Ecosystems can be immense value drivers, but also quickly turn into competitive threats. Their interconnected nature is putting up new challenges for companies. What then should businesses do about ecosystems?
At our recent Innov8rs Connect on Startup Collaboration and Ecosystem Engagement, Martin Spindler Principal at hy - the Axel Springer Consulting Group, worked us through the basics of ecosystem strategy, how it differs from traditional approaches to strategy, and how companies can best engage in or create their ecosystems.
Marten referred to Bill Gates who once said that a “platform is when the economic value of everybody that uses it exceeds the value of the company that creates it.”
The same definition applies to ecosystems – ecosystems are systems in which the economic value of everybody that uses them exceeds the value of the company that creates them.
One measure of a successful ecosystem is that everybody else is thriving in the ecosystem and not just you as an orchestrator or coordinator of the ecosystem. However, despite the fact that many parties may benefit from an ecosystem, the coordinators of the ecosystem often experience extreme value by coordinating the ecosystems.
A Real-Life Example: Digital Media
Media is the canary in the coal mine when it comes to the impact of the internet. Text shifted from newsprint to the web seamlessly, completely upending the industry’s business model along the way. Around the year 2000, digital media companies such as Google started to completely dwarf traditional newspaper print-only companies in terms of revenue.
Google, Facebook and other digital media companies dominating print-only media companies between 2000 – 2020 are a perfect example of the power of digital ecosystems that can scale and grow asymmetrically compared to legacy companies.
The reason why Google and Facebook were able to steal so much market share from traditional print-only newspaper media companies was because they started to orchestrate and aggregate demand. Both Google and Facebook assumed the role of orchestrator. Neither of these companies provide the actual news utility, but they both provide the aggregated demand. This is the crucial role.
Many companies and executives used to prioritize integration. However, the rise of successful digital ecosystems has proven that companies and business leaders should actually focus on aggregation. An effective ecosystem is a network of companies that is aligned by an orchestrator toward a common value creation.
Driving Value in Ecosystems
One of the most important drivers of value in ecosystems is the network effect. Intel and Microsoft are two examples of companies who used the network effect to drive value in their ecosystems. Intel was able to create a strong network effect because the more people who used their products, the more effective they got in developing new products. Microsoft was able to create a strong network effect by running a classic two-sided market in which the more distribution they had on their Microsoft platform, the more attractive the Microsoft platform became for developers to develop on and the more uptake they got.
Acer, on the other hand could not build as a large of a network effect as Microsoft or Intel because they were focused on production, which left them with no room to break. In terms of R&D and infrastructure, they were beaten out by Intel, and in terms of product usage, they were beaten out by Microsoft.
If we can learn anything by Acer’s inability to create an ample network effect relative to Microsoft and Intel, it’s that you have to position yourself in the right place in the value stack or value chain in order to create the largest network effect and drive the most value in an ecosystem. A failure to do this can result in subpar performance.
The Three Structural Roles for a Position in an Ecosystem
In any given ecosystem, there are three main roles for parties involved: enablers, realizers, and orchestrators. The orchestrator controls the customer interface. The realizers provide services within the ecosystem, and the enablers are the people who actually make an ecosystem work.
An example of an orchestrator is Amazon.com, the ecommerce store window where you go and buy your products. An example of a realizer is Amazon Basics which includes the thousands of vendors and suppliers who deliver the actual goods. An example of an enabler is Amazon Fulfillment which enables the provision of technology to make the ecosystem viable.
Another example of an orchestrator is Uber, a company that orchestrates ride hailing. In this ecosystem, the individual Uber drivers are the realizers. The enablers are the smartphone providers like Apple and Android.
How to Successfully Engage With and Create Ecosystems
One of the best ways to create an ecosystem is to create a tool that drives immediate usability and immediate utility, but that also creates a network effect. A perfect example of a company that was able to do this recently is Nest. Nest started out offering a smart thermostat that gave people better control over the heating and cooling of their homes. This tool was incredibly useful and very beautiful. Through the Nest smart thermostat, people were able to save money on their power bills through increased efficiency of energy usage.
Once Nest’s user base became large enough, it started to establish itself as an orchestrator of a significant portion of the power consumption ecosystem. Once Nest established itself in this role, it was able to negotiate with the large utilities to create deals and expand its network effect even more. Nest is the perfect example of how a company can assume the orchestrator position by creating an incredibly handy tool that drives immediate usability and establishes a network effect. If you want to position your company as an orchestrator, then you should follow Nest’s example.
Another example of a company that successfully positioned itself as an orchestrator is Shopify. Shopify started out with an extremely handy ecommerce checkout tool. However, the company soon expanded to providing inventory management, order tracking, analysis functions, and more. Eventually, Shopify became a one-stop-shop that enabled anyone to sell products online. Unlike Amazon, where the users are the customers buying products, in Shopify’s ecosystem, the users are the businesses who want to sell things online. Now, Shopify is one of the key orchestrators in this ecosystem.
The success of Nest, Shopify, and others such as Stripe show us that to become an orchestrator, you need to start out with an incredibly useful tool and then be very cognizant about horizontal expansion that amplifies your network effect. The main points that you should walk away understanding are that that users should come for the tool and stay for the network and they should come for the vertical and stay for the ecosystem. Once the users are there, a network effect can spring up, leading to a healthy community.
There are many important skills that an orchestrator should have, but one of the most important ones is empathy – really trying to understand what your customers want and what they go through. However, on the other side of the coin, you also have to be ruthless and willing to compete aggressively in order to get your company to the orchestrator position. So, be very empathetic with your customers but, compete ruthlessly with other companies.
5 Key Factors to Consider
When trying to build an ecosystem strategy, there are five things you should do to achieve success:
- Figure out your extended market – Markets are converging and your new competition isn’t coming out of the quarters you expect. Monitor your extended market continuously for new business models.
- Explore your unfair advantages – Forget SWOT, it depicts a static picture of your known competitors. Deduce your unfair advantages that help you to grow and thrive against NEW models. These unfair advantages are key for getting ahead of your competitors.
- Don’t act on gut instinct, but instead validate all ideas in the market to find true demand and utility value – Do not act opportunistically. Rather, validate opportunities in the market on potential customers.
- Start with the customer’s needs and work backwards – Don’t just repurpose what you already have. Start with what your customer wants and then build capabilities and partnerships from there.
- Continuously scan for factors that limit growth and reduce them - Continuously look for factors within your ecosystem that can potentially limit your growth. Once you identify them, eliminate them one by one. You can reduce them by building, partnering, or investing in new models, and in the process, redefine your industry.
The above will help you getting started with your ecosystem strategy, and driving the ecosystem-conversation at your company.
If you could use some help, feel free to reach out to Martin.
