If you want to get an idea of the modern ecosystems that are transforming businesses and industries in all fields, it’s best to begin by looking at art, which offers something of a microcosm for what we see and experience in business. Today, art is about so much more than the product of a painter and their paintbrush. New ways of doing things have emerged. In place of a traditional portrait, today you’re more likely to find collaborative, immersive pieces of work that float between collective and individual experience. They’re products of the modern world, which values connectivity, abstract and broader thinking, and a collection of components. Indeed, it’s the melting pot that is responsible for some of the value produced, not just the end result.
Now let’s think about how modern businesses with one eye on the future work. The rise of the Internet of Things (IoT), which will make items in our homes and cars and beyond all interconnected, will require a level of collaboration that goes far beyond what we’ve seen in the past. One company can’t do it all — they’ll be required to work with others to create a product or service that integrates with all the other components. Think of all the things that will be involved, such as advanced technologies, software, applications. It’s beyond the scope of one company. This won’t just be a one-time connection, either. It’ll be a partnership that navigates the complex world of developing technologies and consumer preferences.
If you’re struggling to think of what a digital ecosystem looks like, just take a look at a smartphone. The app stores connect millions of platform partnerships. However, these changes aren’t only evident in the tech industry, which is always primed for — and often the driving force behind — change. Virtually all industries, from banking to healthcare and the automotive industry, are seeing a shift in how they operate and collaborate.
The new way of doing things is more difficult for more traditional companies than it is for tech giants, who, as we said, are historically more open to change. Others have a more individualistic mindset; when moving forward, they usually do so in-house, or they buy a company that already exists in the field they want to enter. Even when they do end up in an ecosystem, which can be difficult not to in this day and age, it’s not the result of strategic planning. They just end up there.
It makes much more sense to actively work towards the new landscape, rather than just waiting for it to naturally form. The companies who understand this are developing their own networks of collaboration, or joining networks who are already established. But this isn’t so straightforward. The difficulty lies in building these ecosystems so that they meet the company’s end purpose, which will be gain a competitive advantage. Since this is the world we’re moving into, the ones who can meet this challenge open themselves up to huge financial rewards. The ones who don’t risk falling away.
There’s a big difference between the artwork you’ll find in the National Portrait Gallery, and the ones you’ll find in the Tate Modern. They fall under the same umbrella of ‘art,’ but they’re fundamentally different. The same can be said of the way we collaborate in today’s digital ecosystem space, which is different from how we would collaborate in the past. To get an idea about how different ways of operating can be, let’s think about the automotive industry. It used to be that car manufacturers would develop a partnership with an original equipment manufacturer in order to enter a new market, or secure parts from many hundreds of suppliers. This way of operating does still exist, but new ways have emerged. An auto company would instead utilise a large ecosystem that spans multiple industries and countries. The end result would be a car that’s about much more than just getting from A to B; it’s interdisciplinary. Consequently, we think of the car manufacturer company not so much as the sole producer of the vehicle, but rather as the creature that nudges all the players in the ecosystem in the right direction, eventually ending up with a car.
So as you can see, we’re beginning to think of collaborations in different terms than we would in the past. The makeup and execution of a collaboration is different, and it’s becoming harder to define where one industry begins and ends.
That we’re living in the “modern age” isn’t the only reason why companies are collaborating differently than in the past. There are other factors, too, as we’ll see below.
Across the World
The digital age heralded a new way of conducting business, and indeed of communication. Now, it doesn’t matter if a company isn’t located in the same area as the company they want to collaborate with. They can communicate via other means, and that means that partnerships can straddle various language, cultural, and, of course, geographical barriers. Indeed, there have been studies have shown that around 90% of ecosystems spread across more than five countries, without exclusion for countries that have historically been left out of partnerships for various reasons. More than 75% involve developed and emerging markets players.
There are several issues that come up with cross-country collaborations. For example, local laws, which may be less robust and stringent than the laws of one of the companies. A lot of trust is required between companies during the collaboration process, such so much knowledge and intellectual property are shared. As such, it’s imperative that intellectual property mechanisms are in place, as well as contracts that hold all parties to account.
One of the main draws of an ecosystem is that it allows access to other industry-specific expertise. Somewhere in the region of 85% of digital ecosystems are comprised of companies in three industries; 50% involve five or more. This is because so much has to go into a product — a vacuum company could make an excellent vacuum, but there’ll need outside help to make it artificially intelligent, for example.
There is the traditional idea of long-term partnerships and joint ventures between two companies, who would grow alongside one another. Ecosystem structures are different. They’re more likely to be flexible, using things like contractual relationships and platform partnerships. This is beneficial to the ecosystem because it allows for greater overall flexibility — changes in technology, competition, consumer preferences, and regulation matters can be handled more readily. It also allows partnerships to be set up or cancelled relatively freely. The vast majority of digital ecosystems involve multiple deal types, highlighting the flexibility.
The power of the ecosystem is felt in how beneficial it is to the members of the system. It should be continually beneficial to all members, and continually create value. A good example of this can be seen in Amazon’s Alexa, which provides, for free, Software Developer Kits and other tools to a network of developers. It is has been beneficial to the developers, who have produced more than 50,000 skills or applications for businesses. It’s also beneficial to Amazon. It has made Alexa more powerful and attractive to potential customers. The Alexa grows in importance, more skills developers are attracted, and the snowball continues to roll. The added user data from the device is then used to advance the AI algorithm and improve the experience of its various digital arenas. Everybody wins, essentially.
This is a lot different from more traditional ways of operating, in which companies solely focused on putting themselves first. They would negotiate a deal that would be best for their profits, all the while pushing the vendors profits down. The development of the ecosystem has changed that way of thinking. It’s better for everyone is there are benefits for all. These benefits are achieved by combining the margin system, splitting revenue, profit pooling, and also offering stakes in a venture.
In traditional supplier relationships, companies often focus on maximizing their own profits while squeezing the margins of their vendors. Ecosystems push companies to rethink how they interact with their partners and ensure that benefits are shared by all. Tools such as a combined margin system, profit pooling, revenue sharing, and stakes in a venture can help all partners meet their goals.
What is the Right Ecosystem?
The challenge for CEOs is deciding which version of the ecosystem is most appropriate for the objectives and capabilities of their company. There are three main types of ecosystem: the digitizer network, platform, and the super platform.
The digitizer network is best if you’re trying to take an existing product and digitize it. It will involve partners but there will be minimal managerial complexity. If your focus is on products, and there’s a limited focus on outside partners, then this is the right way to go.
The platform is best for companies who want to align connected users or smart things on a platform. It’ll do so with high service levels and low complications between users and contributors. This one is recommended for companies that are digitally focused and look outward for expertise.
The super platform is when you have several platforms that you want to work into one integrated service, at the same time collecting user data. This option is for those companies that are digitally advanced, and have a willingness and relaxed attitude to working with others.
You’re not locked into just one ecosystem, however. Many companies use multiple types. Huge operations like the Amazon Alexa use all three for various different tasks. The digitizer improves hardware and voice recognition. The platform adds applications and skills. The super platform integrates into other external platforms.
The digitizer network is used by companies who already have a successful product or service to make their offerings smart and connected. It’s used by companies who are brilliant at producing products, but which have inverse digital capabilities, and which are prone to looking inward. For example, a car company that wants to add digital services to the vehicles it manufactures.
This type of network will involve somewhere between twenty and one hundred different partners, across a range of industries. The key consideration here is to ensure that the partners the company works with have the required skills to fully digitize the product or service to their high standards.
The company in charge will have a time-consuming task on their hands, because it can be difficult to orchestrate so many different partners. They must work together to ensure that all of the solutions can fit together into the product or service. There’s another complication, too. The agreements with the partners are usually not standardised and tailored to each partner. It’s much more straightforward — and efficient — if there’s some sort of standardisation, so try wherever possible.
While there are a few issues to overcome, there’s a reason why so many companies push through with this route: the digitizer network is excellent at delivering value. After working with partners, the end result is a product that’s modern, sought after, and which can add revenue through a higher market price, and sometimes from selling additional services through the connected services. Partners are typically paid linked to how many of the product/services are sold.
Success isn’t guaranteed at any time, with anything. Research has shown that the digitizer networks that were most successful were the ones that started with a product or service that was already advanced. From there, the offering is integrated with advanced hardware and software, which then produces customer loyalty, since customers are looking for the most desirable features.
The platform is a more advanced ecosystem than the digitizer network. It connects smart “things” or users on a high service level digital platform, all the while limiting tensions between users and contributors. This type of ecosystem is mostly used by tech companies and tech startups, though it is increasingly used by non-tech companies, too. For the tech companies, it’s essentially their core business model, their source of revenue. An example would be a smart-home platform company, whose smart-home technology is used by product manufacturers.
In general, there will be more partners in platforms than there would be with digitizer networks, though how many depends on the type. A smart-city platform could have hundreds of partners. A social media, online store, and sharing-economy platforms could have thousands — perhaps even millions — of collaborators. The value increased with the number of collaborators, because it’s the size of the network that determines the success (think of social media). Because size is valued more highly, this type of ecosystem is generally more open to partners than digitizer networks, where the success is more on the quality of the final product.
It’s important, just for the ease of orchestrating, that there’s an established — and usually automated — model that determines the governance and financial exchanged. There are too many contributors for it to realistically be any other way. Face to face interaction, or for that matter any personal interaction between the company, contributors, and users is virtually non-existent. Issues are resolved by online portals.
Since there are so many people involved in the process, and so little governance overseeing the whole thing, then it’s essential that the platform orchestrator ensures that there is trust between the contributors and the users. One way to do this is to gather feedback from both ends. Airbnb, for example, asks for reviews of both the property host and the guest. It’s a way of ensuring good behaviour. If one of the other doesn’t comply with the standards of the website, then they can be blocked from using it in the future. The website invests heavily in staff whose job it is to tackling any trust issues.
If there’s a digital platform that involves a physical product, then things can get a little more challenging. To keep the service level agreeable for both users and contributors, the ecosystem has to keep supply and demand in balance. One such example is Lyft, which alters the price of the ride depending on availability, time of the day, and so on.
The way value is created with this ecosystem can vary widely, since there are so many ways to make money. An ecommerce site would take a percentage of the value of the product when it’s sold. Asset sharing and labour sharing platforms would do the same. With social media sites, it’s about ad revenue, or by selling or using the data from the consumers in other ways. Social media sites depend on people spending time on their platform, and thus, it’s essential that there is enough interesting content on there to keep the users entertained. If the user is there for a longer, then the better the data generation and ad revenue will be. For online sites that deal with streaming, it’s slightly different. They charge a subscription or rental fee, while those dealing with IoT platforms make money from the platform they’ve created.
The best platforms have an advanced and easy to use user interface, a large number of repeat users, trust, and a balance between the number of contributors and users.
There are platforms that can integrate a number of supplement platforms into one large, single platform. For example, a digital assistant that can integrate transportation, shopping, payment, and communication services, all within a solution that’s user-friendly. For this to work, there must be advanced digital capabilities, a willingness to work with outsiders, and a robust platform in the first place. It tends to be favoured by tech companies who are already well-established.
This ecosystem requires a high number of users driving by a small number of partner platforms and the contributors (which can be millions). Super platforms can be open to competitors who can add new features. The Sonos smart-speaker was integrated into Amazon’s Alexa so that it would be attractive to high-end users. Partners are chosen by their strategic value, such as any positive impact they’ll have on market performance.
Super platforms have a smaller number of partners, and thus the company in charge instead uses their time negotiating strategic value. For instance, the sharing of data, changes to the platform that affects functionality, exclusivity, and so on. The strength of the negotiation depends on the strength of the super platform, which is based on the number of users, and number of integrated products and services.
It’s imperative to produce the best customer interface and overall user experience in order to build loyalty, attract new users, and become appealing to other partner platforms. Two of the best super platforms, the Amazon Alexa and WeChat, are highly intuitive to use, which has been developed using the data from the companies’ other businesses. They used their own services and platforms before opening it up to other partners. By the time potential partners were sought, they already had some integration and a solid user base.
You can’t build a super platform without heavy financial muscle. Amazon spent millions on marketing Alexa, and were able to offer it at discounted prices, which brought in users. They also offer money to programmers who can develop skills that’ll improve Alexa even further.
A super platform will by and large make money through data-based businesses, like ads, e-commerce transactions, and offering new services. WeChat began life as a social messenger service but expanded to allow users to buy and sell products, check news, send money to friends, or order their weekly groceries. Because data is so important to the super platform revenue making, they will protect their own data yet access the data of other integrated platforms.
To be successful, a super platform should have strong technology, an advanced user interface, and a strong financial backbone.
The connected world means that industry and geographical boundaries are increasingly irrelevant, and change is always occurring. Ecosystems, therefore, need to be adaptable so that they can evolve alongside demand patterns, changes in competition, and changing customer preferences.
Ecosystems are, however, still in their infancy. Those who learn how to make revenue from such ecosystems will be in a strong position to navigate the uncertain future.