Alstyne, & Choudary, 2016), (Gawer & Cusumano, 2014), (Cusumano, Gawer, & Yoffie, 2019), (Tura, Kutvonen, & Ritala, 2017), (Weill & Woerner, 2015), (Zheng, 2015). However, most research considers entrepreneurs or digital giants organizations and there is a lack of research on how traditional organizations adapt to emerging digital platforms (Garud, Kumaraswamy, Roberts, & Xu, 2020), (de Reuver, Sorensen, & Basole, 2018), (Altman, 2015). In particular, for the case of the software industry there is a market driven scenario that requires a business model adaptation. For example, consider an Enterprise Resource Planning (ERP) system vendor whose customers are mainly retailers. Many retailers have an eBay store, transactions data should be integrated with the ERP system, and customers prefer a particular payment processing system. The solution requires strategic choices such as belonging to a platform, enabling interoperability, or including new partners (retailer, e-commerce platform, digital financial service provider). As a whole, a rebooting of the digital enterprise model is required. Moreover, companies (in particular digital natives) may decide to expand into related products or services broadening industry boundaries. Therefore, established firms are exposed to other players’ expansion. On the other hand, the incumbent has the opportunity to exploit network effects by belonging to a platform player (for example, the ERP vendor joining eBay by integrating the ERP with eBay transactions). The research question for this study is how incumbent software vendors adapt to emergent platform-mediated settings in their business models.

In order to approach the problem of incumbents’ adaptation within the context of digital platforms many issues should be addressed. Both internal and external factors contribute to the complexity of the business transformation. A transition does not occur instantly and may take many forms depending, for example, on the degree of product control the firm is willing to yield. An organizational transformation may not be realized by becoming a platform player or complementor but by a firm’s capability to engage in different networks (Bosh-Sijtsema & Bosch, 2015). In this research work, we intend to analyze incumbents’ transformation in the software sector. The results aim to provide a management guide for those traditional organizations that are on the way of redefining their business models to compete in an ecosystems setting.