Throughout the modern industrial era, industries have generally been organised as linear value chains, producing vertically integrated organisation, organised to control the entire value chain and achieve economies of scale, to create a competitive advantage. As digital technologies gain adoption, they enable new ways of organising how value is created. This transition to digital ecosystems is challenging. There is still limited knowledge of how these ecosystems are created, how they work and how organisations can best participate in such ecosystems.
Drucker Forum 2019
The need to better understand digital ecosystems
Moving to an ecosystem model involves a different approach and a new set of strategies, processes, competences and technology assets.
In a recent interview, the SVP of IoT at Sprint, a major Telecom operator in the US, explained how telecom operators are struggling to transition from serving the single-service consumer market to the myriad of new applications that form part of the Internet-of-Things (IoT) ecosystem.
The key building blocks of digital ecosystems
There are three main elements for building a successful ecosystem.
1. The Platform
This is the enabler upon which ecosystem partners can build their products or services. The platform allows access to platform resources (via APIs, for example) enabling participants to build complementary products or services. The platform in turn supports the other two elements.
2. Network Effects
This is the self-perpetuating cycle of ecosystem participation and user enrolment. More products or services on the platform lead to more end-users attracted to it. At the same time, more end-users on the platform attract more participants with their products and services. Organisations driving successful ecosystems tend to focus on creating the right incentives (financial and other kinds), as well as systems to support other ecosystem participants. Here the focus is on creating and sharing value across the ecosystem.
3. Market Expectation
Market expectation is related to how prospective participants and end-users perceive an ecosystem in terms of its potential to become dominant. Indeed, in choosing an ecosystem they tend to focus more on the prospective development of the ecosystem rather than its current size and position. In a way, building credible market expectations is the first push to get the wheel rolling towards self-perpetuating network effects. This is arguably one of the reasons why the Windows phone operating system failed. Nokia and Microsoft could not create enough market expectation among both users and app developers to propel their ecosystem. As a result, they ended up losing to Apple iOS and Goggle Android.
The above are the three key elements that make up digital ecosystems. The key question is how to activate and cultivate these three elements.
The Enablers of Digital Ecosystems
There are six levers that are used to shape the three key elements that make up digital ecosystems.
Application Programming Interfaces (APIs)
APIs are basic building blocks of a digital ecosystem. APIs can be used to promote network effects. A good example of this is Stripe, a company whose platform enables payments over the internet. Their approach from the start was to build their platform with developers in mind, so their APIs would be simple, well-documented and stable. The company has used APIs to propel its network effects by focusing not only on building its credibility (market expectation) among the developer community, but by providing all necessary support (see support functions below) to drive developer adoption and advocacy.
This is communities of participants that interact with one another and create value within the ecosystem. These participants develop products and services based on platform resources (via APIs). The benefits can be significant as in the case of Stripe. By enabling others to invest and create new products and services on the platform, the ecosystem can provide a richer set of options to end-users than it could do on its own. Moreover, the faster an ecosystem develops a positive reputation among developers and thus more join the platform, the further it develops. This reflects market expectations driving network effects. As more developers are attracted to the ecosystem, more users are drawn to new products and better services offered.
Spearhead Products or Services
The launch of ‘spearhead’ products or services is another essential driver of ecosystem development. These are products or services that are developed on top of their platform, in order to target a key segment of the market. This approach helps develop market expectation. However, the real power of spearhead products or services is that they create a user base that can help kick-start the ecosystem. One way to visualize this is to look at how the video games industry relies on one or more key spearhead games (think Call of Duty) to drive early user adoption to consoles, which helps attract developers to the platform and in turn brings in even more users.
In exploiting a platform enabling an ecosystem, participants expect support. This support includes among others, technical (for example, how to use an API), marketing (how to sell your apps on our marketplace) and operational support (“fulfilled by Amazon” logistics support services). When an element is missing it tends to create frustration and disinterest among participants that can lead to the demise of the ecosystem.
The revenue model is a key feature of a digital ecosystem. The ecosystem has to have a well-defined revenue generation and allocation model – one that incentivises participants to be part of the ecosystem, so reducing their risks to invest and innovate within it. Also the revenue model needs to be flexible and adaptable to avoid partner frustration and churn. One such frustration is with Apple and Google, who are being pushed to adapt their revenue share models in response to complaints by partners such as Spotify, Netflix and Match Group regarding their high platform fees.
An governance model establishes very clearly the rules of engagement among ecosystem partners. It also sets out processes to deal with disputes, as well as how value will be distributed based on the agreed revenue model. In the end, just like all other enablers, the governance model needs to be defined in a way that supports the development of the ecosystem and helps create value for all stakeholders.
As digital technologies continue developing and gaining adoption, they start enabling new ways of organising how value is created. If ecosystems are the new way of organising and enabling value creation, then it is essential that we realise how these ecosystems work. By seeing ecosystems through the lens of the three key elements and the six levers described above, we shall be better prepared to approach this new convention.
About the Author:
Omar Valdez-de-Leon is a digital transformation practitioner and advisor, founder of Latitude 55° Consulting. He is author of the “How to Develop a Digital Ecosystem: a Practical Framework”.
This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, taking place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystems