Blog post Governance mechanisms in the context of platforms and business ecosystems
Less than 15% of business ecosystems are successful in the long term – the main reason for failure is weaknesses in the governance model.[1] It is therefore time to question which governance mechanisms are fundamentally available for business ecosystems and whether there are examples of their application (successful or failed). We have already analyzed the fundamental dimensions of governance (openness, distribution of decision-making rights, value distribution and coordination) in another blog post.[2] In the following, the focus is therefore on a possible catalog of incentive and control mechanisms for business ecosystems.
We assume that there is an orchestrator in the business ecosystem who is the owner of a digital platform and designs the incentive and control mechanisms outlined below. Providers and consumers as further actors are uniformly referred to as participants in the business ecosystem.[3]
A distinction can be made between four different incentive mechanisms.[4]
Connection/access (to the technical infrastructure)
This is about sharing resources with the participants that support value creation in the business ecosystem. A strategic decision must be made as to who will provide the relevant interface technology. This may be the orchestrator or a third-party provider. The reference design for these processes must be determined, as well as the technological connection, e.g. via API or collaboration tools such as software development kits. In practice, developer platforms are often seen as one way of connecting.
Supply with data
For all participants in a business ecosystem, it is relevant for the success of their business model to obtain as much information as possible about customers and planned interactions. Which information strategy is pursued for the platform in general, but also with regard to customer data? Knowledge can be passed on via hackathons or workshops, but also by simply making customer wishes available (products searched for, overnight stays in which region, etc.). This also requires determining the type of communication channels between the participants and the orchestrator.
Autonomy – distribution of decision-making rights
In my view, this aspect is one of the most interesting, as it can be cleverly combined with other mechanisms to create a finely tuned governance system. On the one hand, each participant in a business ecosystem wants maximum autonomy, regarding possible rules they should follow. On the other hand, joint value creation, which follows a central core value proposition,[5] cannot take place without aligning the interactions. A decision must be made on the degree of autonomy of the participants and roles and responsibilities in the business ecosystem must be defined. In addition, it must be determined who may adapt the processes such as the distribution of information, the onboarding process, but also platform interfaces and core components e.g., the offering.
An exciting example in this context is the concept of the superhost at Airbnb.[6] The superhost must fulfill certain quality criteria – such as a certain rating level – but also adhere to certain response times and only carry out cancellations to a very limited extent. This means that the Superhost is limited in its autonomy, but in return it receives a “label” and therefore tends to receive more booking requests.
Value distribution
The focus here is on the distribution of financial and non-financial values. In addition to direct revenue, it can also be about attracting the attention of potential customers – as in the example of Superhost mentioned above. Recommendations and customer reviews in general also serve to attract attention. There are many practical examples, be it the evaluation of purchased goods, hotels, but also the evaluation of people such as drivers at Uber.
Control mechanisms are the counterpart of incentive mechanisms: access, result and behavior control as well as the control of external relationships with other ecosystems can be part of finely conceived governance mechanisms.
Access control
Access control is a governance mechanism that determines who is granted access to a business ecosystem. This means that it must be clear in advance who the desired participants in an ecosystem should be. Examples of successful open access are, for example, the Apple App Store. Here, only the framework conditions for uploading apps are defined, but basically the intelligence of developers can be accessed worldwide. However, there are also examples of a lack of access control, such as shuddle, a kind of substitute for the transportation of children by parents.[7] Not enough security checks were carried out there, so that this start-up had to cease its business activities. However, there are also examples where the customer does not want maximum choice. For complex projects in particular, such as the renovation of a bathroom or a kitchen, it seems to be sufficient to deal with two or three providers in terms of time alone. For example, Houzy only presents its customers with three craftsmen per defined region, whose quality has been tested, according to its own statements. [8]Basically, the service in question determines how much choice the customer wants.
Result control
This involves assessing and monitoring the output and results of the participants in a business ecosystem. The result can be assessed, for example, via ratings by customers. At the same time, incorrect or manipulated ratings, for example through fake accounts, must be prevented. Typical examples are the rating of products on the online marketplace Amazon, the rating of landlords on Airbnb or the drivers of Uber.
Behavior control
Governance also defines which types of interactions should be permitted on the platform. For example, is the customer allowed to interact directly with a provider or should all exchanges take place on the platform? What restrictions should be imposed if undesirable behavior is observed? Open Table (a restaurant booking platform) reserves the right – if customers cancel table bookings several times in a period of less than 30 minutes – to ban them from the platform for a certain period of time.[9]
External relationships with other business ecosystems (multi-homing)
In principle, it would be desirable from the orchestrator’s perspective for all interactions to take place on “their” platform or in “their” business ecosystem. On the other hand, it is difficult to enforce such behavior. Here, for example, mechanisms such as discounts in exchange for exclusivity or voluntary commitments can be used. This is one of the reasons why Airbnb bought the payment provider tilt to enable several tenants to split the rent to be paid within the Airbnb cosmos in order to bind customers more strongly to the Airbnb environment.[10]
In principle, orchestrators therefore have a variety of mechanisms at their disposal which, in combination, should make it possible to control the behavior of participants in line with the Business Ecosystem.
Sources:
[1] https://www.bcg.com/publications/2020/why-do-most-business-ecosystems-fail
[2] https://ccecosystems.news/governance-im-ecosystem/
[3] For the terminology used, see Business Ecosystem Basics: https://ccecosystems.news/grundlagen-business-ecosystems-inkl-webinar-praesentation-als-pdf/
[4] For the following considerations, see L. Chen et al. (2022).
[5] 9 steps to developing business ecosystems: https://ccecosystems.news/9-schritte-zur-erschliessung-von-business-ecosystems/
[6] https://www.airbnb.de/help/article/829/
[7] https://www.failory.com/cemetery/shuddle
[8]https://www.houzy.ch/handwerker?gclid=Cj0KCQjwqP2pBhDMARIsAJQ0CzpUfl2cu34remW8elb8AgRA7PahWzKachBx6DJCupqc7v5oAKYzadAaAoEzEALw_wcB
[9] https://www.opentable.de/legal/terms-and-conditions
[10] https://techcrunch.com/2017/02/22/airbnb-finalizes-deal-to-buy-social-payments-startups-tilt/
