- October 18, 2019
- Posted by: Ramkumar
- Category: Strategy
Rise of Business ecosystems
Business ecosystems have become extremely popular – Thanks to the success of companies like Apple, Google, Facebook and Amazon. Every company wants to build it’s own ecosystems to gain revenues.As companies look to establish their ecosystems, there are some confusions and commonly held beliefs on how to build ecosystems which unfortunately is not true.
Let us analyse some key details on the popular ecosystems, determine the key factors for their success and how long it took them to get profitable.One thing is certain, popular ecosystems like Facebook and Google had a first mover advantage in their ecosystem which gave them an edge over other companies.In addition, these ecosystems tend to follow a similar pattern during their lifecycle.
Ecosystems are difficult to analyze due to lack of structured data available.Hence there is a tendency to believe that building an ecosystem is a profitable value proposition because of successes of companies like Facebook and Amazon.Studies show that less than 15% of ecosystems have been successful with the network effect and was sustainable in the longer run.
Ecosystems have a tendency to rise and fall due to their dynamic nature.Successful ecosystems also do not last, hence companies need to constantly reevaluate their strategy and adapt it as an ecosystem evolves.
Common Trajectories followed by Business Ecosystems
- Ecosystems are stable but at the same time highly dynamic.Most business ecosystems follow a typical path in trying to capture and retain market share.
- Majority of the ecosystems simply fail to achieve their business objectives. Many of them were unsuccessful in even gaining minimum market share.Successful companies even had their own share of failures, for instance Windows phone from Microsoft and Operating system from BlackBerry were unable to gain significant market share.
- On the other hand there are successful ecosystems that were able to capture significant market share initially but were unable to sustain it for a longer period.For instance, Netscape’s web browser and Symbian’s operating system for mobile phones were not able to sustain the initial hype that was created by them when it was launched.Many of them had to gradually exit from the market where as others who are still there have less than 10% market share.
- Few ecosystems have captured significant market share but have witnessed a slight dip recently.This decline can be temporary and there is every chance that these ecosystems can restore back their leadership position.The biggest example is Uber which captured 80% of the ride sharing market, but recently are seeing a decline. These ecosystems still hold a significant market share even though they had a slight decline recently.If corrective actions are not taken by them quickly, there is every chance of them losing their market share to their competitors.
- The final category of the ecosystems are the winners who occupied a significant market share and are still able to sustain their leadership position. Microsoft windows and Amazon are able to sustain their leadership position for more than 20 years.There are clear benefits to be a leader – Higher profits and revenues.
- The net takeaway is that odds of success with ecosystems are same as traditional businesses.In addition, ecosystems that have gained significant market share in the beginning need not sustain this position in long term unless they are able to adapt to the dynamic nature of ecosystems.
Critical Success Factors for business ecosystems
- Every ecosystems reaches an inflection point at each phase of their lifecycle.The actions taken by the player in these inflection points determine their success and failure.
- In the first stage, companies need to seize their opportunity to capture a significant amount of market share.In the second stage, they need to constantly evolve their model by reevaluating their strategy and service offerings to avoid losing momentum and market share to their competitors. Finally companies need to lock their market leadership position so that they can maintain their leadership over a longer period.
- Each of the above inflection points/stages require different actions in order to succeed.This underscores the dynamic nature of the ecosystems and the constant need for the companies to reevaluate their strategy over time.
Seize the Opportunity
- Most of the ecosystems that seized the opportunity were not first movers.They were disruptive new entrants who overtook the pioneer in the market.This shows that being a first mover does not guarantee long term success and entering the market later does not preclude it.So while timing is important and the first movers can gain an edge, there are no hard rules.
- Successful ecosystems were able to scale fast, almost majority of them gained more than 50% market share in the first 5 years.This shows that if scale does not come fast, then it never will.Gaining scale requires attracting users and ecosystems simultaneously in order to take advantage of the network effect.More users would attract more partners who will develop attractive features that will entice more users.
- Successful ecosystem prefer growth over profitability. Initial years for these ecosystems resulted in major losses highlighting the significant risk involved in scaling up an ecosystem.There is no guarantee that there will be a return on investment, hence companies should have a willingness to accept significant losses early on.
Evolve the model to sustain momentum in business ecosystems
- Ecosystems that have initially seized the opportunity and captured a significant share of the market should now work towards retaining the market share.They need to do this by constantly expanding the scope of the platform and increasing engagement with platform participants.
- Ecosystems need to broaden their scope by addressing additional customer needs or by moving to other markets through strategic partnerships and acquisitions.This underlines the fact that ecosystems need to constantly evolve to succeed.
- Uber started with Uber Go, but then rapidly expanded its scope to Uber Pool and Uber X.It expanded its offerings to Uber Moto by allowing its users to book a ride in motorcycle.Then it moved to Uber Eats to offer food delivery.It is also investing in self driving cars to further protect its market share.
- In addition to expanding the offerings, ecosystems should also increase their engagement with platform participants through better communication and collaboration.Increasing engagement deepens relationships which will ensure that partners do not jump to competitors.The objectives and goals of ecosystems need to be aligned with the platform partners ensuring ecosystems continued innovation.
- For instance, Google has developed communities for its partners to get relevant product and program updates.This helps the partners to find ways of growing their business, get advice on Google products and communicate with Google specialists and thought leaders.
Lock in Leadership
- Companies that were able to seize the initial advantage and then did not lose the momentum by expanding their scope of offerings need to sustain their leadership position over the longer term.They need to manage the vested interests of their stakeholders from partners to regulators and customers.This requires building communication channels to allow stakeholders to iron out their differences.
- Successful ecosystems locked in their market position by providing differentiated offerings and then taking steps to make it hard for the competitors to replicate their business models.They do this by offering cheaper discounts to their partners, and by developing dedicated services for their partners to do business on their platforms.
- Didi Chuxing – A mobility service in china is offering discount prices for their cars and petrol so that the drivers can continue to do business on their platform.Sustainable ecosystems also continuously renew their platform in order to withstand any competitive disruption.They redesign their platforms often based on new technology to regain leadership .They achieve this by either doing it organically or through acquisitions.For instance, Facebook acquired WhatsApp and Instagram to defend themselves against mobile based social networks.Facebook has built a family of apps with breadth of formats and reach that appeal to all marketers, while also streamlining processes and improving customer experience.
Business ecosystems will evolve
- Business ecosystems need to constantly renew themselves due to the dynamic nature of the ecosystems.The dynamic nature of the ecosystem is because of the constant evolution in the ecosystem space.
- Simple two sided market places with customers and producers are replaced by nested market places.This means the B2C market places will soon be supplemented by B2B market places which may operate on a different logic.