From firms to ecosystems

July 24, 2018

Your book proposes that the new competitive landscape will be shaped less by firm-specific strategies and more by new business models, powered by ecosystem-centric strategies…

 Here is what is evident: fewer than 15 per cent of firms realize approximately 85 per cent of economic profit in just about every industry. Much talk is made of the usual culprits here—Facebook, Amazon, Netflix, and Google, but there are others too—Tencent, Tesla, Applied Materials, Microsoft, or any number of other companies. Besides capturing a disproportionate amount of economic profit, these and others are the explosive growth models to learn from. While different in size, industry, and geography, many of them share a commonality that begins to highlight a stark difference between the growth models of yesterday and those of tomorrow.

The difference? They share an ecosystem-centric strategy. But how did they come to this? Simply, they realized that a new competitive landscape required asking, and answering, new strategic questions: where is value being created and destroyed in the ecosystem and value chains in which you are engaged? What role do you play within it? With what set of (new) capabilities to do so?

And here it gets particularly compelling.

How can organizations take advantage of business ecosystem so that they can identify and capture new sources of value in new ways? It requires four steps:

  • ask (and answer) the new strategic questions

Asking these questions leads to looking at your competitive landscape from an ecosystem perspective, rather than that of your business and even your industry. Doing so logically leads you to ask: what is my ecosystem? How is it changing? What are the specific clusters of capabilities (skillsets and technology assets) catalyzing those changes? And then, how will different types of technology impact our business over time, with what implications on our future workforce? These have become the critical questions and require an ecosystem perspective to answer if you want to drive explosive growth, which leads to the next step.

  • plant a flag on a problem to own, and own it

 

Explosive growth has always come from identifying points of friction, non-consumption, or market breakdown. Tackling these is the key to figuring out what flag to own.

Note: planting a flag has little to do with refining your existing set of products and services—which is an inside-out perspective. Instead, it requires starting from an outside-in viewpoint and working from the critical points of friction or market breakdown and what is required to tackle those. Then, and only then, figure out what products and services are needed, including the ones you have today.

Where you plant your flag will determine new sources of value to deliver, which has very real implications on how you engage with customers, the products, and services you deliver, and how you both extend and create new revenue streams.

The first two steps help you figure out ‘where to play’ in a changed competitive world; the final two help you to ‘execute’.

  • clarify—and mobilize around—your new 20 per cent

Capabilities (your skill sets, behavioral profiles, and technology assets) are the infrastructure of execution. No capabilities, no execution. No execution, no customers. No customers, no business. Pretty straight forward—until it is not. As much as 20 per cent of any organization’s capabilities drive roughly 70 per cent of the value it delivers. A changed competitive world requires a new 20 per cent of capabilities critical to capture the 70 per cent of new value. The question becomes: what is that new 20 per cent, and what do you do about it? This takes us to the fourth step.

  • orchestrate your ecosystem

Orchestrating your ecosystem involves knowing what is the new 20 per cent—not only yours, but those of your partners—and figuring out how to harness or orchestrate all of these capabilities to capture new sources of value in new ways.

Could you explain the idea of ‘the new 20 percent’?

What made organizations successful in the past is not what is needed to be effective in the future. A senior executive of a national insurance company realized this, triggering an ‘ah-ha’ moment for him. The core asset (his 20 per cent) of an insurance company has been how it prices risk. “What happens,” he asked, “when our core asset shifts from pricing risk to preventing accidents?” He acknowledged, “What has always driven our value to our customers will change… because the capabilities needed to price risk are completely different from those to prevent accidents.”

One quick point to take away from this anecdote—doing more of the same, just faster and cheaper, is not going to work over time. The key capabilities that underlie your business—that shape how you do what you do—are changing. There has always been roughly 20 per cent of capabilities that drive 70 per cent of the value an organization delivers to its customers. The reality is, there is now a new 20 per cent needed to capture the new sources of value catalyzed by a changed competitive landscape. The question becomes: what is that new 20 per cent and what do you do about it? At CapImpact, we have built a predictive analytics platform to help organizations ask, and answer, that question.

 

Will economic moat (installed by, and around an individual organization) still be relevant when value is driven not by firm-specific strategies but by an ecosystem-centric business model?

 Of course, but the moat will not have been dug by an individual company, but by the orchestration of different companies in service of whichever flag they mobilize around. The key word here is orchestrated, rather than controlled. The question becomes, then, is there a conductor driving this orchestration for which they realize extraordinary value? Yes, but value accrues to everyone in a ‘rising tide raises all boats’ way. For example, Amazon Web Service and Microsoft’s new platform strategies are premised on enabling others to build whatever it is they want to build. A moat exists, but value is realized by all.

Different organizations take different parameters into consideration while deciding ‘currency’. Are there any basic parameters that are common to all?

Yes. But let us set the stage first: different stakeholders often care about, or are motivated by, different definitions of value. We define these different definitions of value as currencies—units of value that motivate the behavior of different stakeholders.

Why does this matter? Because different stakeholders are motivated by different definitions of value. For example, executives responsible for energy sustainability will be motivated— and incentivized—by how much they reduce their carbon footprint; others by driving NPS (net promotor score); some others by brand equity; and some, particularly in the public sector, by citizen responsiveness. The default currency in the private sector remains profitability (or other measures that drive shareholder value).

However, an ecosystem-centric model engages different types of actors around a common problem to solve, with different types of values that motivate them. (This will become more and more important as we tackle harder, interconnected problems over time.)

If we are going to tackle diabetes, for example, how do we get different stakeholders who care about different currencies—from patient outcomes to pill profitability—to work together? Building mechanisms to allow those with different currencies to have an equal say at the table is critical to harnessing the power of ecosystem-centric business models.

So, the parameters identify what motivates the behavior of different stakeholders; design a shared value framework of those currencies so that every stakeholder traces back capabilities they bring to the table; develop a way to simulate—by playing what-if scenarios—the implication of decisions made and actions taken and how these different currencies and focused projects will be impacted under different conditions. This is one way to build trust, traceability, and accountability in these new growth models.

(As told to Ashutosh Gotad)