Open Architecture Strategies

Concept related to the competitive approaches of firms.

Also called an "open plain approach", and it is contrasted to Walled Garden approaches.

Source of the quotes below: Knowledge@Wharton article:

Who's the Winner in the Tug-of-War between 'Walled Garden' and 'Open Plain' Strategies?

Description

From http://knowledge.wharton.upenn.edu/article.cfm?articleid=1804:

" In building walled gardens with its devices, Apple is making a calculated gamble that it can delight consumers enough that they won't opt for products and services that offer more flexibility, says Kendall Whitehouse, Wharton's senior director for information technology. In contrast, firms that take a more flexible approach are often said to be employing what could be called an "open-plain" or "open-architecture" strategy. They are betting that, by allowing their offerings to be extended or customized by others, they will encourage the growth of an "ecosystem" of complementary products and services, thus increasing the size and value of the market for everyone.

"The classic open architecture is the web," Whitehouse says. "You don't need a license or a partnership deal or approval from anybody to launch a website. This is partly why the web took off like wildfire." Companies like PDA and smartphone maker Palm, computer workstation vendor Sun Microsystems and even industry giant Microsoft encourage independent programmers to write software for their devices and software platforms, Whitehouse adds. (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1804)

Examples

The Credit Card wars

"The tug-of-war between the walled-garden and open-plain strategies is a fundamental tension, not just in information technology, but also in the wider world. The credit card business, for example, began as a fight between Bank of America, with its exclusive card and network, and other California banks, which had a less rigid offering, says Philip Evans, a senior partner with Boston Consulting Group.

Bank of America, then based in San Francisco, introduced its BankAmericard, which began as a walled garden nearly 50 years ago. The bank, as the largest in its home state, had little trouble recruiting California merchants to accept the card. It then rolled it out to consumers; people who wanted one had to have an account with Bank of America. "Bank of America was running away with the market," Evans says. "The smaller California banks couldn't match it individually. So they got together and provided a single standard interoperable card." Their network was open to any of their customers; it was, in other words, an open plain. "They called it Master Charge, which became MasterCard."

Soon, both cards had expanded out of state, and Bank of America renamed its offering Visa. In response to consumers' preference for flexibility, the company opened up its formerly exclusive network. "They fought each other to a draw, and now they're basically interchangeable," Evans adds.

That fight followed a typical pattern in the competition between walled-garden and open-plain firms. An innovator enters a market with an appealing product or service -- such as a cell phone or a credit card -- and wants to squeeze as much revenue from it as possible. So it creates a walled garden. Eventually, consumers start to demand more flexibility. Competitors see an opportunity and seize it. The originator is forced to tear down some, if not all, of its walls." (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1804)

The Macintosh

"The Macintosh began largely as a walled garden, with Apple limiting hardware expansion options and tightly controlling access to features of its operating system. As a result, few programmers wrote software for the Mac, and the more flexible PC architecture running Microsoft's operating system ran away with the desktop computing market. Macs ran smoothly, but they couldn't be customized and -- because of the shortage of software -- couldn't be used for as many tasks as Windows-based PCs.

Apple responded by gradually loosening its grip on its machines. Today, it employs "an operating system that's perhaps the most customizable and open out there," Werbach says. Apple also has embraced industry standards in many areas, meaning, for example, that other firms' peripheral devices can be integrated seamlessly with Macs. That wasn't always the case." (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1804)

Discussion

The Dangers of Openness

"People also should understand that openness, despite all of its benefits for consumers, does have shortcomings, says Kartik Hosanagar, Wharton professor of operations and information management. A walled garden translates into tight control over the customer's experience with a product or service. And while that may sound like Big Brother, it means that a firm's offerings can work better. Apple's iPods, for example, dovetail seamlessly with its Macs and iTunes software.

"If you let go of that control, there's the possibility of two things happening," he says. First, "you mess up your brand's image in the consumers' mind. Second, if other companies are developing applications for your device, you could end up with security [problems]."

Even so, Hosanagar believes that the open-plain approach makes the most sense in the long run. By restricting the ability of others to develop applications, a firm ultimately limits the utility of its product or service for consumers and thus its value." (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1804)