"Business Ecosystems" is a well-established business buzzword. It is a broad concept and includes market places that bring together a large number of producers of products or services and potential customers. Despite several diversities in ecosystems, several characteristics distinguish them from other governance models.
- Modularity the components of the systems are designed independently and yet function as an integrated whole. In many cases, the customers can choose among the components and how they are combined.
- Customization The contributions of the ecosystem participants tend to be customized and made mutually compatible. This implies that participation in the ecosystem requires some ecosystem specific requirements.
- Multilateralism Ecosystems consist of a set of relationships that are not decomposable to an aggregation of bilateral interactions.
- Coordination Business ecosystems are not fully hierarchically controlled but there is some mechanism of coordination, through standards, processes, and rules, beyond simple market-ruled mechanisms.
The concept of business ecosystems is not something new. many of today's ecosystems are fostered by digitization, the concept of an ecosystem does not strictly require a digital business model. Many successful ecosystems started without a digital backbone. Nor does it require a concept of a platform as an intermediating interface among different players. There are many examples of physical ecosystems like electric vehicles, solar systems, 3D printing in which players interact directly without an intermediary. Thus the concept of business ecosystems is more general than the concept of digital platforms. digital platforms increase the reach, speed, convenience, efficiency, and scalability of many ecosystems.
What are the basic types of ecosystems?
Two types of ecosystems can be observed in practice.
- Solution ecosystems that create and deliver a product by coordinating various contributors.
- Transaction ecosystems that match or link participants in a two-sided market through a platform.
Solution ecosystems - In its most basic form, it makes an offering of several complementors. During the development of a solution, suppliers to the firms can also be part of the ecosystem because they are independent and their activities can be coordinated with other players. Once the basic objective has been achieved, they may be restricted to a reduced role. In this ecosystem, the customer is not an active member but has a big role in selecting and combining the offerings of the core form. Also, intermediaries may participate in the ecosystem because of their activities must be aligned with other players.
Transaction ecosystems - This is characterized by a central platform that links independent producers of products with customers. These ecosystems are two-sided markets that benefit from direct and indirect network effects. Direct network effects occur when participants value the offering more as their market grows. Indirect network effects emerge when the value of the ecosystem increases as the participants grow on the other side.
The two ecosystems differ not only in their structural form but also their purpose, success factors. The purpose of a solution ecosystem is to create a solution. It captures the value they create by selling their product or service.
The purpose of a transaction ecosystem is to be a matchmaker, identify the best fit between the needs of the customer the offering of the producer, and facilitating the transaction. Value creation is driven by the number of successful transactions and their benefits to both sides of the market. It also manages access to the platform, establishes standards and rules, and set incentives to both sides to grow the market.
When is an ecosystem the right governance model?
Unpredictable and malleable business environments may lend themselves to an ecosystem approach. This would enable a shaping strategy that defines the profile of an industry before the rules have been defined. hence it is required that you collaborate with others because you need others to contribute capabilities, build a new market, and share the risk. Business opportunities in such environments are characterized by the high modularity of the required product - ideal for business ecosystems. Highly modular systems lend themselves to an open market model.
Shifts in the need for coordination and the level of modularity requires a change in the governance model. The increasing modularity enables an open market system model and an open market system model restricts innovation. The preferred governance model for any business opportunity and business environment is ambiguous.
What are the drawbacks and benefits of organizing business ecosystems?
Business ecosystems offer three critical benefits - access to a broad range of capabilities, ability to scale quickly, flexibility, and resilience. in the beginning, they can access the external capabilities that may be too expensive to build internally. Once set up, ecosystems can scale much faster than other governance models. Their modular structure permits rapid growth. Positive network effects can foster explosive growth for transaction ecosystems. Their modular structure with a stable core or platform enables both a high variety and a high capacity to evolve.
There are drawbacks to the ecosystem model. It largely comprises of independent economic players that agree to collaborate, which implies only limited control of the overall system by each participant. The challenge is to engage external partners without full control. Related to the challenge of a limited control, is the problem of value capture. The total value captured must be split among the participants. The more open the system the more difficult it is to capture value. Companies need to come up with new and novel ways to monetize the value of their ecosystem.
The odds of succeeding with ecosystems are not better than other governance models and the gains for those that initially succeed are often temporary. This is due to many challenges they face - ensuring cost don't shoot up during the initial phase, ensure quality does not suffer, defend against competitors, and low entry barriers.
The dynamism and flexibility of ecosystems cut both ways, the model is available and evolvable, but it requires continuous adjustments.
The checklist
- Consider building a business ecosystem if you face a highly unpredictable but malleable environment that requires you to collaborate with others.
- Individual components can easily be combined but a certain level of coordination is required to identify partners, specify roles, and align activities.
- benefit from external capabilities, fast scaling, flexibility, and resilience that an ecosystem offers.
If you decide to go ahead, be prepared for challenges of a limited control, and constrained value capture.
On the other hand, if your business environment is rather predictable, you cannot reshape it, rely on internal capabilities for launching, scaling, other governance models like vertical integration, hierarchical supply chains may be better choices.
Managers must evaluate dispassionately if the business ecosystem is the best solution they require.
DO YOU NEED A BUSINESS ECOSYSTEM?
By Ulrich Pidun, Martin Reeves, and Maximilian Schüssler
Comments
Post a Comment