- Are Ecosystems the New Favourite Flavour?
- Value creation through network effect
- Less fragile under stress
- Deeper customer lock-in
- Rethinking Digital Transformation Services in an Ecosystem
- Strategically select ecosystems
- Integrate data across your ecosystem for clear business use cases
- Prioritize customer value from the outset
- Cultivate the right partnerships
- Strike a balance in ecosystem governance
- Measure the right impact metrics
- And So…
Mercantile history has followed a template for decades. Identify a need, build a product or service to satisfy the need, scale production, optimize distribution, and grow. This template has been tried, tested, and trusted for the last hundred years and has led to the creation of many a business behemoth across the world.
However, that template is undergoing a foundational change.
Probably the earliest warning shot was issued by Nokia. Once a hugely successful cell phone brand, it has become irrelevant today. Imagine this. In 2007, Nokia commanded over the cell phone market with a 50% share. In 7 years, it dramatically fell to less than 5%. The decline and fall of Nokia is a testament to the emergence of businesses that build on ecosystems: in a hyperconnected, high-velocity market, ecosystem models will dominate over product-centric strategies to drive growth.
Academicians Peter Williamson and Arnoud De Meyer provide a compelling argument in favor of ecosystems in Ecosystem Edge: “The new competitive battleground isn’t products; it’s the architecture of relationships around them.” McKinsey corroborates this: “Ecosystem-building is a proven strategy for delivering outperformance and value creation in the long term, and firms anchored in business ecosystems are significantly more resistant to disruption than their product-focused counterparts.”
Are Ecosystems the New Favourite Flavour?
While the term ecosystem in a business context may be relatively new, the concept by itself is not. Think Apple, Alibaba, Microsoft. These companies have striven to build ecosystems with complementary offerings and provide products. Services across the entire spectrum of their customers’ needs.
Apple is a classic example. Built on the back of its own operating system, Apple today has over 2 million apps on its App Store and over $1 trillion of developer revenue, which further acts as an incentive for the value chain. Earlier criticized as a closed network (as compared to the Windows world), today Apple has emerged as an ecosystem in its own right, taking on Google’s Android, another growing global ecosystem.
On the B2B side, a good example of building a business ecosystem is that of Alibaba, which was started off as a B2B marketplace. Over time, the group has added newer products and services around its core target group, ranging from e-commerce to cloud services to financial products.
To understand why ecosystems are the flavor of the day and why they win, we need to understand the key advantages that ecosystems have in the current digital world.
- Value creation through network effect Ecosystems thrive on scale and interdependence. More users attract more partners,and more partners enhance value for all. Like the Apple App Store example above, once the partners feel that they can create a symbiotic win-win for the customers through the brand, they will accelerate the usage of the ecosystem.
- Less fragile under stress Unlike traditional models, ecosystems are designed to absorb shocks and adapt quickly. During Covid times, Siemens used digital twins during the COVID-19 crisis to reroute supply chains within hours with the help of over 1500 partners.
- Deeper customer lock-in The more integrated an ecosystem, the higher the switching cost. Once the customer has bought into an ecosystem, the chances of her leaving the same and moving over to another competitor is rare. Imagine a company that has Adobe as the key design platform. Switching to newer file formats, fonts, plugins, and collaboration tools, which are interconnected, will make switchover expensive and painful.
- Longer shelf life Android has released over 13 generations of mobile devices, while Apple, at the recent WWDC, released Sequoia, the 14th version of the original MacOS released in 2001. On the other hand, it is rare to see a single product that can last more than 5 years before being disrupted in full or in part. Alibaba’s ecosystem, spanning logistics, finance, and cloud, took 15+ years to build, creating nearly insurmountable barriers to entry.
Rethinking Digital Transformation Services in an Ecosystem
According to McKinsey, building and sustaining a successful business ecosystem requires careful strategic execution and continuous management.:
- Strategically Select Ecosystems: It is vital to deeply assess which ecosystems offer the most attractive value pools, aligning these opportunities with the company’s core assets and ambitious growth objectives. By focusing on initial use cases within prioritized sectors, value pools adjacent to the core business can be identified, which helps in charting out a path to realizing the broader, long-term ecosystem vision.
- Integrate Data Across Your Ecosystem for Clear Business Use Cases: Maximizing the value of an ecosystem necessitates leveraging the vast amounts of data that can be collected through ecosystem initiatives and from partners. This integrated data can serve to reinforce existing operations or become the foundational layer for developing entirely new value propositions. Alibaba’s leverage of over 600 million active accounts on Taobao allows it to drill down to provide meaningful value-driven services to its B2B customers, like advertising on the Taobao network.
- Prioritize Customer Value from the Outset: The primary aim must be to deliver a quantum leap in customer experience and genuine value. It is crucial to test initial concepts and thinking with real customers early in the development process.
- Cultivate the Right Partnerships: Identifying and securing partners who not only share the company’s core principles but also handle customers with a similar approach is paramount for long-term success.
- Strike a Balance in Ecosystem Governance: Depending on an organization’s innovation culture, its existing capabilities, and the strategic ambition of the ecosystem initiative, companies must find the delicate balance between providing sufficient independence for new entities to move rapidly within appropriate guardrails, while still maintaining enough connections to build upon core organizational strengths.
- Measure the Right Impact Metrics: Relying solely on traditional Key Performance Indicators (KPIs) may fail to capture the true, multifaceted benefits of ecosystem efforts. Successful large technology players meticulously consider the distinct roles that each portfolio asset plays within their overall ecosystems. Some initiatives might purposefully incur losses but serve as crucial traffic entry points, drawing in new customers. Others may function primarily as enablers, ensuring that revenue and profit generation can be maximized elsewhere within the ecosystem. Companies must adopt a holistic view, looking across the entire value generation funnel—from customer traffic and engagement, to direct profit generation, and even potential valuation uplift—and select the appropriate KPIs accordingly to accurately assess their ecosystem’s performance.
And So…
Linear growth is no longer the path to industry leadership. In a connected world, ecosystems provide resilience, compounding value, and a strategic moat. Companies that master the art of ecosystem building across B2B and B2C landscapes will not only survive but shape the future of their industries.
Well-orchestrated business ecosystems are built for enduring success, offering resilience, exponential value creation, and a sustained competitive edge in an increasingly interconnected world. For any organization embarking on its digital transformation journey, an ecosystem-centric growth strategy must be at its very heart.
As Marshall Goldsmith put it: What got you here won’t get you there.
By Ameya Waingankar
