The origin of a Paradigm Shift – an organization innovating for impact with talented and ambitious leadership triggers change. And with an ecosystem of external and internal capabilities, the change is more pronounced and occurs faster.
A recent report by Accenture Strategy found that ecosystems are increasingly seen as a cornerstone of future growth. In fact, almost 50 % of those surveyed are seeking to participate in ecosystems to create new business models, make good on opportunities, improve products and services, etc. This recognizes the need to be agile and opportunistic, increasing complexity, the importance of minimizing the risks associated with change, and the requirement to compete effectively. Basically, an ecosystem strategy is essential to making innovation more rewarding to increase relevance and revenue. An example of this are the many networks and partnerships to generate sales, expand innovation capabilities, etc. with ecosystems to increase business opportunities and have more ways to deliver value. This is important to better enable innovation initiatives contribute to achieving corporate objectives and meaningfully improving business outcomes.
For Competitive Advantage
The dominant view of strategy in the 20th century was based on Michael Porter’s ideas about competitive advantage where success was based on dominating the value chain – by maximizing bargaining power among suppliers, customers, new market entrants and substitute goods.
This thinking style is viable when the business, market and technology are relatively static or change slowly over time. However, when things change rapidly or the nature of change is different than before, the organization misses out on new opportunities, attracting talent, leveraging capabilities in new ways, etc. This greatly diminishes the ability to compete.
An example of how things change is when IBM developed the System 360 mainframe architecture in the late 50s and invested hugely over many years in ongoing developments and bringing the product to market, the value chain was almost completely self-contained and vertically integrated. In contrast, the PC was more of a hybrid strategy with some internal but mostly external resources because of the different technologies, it was making a new market, and there was an urgency to deliver a product. As a result, IBM partnered with various companies (ie: Microsoft, Intel, etc.) – while controlling the architecture, product direction, etc.
Today, rather than looking to dominate value chains, progressive companies seek to widen and deepen connections with partners having complimenting innovation capabilities as well Customers and startups. This is because of the need to look at things in new ways as well as leverage various competencies to better assess opportunities, potential and risk. These are the new business realities that require a change in thinking and modus operandi. With this, it’s important to recognize that today markets are evolving and change is much faster, there are higher User expectations, people and systems are more interconnected, and the environment is more complex than in the past. As a result, if you are looking to maximize your bargaining power and control of things, you are likely to be cut off from important information, capabilities and opportunities, etc. This is not the way to effectively compete or increase relevance and revenue !
Understanding the Benefits with Ecosystems
Value chains are linear, so the biggest and most powerful link in the chain tends to dominate. A major industry player like McDonald’s or Walmart has significant bargaining power that impacts both customers and suppliers as well as creating barriers to entry for new market entrants and substitute goods. In contrast, ecosystems are nonlinear and complex – whereby power emanates from the center instead of at the top of a value chain. You move to the center by connecting out. So, while an industry giant may possess significant bargaining power, exercising that bargaining power can be problematic because it can weaken links to other nodes in the ecosystem. Consider the case of Ford, which in the 1920s built the vertically integrated River Rouge plant to dominate the value chain and control the manufacturing process. Because the company had the ability to produce just about every facet of a product itself (the plant even had its own steel mill) – the company had tremendous bargaining power. However, as the industry matured with other companies specializing in various parts and assemblies, Ford and the other vehicle manufactures were unable to compete effectively on multiple fronts. As a result, there was a change from the internal vertically integrated business model to operate in the much larger ecosystem with other stakeholders. As all the transportation companies discovered after moving to an ecosystem, they were able to get better parts, cheaper, and faster. Suffice to say, this was hugely beneficial operationally and financially ! And as Magna Int’l expanded their capabilities, the benefits increased from being in an ecosystem and further collaborating with suppliers – for the car companies and their Customers – by getting more for less.
Interestingly, during the financial crisis in 2008, Ford’s CEO, Alan Mulally indicated in testimony to Congress : “ The collapse of one or both of our domestic competitors (GM, Chrysler) would threaten Ford because of the 80 % overlap in supplier networks and nearly 25 % of Ford’s top dealers also own GM and Chrysler franchises”. In the historical value chain driven world, Ford would have welcomed the collapse of a competitor. In an ecosystem driven world, their collapse could do damage to Ford. This is a great example of how the nature of competition and competitive advantage has changed !
Utilizing “ Convening Spaces “
Ecosystems are essentially networks of networks, so a crucial component of any ecosystem strategy is to participate in convening spaces. Traditionally, these have been industry-based associations / forums, focus / peer groups, etc. While these are still important, as moving to ecosystems has increased, so have the number and types of convening spaces. Some of these convening spaces typically have a focus (ie: technology – IoT, AI, ML, Smart…, Mobile, etc. ), a certain theme / domain (ie: Leadership, Strategy, Innovation, Industry, Geography, etc.), a business network or social media platform (ie : LinkedIn, Facebook, Twitter, Instagram, etc.). These forums are essential for any ecosystem strategy for industry people or a community to facilitate connecting, learning, making decisions, etc. For example, with quantum computing, IBM has created the Q Network to collaborate with partners, enterprises, accelerators, VC funds, etc. to assist like minded people to fast track learnings, engaging with emerging ventures, benefit from thought leaders, etc. Google’s academic program helps the company connect to the world’s leading minds and have a leg up on recruiting the best talent. In an ecosystem driven world, having “ Convening Spaces “ with widening and deepening links is how you move to the center of networks – to facilitate increasing your capabilities and expanding business opportunities.
Preparing for the Future – in a new way
Historically, the lines between industries and competitors was fairly clear-cut (ie: Ford competed with GM and Chrysler in vehicles / transportation). Later, foreign competition became important because they disrupted the market of the Big 3. Regardless, the basic premise of the industry remained much the same – a manufacturer produced cars and sold them to the public through a network of dealers. Today, however, the nature of competition has changed and industry lines have blurred. For example, Amazon competes with Walmart in retail, Microsoft, IBM and Google in cloud computing, and Netflix and Warner Media in entertainment. The company itself is much more than simply a bundle of operations competing in different value chains, but a platform for delivering products, services and convenience for Customers as well as creating synergies and opportunity – by utilizing a variety of ecosystems to grow the business and acquire talent with technology and information.
Another example of how industries and organizations are changing is the automobile manufacturers are making investments in driverless / connected vehicles with significantly greater digital capabilities to become a much more technology sophisticated and Customer centric enterprise. To do so, they are building ecosystems made up of established technology companies, startups and others. They are not seeking to “maximize bargaining power,” but rather to prepare for a future in the making where knowledge is power and monetizing value creation is critical for success.
Summary
A “ Value Chain based strategy “ is slow and rigid – while an “ Ecosystem based strategy “ recognizes the world is redefining value as well as becoming fast and agile. For the most part, the days are gone when you could simply build a better mousetrap by yourself. You need to relentlessly connect, collaborate and effectively contribute to deliver new capabilities as well as be good at the various forms of innovation and managing the risks associated with change to increase relevance and revenue.
In conclusion, an ecosystem strategy matters for those wanting to innovate for impact to meaningfully improve business outcomes.
Dec 18, 2019 Greg Satell / CAIL Innovation commentary info@cail.com