Digital ecosystems drive opportunity – and risk

With today’s fastest-growing companies – from Amazon to Google and Uber to JustEat – explicitly positioning themselves as ecosystem players, it is clear that digital ecosystems can offer unprecedented power and growth.

But these ecosystems can not only offer your company amazing new opportunities, they can also create it for others, adding risk to your status quo.

Ecosystems in themselves are nothing new or revolutionary, and they don’t get as much hype as, say, blockchain or AI in the media. But the simple fact is, they are omnipresent. In the past, the term was confined to natural environments. This is no longer the case. Today you see businesses, public sector institutions, even non-profits, all moving beyond their traditional operational borders via ecosystems.

These businesses create and participate in new, flexible, and adaptive networks of enterprises while jointly pursuing their ambitions. While companies including Volkswagen and Toyota have been using ecosystems for years – orchestrating huge networks of suppliers and distributors – what is new today is digitalization. In this digitally enabled market, the concept of a social, business ecology (as outlined back in 1985 by Peter Drucker) has become a full-blown reality.

Digital drivers

To benefit from digital ecosystems, you need products that generate and share data within your network (contacts, customers, prospects, partners etc.). In doing so, you can compete not just with your products but also with the data your products generate. At a basic level, by infusing digital connectivity into your value chain and production ecosystems you strengthen your prevailing competitive position.

Of course, digital per se is not a new term; its applications go back to the era of mainframe computers. Neither is the topic of data; most enterprises are accustomed to capturing and utilizing data on markets, products or operations, and integrating them within their value chain. However modern technologies enable real-time and archived data to be combined and strategically harnessed in new ways. 

They allow companies not only to unleash historical data from their silos, but also to mash these historical views together with real-time data – providing completely new real-time insights. These new insights can provide you with strategic advantages and allow you to be more competitive than before.

IoT machine learning

For example, IoT sensors on compressors provide industrial manufacturer Gardner Denver with real-time insights specific to each time the compressor is used by a customer. By archiving data, the manufacturer accumulates IoT analytics and insights over time to develop profiles of each compressor. With these insights it can refine each compressor’s profile using real-time streaming analytics, helping it to grow in intelligence. Knowing how often a customer uses its compressor and how continuously, for example, can help Gardner Denver offer compressors that more closely meet the needs of the customer.

Opportunity… and risk

Digitally enabled ecosystems (or digital ecosystems) offer opportunities but also increase risk to the status quo in every industry. By adding data-based competition into the mix of product-based competition, it creates new competitive scenarios and dynamics.  You will see more such asymmetric competitive battles between grow digital and born-digital, such as Google, Apple, and Amazon entering new industries. Like Amazon in retail with the Amazon Go concept, or Tencent in Banking through WeChat. One fresh from the press is Ford’s initiative to deliver subscription services in collaboration with Salesforce.

Traditional margins associated with dominant product/market share may also erode if new data-driven digital ecosystem services commoditize product-based offerings. Tesla is good example; it is forcing the German car manufacturers to rethink how to produce and sell their cars. The Tesla example also underlines that dominance through product may not be enough when competing in digital ecosystems. You have to seek new methods of dominance through data orchestration. Let me explain what I mean by that. 

Data orchestration through platforms

Since most of today’s fastest-growing companies – from Amazon to Uber – are explicitly positioning themselves as ecosystem players, hubs within networks of customers, suppliers, and producers of complementary services, it is clear that digital ecosystems can give you unprecedented power and growth.

Instead of going for a conventional vertical/industry domination to create and capture value, ecosystems players have developed a whole new of competing that is much more horizontal. The hub out of which they operate is often referred to as the platform (although it may have all kind of different names like Apples Appstore, for example).

The platform economy

That is why some people refer to the new digital ecosystem economy as the platform economy; the platform being the orchestration tool in the hub to channel communication within the ecosystem. Having the control over the platform is powerful and desirable because it enables you to implement levies.

The power of this is not to be underestimated, given the discussion on Apple’s levy of 30% on everything that flows through Apple’s Appstore including in app payments. At the beginning of an ecosystem, it is likely that nobody will really complain about it, as the benefits outweigh the disadvantages. Later on, though, this kind of control can become pretty frustrating. The case of Epic vs Apple shows this: Where Apple kicked Epic’s fortnite game from the Appstore because it had implemented its own payment system to bypass Apple’s commission.

Another huge benefit of being an ecosystem orchestrator is that you have privileged access to information about your entire ecosystem. You see what’s selling well, and you see how the market is evolving before others do. We refer to this advantage as the spider economy. It takes a lot of effort to refrain from going after these opportunities yourself and instead leave it to your ecosystem partners.

We don’t yet know if these so-called ecosystem orchestrators have an enduring advantage. For every Google or Tencent that is hugely profitable, there is a Spotify, a WeWork or an Uber that continues to lose money. But regardless of how successful they prove to be, it’s important to understand that they are playing by a different set of strategy rules than traditional firms.

Rather than building moats, cutting off competitors, competition becomes more turnstile. Rather than starving your competitors you outgrow them. You do this by creating very easy onboarding options, offering free trials that are complemented with new business models like pay-as-you-go, or software as a service. (Frictionless is another word that comes to mind; to make it as easy as possible for someone to onboard by themselves.)

A hybrid world

Unfortunately, it is not all that black and white. To further complicate things, the split between the worlds of moats and turnstiles isn’t absolute. For example, Amazon isn’t just building an ecosystem – it is also operating in the bricks-and-mortar world of logistics and retail. Alibaba is explicitly pushing its ecosystem strategy while also building a strong proprietary capability in artificial intelligence. Google has its own smartphone offerings alongside its search and video-sharing businesses.

A hybrid world brings a lot of complexities; it is where brown field meets green field. It is where OT meets IT, it is where bricks and mortar meets the metaverse. It is where the physical world meets the cloud. And, it is where Software AG can  understand and help with your digital transformation as no other.

Next, I will discuss how the API economy fits into ecosystems.