Competing In Industries Without Borders
To effectively compete in the “Beyond Digital Transformation” world sourcing elements of the value chain from suppliers, distributors, and other third parties is no longer enough. Today customer demands are so complex that no single company can meet them alone and trying to compete on your own will only limit value creation opportunities and it will make it impossible to gain deep customer insights and to scale up quickly. Current customer demands can only be addressed by networks of companies and institutions that work together. Welcome to the era of ecosystems!
Ecosystems are nothing new. The term ecosystem was first applied in a business context in a 1993 Harvard Business Review article by James F. Moore. A distinguishing feature of the new ecosystems is that the partners work together to maximize the total value. Instead of outsourcing arrangement where an organization buys materials or services to improve its own production, the partner network work together to achieve improved end-customer or user-oriented outcomes – creating a greater outcome that will compensate them all. To accomplish this companies must cross industry boundaries. As a result, the growing number of sectors the firm and even the industry have ceased to be meaningful units of strategic analysis. According to McKinsey analysis, 12 new ecosystems are likely to emerge in place of many traditional industries by 2025. We are already seeing signs of convergence in the emerging mobility ecosystem. It spans across finance/payments, insurance, retail, auto services and government sectors. That is why Daimler and BMW jointly created a managed-mobility ecosystem combining car sharing, ride hailing, parking and other services to fight the potential disruption from firms like Uber and Lyft.
In a world where you must focus on competition between digitally enabled ecosystems that span traditional industry boundaries and offer complex and customizable product-service bundles, there are four key factors to consider ensuring successful ecosystem strategy:
Shape your view on your ecosystem play
What role should you play in the ecosystem? In the beyond digital age, your attention needs to shift from what you own to the value you are creating. Let go of some things, perhaps some of your data, to open new avenues. As long as you can measure the value you are creating through ecosystem, what you own is less of the worry.
Focus on the value you are creating for the ecosystem
…not just what you are extracting from it. Value creation must be symbiotic. Your value proposition must increase the value of ecosystem, and the ecosystem must in turn help you expand the value you can create. Consider Google’s Nest, which started by developing a smart digital thermostat that can be controlled remotely. It then added an alarm, thus building a bundle that controls both comfort and security. Next, capitalizing on the possibilities of digital interconnections, it created the Works with Nest ecosystem, which lets firms innovate by connecting with Nest. For instance, LIFX designed a Nest-compatible system whereby red LEDs flash if the smoke or safety alarms are activated. Fitbit, the wearable fitness tracker, can tell Nest you are awake so that it knows to warm your home. And Mercedes-Benz cars can use GPS to tell Nest to switch on the heat as you arrive. These extensions constitute a value proposition greater than anything Nest could have provided on its own.
Define your ecosystem capabilities
Identify what capabilities you contribute to, receive from, and deliver together with your ecosystem. Many firms assume they should be the focus and chief architect of any ecosystem they create. That’s not necessarily the case; sometimes you are better off sharing the role or being a complementor. If you lack the qualifications to build an ecosystem but have an IP-protected product or service that could anchor one, your best bet is likely to involve attracting the interest of a large company that could buy into or license your idea. If a small HVAC installer had come up with remotely controllable thermostat, it probably would not have attracted the ecosystem of complementors that Google did.
Invest in building trust and understanding with your partners
The key is to go beyond the superficial and build a real understanding of how ecosystem partner work, think, their DNA and how you add value. Without a deep understanding of your ecosystem partners, you simply won’t be able to generate the type of value required in the beyond digital age.
Final thoughts
We are still in the early days of the ecosystem revolution, but they are becoming powerful creators of new competitive advantages and have the potential to change how entire industry works. Cross-industry ecosystems will be the business model of the future and organizational structures will need to evolve as the result. While many incumbent firms have been caught off-guard by technology players and startup firms venturing into their markets based on ecosystem business models, they are catching up fast. It may well be that they will dominate the next wave of ecosystem plays, as ecosystems become more prevalent in B2B markets.