Ecosystems are not a fad or a sexy buzzword. They reflect a true paradigm shift in business. They are a genuinely new organisational form: fluid networks of organisations combining to deliver bundles of products and services in new and unfamiliar ways. And just like the step from single- to multi-cell organisms in nature, they represent a profound evolutionary shift.
Ecosystems have both enabled and resulted from big changes in the ways we consume and produce. Who would have imagined, even a few years ago, that you would be able to buy coffee with a phone, or ask your stereo or your fridge to order your groceries?
Ecosystems are developing at remarkable speed and the opportunities they offer are simply too large to be ignored. A McKinsey report suggests that by 2025, today’s 100-plus industries and value chains will have collapsed into a dozen or so multitrillion-dollar ecosystems accounting for some $60 trillion in revenues – one third of the global total. It also predicts that new configurations will feature “a few large orchestrators, big winners, and a huge shift of wealth and value creation”. Boston Consulting Group (BCG) found that the use of the word “ecosystem” in large companies’ annual reports had grown 13-fold over the last decade and that those who used it grew much faster than those who didn’t.
As technology and regulatory change blur the boundaries between products and services, producers and consumers, organisations and markets, it no longer makes sense to think in terms of traditional industrial sectors and categories. Business ambition, strategy, organisational behaviour and policy will all need a rethink.
So, while the hype about ecosystems is justified, their complexity brings some fundamental challenges. Some of these are becoming clearer: recent academic research maps out what ecosystems look like; a BCG project explores the myths and realities and fierce ecosystem competition; a World Economic Forum White Paper sets out the basic rules of the game; and a recent Harvard Business Review paper outlines the major strategic implications.
Where do people come into the picture? One of the biggest challenges for leaders in this unfamiliar new world will be to reimagine themselves and how they relate to the world around them. Humans have always thought of themselves as the centre of the universe, with other individuals and institutions ranged in near or distant orbits around them. For CEOs of large companies, that may be even more true – you don’t get to the top without ambition, self-confidence and the belief you should be in control.
“When there are no longer any rules, competition becomes multidimensional and handling it is a skill that must be learned”
Unfortunately, managing in ecosystems requires very different qualities – perhaps even a new set of corporate leaders. This is the result of new demands placed on organisations and those who manage them.
Customers have a far wider range of choice than they used to. When clear-cut industries and categories ruled, companies competed to deliver the same mass-produced product – but not in how the underlying service was delivered. You could have any means of mobility, as long as you bought your own car; any way of talking to people far away, as long as it was on a phone. To that extent, customers were captive and the winners were those who upset their customers least (in retrospect, not such a big ask to make of managers).
Now, however, offerings can be sliced, diced, orchestrated and bundled for delivery as seamlessly as an Amazon package. The implication: you have to understand, and understand deeply, the “jobs to be done”. What demands emerge from how customers actually live their lives? Once you know that, you can start getting partners to team up and innovate around it.
Consider Hyundai’s artificial intelligence (AI)-based Blue Link app, which can track your vehicle, monitor and report on driving behaviour and perform various remote actions on the car. One of these is a one-time-only door lock and unlock. So, in combination with car-wash app WashOS, you could – from your office – ask someone to locate your parked car, valet it and return it ready for collection after work.
Or you could have a grocery order delivered into the boot. Hyundai touts the app as “enhancement of the connected driving experience”; you might call it mobility, retail or convenience.
But the name of your ecosystem’s product matters much less than whether it delights its users.
With the advent of the full Internet of Things and 5G, technological capabilities will only expand. And so will the roster of potential partners able to offer them. BCG recently reported that more than 50% of ecosystems involve partners from five different industries and 90% participants from five or more countries. As technology allows us to redesign our world, this kind of choice makes two things all but certain. First, offerings won’t be delivered in the way they are now. Second, your company is most unlikely to be at the centre.
This means that you should approach customer acquisition, customer retention, new product or service development and customer engagement in a fresh way. Customers expect a seamless suite of services focused around their needs, not the offerings of individual companies that they must piece together themselves.
Many CEOs assume that their job is to create their own ecosystem. But this is a folie de grandeur. The reality is that few companies have the exceptional brand, data, platform-shaping skills, scale or financial assets to become the ‘orchestrator’ of an entire ecosystem. And even firms with significant muscle might want to think twice before grabbing the lead role. We’re talking ecosystems – not ego-systems.
Consider changes in the world of mobility. The rise of Uber, Lyft and Grab has put pressure on traditional car manufacturers, especially at the top of the market. If all customers really want is the convenience of being transported from A to B in a nice car and they don’t really distinguish between brands, what’s the point of being a premium manufacturer?
Both BMW and Mercedes-Benz, traditional arch-rivals in the luxury car segment, saw this threat early. They prepared a mobility service focused on luxury to leverage their investment in upscale vehicles and protect their brand image. Yet, despite their individual clout, they still had to work together to attain the critical mass and visibility necessary to counter Uber – in a move that sent shock waves through their industry.
Leaders must also be prepared merely to manage their ecosystems, not control them. Letting go of control is tough – even for some of today’s celebrated ecosystem orchestrators. Apple’s iPhone only took off when Steve Jobs reluctantly opened up the App Store to outside developers, launching an ecosystem that now numbers more than two million apps and 500,000 publishers.
In the new world, value obeys a different gravity. Above all, it flows to where the information is. Consider the rise of the tech titans. In striking contrast to even the recent past, the chief asset of the most valuable companies in the world – Apple, Alphabet, Amazon, Microsoft and Facebook – is data. By comparison, their tangible assets are meagre. Not coincidentally, each is at the centre of several overlapping ecosystems and also participates in others.
We shouldn’t be surprised if it’s one of these data giants – or another outsider like Uber – that ends up as orchestrator of the emerging mobility ecosystems, rather than a traditional car-maker. Despite a common misapprehension, ecosystems are not supply chains. And there’s no guarantee that even very large companies that sat at the top of their supply chain will go on play the lead role in an ecosystem.
The implication of all this? Most firms will participate in ecosystems not as orchestrators but as ‘complementors’ – suppliers of supplementary technologies, brands or capabilities. But even this will be less straightforward than it might appear – and again, not amenable to ‘ego-system’ tactics.
Think about it. You are no longer just competing to win customers directly. Now, you also have to attract the complementors that will augment your product or strategic position. Which value chain you were part of used to be pretty clear. But now complementors, like customers, have many choices – as do you.
Suppose, for example, you have AI expertise to help your phone source the briefcase or handbag you saw and liked and suggest other accessories you’re likely to appreciate and where to buy them at low cost. Do you have better leverage, market access or strategic positioning if you try to sell it to Apple to integrate it in its iOS, or simply develop your own app?
“In the new world, value obeys a different gravity”
If you want complementors to create add-on functions, are you in a position to require co-investment, effectively locking in a few trusted partners? Or do you spread the net as wide as possible in a drive for growth? And, if you’re Samsung or Huawei, how do you get AI developers to work better with your phones (or chip-sets), as opposed to working with Apple or Android, which means that intelligence will rest at the OS level, let alone the App?
All this requires much thought. When there are no longer any rules, competition becomes multidimensional and handling it is a skill that must be learned.
For companies that can learn to navigate these new territories, there are substantial growth opportunities on offer. Fresh cross-boundary collaboration can give firms access to new intellectual property, help firms merge physical and digital channels, and advance new technologies, says a BCG report. It points out that: “Ecosystems can offer multiple players a powerful way to build new revenue streams from products and services that they could not develop and bring to market on their own.”
If you want to end up on the winning side in these new combinations, the first step is to understand where your company best fits. What is your niche? Start by giving yourself a stern reality check.
First, make a sketch of your company at the centre of its existing universe, noting all the elements with which you interact.
Then, set your sketch aside and draw another one centred on the customer – surrounded by all the organisations that can provide the types of services you are concerned with. Who else can act as an intermediator? What other offerings and ecosystems can they bring to bear? You will need to scan a wide horizon. Bear in mind the increasingly likely possibility that competitors may appear from outside your sector as you previously understood it.
From this outside-in perspective, consider how you could make myself more attractive to the customer in this array of possible connections. Who would you need to work with to make that a reality?
Then turn to the roster of complementors. Think about why each of them would want to work with your company (if they would at all). What’s the advantage of your offering? Is there something you can offer that others can’t? How could you leverage that USP?
Answering these questions will be challenging. So will the organisational change that stems from them. But an even greater challenge may be to uproot entrenched thought patterns – in particular, to shift from the assumption that you know what to deliver to the customer, and how, to a humble acknowledgement that the choice is now entirely theirs.
What’s more, whether you carve yourself a niche or are cut out of the equation altogether also depends on how closely you can stay attuned to both customer preferences and to the strengths, weaknesses and opportunities of complementors.
Most ecosystems are driven by data. But thriving in them will depend less on technological expertise than on the irreducibly human qualities of intuition and putting yourself in someone else’s shoes, plus the creativity to turn whatever you find out into a strategy. Forget ego – it’s all about eco.
Firms like Haier have reinvented themselves by putting the customer first, and are now turning to ecosystems as the next step in their development.
In the 1980’s, Haier, then a fledgling firm with quality defects in producing fridges, was on the brink of bankruptcy. Yet Zhang Ruimin, its iconic CEO (and management thinker) transformed his organisation, driven by a relentless focus on the customer. To do so, Haier had to harness the energy of its employees as it improved and innovated in its home market and abroad. (Haier’s success allowed it to take over ailing established brands such as GE’s white appliances, Sanyo in Japan and Candy in Italy.) This, as Gary Hamel wrote in HBR, meant that Haier had to challenge bureaucracy head-on.
One of Haier’s tools in changing its organisation was its management philosophy, Rendanhayi, which draws on Ren, employees; dan, user value; and heyi, alignment. Initially, Rendanheyi (in 2010) consisted of the creation of a host of ‘independent (customer-focused) operating units’ which operated as virtual teams, with significant decision making. The next iteration, Rendanheyi 2.0 (in 2015) turned the firm into a conglomerate of independent micro-enterprises, each focusing on customer need, with ownership stakes from outsiders and authority in all contracting, budgeting, and recruitment decisions. And, in 2019, Rendanheyi 3.0 was introduced, which focuses on ‘Ecosystem Micro-Enterprise Communities’, to acknowledge that customer needs are tackled by cross-cutting ecosystems, where Haier would want to play an important role.
Thus, Haier is consciously transforming into a platform, focusing on shifting customer needs, and changing old organisational practices that can hold it back. In Zhang’s own words, Haier aims to become a “3E system: ecosystem organisation, ecosystem revenue, and ecosystem brand. In an ecosystem organisation, it’s not the company versus the user, but the company, the user, and the supply chain interconnected in an ecosystem.” Zhang sees the risks of Haier products being commoditised; he doesn’t want Tencent or Google to be ordering the milk from the fridge with replenishment sensors and interactive screens. He wants Haier to play a role, and he wants Haier to develop true affinity with the customer. This requires a different mind-set, and a different structure.
Haier has created new tools, such as the ‘Win-Win Value-Added Statement’ to align between different ecosystem participants and has instituted rules on how “Ecosystem Micro-Enterprise Communities,” Rendanheyi 3.0’s units can be set up. It also encourages employees to focus relentlessly on consumer needs in the ecosystem, becoming “a node in a bigger system”. This, though, doesn’t mean an easy life. Employees asked to be entrepreneurs, need to deal with upsides and downsides. As Zhang says, “to turn a business into a node in a network, employees need to be empowered with rights in a self-employed, self-organised, and self-motivated organisation where they are paid by their users.... those who can’t create value for the user won’t get paid.” In a customer-centric world, favouritism, political posturing and hoarding won’t get you far; a radical, but transparent (if potentially tough) structure is what appears to be enabling firms like Haier to thrive.
Michael G Jacobides is the Sir Donald Gordon Professor of Entrepreneurship and Innovation and Professor of Strategy and Entrepreneurship