For ecosystems to be effective they must delegate risk, harness third party innovation, and create low barriers to entry
This is the first in our Ecosystem Thinking series. For more information, articles and updates, click here.
How times have changed, until you look back through an old document or PowerPoint. I did that recently and came across an ecosystem diagram from 2009. Here, in blocky blues and oranges was a description of a mobile ecosystem. To be precise, it was Nokia’s ecosystem.
A trip down memory lane
First impressions? Ten years ago, ecosystems had already begun to look complex. Alongside its supply chain, its silicon providers, its partnerships with telecoms network providers, and its operating system there was also Nokia’s online entertainment service, OVI, and all the contributors to that. The company’s mapping acquisition (NAVTEQ) had taken them in the direction of augmented reality or ‘layers’ – information about points of interest, to be contributed by the public.
There is a box on the diagram for developers, the group that powered competitor Apple to superstar status. Sadly, Nokia had very few of them. And looking closely at the OVI partners, these were, on the whole, large media companies that already provided blockbuster entertainment on other platforms.
That, I decided, after a day thinking back, is what really distinguishes genuine ecosystems. Not so much developers or media companies. What struck me was the lack of any group or groups in Nokia’s old ecosystem that were committing their own resources, at risk, to innovate for Nokia’s customers – or better still to innovate for their prospective customers.
The so-called ‘ecosystem’ was – in reality – no such thing. It was a collection of companies pretty much doing business as usual.
Spreading the risk
Delegating innovation risk to third parties, however, is actually a critical element of ecosystem thinking. It is far better to delegate risk to third parties than it is to assume all market risk in the mother ship.
Scaling at low relative cost is a major advantage of ecosystems, particularly in long tail markets.
Most large companies don’t know how to innovate for the long tail of customers. They do ‘mass’ very well. Mass production, mass marketing, mass advertising. But they don’t do highly scaled niches.
Not until Amazon came along and made a fortune out of it, did we realise that, actually, mass works best alongside niche. Mass market appeal brings people into an ecosystem. Once there they typically identify niche products they also have a burning desire to buy.
Delegating risk to third parties takes the orchestrating company closer to customers and their widely varying needs. It produces the customer-centricity that large businesses crave. It is also a driver of speed and scope.
A question of cost
But let’s return to the idea of cost. By low cost, I mean low relative to the cost of trying to innovate for long tail markets on your own account.
Imagine Apple innovating in health care diagnostics, in-car systems, education and learning, fitness, pilot route maps, and so on. It would take too long, be too expensive and in all probability the company would not be able to recruit the expertise to do a good enough job.
Similarly, imagine if Google had tried to provide search engine marketing advice to newspapers and magazines across the world as the company powered the digital content ecosystem in the 2000s. It simply wouldn’t have been possible.
There’s another clue to the nature of ecosystems in those two examples. The barriers to entry are zero to very very low. People, companies, entrepreneurs, need to be able to enter an ecosystem at very low cost. How low? About the cost of providing a quality experience. The orchestrating company can’t add to that cost without deterring entrepreneurs.
Low cost can also mean no cost. But in reality good ecosystem orchestrators provide a whole slew of tools to help ecosystem partners prosper.
All aboard for Amazon (and Google)
Take AWS, the Amazon Web Services subsidiary that pioneered Cloud services. It will provide new partners with training. It will help them hire. It will help identify solutions that can go into their new offering. Or Google’s analytics packages. Google began by giving away analytics and has continued to give valuable resources away ever since (Translate, Trends, Charts, Designs, Docs and so on).
Looking back at that Nokia ecosystem you can already see how dramatically business had begun to change. The change was not just complexity. It was a change in ideas.
Nokia’s business was looking highly dependent on external relationships and therefore less so on its internal expertise. But critically all of those relationships were ones that Nokia hoped to control through service agreements and other contracts.
However, we had just moved into a world of niche, very low cost applications and content, with no entry barriers for entrepreneurs. Contracts and service agreements and size were all becoming less relevant.
I sense this is still an area that some executives have difficulty understanding, let alone embracing. But it is key to ecosystems. If I was asked to define a modern business ecosystem it would be something like:
A group or groups of independent companies and individuals who innovate for your customers in long tail markets in order that you can scale applications, products, services or solutions across a broad scope of markets, at speed, and at low relative cost.
Give away control
Ecosystems arrived very quickly in their modern form. We’d seen value-added reseller network already in the 1980s and 1990s. But those relied on formal qualifications and investment (Reaching Gold status with a platform like Microsoft .NET for example). Today’s ecosystems are more of a free for all.
When thinking about ecosystems, think of an entirely different lineage. Go back to 2001 and Procter and Gamble making a bold argument for research and development to be 50 per cent externally sourced.
Open innovation and the idea of ‘not invented here’ were important markers on the way to the modern business ecosystem. Their basic message to executives is that you cannot manage modern markets like you used to it. Give away control. Embrace the ecosystem ideal.
Haydn Shaughnessy is the co-creator of Enterprise Flow, a framework and future operating model for companies undertaking digital or agile transformation. He has published widely on business issues, including at Forbes.com, the Harvard Business Review and on enterprise risk for The Global Association of Risk Professionals.