What Is Your Business Ecosystem Strategy?

Ensure social acceptance. A number of successful ecosystem players have recently experienced substantial backlash from consumers, partners, competitors, and regulators. In order to build social capital and secure social legitimacy, orchestrators must establish an ecosystem governance model that is consistent and fair. Consistency means that the mechanisms of governance are transparent and easy to understand, comprehensive, internally consistent, and stable over time. Fairness means that governance complies with local laws and norms, avoids biases (for example, in data algorithms and access), and engenders trust among participants. An ecosystem can only prosper in the long run if it creates tangible value and distributes it in a fair manner among its participants.

5. How Can We Win Against Competing Ecosystems?

Ecosystem competition differs from conventional market competition in three ways.

First, boundaries are fuzzier with ecosystems. Market borders become fluid as expanding ecosystems follow customer needs. Automakers find themselves competing with tech players for mobility solutions, and banks find themselves competing with e-commerce retailers for payment services. Corporate borders become less relevant as the competitive context shifts from products and companies to the broader context of ecosystems. As CEO Stephen Elop rightly observed in a 2011 speech to Nokia’s employees: “Our competitors aren’t taking our market share with devices; they are taking our market share with an entire

ecosystem!”3

3
Charles Arthur, “Nokia’s chief executive to staff: ‘we are standing on a burning platform,’” The Guardian, February 9, 2011.

Notes:

3
Charles Arthur, “Nokia’s chief executive to staff: ‘we are standing on a burning platform,’” The Guardian, February 9, 2011.

Second, ecosystems must compete for contributors as well as customers. In addition to a compelling customer value proposition, they need a powerful contributor value proposition, as well as the ability to strike a nuanced balance between collaboration (to grow the pie) and competition (to divide the pie). Also required is the willingness to give up full strategic control and accept that ecosystem strategies, even more than traditional competitive strategies, are to some extent emergent and may pivot from time to time.

Third, ecosystem competition is frequently winner-takes-all or winner-takes-most. Network, learning, and scale effects bolster the competitive advantage of the leading ecosystems and make it ever more difficult for other ecosystems to catch up. This suggests that there is a first-mover advantage that is less about being the first in the market and more about being the first with a complete solution. Apple’s iPod was not the first digital music player, but it was the first to offer a comprehensive solution by combining the hardware product with the iTunes music management software.

While some aspects of competition are different in an ecosystem context, others are the same. Ecosystems still need to differentiate themselves from their competitors. Orchestrators can use the architecture and technology of their platforms, data analytics frameworks and algorithms, and their governance model to differentiate along three dimensions: the scope of the ecosystem, its customer value proposition, and its contributor value proposition.

The scope of the ecosystem answers the timeless strategic question of where to play. Which market segments and geographies will you target? Niche plays can succeed when some customers have divergent needs that are not fully served by mass solutions or when they develop a yen for more sophisticated solutions. Thus, we see Uber and Lyft competing head-on in the mass market for ride-hailing, while their competitors Wingz, HopSkipDrive, and Veyo focus on airport transfers, small children, and non-emergency medical transports, respectively. Geographically focused models can succeed when local network effects or network density is more important than network size, as it is for platforms that focus on well-defined neighborhoods.

The customer value proposition is part of the answer to the strategic question of how to play. In ecosystems, one of the major tradeoffs in the customer value proposition is between an emphasis on the scale and breadth of the offering and an emphasis on the quality of the customer experience. The used-fashion platform Poshmark focuses on expanding its offering by setting very few boundaries for sellers and driving engagement and social interaction among platform participants. By contrast, its competitor ThredUp focuses on customer experience and quality by actively curating and positioning products on the platform.

A strong focus on customer experience typically requires a higher investment in areas such as enhanced platform functionality, curation processes, and additional services. Ecosystems that pursue this strategy can compete in ways that can be difficult for competitors to match without jeopardizing their core business model. When Google launched Google Maps on Android, TomTom, the leading location technology provider at that time, managed to avoid head-to-head competition by refocusing its customer value proposition, emphasizing transparency of data usage, which enhanced its appeal to major car manufacturers, ride-hailing service providers, and mobile operating systems. Google could not follow without jeopardizing its core business model of data

monetization.4

4
Ron Adner, Winning the Right Game, The MIT Press, 2021.

Notes:

4
Ron Adner, Winning the Right Game, The MIT Press, 2021.

The contributor value proposition, which defines the ecosystem’s desired contributors and what they will receive in return for their participation, provides the second part of the answer to the question of how to play. The governance model of the ecosystem is an important source of competitive advantage here. An open model makes it easy for contributors to join and offers them greater freedom, while a closed model limits internal competition and enables strong alignment among contributors. Both approaches can be successful, as seen in the video game industry where Nintendo adopted rather strict quality controls and quantity limitations for externally developed games and Microsoft Xbox offered external game developers a good deal more freedom.

We’ve seen that the development of an ecosystem is strongly path dependent and that early governance decisions can significantly change its trajectory and future position. Thus, many successful ecosystems started with rather closed governance (to control quality and behavior and avoid a vacuum that contributors could fill) and became more open over time. However, new entrants to ecosystem competition are frequently forced to start with a more open governance model to quickly gain scale and catch up with their more established competitors.

Of course, positioning an ecosystem on the three dimensions of competitive differentiation does not represent dichotomous choices—the dimensions are more like spectrums that contain many potential positions. Moreover, the combination of the dimensions and the way they reinforce each other offer additional opportunities for differentiation. HopSkipDrive focuses its ride-hailing platform on the narrow customer segment of small children. Correspondingly, it emphasizes trust, transparency, and safety in the customer experience (for instance, by publishing regular safety reports and offering real-time tracking of rides). This positioning is further reinforced by a very strict governance model that requires drivers to prove their qualifications and pass a detailed background check.

6. How Can We Capture Value in Our Ecosystem?

Numerous platform-based businesses—many of them fueled by cheap venture capital—have achieved impressive revenue growth, market positions, and valuations but are still far from earning profits.

And they may be right not to focus too much on profit because in an ecosystem world the question of value appropriation should not come first. The best way to benefit from an ecosystem is to focus on creating value for the customer. This will increase the total size of the pie and thus the size of your slice. An ecosystem where all participants focus on their own advantage will find it hard to establish the level of cooperation that is required to create some value to distribute in the first place.

Nevertheless, at some point, boards and investors will want to know how the platform owner is going to capture a fair share of the value that is created by and for the ecosystem. For this, it is important to understand the peculiar economics of the ecosystem business model. Most traditional businesses experience diminishing returns; as the number of customers grows, the value per customer declines, naturally limiting the economically viable size of the business. In contrast, most business ecosystems enjoy increasing returns; driven by network and learning effects, the value per customer increases as additional customers join the ecosystem. This enables many ecosystems to benefit from exponential growth and winner-takes-all or winner-takes-most dynamics.

There is a dark side to the story, however. An exponential growth profile also implies that it may take a long time before the ecosystem reaches the tipping point and really takes off. Accordingly, platform owners tend to wait and hope that they will eventually reach the tipping point, so if they fail, they fail late, after spending substantial amounts of money. This makes ecosystems an investment with potentially high returns, but also with high risks. Many venture capitalists are attracted by this profile, but it is much harder for most incumbent firms.

For the orchestrators, this economic profile is even more pronounced than it is for contributors. The orchestrator is the residual-claim holder of the ecosystem. While it has a big influence on the distribution of the value created, it must also make sure that all players earn enough to keep them on board. In return, the orchestrator can retain the residual profit, which may eventually be very high but is negative for an extended period. By comparison, a contributor role offers lower upside potential at a lower risk.

Orchestrators must consider two levels of value capture. They must monetize the benefits that the ecosystem creates for its participants (ecosystem monetization), and they must distribute the value among its participants (value distribution).

In terms of ecosystem monetization, the orchestrator must balance three competing objectives: maximizing the size of the pie; enabling essential contributors to earn enough profit to ensure their ongoing participation; and capturing its own fair share of the value. To achieve this, the orchestrator must decide whom to charge and what to charge for from a wide range of options. For example, it could charge all participants or charge only one side of the market while subsidizing the other side, or it could offer reduced charges for particularly price-sensitive customers. Similarly, the orchestrator could demand an access fee, licensing fee, transaction fee, or revenue share, or it could monetize the ecosystem through the sale of supplementary products or services, or through advertising revenues.

In general, ecosystem monetization should not stifle the growth of the ecosystem; it should encourage and incentivize participation. This can be achieved, for example, by charging for transactions versus access, subsidizing the side of the market that is less willing to participate, and/or offering rebates for increased usage and rewards for recruiting new participants. Moreover, monetization efforts should be directed at overcoming bottlenecks in the ecosystem and encouraging innovation by, for example, subsidizing bottleneck players and/or lowering prices on new products.

Value distribution, which is regulated by the ecosystem’s governance model, can include access to customers, data, and intellectual property, as well as money. The orchestrator can secure its share of the value by harnessing its role as a gatekeeper and occupying critical control points, such as access to customers, essential products or services, and bottlenecks in the system.

Orchestrators can use a variety of strategies to increase their value share. Some improve and extend their offering by integrating their own versions of successful applications developed by complementors, a strategy called

“coring.”5

5
A. Gawer and M.A. Cusumano, ”How companies become platform leaders,” MIT Sloan Management Review, 2008.

Notes:

5
A. Gawer and M.A. Cusumano, ”How companies become platform leaders,” MIT Sloan Management Review, 2008.

Apple, for instance, launched the screen extension and mirroring feature Sidecar for macOS 13, an application similar to popular apps like Luna and Duet Display. Other orchestrators exploit their knowledge of what is selling well in their marketplaces to offer such products themselves, in direct competition with contributors. Still others attempt to build their share of value by commoditizing contributors’ offerings (creating rules that stimulate more intense competition among them, restricting opportunities for differentiation, controlling pricing, or fostering the entry of new competitors).

Orchestrators should take care not to reach beyond their grasp in the quest for value appropriation or to misuse their power. They must manage the risks of losing the support of their contributors as expressed by increased multihoming (when contributors participate in multiple competing ecosystems), disintermediation (when participants bypass the platform and connect directly), or forking (when contributors exploit the resources of the ecosystem to become direct competitors). Toward this end, orchestrators should continuously monitor the health of their ecosystems and look for red flags, such as declining engagement levels, complaints about predatory behavior, negative coverage in social media, or increases in the number of legal actions filed against the platform.

7. How Can We Benefit as an Ecosystem Contributor?

Not every company is ready, willing, and able to be an ecosystem orchestrator. Indeed, given the vastly greater demand for contributors, it is far more likely that your company will fill that role.

Fortunately, being a contributor can offer as many opportunities as being the orchestrator. Many incumbent firms have successfully followed this path and shared in the success of large ecosystems. Axa launched a first-of-its-kind ridesharing insurance product on the BlaBlaCar platform, and Philips executed on its strategy of becoming the leading lighting expert in the smart-home market by first partnering with Apple and then joining most other smart-home ecosystems as a complementor.

There are five key success factors that contributors need to get right.

Join the right ecosystem. Contributors should identify ecosystems that are aligned with their strategic priorities. They should assess the competitive position of potential ecosystems to find the one with the highest likelihood of success. Then, they should scrutinize its governance model, paying particular attention to transparency and decision rights, rules that limit access to customers and the freedom to operate, required commitments and investments that may restrict future flexibility, and the design of the data and value sharing plan.

Define the right level of engagement. The right level of engagement can be determined by asking two questions:

• Should we commit to just one ecosystem or multihome in several ecosystems?
• Should we bring the full breadth of our offering to the ecosystem or limit it to specific products and services?

A high level of commitment to one ecosystem allows a contributor to strategically focus its efforts, limit the complexity of its operating model, and realize economies of scale. On the other hand, it can maximize exposure to and dependency on the ecosystem and reduce strategic flexibility and bargaining power.

Stand out from other contributors. Competition within an ecosystem is different from competition in an open market because the rules of ecosystem competition are largely defined by the orchestrator and can change over time. A contributor can stand out from its internal competitors and improve its bargaining position by occupying control points within an ecosystem, such as essential components, customer access points, and bottlenecks. It also can stand out by enhancing the value it adds to an ecosystem—becoming a category leader, dominating a niche, creating a new category, closely collaborating within a subset of contributors, or finding creative ways to exploit the mechanics of the ecosystem.

Avoid being commoditized by the orchestrator. Contributors can avoid commoditization using preventive and defensive measures. To mitigate the chances of such a threat materializing, contributors need to stay innovative and deliver value that orchestrators cannot. They also should secure direct access to customers and their granular data whenever possible. And, if the orchestrator begins to act in ways that commoditize contributors’ offerings, the contributors should be ready to resist through lobbying, mobilizing public support, and, if necessary, legal action.

Know when it is time to leave. Contributors should regularly review their decision to participate in an ecosystem and be open to reversing it. Indicators that it may be time to seriously consider leaving an ecosystem include a rising risk of brand damage, competitive discrimination, erosion of trust, the decline of the ecosystem, and the emergence of better alternatives. Leaving an ecosystem should not be an unmindful decision—joining an ecosystem should entail a commitment to support and fight for it. But in the end, one of the benefits of being a contributor is not having to go down with the ship.

8. How Can Our Ecosystem Strategy Evolve over Time?

The evolutionary development of ecosystems cannot be predicted. It is an emergent process that is influenced by many factors, such as competition, regulation, the evolving needs of customers, and your resources, underutilized assets, and appetite for risk.

Many of the successful ecosystems we studied have pivoted multiple times and in unexpected ways. Indeed, adaptability is one of the major strengths of ecosystems.

Would-be orchestrators should consider the evolutionary possibilities when planning ecosystems because those possibilities can inform the initial design and guide future strategic decision making. In addition, the orchestrators of existing ecosystems should consider their future possibilities as they seek to build and expand. We’ve identified eight vectors of ecosystem evolution in two categories. The vectors can be pursued individually or in various combinations. (See Exhibit 3.)