More and more companies are choosing to join an established or emerging business ecosystem as part of a strategy to deal with industry disruption, increased uncertainty, and customers demanding solutions of ever-greater complexity and depth. Whether it’s a well- known consumer ecosystem such as that led by Apple, or a business-to-business ecosystem such as that led by ARM or Amazon Web Services (AWS), the same critical question arises: if I don’t lead the ecosystem, how can I succeed in becoming a profitable ecosystem partner?
Researching ecosystems that span industries from e-commerce and publishing to semiconductors and healthcare over the past decade, we found companies that have been successful for years by contributing to an ecosystem. Sometimes, by contributing as partners, they earn even higher returns than those enjoyed by the ecosystem leader. But the path to success is littered with traps for the unwary who, despite their best intentions and willingness to invest, may find themselves confined to an unprofitable niche role in the ecosystem, drained of their intellectual property, or supplanted by the leader. So how do contributing partners secure and sustain a profitable position in an ecosystem and leverage it to their advantage? We identified five keys.
Choose the most promising ecosystem
Competition is increasingly between ecosystems, rather than only between individual companies. In the emerging autonomous vehicle industry, for example, Baidu has built an ecosystem around its open Apollo project that brings together almost 200 industry partners, including companies as diverse as BMW, BYD, Bosch, Continental, Daimler, Ford, Grab, Honda, Hyundai, Intel, Nvidia, Microsoft, and the insurer Swiss Re.1 Meanwhile, Alphabet, Google’s parent company, has built a competing ecosystem around its Waymo subsidiary’s artificial intelligence (AI) and lidar technologies that includes Stellantis (Fiat Chrysler), Geely (owner of Volvo cars and its strategic affiliates Polestar and Lynk & Co.), Jaguar Land Rover, Nissan, Avis, and UPS.2 In the cloud hosting market, the AWS ecosystem is dominating this fast-growing industry, with several competing ecosystems led by Microsoft, Google, Alibaba and IBM.
While it may be possible to join multiple, competing ecosystems as a contributing partner, it will often make sense to focus your available resources on aligning your strategy and co-investing with just one. That choice should first be guided by the credibility and demonstrated commitment of the leader of the ecosystem and the foundation partners; are they likely to have the resources and determination to succeed against competing ecosystems? But the probable “fit” with your own strategic goals and capabilities is also important. Consider whether you are likely to bring something unique to the ecosystem, be it a component, service, knowledge, or connections. As we discuss in more detail below, a unique contribution will underpin your future power and leverage in the ecosystem that are essential preconditions for monetising your involvement. Equally, unless you can bring a unique contribution, the ecosystem leader is unlikely to welcome any attempts you might make to become involved.
For most ecosystems, the precise customer value proposition must be discovered while the ecosystem takes shape. New value can be created by developing a new product bundle, a new customer solution, a platform that opens the way for new functionality or convenience, or even a whole new industry (such as green mobility) that a new company could not deliver acting alone. The necessary starting point for this discovery process, however, is the identification of an unmet need and a “proto” vision of what might create value for the potential customer.3 This vision of what might create value will be more convincing for some prospective ecosystems than others. Good indicators of an ecosystem with attractive potential are the engagement of potential lead customers, and investment in the form of R&D and information sharing by the lead firm.
Another important dimension of fit is how well the roadmap for the future evolution of the ecosystem set out by the leader is aligned with your own strategy. Is the ecosystem likely to develop in ways that further your own strategic goals? Will you also profit as the leader profits from the growth of the ecosystem or are your monetisation strategies likely to come into conflict? Take the case of the hugely successful ARM ecosystem for reduced instruction set computing (RISC) chips that has seen the ARM architecture embedded in 95 per cent of the mobile phones in the world, as well as other devices totalling over 150 billion chips. The original equipment manufacturer (OEM) partners, such as Samsung and Xiaomi, benefited from wider choice of semiconductor fabricators, faster advances in technology, wider availability of developer tools, and lower unit costs as the ecosystem grew. Silicon fabricator partners, meanwhile, extended their potential customer base as ARM architectures became the de facto global standard for RISC chips. Software providers also benefited from the growing customer base as well as a faster pace of innovation fuelled by combining new knowledge generated throughout the ecosystem. Although there were compromises involved in balancing individual partner requirements with a global standard, the overall success of the ecosystem was well aligned with partners’ strategies. ARM’s approach to monetisation, based on licences and unit royalties paid each time its architecture was used in a chip, was well aligned with the success of the partners, embodying the principle that the ecosystem leader only gets rich when its partners prosper.
Not every ecosystem, however, has good alignment between the leader’s strategy and monetisation scheme and those of its partners. This can make a significant difference to the rewards available from joining an ecosystem as a contributing partner. Intel’s early partners providing Wi-Fi connectivity to personal computers equipped with its processors, for example, found themselves squeezed out when Intel embedded Wi-Fi capabilities starting with its Centrino chip. This was in line with its strategy of competing by increasing the speed and functionality of each new generation of its semiconductors, which conflicted with the aspirations of partners seeking to complement the chips’ capabilities.
Identify your unique contribution
A partner’s power and leverage in an ecosystem derives from making a unique contribution that the ecosystem will depend on if it is to deliver value to the customer. This needs to be some element of, or activity in, the ecosystem’s value creation system that you can own and control, on which the ecosystem’s ability to create value for customers is dependent.
Without that element, the ecosystem would be unable to satisfy its customers. Such a contribution is usually embodied in something that other participants in the ecosystem find essential – a component, a design, or a service.
To provide a sustainable flow of profits, your contribution needs to satisfy certain conditions. These are the same four conditions which strategy theorist Jay Barney concluded that a resource must satisfy before it can underpin a sustainable competitive advantage: it must be valuable, rare, non-substitutable, and hard to imitate.4 In IBM’s PC-compatible ecosystem, Intel’s CPU and Microsoft’s MS-DOS were good examples; it was almost impossible to navigate around them. In this case, while the IBM-PC ecosystem came to dominate its industry, it was a cruel irony that its leader, IBM, made scant profits compared to those of its partners. IBM laid out the ecosystem’s architecture, interfaces, and protocols, but it lacked control of a key element which it could leverage to capture a share of the profits generated by the ecosystem. Its leadership and contributions clearly created value for all the participants, including users, but it was difficult for IBM to collect a licence fee for its contributions. The architecture, for example, was not only difficult to capture in a single bundle that IBM could license to participants, it also represented a key element that had to be readily shared if IBM was to succeed in the quest to establish a dominant design.
The partners in athenahealth’s successful healthcare ecosystem benefited because the rapid pace of change in healthcare made it impossible for any one entity to deliver every healthcare practice’s needs. Each partner brought focused expertise to the athenahealth ecosystem’s clients, offering specific functionalities that addressed carer needs.
Partners thrived if they were able to demonstrate that they were best at a certain specific service.
Shape your interactions with other partners
Much of the benefit of being part of an ecosystem comes from the opportunity to interact with a diverse set of partners, some of whom may be in industries beyond your own, and to learn and co-innovate with them. Successful contributing partners, therefore, take the opportunity to work with other partners in the ecosystem, not just its leader. Contributing partners in the Amazon Web Services (AWS) ecosystem, for example, used the partner networking platform established by AWS to forge links between themselves to enable experience-sharing and innovate. Professional services and consulting partners worked with software and technology partners to develop new tools to help customers migrate their on-premise IT systems easily to the AWS cloud.
To make this kind of co-innovation between the partners requires the right interfaces. Some of these will be established by the ecosystem leader, but individual contributing partners will need to take the lead in establishing effective channels through which to cooperate. In a classic supply chain, most of the interfaces between parties are governed by contracts. That’s appropriate, and efficient, when performance can be measured objectively; think of a situation where a component or service must be delivered in the right quantity at the right time. However, in an ecosystem, the interaction between partners is seldom that simple and straightforward. For an ecosystem to succeed in innovating, partners need to interact in a way that helps each party to learn. Instead of designing the interfaces around transactions where one party delivers something to another, interfaces need to be designed to facilitate the flow of knowledge and enable innovation. And as partners in the ecosystem learn, roles and contributions will change, so the interfaces need to be flexible enough to allow the ecosystem to evolve continually.
There are several ways to establish these kinds of effective interfaces. Where contracts are required, it makes sense to write these with a focus on high-level outcomes, leaving room for flexibility, and with clear mechanisms for dispute resolution. Second, consider establishing portals to smooth the path of data exchange between those partners you could benefit from working with. For the exchange of complex know-how, try to establish interfaces through high levels of human interaction. This might include creating dedicated partner management roles within your organisation. In other cases, it might be necessary to codify some of the complex and tacit knowledge, so that it can be exchanged more efficiently through data links and high-quality APIs.
Partner interactions that go beyond transactions involving the exchange of well-defined commodities inevitably depend on establishing trust between the parties by the very fact that what flows between them, such as knowledge, is difficult to verify and value. Many of the necessary partner relationships in an ecosystem are also symmetric, where success depends on developing understanding and coordination between partners. In such situations, trust can usually only be developed by experimentation and learning by doing.
Learn from the ecosystem to fuel ongoing innovation
Any contribution to an ecosystem can eventually be copied or substituted, given enough resources and time. Therefore, you need to update and evolve your contribution so that it can generate new and unique sources of value that participants in the ecosystem will continue to pay for. You can use your involvement in the ecosystem to help you do this. Capturing and redeploying what you can learn from the ecosystem enables you to keep on innovating faster and more effectively than rivals, as well as any would-be usurpers among your partners.
Clearly, the ecosystem leader is usually in the best position to capture and aggregate data and knowledge and learn from the ecosystem. ARM’s historic business, for example, consisted primarily of designing chip architectures for mobile phones. However, in the course of working with partners such as Qualcomm and Freescale, ARM learned about the emerging demand for tablet computers. Using that insight, complemented by what it had learned from other partners and some internal know-how, ARM was able to design new chip architectures for tablets. When the market took off after the release of Apple’s iPad (which included ARM chips), a fresh revenue stream opened.
Other partners in an ecosystem can be active learners, too. Partners developing software that used ARM-powered chips and electronic design automation tool developers, for example, also gained insights and data they could use for future innovation from their interactions with other partners in the ecosystem. This was aided by the annually hosted ARM Partner Meeting, which brings together OEMs and providers of complementary products, as well as ARM’s direct customers. Reliably fuelling your own innovation by using data and knowledge you are extracting from the ecosystem, however, requires putting processes in place to act on what you have learnt, using it to innovate, and so renew your unique contribution and strengthen your position in the ecosystem.
As you learn from the ecosystem, it is also important to decide which data and knowledge it is advantageous to share with partners to promote the health and vitality of the ecosystem, and what needs to be kept proprietary to reinforce your unique contribution to the ecosystem. A useful rule of thumb is to share information that can help your partners contribute to the ecosystem more effectively, but to keep proprietary data and knowledge you glean from the ecosystem that can help reinforce your own contribution.
Establish your toll gates
To profit from your contribution to the ecosystem, you must establish an efficient “toll gate” to collect revenues when partners make use of that contribution. The tolls may take the form of licence fees, royalties or commissions on transactions within the ecosystem, a share in the revenues of the products and services that other partners supply, or the profits on value-added products or services created using the data and knowledge from the ecosystem.
The size of the toll needs to balance the lure of increased profitability drawn from the ecosystem against the risk of extracting so much that it milks the ecosystem dry, leaving too little upside for the leader or other partners to keep them engaged. In consequence, the toll for any single type of transaction, activity, or partnership will have a limit. It is worthwhile trying to estimate that ceiling on the profit you can extract through any single toll gate. This entails working out exactly how much your partners should be willing to pay per unit based on projected volumes before it would become more economical to encourage a substitute complementing partner to join the ecosystem and take the work in-house.
One response to this kind of limitation on how much profit can be captured from a single toll gate is to diversify your revenue sources from the ecosystem. That means designing multiple toll gates at different points in the ecosystem. Contributing partners should follow the same playbook used by many successful ecosystem leaders such as ARM, AWS, and Apple, that have generated profits from their ecosystems without inflicting too much pain on partners or customers by using multiple toll gates that they positioned at different points, each collecting a small fee. ARM, for example, charges one-off licence fees to anyone who wants the right to its proprietary IP. But it also charges a royalty on the sale of every unit of the devices that embody its designs. It derives a double benefit as the ecosystem expands; its revenues and profits grow when new participants join the ecosystem, as well as when as existing partners grow their sales. Designing your monetisation so revenues and profits grow as the ecosystem expands avoids burdening it with large, fixed costs and stifling its growth when it is small and underdeveloped.
Our overarching message is this: you don’t have to be the leader of an ecosystem to benefit from an ecosystem strategy. Contributing partners can thrive and profit handsomely by participating. But to achieve this requires proactive management of your role in the ecosystem and your interactions with others. This starts with choosing the most promising ecosystem that best fits your future strategy. Identifying your unique contribution is key, along with shaping your interactions with fellow partners, not just the ecosystem leader. To maximise your gains and future leverage within an ecosystem, look for ways to extract knowledge and data from the ecosystem to fuel your own innovation, as well as establishing toll gates to capture the value you help create.
About the Authors
Arnoud De Meyer is Professor Emeritus and former President of Singapore Management University. He is an internationally recognised researcher in R&D and Innovation Management, Manufacturing Strategy and International Management. Currently he is Chair of the Temasek sponsored Stewardship Asia Center (Singapore) and independent director of several listed companies.
Peter J Williamson is Professor of International Management at the University of Cambridge, Judge Business School and Fellow of Jesus College. He has served as a non-executive director of companies spanning whisky to green energy and software. The latest book, Ecosystem Edge, shows how to leverage a network of partnerships to gain competitive advantage.
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