Symbian or Uber? Thriving or Collapsing in Digital Business Ecosystems

By Jacques Bughin

“In an avalanche, no snowflake ever felt accountable,” – Voltairei

What makes successful digital business ecosystems? Beyond a common evolutionary vision, we discuss the success factors successful ecosystems have working for them.

The rise of business ecosystems 

What do Apple, Amazon, Alibaba, Netflix, Uber, TradeLens, and SAP have in common? In the contemporary digital economy, all are platform-based. In turn, platforms are the tip of the iceberg of a new market organization as the main orchestrators of so-called business ecosystems, – in which organizations interact co-dependently to increase, share, and maintain value. 

In order to thrive, ecosystems have a shared common evolutionary vision, and each player contributes to the growth and robustness of the network. To paraphrase Moore, strong ecosystems are dynamic systems of diverse interactions, arrangements and partnerships between the leading center (orchestrator or platform), the network and peripheral players, to exploit complementarities. Through its strategic vision and ecosystemic relational skills, the orchestrator firm is key as it builds and governs ‘the most collaborative path possible around a strategic intention that allows the greatest number of people to adhere to the project. In that perspective, the orchestrator aims to have complements to grow, while constituents are there to maximize the benefits of participation, through critical mass and network effects. Other players, hub landlords or niche players—control localized nodes, and create mass and diversity to secure networks-effects.  

Digital changes everything 

Historically, ecosystems have been limited in number, but have been observed in multiple fields, such as ATM and payment services, telecom, or airline equipment (Boeing and Airbus in the early 2000’s). However, with the rapid evolution of digital and AI technologies, ecosystems have begun to “rule the world”. They have become increasingly important for several reasons: 

1. Technology complexity: Developing and deploying tech solutions is complex and often requires specialized expertise and resources. Ecosystems can provide the necessary infrastructure, tools, and talent. 
2. Innovation speed: Digital technologies (think AI) are evolving rapidly, and businesses must be able to adapt quickly to new technologies and market trends. Ecosystems can facilitate collaboration and knowledge sharing, accelerating innovation. 
3. Scale and scope: Ecosystems can provide businesses with access to a wider range of customers and markets, enabling them to scale their operations and grow their revenue. In the context of digital technologies, marginal economics are often close to zero, making scale a concentration game. 

In addition, digital architecture and the virtualization of practices have boosted the opportunities for large network effects, and hence ecosystems, namely: 

1. Modularity: A classic example of the power of modularity was when PCs were built from standardized modules and semiconductor chips could be designed by one firm and produced by another. Companies that designed chips contributed to a substantial increase in semiconductor patenting and have since ushered in new technology and new client industries to build large ecosystems of connected cars, wearables, implants, cloud computing and Industry  
2. Data and Digital Transformation: The increasing volume of data is transforming business practices, and supports the effect of network economics and interconnected relationship business models.  
3. New appropriability mechanisms have come into life such as patent/licenses or Saas Models that sustain the interest of players to remain in the ecosystem.

A look at ecosystem performance 

Before the digital age, business ecosystems were considered a strange, but powerful idea, especially if they could impose standardization. For instance, IBM, HP and Seagate created business ecosystems for a new open format of linear tape technology in 2000 by using standardizations and succeeded in expanding the market for limited-time offers (LTO) drives. Media manufacturers such as Fujifilm, Sony, Hitachi, Maxell, and others, manufactured and sold their LTO media as complementary business ecosystem members. The LTO format share increased from 12% in 2001 to 77% in 2008 in the backup market of midrange and low-end servers. 

In digital, ecosystems have also become king. Today, the Apple Store, which launched by 2008 with 500 apps, now hosts more than 2 million apps, or a compound rate of more than 20% a year, for an ecosystem generating 1 US Trillion of yearly revenue, or bigger than the GDP of the Netherlands.  

Deepening on the evidence on how business ecosystems drive corporate performance, ecosystems are clearly influential: 1.) on Innovation Acceleration: 50% faster throughput, and 100% when it concerns radical innovation; on 2.) market access and extended customer reach. Through partnerships and collaborations, companies can tap into new markets, customer segments, and distribution channels, driving business expansion. The typical effect is large, in the range of 20% to 30% sales. In a study of the enterprise sales ecosystem with SAP, small software players enjoyed a 26 percent increase in sales after they became SAP certified. A study by this author had shown that platform ecosystem play may boost the sale/profit growth of participants, which was as large as many successful private R&D programs.  

Yet, there is never a free lunch in business. Against business ecosystems come along dependency risks. For instance, overreliance on an ecosystem can pose risks to firms. Dependency on specific ecosystem partners for critical resources or capabilities may make a firm vulnerable to disruptions if those partners face challenges or exit the ecosystem. Also, sharing knowledge and intellectual property within an ecosystem may lead to concerns about the protection of proprietary information. Finally, ecosystems also can be highly competitive, making it difficult for businesses to differentiate themselves.  

More crucially, recent studies have demonstrated that barely 1 out of 7 ecosystem play remains alive and flourishing after 15 years. And worse, from Symbian to eBay, ecosystems may collapse when unsuccessful.  

So what should you do?  

To play or not to play in digital ecosystems? 

To answer the question, the recent 15th G-20 Y at Evian-Les-Bains, of which this author is a leading member of the leadership group, has welcomed business leaders ranging from Tokyo, Kuala Lumpur, and Riyadh to Jo’burg or Chicago and Los Angeles, – to discuss how to best play in a business ecosystem where network effects have become the management foundations of the 21st century organization.   

To tilt toward success, and not collapse in business ecosystems, we have synthesized a checklist of 10 key success factors to monitor:  

1. Users value creation. Users ultimately define value creation in ecosystems—technology can help to be direct to customers, while data and AI can build prediction and personalization. Ecosystems that thrive are obsessed by end users, to lure them into being prosumers, like in games and video ecosystems such as YouTube, or Netflix.  
2. Role play. Don’t be obsessed with being the orchestrator—the main platform tends to be the one taking that role, given their end-user reach without mass. Being a node in an ecosystem is possibly as rewarding if you specialize without the obligation and integration/ maintenance requirements of the orchestrators. 
3. Coopetition mindset. The traditional principles of strategy are rooted in concepts of competition—winning at the expense of, etc. In ecosystems, codependence and value sharing are as important as competition.  
4. Beyond industry concept—In ecosystems, industry boundaries no longer hold—most platforms in digital blur payments, products and services together. Uber leverages a mobile network, and payment applications, plus location services, and offers end-to-end delivery of mobility services, including transport, but also food. 
5. Creative versus operational capabilities – Ecosystems can be transactional, but also innovative. In an ecosystem, creativity, risk, agility, and exploration are core capabilities.
6. Governance is king —A large portion of ecosystems fail because of weak governance design. In particular, governance rules must among many ensure that they:
   a)  Limit free-riding in favor of fair contribution
   b) Favor open rather than closed forms and vertical integration
   c) Favor extensive “flying wheels” to densify network effects
   d) Support transparency for benefits and duties of members in the ecosystem, in order to build trust
   e) Develop mechanisms of conflict resolution
7. Control versus market. Control is a typical reflex as a way to ensure rents and participation—but in most digital business ecosystems, players often find that market excess demand prevails in assets such as skills, data, or models—in this instance, outsourcing through the network may be more agile, and the integration capabilities of those market access may build the participatory value, rather than own the assets. Most platforms are actually asset-light, “without mass”.
8. Participation, but with a hedge. The risk of the collapse of an ecosystem invites caution. Firms should consider multihoming – providing a credible threat to leave the ecosystem if this does not grow, and because multihoming allows to maximize reach for niche players. 
9. Ecosystem, not self-efficiency. Nature shows how the ecosystem maximizes efficiency. For instance, drafting allows geese to fly about 70 percent farther than they could on their own. Each goose will take the lead slot for about the same amount of time, and then spend the rest of its journey drafting behind other birds.
10. Network economics. In ecosystems, network economics plays a crucial role. Two important points should be analyzed to understand the minimal economics of an First, check the strength of weak ties; and second, understand the players at the edge. In a network, the key is not direct links but the relays of those direct links, the indirect “weak” links. They must develop deep interdependence and dense links to support the viability of the network and its stability/robustness. In general, companies only look at direct vicinity players – the reflex should however be to look at higher-order interdependence.

Finally, the edge defines the structure of the network and the economics of belonging or not. By looking at edge players and how their performance is supported by ecosystems, companies may have a very good hint at the minimal attractiveness of ecosystems. 

About the Author 

Jacques Bughin is the CEO of MachaonAdvisory and a former professor of Management. He retired from McKinsey as a senior partner and director of the McKinsey Global Institute. He advises Antler and Fortino Capital, two major VC /PE firms, and serves on the board of several companies.