Having first appeared about 30 years ago, business ecosystems proved their viability in global business environment. As such, 7 out of 12 top companies by market cap are ecosystems (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, Tencent, VISA, LVMH). Furthermore, according to Accenture consultancy, within the next 10 years ecosystems could bring $100 billion worth of value to business and the society globally. At the same time, this phenomenon is so complex and difficult to navigate, that only 15% of the ecosystems succeed. Hence this complete guide to business ecosystems provides all-in-one source on their structure, benefits and risks, business models, roles, as well as major failure and success drivers. Let’s dive in.
Imperatives for business ecosystems
Ecosystem is a dynamically interconnected network of diverse players creating value in collaboration. Unlike M&As, companies in the ecosystem remain independent. They often come from different industries with direct synergy potential not being obvious. According to BCG, 83% of digital ecosystems involve partners from 4 or more industries. Luckily, ecosystems are less expensive and disruptive for its players than M&As as the level of integration required is much lower. On the other hand, comparing to partnerships, ecosystems are more complex and risky, due to the diversity of their participants. The interdependency in the ecosystems is also much higher than in 1:1 partnership due to a much broader network. But the major difference between business ecosystems and traditional collaborative models is the coexistence of cooperation within the system and competition outside it.
So what are the conditions that led to ecosystems rising? There are three major factors that underpinned their growth. First of all, macro-economic trends changed business and social landscapes. Globalization led to more specialization among business actors. Hence it became vital for companies to enhance own offering with complementary products or services to delight customers. In addition to that, Covid-19 pandemic accelerated already nascent digitalization trend. Those two factors, in turn, contributed to the decreased cost of transactions, making outsourcing of non-core activities as good as it gets.
Finally, the world is becoming more integrated, with blurred boundaries between previously separated areas. Industry barriers are being dispelled by technology advancement and appearance of distribution omni-channels. Workplace boundaries are being displaced by hybrid working. Producers and consumers mix through content co-creation on social networks and digital peer-to-peer networks. Human-machine interactions are becoming iniquitous with the AI taking the world by storm within the past 6 months with the ChatGPT and alike.
That leads us to the second major driver behind ecosystems spread: shift in customer demographics. Gen Z and millennials have entered the workforce and changed the rules of the game. Digital natives, they break out from hierarchal systems and processes. They value independence, innovation, choice, meaning, and communities. Traditional “push” marketing becomes increasingly outdated, as young customers are looking for products and services on “as needed” basis, driven by desire for instant gratification. Old loyalty schemes are challenged by the abundance of choices. On the other side, too many choices become overwhelming. Hence customers are looking for more end-to-end solutions, that could now be seamlessly delivered thanks to technology developments. Thus, companies have to adapt the ways they produce, deliver and support their products or services.
Such adaptation was achieved through industry consolidation and vertical integration that constitute the last underlying reason for ecosystems’ success. There is a limit for such trend, both from anti-trust and practical perspectives. Therefore, companies seek to partner in order to access lacking capabilities and attract customers with exciting innovative solutions.
At the same time, the best partners are those who have a unique expertise in their field. That forced firms to focus on their core business and to specialize, paving the way for the “cooperation of experts” in the ecosystem. And as competitive pressures continue to increase, so does the need to extend the partnerships to new players that could add value to the overall offer. The more novel and exciting is the offer, the easier it is be to grab attention in the crowded markets. Smartphones, smart homes, e-commerce, ride hailing, social networks both satisfy customer needs and deliver superior returns to their shareholders.
Main attributes of business ecosystems
The first most obvious characteristic of business ecosystems is their complexity. A typical car producer draws on contributions of over 30 partners across more than 5 industries to make their car convenient, connected, and sustainable. Caterpillar has forged partnerships to improve its proprietary IoT platform technology and made multiple minority investments to expand its automation, optimization and analytical capabilities. Such multitude of players coming in different shapes and sizes, based on remote geographies and spread across several industries is what makes ecosystems both performant and complex.
The second feature is ecosystem’s dynamic and evolving nature. Aimed to arm their participants with the ability to respond quickly to market changes, ecosystems are flexible by design. But they are also unstable as partners are independent from each other yet interconnected. As a result, system configuration is not fixed, rules are adjustable, and power can be shifting with time.
The third particularity of ecosystems is the fact that their value proposition is delivered by multiple partners. However, vis-à-vis the customer, the offer should be seamless driving the need for coordinated efforts. That is why business ecosystems are often structured in the way to appear as a whole to the customers. It could be a common digital platform or a singular final product combining the inputs from several partners (eBay, VISA, Salesforce, Tesla etc).
The fourth attribute is that ecosystems are influence-based vs traditional power, control or ownership based. Often comprised from the companies that otherwise compete with each other, ecosystems require incentives for collaboration through shared interests, goals, and values. In other words, if everyone contributes, everyone benefits from these virtual “commons”. Shared economy with its intrinsic focus on relationships is a perfect example of that. Another example is a “golden triangle” of businesses, governments and communities who work together to solve major societal problems, such Global Food Safety Initiative.
That brings us to the fifth distinction of ecosystems, namely self-governance. Participation in the ecosystems is always voluntary. That creates a challenge of shared responsibility and governance. Not surprisingly, many ecosystems opt for common platforms, as well as mutually accepted rules, processes, and standards to facilitate the management of these “organizations without organizations”.
Last but not least, the adoption of technology is ecosystem’s hallmark. Coordinated efforts are impossible without support of modern technology tools. At the same time, data access, capture, ownership, distribution and monetization is one the major incentives for the partners to join. Not surprisingly, 64% of ecosystem partners in the recent Accenture survey recognized the importance of choosing the right technology to support the system.
All in all, ecosystems transform existing companies without destroying their core business.
Ecosystems benefits and risks
One of the major advantages of ecosystems is their contribution to the performance improvement of their participants. The partners can focus on their core business and leverage system resources for innovation input. Distributed innovation expands the boundaries of existing organizations to draw on resources from multiple stakeholders. Examples include open-source software (Linux), knowledge management (Wikipedia), sport equipment manufacturing (Nike), smart farming (Deere and Company) and many more.
Additionally, ecosystems offer its partners access to a broader range of human capabilities, including sharing talent. Expert ecosystem companies lift and shift talent to other organizations within the system. Accenture survey reveals that 77% of best performing ecosystems share the talent across. That compresses the learning curve, reduces costs, and provides new angles of customer insights, leading to the second benefit of ecosystems – increase in sales.
According to 2022 channel/partner marketing survey by DemandGen, an astonishing 96% of B2B leaders expected revenue increase to be directly attributed to their partner ecosystems. Apart from direct sales, ecosystems offer their participants an opportunity to expand their digital and physical footprint and access new markets. That, in turn, positively impacts companies’ ability to scale while reducing associated risks for doing it alone. And impact of successfully scaled ecosystems cannot be underestimated – they transform entire industries beyond imagination (VISA, AirBnB, Uber).
Not surprisingly, according to Accenture consulting, 84% of companies state of ecosystems are important for their strategy.
At the same time, ecosystems have inherent drawbacks and risks that can impede their success. First and foremost, their informal nature calls for a significant permanent coordination effort. That could be achieved through a dedicated role and resources, as well as adequate governance structure. The latter is even more important considering limited influence of each partner combined with high level of their interdependency.
The second significant risk lies in the area of IP and data protection. While 77% of ecosystem experts share data and IP with their partners, regulations lag behind to address potential issues. While technology and digitalization develop fast, laws are drafted and enacted slowly. That could be a major disadvantage for some innovations, like health-tech, where inventors may not be able to find investors for 5+ years of clinical trials. And that is the reason why some ecosystem founders apply creative “back-door” strategies to scale fast. For example, Uber positioned itself as tech business, not a transportation provider, in order to avoid heavily controlled taxi medallions and licensee transfers. Additionally, ecosystems often extend their reach across several traditional jurisdictions, further complicating regulatory approach. IoT, drones, Bitcoin are examples of cross-border ecosystems products. That calls for innovation in regulatory frameworks to safeguard both partners and customers interests.
Last but not least, ecosystems are fragile due to the difficulty to capture value and reach profitability in the initial years. During this growth phase, profit margin could be as low as minus 60%, according to MIT Sloan management review. That could negatively affect both partner motivation and investment attractiveness, putting the entire system at risk. However, if product-market fir test is passed successfully, an ecosystem could even go public while still being unprofitable (Uber, Lyft, Snapchat, Spotify).
Ecosystems types and actors
Ecosystems can have one, two or multiple sides where different actors play distinct roles. Whereas players come in all sizes, legal shapes and models, there are 5 roles that are most common.
First one is the Orchestrator, often the key participant. Usually, ecosystem is built around its strategic activity. Consequently, it plays an active role in identifying customer needs, developing ecosystem, ensuring its quality, recruiting new partners, coordinating activities, facilitating resources, resolving tensions, etc. It is not uncommon that Orchestrators leverage digital assets, software and platforms, that facilitate interaction and collaboration within the system. At the same time, it is not required for an Orchestrator to be a dominant company. A small and agile startup with innovative idea could be very efficient in this role, although it will need the support of a well-established partner. Thus, a start-up could benefit from increaesd credibility, access to resources and network introductions. A corporate partner can also gain competitive advantage in such cooperation. As an example, Toyota invested $1.5 bln into Grab’s car hailing business in South Asia to better understand usage patterns of its customers.
The second key role within ecosystems is Generator. They produce final product or service and have a large network of customers/supporters. Generator embodies strong leadership, usually has superior product, brand, IP rights, and large production footprint. They are the ones who actually generate the business. Examples include Disney, Harvard University, GE and LVMH.
Core Partner is the third important role. These companies provide highly specialized contributions that are critical for the overall success (technology, finance, go-to-market channels, brand, manufacturing facilities, critical supply chain component, etc.). For example, semi-conductor manufacturer is a core partner for smartphone, gaming, computer, and medical equipment ecosystems. For Phillipe eHealth solutions, it will be AWS providing cloud computing services.
Provider is another role in business ecosystems. They supply complementary goods, services or capabilities that augment system’s value proposition, but are not essential for its success. They can be replaced without significant impact on the overall quality of the offer. For instance, if any of Uber drivers or Amazon sellers leave, the system will continue functioning properly.
Finally, Beneficiaries are vital parts of the ecosystems. They are the ones whose problem the ecosystem solves. Among them are customers, consumers, community members and alike. They are living source of ecosystem, without whom it cannot exist. If they leave, the system dies.
Obviously, not all 5 roles are present in each system, and quite often at least 2 roles are performed by the same player. For example, IBM is an Orchestrator and Generator in its hybrid cloud ecosystem. Another trend is that companies increasingly participate in different ecosystems where they play different roles. If we take the IBM example, it plays a core partner role in Linux ecosystem providing hardware platform for LinuxOne. In META ecosystem, creators could be Generators of their own content, Providers in collaborations with influencers, and Beneficiaries if they consume products of other creators.
Partner power is directly proportional to the role they play and influence they have within the system. Unlike in traditional partnerships, this influence does not come from ownership, but rather from the access to a critical influence point. This point forms at the intersection of most important interactions. The one who has privileged access to those influence points, will command a higher portion of ecosystem’s value.
The underlying reason is that they can access a large amount of diverse information and will be the first to see the signals of emerging trends, moves or opportunities. A broker in a marketplace usually benefits from such advantage (Craigslist, Chinese B2C platform Tmall). They use data to help buyers and sellers interact more efficiently, that drives in more participants, resulting in even better matchmaking and network effect, that ultimately produces even more data. That’s the power of influence point.
At the same time, with over 15,000 shoes vendors on Amazon, none of them is in a unique position to expect high margins. By contrast, OpenAI has a leadership spot with its ChatGPT app that gained 100 million active users within two months after its launch. Consequently, it could play a Generator or Core Partner role in multiple ecosystems that are being formed with Microsoft, Salesforce and others.
Position of influence points within an ecosystem depends on its main purpose. Consequently, there are 4 major types of business ecosystems.
Solution-based systems are structured around a particular product or service that creates a compelling value proposition to the customer. For example, smartphone ecosystem includes hardware manufacturers, software and apps developers, content creators, as well as network and connectivity providers and distributors. Their level of coordination is high as all pieces should seamlessly fit together. The company occupying the influence points is the manufacturer or a supplier of a key product: main value proposition is locked at the moment of production, although could be further augmented during the usage. All “smart” systems – smarthome, smartcar etc. – fit in this category.
Transaction-based systems have a short-term focus on satisfying an immediate customer need. Their particularity is that one-off transactions take place constantly and repeatedly, although the parties change. VISA, PayPal, eBay, Etsy are example of such ecosystems that are usually de-centralized to allow buyers and sellers to interact. The influence point is often a digital platform or other transaction mean. It enables its owner to access large amount of diverse information from the interactions between buyers and sellers. Hence it will be table to analyze the aggregate data to identify the trends and will tailor the platform capabilities accordingly.
Community-based systems are by definition long-term focused. They are based on shared common goals, interests and interpersonal connections. Social/media/gaming/streaming networks gave birth to a new phenomenon of creator economy (META, YouTube, Twitch, OnlyFans, Twitter). However, NGOs and non-profit initiatives also fall into this category (GAVI vaccine alliance). They all use data to help the community to interact more efficiently, resulting in better personalization capabilities, that produce more data. The network owner can capitalize on it, for example, by selling ads space or creating auxiliary offers, such as launching virtual competitions.
Technology-based systems are usually self-regulated environments, often built on an open-source technology that fosters innovation (BitTorrent protocol, Bluetooth, Linux, Blockchain). They provide the basis, the building blocks for other users to create interoperable solutions. Their use cases cross physical and virtual boundaries of industries, products, countries, currencies etc. Needless to say, the influence point lies with the multitude of use cases the technology creates. The more opportunities are created, the higher value end users will see in it. Bitcoin is one of the most recent examples of using the blockchain technology to create a decentralized digital currency.
Ecosystem business models
The difficulty of designing ecosystem business models is that it should benefit all partners and ensure that value it creates is fairly shared. It is not straight forward, as companies leverage activities and assets outside of their own boundaries. Moreover, if a system has multiple influence points, it can also have several business models attached to them. And finally, revenue models are indirect, as profits come from system’s interactions, transactions, and cross-fertilization initiatives rather than a traditional direct monetization.
3 most popular business models reflect the influence points and capabilities that are critical for the system’s success.
First model is Brokerage. The main function of a broker is to connect producers and consumers, or buyers and sellers. In the traditional brick-and-mortar operating model, a retailer acted as a broker. It allowed manufacturers reach the consumers through a physical point of sale. Customers satisfied their needs by buying a product from the store. And a broker got its margin as a difference between the price paid to the supplier and the retail price to the consumer.
With the economy digitalization and the raise of e-commerce, brokerage model has evolved. The basic principle – connecting supply and demand sides – remained the same. But their value added expanded. On one hand, brokers obtained access to a much larger, aggregate data on consumer demand. On the other hand, they are able to bring together multiple supply options in fragmented markets, helping consumers to find the best product, service or information they need. Thus, brokers’ revenue streams have diversified.
- Transaction fee: interaction facilitation fee charged to one or more parties in the ecosystem.
- Listing fee: allowing suppliers to put their product in the marketplace.
- Advertising fee: selling personalized ads to reach a large consumer audience.
- Success fee: increasing power of one side in the ecosystem (bidding, group discounts).
- Service fee: marketing, analytics, search facilitation, customer feedback.
As you may have guessed, brokerage model is wide-spread in Transaction-based ecosystem and is often used by Orchestrators and Core Partners. Examples include TaoBao, DoorDash, Kajabi, Rakuten, Walmart.
The second business model is Integration. Its value-added lies in the ability to integrate multiple suppliers to create an end-to-end value proposition to the customers.
Apple’s Health Record aims to be a central health record for users, combining data from more traditional Health System with a variety of wellness and disease management devices and services. As such, Apple’s ecosystem integrates data from medical care providers, manufacturers of health devices, such as Nike and Jawbone, as well as own products. For example, medical devices with diagnostic tools may physically connect to the iPhone or integrate with the Apple Watch. The latter now also includes health data like electrocardiogram and a blood oxygen monitor. Hence the users can access otherwise fragmented data and get a complete view.
As we can see, often integrator itself manufactures the major product within the ecosystem that it further enhances with complementary elements to create an innovative solution for the customer. At the same time, the highly distributed partner networks benefit from Integrator’s large customer base, reach and financial strength. Their collaboration brings more innovation, flexibly, and resilience to everyone.
Certainly, this requires additional capabilities, such as digital platforms, to manage numerous diverse partners within the ecosystem, such as IBM Supplier Connection Portal.
So what are the revenue streams in the Integration business model?
- Flagship Product: bundled with complementary options from the partners.
- Auxiliary services fee: maintenance, data analytics, delivery project management.
- Advertising fees: mainly for B2C products and services.
- Consulting, training or managed services fee: for complex or transformational solutions.
Integration business model is used by Generators in Solution-based ecosystems. Examples includes Zoom unified communications platform, Siemens Xcelerator, Amazon Alexa, Disney, HubSpot.
The third ecosystem business model is Enablement. By definition, enablers help their partners to innovate, collaborate, share information or work more efficiently. To that end, they provide the environment, open commercialization infrastructure, where partners can “plug and play” their innovative ideas. Enablers’ main functions include providing knowledge services to the participants, such as machine learning, as well as developing the solution roadmap and providing technical support.
Enablement business model is not easy to monetize initially, as mass adoption is the key for revenue generation. Therefore, enabling start-up companies require subsidies, grants, and donations to support their initial development. Often, they start with providing their value for free and only later evolve into a “freemium” model. Once mature, Enablers can have the following revenue streams.
- License fee: whole technology, its part or specific features.
- Premium option fee: optional value-added features, while basic ones are provided for free.
- Access fee: for platform infrastructure/API.
- Advertising fee: access to personalization tools.
- Service fee: support, analytics, data processing, transaction facilitation, consulting, etc.
This model is used mainly in Community-based and Technology-based ecosystems by Orchestrators and Core partners. Examples include Google Cloud and Workspace, VISA, LinkedIn, Wikipedia, AI, blockchain and other open software platforms. For the latter, it’s not obvious to access revenue streams, so they have to be creative. They could provide a part of their proprietary code as a paid option, sell managed hosting, or offer other support (deployment and integration, bug fixes, trainings).
Brokerage, Integration, and Enablement business models could be enhanced by highly specialized capabilities of Core partners to meet customer needs. It often concerns technology capabilities that are either directly integrated in the system (digital platforms), provided to the participants “as-a-service”, or licensed to 3rd parties to enable ecosystem expansion outside its boundaries.
Managing ecosystems launch
So how do business ecosystems develop and scale? Typically, they will pass through a number of stages, very similar to a startup journey. The main difference is that multiple partners will be involved at each stage, thus, increasing both opportunities and risks.
It all starts with seizing a market opportunity spotted by an Orchestrator and/or Generator. This opportunity is a customer problem that ecosystem will solve. The way they formulate the problem is the way the ecosystem will be built.
The founding partners will then design the system and invite first partners to create a prototype and to test it together. As any MVP, the test will be about validating the market appetite for the product, gaining knowledge about major unknowns, identifying system flaws and improving rapidly. Overconfidence could lead to skipping the MVP stage, but this could kill the entire project. CNN+ was launched under a premise that people trust mainstream media and will pay for a privileged access to its streaming service. However, after hiring 300 employees and spending $300 million in one month, it was shut down. With so many free alternatives to get information through social media networks, there was no market need for it.
Another major challenge here is to manage system complexity. In order to achieve that, companies could start on the edge of the existing business models, leverage a proven technology, limit the number of participants and curb costs. Although some may believe that strict cost control could impede development, it is actually proven to fuel creativity and innovation to overcome financial constrains.
Finally, an important success factor for MVP test is to identify key assumptions and metrics in advance, before test data begins to flow. The MVP design must have feedback loops for collection and analysis of learnings during the test, so that required adjustments could be made and further tested.
The main outcome of the MVP stage is validation of market opportunity and ecosystem design. The latter will serve as a blueprint for the next stage activities.
However, it is important to note that not all ecosystems start from scratch. Often big companies span off some of their activities and assets that have higher potential to grow independently. Examples include eBay spanning off PayPal and Bank of America liberating its own credit card program to create VISA. Both PayPal and VISA have later created their own successful ecosystems.
The Launch phase is very exciting but is also challenging. Four major areas are put to test here.
First, ecosystem configuration should make it easy to join, but still protect partner interests. 1 of 5 companies design the system wrongly. As an example of bad design, let’s look at Sony eReader, a digital innovation product launched before Amazon’s Kindle. Customer journey was cumbersome: they had to purchase the e-book on-line and then manually upload it on their eReader. Additionally, because of this open uploading mechanism, publishes were worried about copyright and hesitated to join the system. Amazon Kindle configuration was different. On one hand, customers can pay and automatically load the content directly from Amazon to Kindle. On the other hand, nobody could transfer the book to another device or to a printer, so publishers rights were protected by design. As a result, Sony withdrew from the market in 2014, while Amazon took the leadership position.
Second, ecosystem business model validation is key at this stage.
In the Brokerage business model, revenue generation is the ultimate validation tool. But at launch, it often boils down to the question: who do we charge and who do we subsidize? If we take Amazon example, at the very beginning, it was subsidizing its books to attract customers. Once it established a large customer base, it invited advertisers to join the ecosystem and charged them, creating a sustainable revenue stream. In China, TaoBao was also charging advertisers, not customers. Unfortunately, eBay did a “copy-paste” of its US and Europe strategy, charging customers for transactions on its platform. This strategy failed as customers had free alternatives, and eBay had to close its marketplace platform in China in 2006.
The best practice here is to subsidize the part of the ecosystem that is the most hesitant to join by offering tailored incentives that increase appeal of its products or services.
For Integration business model, the main challenge is associated with managing multiple supply chains, that involve overlapping networks rather than linear chains. Hence those supply chains turn into highly distributed “value webs”. Therefore, the quality of cooperation directly affects not only efficiency, but also profitability of all system partners.
Best performing Integrators use technology (cloud computing, IoT, AI) to coordinate supplier relations. They also foster trust and knowledge management within the system, like Nike that organizes joint trainings with supplier employees. Another example is AWS who holds yearly conferences for their 3rd party developers. Finally, many integrators deploy superior risk management tools that analyze ecosystem data to ensure business continuity.
Thus, the viability of the business model here is determined by information flows, relationships strength and ability to adjust quickly in case of disruptions.
Finally, the Enablement business model is tested by the speed of adoption. As mentioned before, often enabling companies can remain unprofitable for years. Their worth lies in the user base, as it serves as a basis for future revenue streams (premium options, advertising, subscriptions, trainings). The more users recognize value in the ecosystem offer, the more projects it will attract, increasing its appeal to more partners and improving the chances for the technology to become standard. Additionally, more usage provides more data for the Enabler to continue developing its product and to service its users even better. That creates a quality loop that fuels the adoption and lays the foundation for future revenue streams.
Third, ecosystem operations should include light processes and tools, that create a backbone structure to support its dynamic interactions. Before launching, core ecosystem partners must ensure that all interdependencies are identified and monitored.
The most significant risk areas include technical, legal and service delivery. They have a direct impact on monetization, data management and customer satisfaction.
In order to mitigate those risks, ecosystems need to deploy appropriate tools to help them with service orchestration, customer communication and data management across the entire system. Such tools could include:
- project management and issue tracking programs;
- data storage and visualization applications;
- engagement tools, such as CRM, email marketing, donor management software;
- collaboration instruments (file sharing and editing, video conferencing);
- public platforms, websites, mobile apps and social media channels;
- knowledge management tools (intranet)
It is also advisable to create a digital ecosystem map – a visual representation of all participants, connections and tools used within the ecosystem. It illustrates how data is transferred between the parts of system and whether a particular process is automated or manual. It also helps visualizing which parts of the system are not connected and decide on data transfer among them. Finally, it documents who are the users of each system, which rights each user has and who is responsible for maintaining it.
It may sound complex, but in fact it makes ecosystem design and flows transparent. Additionally, it highlights potential issues and allows core players to develop contingency plans to address them. Finally, it enables them to identify critical KPIs to measure ecosystem’s success.
Those KPIs form ecosystem’s initial balanced score card. It has to be very simple. Participants’ satisfaction with information sharing and exchanges, speed of decision-making, adherence to originally planned milestones, and percentage of target metrics achieved by each player could be a good start.
Depending on the ecosystem type, a couple of additional KPIs could be included.
- For solution-based system: revenue growth and customer satisfaction metrics (NPS).
- For transaction-based system: number of transactions and return on marketing activities.
- For community-based system: number of participants and awareness (publications, TOMA)
- For technology-based system: number of users and quality assurance metrics.
Forth, ecosystem governance is established and tested at this stage. In the absence of hierarchy and control, it is crucial to include major stakeholders in decision-making process. Although in some ecosystems orchestrators act as a central authority (Uber, AirBnB), the trend is to make important decisions jointly. A Board of Directors or a Steering Committee with the representatives of main players is often in charge of establishing rules and processes that would govern the ecosystem operations. For example, the open-source operating system Linux is managed by a committee consisting of Linux community, including corporate members, individual open-source leaders, vendors, users, and distributors. Similarly, Wikipedia is governed by a structure of committees whose members are elected by the community and make decisions by consensus.
The exact scope of responsibilities of this joint governing body will depend on the ecosystem type. Virtually all ecosystems will need to establish the basic governing principals at this stage:
- what is the system purpose and strategy to achieve it;
- who can join and under which conditions;
- what level of commitment is required, including investments, R&D and IP rights;
- who and how is engaged in the marketing activities;
- how decision rights are distributed within the system;
- which rules apply for information sharing;
- what are major risks and ways to mitigate them;
- how disagreements and disputes are resolved.
The last points is of utmost importance as it could endanger the basis of ecosystem’s operations – trust. Emerging platforms often have orchestrator as an arbiter. At Uber, riders and drivers can complain about each other via the app, and the conflict is resolved by a dedicated central team. In other systems, stakeholders are more strongly involved in conflict resolution. For instance, Graigslist and Reddit use volunteers and professional moderators to solve conflicts.
Overall, the choice of governance model could make or break ecosystems operations. This choice is often driven by system’s type and business model. For example, in transaction-based systems, the orchestrator may make majority of the decisions centrally. Its business model will most likely be brokerage, that puts data at the center of its value proposition. Hence it will share data with the partners selectively and strategically. By contrast, in solution and community-based ecosystems, sharing data, decision rights and tools will grow trust, engagement and attract more partners.
All in all, governance models should reflect the strategic focus of the system itself. If the focus is on fast growth, exploration and innovation, the model should be rather open to enable new participants to join easily (Android OS). If the focus is on quality, consistency and value capture, a closer governance would be a better fit (Deere & Company’s digital farming).
Needless to say, the governance model has to evolve as the system grows. The original model may become too complex as the number of partners increases and should be adapted. Start Alliance was originally structured as “one company – one vote” system. But when more airlines joined, it changed for a tiered approach to voting.
Current technology advancement could make such evolution both fast and efficient. Digital transaction records provide valuable and tamper-proof information about ecosystem participants, their activity, and emerging trends. This information facilitates governance on different levels increasing robustness of the system.
To sum up, the Launch phase represents a stress-test for ecosystems’ viability. Not surprisingly, only 50% of ecosystem are able to pass through it and develop further.
Ecosystems growth strategies
The winning ecosystems scale fast. 80% of them gain over 50% market share in the first 5 years of operations. However, unmanaged growth can be fatal. Controlling cost, quality and integration is challenging while operations are speeding up.
The best approach is to phase the growth. Google + was able to attract users, but failed to keep them as usage and engagement were low. Data security flaws did not help either. By contrast, Facebook originally restricted its platform by allowing to join only the same school alumni. Once its system got tested and improved, the company opened it up for a mass market. Later on, when the system matured, Facebook extended its reach to mobile users by acquiring Instagram and integrating it with shared capabilities, such as advertising tools.
Overall, there are two main vectors of ecosystem evolution: internal and external.
Internal evolution is focused on extending the offer while maintaining the ecosystem closed. This includes geographic expansion, product portfolio extension, consolidation via M&As, diversification of supply networks. For a long time, Apple, a Generator, was a perfect example of a closed system. That allowed it to guarantee its customers seamless interoperability of all its products. On the distribution side, it also ensured highest levels of security by prohibiting sideloading of apps from third-party stores. However, in 2022 Apple was forced to abandon its App store-only distribution model for apps, as it is judged anti-competitive by the EU regulators.
External evolution happens when existing assets (technology, know-how, partners, users) are leveraged to create adjacent offering outside of the ecosystem. In 1980s, IBM, Microsoft and Intel have formed a partnership, where IBM was initially the dominant player. However, the influence point shifted once Microsoft started to sell its operating system to other computer manufacturers, leveraging its knowledge of Intel microprocessor they used. It then become powerful enough to continue its expansion without IBM. Through persistent bundling and marketing strategies, Microsoft standardized its Windows operating system for non-Apple microcomputer industry and became one of the largest companies worldwide.
Likewise, Amazon started as book-selling business, later expanding to other products. It secured a competitive advantage by patenting its 1-click technology that allowed users to purchase an item on-line with a click of a mouse. That prompted customers to buy more, helping Amazon to get more revenue and purchasing data. Additionally, through a lawsuit against Barns & Noble, the company forced other websites to license its 1-click technology, creating both a new revenue stream and protection against competition. But Amazon continued evolving its model. It understandood that opening up its platform for 3-party sellers would actually be advantageous for the company. It started offering clothes, electronics, toys, kitchenware and other products from 3rd parties, charging sellers for using the marketplace it created. Once the platform was tested enough, Amazon launched web hosting services and licensed its platform to other e-commerce companies, such as Borders.com or Target.com. At the same time, Amazon decided to increase revenues from the other side of the platform – its 100 million customers worldwide. In 2005, the company announced creation of a paid loyalty program that lured users with a free two-day shipping. In the following years, Amazon offered its loyal users even more innovative products and services in the growing market segments by acquiring Audible, Zappos, Twitch, and Echo that served as a basis for its Alexa. Although some M&As and product launches did not pan out (Joyo in China, launch of own Fire smartphone), overall Amazon’s constant external evolution strategy was a great success. For its 25th anniversary in 2019, the ecosystem had grown its reach through a wide range of industries, reaping the synergies through B2C and B2B services. It is now worth over $1trillion. Overall, all successful ecosystems will eventually expand beyond its original scope and evolve their model. The ones that managed the expansion well, will enjoy a hefty 30% average margin.
Ecosystems success and failure drivers
As we have seen, ecosystems growth is a complex and risky process. According to McKinsey, not more than 10% of launched ecosystems have gained sufficient scale to bring >5% of revenue increase to its partners.
Majority of ecosystems fail at the initial stage of development. 85% of them fail due to the issues with their design vs 15% failure due to the execution errors. All failure reasons could be divided into two categories: system vulnerabilities and partner relations.
System vulnerabilities come from wrong strategic choices. First and the most common one is misjudging customer needs. Windows phone never took off as it lacked functionality and compatibility that users wanted. At the same time, Google’s Orkut was launched successfully, but then failed due to the lack of privacy as well as technical issues with handling rapidly growing number of users. In other words, the danger is two-fold: start too narrow and never scale, or start too broad and fail to integrate.
Second, to continue on the integration topic, ecosystem’s offer should provide a seamless experience to the customer. In the Blue-Ray battle with HD-DVD, Toshiba partnered with Microsoft to provide optional connection of HD-DVD to the Xbox 360. However, customers had to buy a separate drive to connect it to Xbox, whereas Blue-Ray was directly integrated into Sony’s PS3.
Third systemic issue comes from not designing sufficient self-defense mechanisms. Uber ceded part of the market to Lyft, as both drivers and riders could participate in a competing ecosystem without restrictions. By contrast, Air BnB allowed no phone number exchanges between the host and the travelers to prevent disintermediation.
The fourth vulnerability comes from the company’s role and position in the value chain. Li & Fung orchestrated digital supply, logistics and distribution networks between retailers in the West and manufacturers in the East. Its global platform once had over 15,000 partners. But the middleman position was a tricky one exposing the company to competitive moves. On one hand, Alibaba connected Chinese manufacturers directly with their buyers. On the other hand, Amazon “stole” its brick-and-mortar resellers, further squeezing intermediary’s margin. As a result, Li & Fung lost 95% of its market value within 9 years prior to its de-listed during the Covid pandemic.
Fifth, inappropriate governance causes not only 35% of ecosystem failures, but also makes them fatal. Wikimart in Russia started as a promising local e-commerce contender to eBay but failed due to questionable acquisitions and unprofessional steps taken by its top executives. Nowadays, with the use of technology, such as blockchain, governance could become both decentralized and transparent.
Partner relations have much bigger impact on ecosystem health, than many imagine. On one hand, trust is an essential component of ecosystem operations that have no formal structure. Google acquisition of Android for its own phone was in direct competition to its partner Samsung, the largest Android-based smartphone brand. Not surprisingly, Google Pixel is nowhere near in terms of market adoption.
On the other hand, investment in partner relations could give the ecosystem a competitive edge against competition. Lyft, an orchestrator, incentivizes exclusiveness to its drivers. They can rent a vehicle for a weekly fee via Lyft ExpressDriver program if they agree to facilitate 20 Lyft rides per week and go exclusive. Likewise, Facebook provides a superior end-to-end customizable tool to its advertisers, essentially locking them on the platform. Hence, we can conclude that partner relations could be strengthened by incentivizing loyalty, as well as smartly increasing switching costs.
Speaking about ecosystem successes, many factors come into play. 5 most impactful success drivers are listed below.
First and foremost, the ecosystems are built around an innovative vision shared by all participants. The best example would be creation of a VISA community by Dee Hock. He believed in the chaordic organizations that lives in the commons with the control, governance and decision power being distributed among its member community. With this vision, Hock persuaded the Bank of America to release the control over its infrastructure for back-office processing of credit card transactions in order to create a shared platform that benefited all players: merchants, banks and customers. Today, VISA handles over 255 bln transactions per year and is one of the most valuable companies in the world.
Second, winning ecosystems prioritize fast scaling over profitability. According to PitchBook, out of more than 100 companies worth more than $1 bln that have gone public since 2010, 64% were unprofitable at the time of listing, including ecosystems such as Uber, Lyft, Snapchat, and Spotify. In its IPO filing, Amazon warned investors that it expected to report “substantial operating losses for the foreseeable future” due to heavy investments in technology and marketing. What convinced the investors to buy the stock of largely unprofitable companies? Precisely, the big innovative vision they had for their future.
Third, the value added by the ecosystem should exceed the individual offers of its participants. In 2021, Haier launched its Internet of Food (IoF): ready-to-cook meal IoT solution platform – Alphesh.
Catering businesses can offer their own pre-made meals on Alphesh, and users can place orders to have the food delivered. Users can then place the ready-to-cook meal in their steam oven for one-click cooking. This was an effortless solution for users, from purchase to preparation.
Through a shared ecosystem, Haier IoF has connected the dots from restaurant brands to processing plants, food ingredient providers, cold chain logistics, and top chefs to deliver an upgraded one-stop solution to the customers. Thus, the value created by the ecosystem was much higher than that of its otherwise fragmented parts.
Forth, constant adjustment of the strategy and operating model is another pre-requisite of success. An agricultural division of chemical company BASF was once a traditional company selling traditional products to the farmers (insecticides, herbicides, fungicides, etc). It then changed its definition of customer’s problem from traditional view “farmers want chemicals” to more encompassing view “famers want higher yields with less costs and more efficiency”. Consequently, the company gradually integrated complementary offers from over 25 partners to address that challenge in a “all-in-one” solution that includes:
- agronomic data (weather forecasts, soil data detection, mapping tools)
- connected farming machinery from companies like John Deere, Nevonex, Agrirouter
- smart equipment tools like smart sprayer co-developed with Bosch etc.
By evolving its strategy and partnerships, BASF was able to create an innovative solution for the farmers and more than quadrupled its user base since 2018. Via local digital provides and distribution partners in its ecosystem, BASF extended its offer to serve over 1.2 million users in 120 countries.
Last but not least, visionary leadership is the ultimate success factor for the ecosystems. Social responsibility, equal opportunities, sustainability increasingly become a baseline of business success. Of course, not every company will follow Patagonia’s founder Yvon Chouinard, who gave away its $3bln business to the Purpose Trust and Holdfast Collective NGO. But same as Dee Hock, Chouinard proved that higher purpose can drive higher profits. And more and more companies realize that thinking outside the box and reframing business problems as opportunities for collaboration and contribution open up new possibilities. Unilever in India could not increase the sales of its soaps, despite the fact that they could prevent children death from diarrhea. Poor mothers simply had no money and interest for a quite expensive brand. So the company engaged with local NGOs to help their customers and created a new market by providing microloans, contributing to public health awareness campaigns and so on. Conclusively, the 4th industrial revolution is not about tech and tools. It’s about leveraging technology to create more value for everyone.
Conclusion
Ecosystems are transforming traditional ways of doing business and engaging multiple stakeholders in innovative ways to create value. New type of advantage – collaborative advantage – is starting to appear. It is not concentrated, but rather spread across different groups that work both collectively and independently for the common good. Companies, authorities, civil society and individuals have an important role to play in the evolving business landscape.
On the business side, flexible ecosystem models are breaking barriers to innovation, mobilize diverse participants, mesh resources and capabilities, and unlock new markets. On the human side, there is a need to re-structure the workforce in order to accommodate younger generations. Close to 70% of the millennials expect to spend at least part of their career working independently, and Gen Z shows even higher percentage. Ecosystems give young generations the access to the corporate know-how while pursuing own business ideas.
Governments need to provide incentives for divergent business structures, as global economy slows down and old approaches become untenable. In 1940, there were 42 workers per a retiree. Today the ratio is 3-to-1 and is poised to decrease further. Such pressure risks to break the existing public systems, unless they are transformed to create more opportunities for entrepreneurship and economic prosperity.
Civil society plays a crucial role in directing joint efforts towards more sustainable business practices. Many ecosystems are already engaged in social and philanthropic activities, such as Mammut supporting ClimbAID and Together for Glaciers. Thus, community-based organizations need to partner with for-profit firms to create win-win business opportunities.
Finally, individuals – customers, participants and co-creators – can become a sounding board for ecosystems offering, ultimately voting with their feet and wallet. At the end, participation is always voluntary, so the best solutions are those that bring maximum value to all beneficiaries.
If you are ready to embark on the exciting journey of creating and managing the ecosystems, take a peek at the ecosystem design check-list. For further information and questions, reach out.