Strategy in an Age of Increasing Interconnectedness – Taking Stock (Part 2)
The examples of Alibaba, Amazon and Airbnb impressively demonstrate the value creation potential of ecosystems compared to traditional, linear value creation structures. But how do you plan and develop an ecosystem? As I explained in the first part of this blog post, traditional strategy concepts cannot be easily transferred to ecosystems. So what constitutes an ecosystem strategy? In the following, I will present three further prerequisites for the successful design of an ecosystem, which must be part of every discussion about building or participating in any ecosystem.
Dimensions of an ecosystem strategy (continued)
Flexibility is another strategic parameter to be considered when developing ecosystems and is aimed primarily at creating sustainable or recurring interactions [10, 18]. While an ecosystem develops dynamically and not every step can be planned and implemented proactively, many people still tend to follow classical approaches, such as the concept of customer or partner lock-in. This means that the relationship is designed in such a way that other actors quickly become dependent and no longer want to move away from the ecosystem. However, the flexibility to withdraw from an ecosystem is often not only a tolerated parameter, but a necessary prerequisite for participation. For many actors, for example, so-called “multihoming” [14], i.e. participation in several similar ecosystems, represents an absolutely sensible strategic choice, while a ” ban” on participation in other networks would be more of a hindrance and would constitute an entry barrier that would hinder one’ s own growth.
The management of dependencies is another central aspect of an ecosystem strategy. This can be, for example, the identification of so-called bottlenecks that endanger the existence of an ecosystem. Ron Adner introduces two central considerations [4], on the one hand the resolution of co-innovation risks, on the other hand the resolution of adoption chain risks. Co-innovation risks arise when individual players develop new products or services, but are dependent on so-called co-innovations, i.e. complementary technologies. For example, the iPod may have been a sensation in itself, but it would not have been successful without the music management software iTunes or possibilities for obtaining digital music tracks (partly through illegal peer-2-peer networks). Only the combination made success possible, which is why Apple was never the pioneer in digital music playback – a first-mover strategy was not appropriate here (the first portable music player was MPMan, 1998 [3]). Apple waited patiently for the right moment and launched the iPod, together with the right software, only 3 years after the first digital music player, when necessary complementary services were already available. When the right innovations are available, in addition to co-innovation risks, it is also important to ensure that these technologies are available on the market and are used in the right places in the ecosystem [4]. For example, a few years ago Michelin introduced the so-called PAX tires, which could be driven for many kilometers without any loss of quality or safety even when defective, until they were finally replaced. However, these tires required special machines and skills in the workshops, which were never available on a large scale. Although the PAX tire had irrefutable advantages, it did not succeed on the market due to the lack of complementary services.
From a strategic point of view, the orchestration of the ecosystem is considered the supreme discipline and is often equated with the big tech giants such as Amazon, Google, Facebook, Alibaba, WeChat, etc. However, equating orchestration with the big platform providers is not enough, because these companies are rather atypical platforms [16]. In our view, orchestration is more than just providing a mega-platform, such as Amazon or WeChat. In our view, ecosystem orchestration can be divided into two activity classes: operational orchestration and dynamic orchestration. The operative activities mainly include the coordination of the individual participants or their activities. This includes, for example, the operation of a platform that enables interaction between individual parties (e.g., merchants and customers on Amazon), or the provision of necessary information for the participants (content provision in social media). In addition, activities are necessary to ensure the continued existence of the network, for example the continuous integration of potential partners. In addition to the operational activities, there are also various dynamic orchestration activities that aim at the continuous development of the network. This could be, for example, the continuous development of new services. In recent years, for example, Uber has invested a great deal of time and effort in expanding the range of services offered in its ecosystem. For instance, more individual mobility services (Vision: “Move the way you want”) or other new services in the areas of food (Uber Eats) or health (Uber Health) were integrated, thus continuously enriching the vision: “Setting the world in motion”. All these activities can be carried out by a so-called orchestrator, but a look at reality shows that pure orchestrators, providers or contributors are often more of a theoretical construct. Orchestrators Amazon or Alibaba, for example, invest heavily in so-called contributor services (e.g. logistics) to provide critical services that influence the success of the ecosystem. But also for providers it can be a sensible strategic option to invest in activities that support other actors in the value chain (e.g. by enabling customers to use the login function of Facebook or LinkedIn). In the long run, non-differentiating activities in the ecosystem will certainly be increasingly taken over by a single party (e.g. the orchestrator).
Growth in the ecosystem through the “turnstile strategy”
Taken together, all these considerations ultimately pursue one goal: to let the ecosystem grow. Birkinshaw introduces the term “turnstile strategy” for this purpose. In recent years, the process of strategy formulation has been dominated by industry analysis [25] and the resource-based view [7, 31], but both approaches no longer seem sufficient to describe the dynamic developments in ecosystems. The turnstile strategy describes how the continuous flow of resources and information is increased by more and more actors. The concept is not necessarily intuitive, since in the past, competitive advantages and one’s own resources were protected and competition was kept as far away as possible – however, more and more ecosystem players are showing that an open game involving direct competitors can be advantageous [10]. The real competitive advantage of an ecosystem seems to be the size of the network and the positioning at the flow of resources and information. The more participants, users, manufacturers and contributors there are, the greater the competitive advantage that results – because it is difficult to grow a new network and not necessarily feasible due to the high investment costs. The mobility platform Uber, for example, invests large sums of money over a period of years in the development of the network (e.g. onboarding of drivers and acquisition of new customers), without itself having made a profit so far. In doing so, the company is betting (also by introducing additional services such as Uber Health or Uber Eats) that they will orchestrate the dominant network, which gives neither providers nor users any reason to look for mobility services elsewhere.
The strategic considerations in the age of ecosystems seem to be changing. Coopetition and collaboration are more and more coming into focus. If one combines all the approaches discussed above, partnerships, flexibility, management of dependencies, orchestration and finally the meta approach of the “turnstile” strategy, one comes to the conclusion that one’s own success depends on the success of the network or the actors in the network. Successful organizations are those that help others to succeed. Or as Jack Yun Ma, founder and director of the Alibaba Group at the World Economic Forum 2015 said: “If you want to win in the 21st century, you have to make sure you are making other people more powerful. Empower others. Make sure other people are better than you are. Then you will be successful.”
Sources
1. Accenture. 2017. Technology Vision 2017 – Amplify You. Accenture. Retrieved from www.accenture.com
2. Accenture. 2018. Accenture Open Banking for Businesses Survey 2018.
3. Ron Adner. 2012. From Walkman to iPod: What Music Tech Teaches Us About Innovation. The Alantic. Retrieved June 17, 2020 from https://www.theatlantic.com/business/archive/2012/03/from-walkman-to-ipod-what-music-tech-teaches-us-about-innovation/253158/
4. Ron Adner. 2013. The Wide Lens: What Successful Innovators See That Others Miss. Portfolio Penguin, New York, USA.
5. Ron Adner. 2016. Ecosystem as Structure: An Actionable Construct for Strategy. Journal of Management 43, 1: 39–58. https://doi.org/10.1177/0149206316678451
6. Rainer Alt. 2018. Electronic Markets on Digitalization. Electronic Markets 28, 4: 397–402. https://doi.org/10.1007/s12525-018-0320-7
7. Jay Barney. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management 17, 1: 99–120.
8. Christian Betz. 2020. Dynamic Value Creation in Business Ecosystems – A Framework for the Analysis of Value Creation and Orchestration (Preliminary Study). St.Gallen, Switzerland.
9. Christian Betz, Marc Burkhalter, and Reinhard Jung. 2019. Prerequisites for Value Co-Creation in Business Ecosystems. 25th Americas Conference on Information Systems, AMCIS 2019: 1–5.
10. Julian Birkinshaw. 2019. Ecosystem Businesses Are Changing the Rules of Strategy. Harvard Business Review: 1–8. Retrieved from https://hbr.org/2019/08/ecosystem-businesses-are-changing-the-rules-of-strategy
11. Marc Burkhalter. 2020. Allocentric Business Models – An Allocentric Business Model Ontology for the Orchestration of Value Co-Creation Using the Example of Financial Service Ecosystems. University of St.Gallen, St.Gallen, Switzerland.
12. Brian Chesky. 2014. Twitter. Retrieved April 5, 2020 from https://twitter.com/bchesky/status/421856850384932864?lang=de
13. Deloitte. 2015. Business Ecosystems Come of Age. Deloitte University Press. Retrieved April 5, 2020 from https://www2.deloitte.com/content/dam/insights/us/articles/platform-strategy-new-level-business-trends/DUP_1048-Business-ecosystems-come-of-age_MASTER_FINAL.pdf
14. Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne. 2006. Strategies for Two-Sided Markets. Harvard Business Review 84, 10: 1–11. https://doi.org/10.1007/s00199-006-0114-6
15. Annabelle Gawer and Michael A. Cusumano. 2014. Industry Platforms and Ecosystem Innovation. Journal of Product Innovation Management 31, 3: 417–433. https://doi.org/10.1111/jpim.12105
16. Michael G Jacobides. 2019. The Delicate Balance of Making an Ecosystem Strategy Work. Harvard Business Review: 1–5. Retrieved from https://hbr.org/2019/11/the-delicate-balance-of-making-an-ecosystem-strategy-work
17. Michael G. Jacobides, Carmelo Cennamo, and Annabelle Gawer. 2018. Towards a Theory of Ecosystems. Strategic Management Journal 39, 8: 2255–2276. https://doi.org/10.1002/smj.2904
18. Michael G. Jacobides, Arun Sundararajan, and Marshall Van Alstyne. 2019. Platforms and Ecosystems: Enabling the Digital Economy. Briefing Paper World Economic Forum, February. Retrieved from www.weforum.org
19. Richard Johnson, Susan Moore, Katya Petriwsky, Charmaine Rice, C John, and Dana Sand. 2018. Digital McKinsey: Insights of Winning in Digital Ecosystems. 0718 Hospitality Technologies 3, 1: 5–25.
20. Henry Mintzberg. 1983. Structure in Fives: Designing Effective Organizations. Prentice Hall, Eaglewood Cliffs, New Jersey, USA.
21. James F. Moore. 1993. Predators and Prey: A New Ecology of Competition. Harvard Business Review 71, 3: 75–86.
22. Richard Normann and Rafael Ramirez. 1993. From Value Chain to Value Constellation: Designing Interactive Strategy. Harvard Business Review.
23. Mirva Peltoniemi and Elisa Vuori. 2004. Business Ecosystem as the new Approach to Complex Adaptive Business Environments. In Proceedings of eBusiness research forum, 1–15.
24. Michael Porter. 1985. Competitive Advantage: Creating And Sustaining Superior Performance. Free Press, New York, USA.
25. Michael E Porter. 1980. Competitive Strategy. Techniques for Analyzing Industries and Competitors. Free Press, New York, USA.
26. Michael Porter and James Heppelmann. 2014. How Smart, Connected Products are Transforming Competition. Harvard Business Review 92, 11: 64–88. https://doi.org/10.1145/3017680.3022452
27. PwC. 2016. Manufacturing’s Next Big Act: Building an Industrial Digital Ecosystem. June.
28. Scrapehero. 2018. How Many Products Does Amazon Sell Worldwide – January 2018. Retrieved April 5, 2020 from https://www.scrapehero.com/how-many-products-amazon-sell-worldwide-january-2018/
29. Statista. 2018. Anzahl der Hotelzimmer der größten Hotelgruppen Weltweit 2018. Retrieved April 5, 2020 from https://de.statista.com/statistik/daten/studie/617552/umfrage/top-10-der-hotelgruppen-weltweit/
30. Statista. 2020. Kennzahlen zu Airbnb Weltweit. Retrieved April 26, 2020 from https://de.statista.com/statistik/daten/studie/419494/umfrage/globaler-ueberblick-von-airbnb/
31. David J. Teece, Gary Pisano, and Amy Shuen. 1997. Dynamic Capabilities and Strategic Management. Knowledge and Strategy 18, March: 77–116. https://doi.org/10.1142/9789812796929_0004
32. Walmart. 2020. Our Retail Divisions. Retrieved April 5, 2020 from https://corporate.walmart.com/newsroom/2005/01/06/our-retail-divisions
