How to make Ecosystem for Business

This critical study by strategy professor Ron Adner may cause you to reconsider what you “know” about disruption. The majority of advice on the subject still sets start-ups against incumbents. Adner explains how leaders must keep ecosystem disruption in mind. Beginning with the well-known but misleading story of Kodak’s demise, he argues that industry barriers are giving way to cross-sector ecosystems where new value architectures – which partners establish and defend – are most important. These systems continue to be poorly understood. Adner provides tools to assist you in identifying threats and developing an ecological strategy.

Previously, disruption meant newcomers adopting digital business strategies to displace incumbents. 

Whether it was Southwest Airlines or Nucor Steel, the conflict between David and Goliath has always occurred within well-defined industries. With disruptive technology, incumbents had to keep an eye out for challenges from below. To displace the titans, start-ups merely needed a good idea and a fresh business plan. 

In response to this threat, incumbents attempted to disrupt themselves by investing in innovation. This strategy typically entailed diverting resources away from long-standing cash cows, sheltering innovative teams from the larger operation, and showing the bravery to cannibalize existing, still-profitable business lines.

When Kodak turned digital, it outlasted traditional disruption but won the wrong game. 

Kodak, which was founded in 1892, went bankrupt in 2012. It’s possibly the most well-known bankruptcy story of the last half-century. According to legend, Kodak established and maintained global dominance in traditional film developing for decades. It created digital photography in 1975. Unfortunately, it was too tied to its traditional film business’s revenues and margins to make the conversion to digital. Others swept in, and by the time Kodak realized what was going on, it was too late. 

This is now a great lesson for CEOs worldwide. However, key elements of this well-known story are untrue. Kodak, in fact, went all-digital in 2000. Kodak’s executives foresaw the analog-to-digital transition. They were well aware of the lessons of interruption and were determined not to let it happen to them. They reorganized, innovated, and invented new things.

Most leaders understand competition, substitutes, and complements, but not always “value inversion.” Complements help you succeed by improving you, but only to a point. When complements become very effective, they might invert the value proposition and become substitutes. At first, digital cameras and camera phones supported Kodak’s new strategy.

However, screens grew in size and resolution, smartphones became common, and internet sharing services such as Instagram emerged. The game evolved from analog prints vs. digital prints to screen viewing vs. digital prints. Kodak failed to anticipate this shift. As a result, it was unable to respond in time.

What should we learn from Kodak? Winning the wrong game can equate to losing. Avoid Kodak’s destiny by acknowledging that the approach and methods meant to combat industry-specific upheaval are no longer applicable in many circumstances. For the age of ecosystems, you need new technologies.

The struggle against disruption is increasingly spreading beyond industries and into ecosystems. 

Industries no longer fit neatly into categories with well defined customers, rivals, rules, and suppliers. They are continually shifting and becoming more connected. Interdependence extends beyond supply lines and into relationships. If Kodak had adopted an ecosystem mindset, it could have survived. Smartphone and social media makers had no intention of destroying Kodak. Kodak, on the other hand, was merely collateral damage.

Learn from Kodak’s error. Examine the ecosystem in which you operate as well as your industry. In industry competition, you win through improving efficiencies or developing unique capabilities that provide you an advantage over competitors. In an ecosystem, your focus must shift to what you can do in collaboration with a unique set of partners to co-create a new “value architecture” with a new value proposition. Kodak’s value architecture consisted of photographing (capture), creating (chemical development), seeing (quality prints), and sharing (duplicates to give to friends and relatives). It made the move to digital cameras (capture) and digital printers without incident (produce). It received some sharing (duplicates to social media/email), but it did not experience the ecosystem disruption of viewing (prints to screens).

“The key difference between classic disruption and ecosystem disruption is that the source of the threat does not start as an opponent, but as a benign co-creator of value.”

Kodak, like its competitors Lexmark and Fuji, could have survived with a better understanding of ecosystem dynamics. It may have shifted to narrow areas where it had a competitive advantage, such as sensor technologies. Kodak could have controlled the “share” end of the value architecture with its early advantages in online photo storage and sharing, or expanded into online photo book creation rather than betting all on digital printing.

Analyze your ecosystem to identify potential risks and new opportunities. 

Adopt an ecosystem mindset to create game-changing ecosystem tactics. Select the best strategic tools and language. Focus on the structure of interdependencies and relationships — not simply supply chain interdependencies, but partners with whom you might align to develop a structure to deliver a new value proposition.

Begin by understanding your value architecture, and then consider what is changing in the environment. Examine the causes of stress and threats. Simultaneously, examine your internal options menu and prioritize them based on how well they fit the changing surroundings. Consider your approach to ecosystem creation. First, create a “minimally viable ecosystem” (“MVE”), and then stage your expansion.

Adopt a collaborative approach to partners, especially in a growing ecosystem. Consider a longer time frame and emphasis greater teamwork and dedication. Adjust as needed, but remain confident in your strategy. To keep colleagues on board, communicate your strategy throughout the organization. Everyone must understand the underlying plan and why they should adhere to it.

Construct your environment in stages. 

Amazon today controls the market for home assistants, but it began as a clear underdog versus Apple (Siri), Google (Now), and Microsoft (Cortana). Amazon waited patiently. In 2014, it released its first MVE, the Amazon Echo. The product’s sound was tinny, and its built-in assistant (Alexa) couldn’t answer many inquiries. However, Amazon partnered it with a new service called Amazon Music, which is free for Prime members. This combination resulted in a critical mass of users and a steady trickle of feedback.

Next, Amazon spent in strengthening Alexa’s capabilities by using fast-learning algorithms from Amazon Web Services. Alexa will soon be able to order food for you. More people joined, attracting more platform developers (partners). Alexa had 25,000 “skills” by 2017, and 80,000 by 2021, up from 130 in 2015. Building on this success, the platform was made available to hardware manufacturers (additional partners), who integrated Alexa’s capabilities into everything from light switches to dishwashers. Amazon will control 53% of the home assistant industry by 2021.

By the 1990s, ASSA ABLOY, a Scandinavian lock and key firm founded in the nineteenth century, had become trapped in a commodities market. With a strong desire to go digital, the corporation followed a similar path to Amazon’s to transform itself into an ecosystem leader. It created an MVE, a computerized lock that could manage access codes and store entrance data, in 2001. It integrated data from the locks to a network that linked them in 2008. Then it launched personal key cards in 2012, which enterprises could program to enable wearers access to a range of locations — while also serving as a library card and e-currency at associated cafeterias.

Start-ups may benefit from industry disruption, but ecosystem development and disruption do not

Large corporations, such as Amazon and ASSA ABLOY, typically have a large number of trusted relationships from which to establish an ecosystem of satisfied, aligned partners. However, start-ups do not. To defend against ecosystem disruptions caused by heavyweights like Amazon, you must have your own defensive partners. The value architecture you develop with partners extends well beyond your own firm’s value proposition. Make a robust architecture out of the elements you bring together with your partners. When faced with a giant, use a partnership attitude to create a collective shield.

Wayfair, an online furniture marketplace, defended and prospered in the face of a full-fledged Amazon furniture offensive. Wayfair has a significant logistical and selection edge over traditional furniture stores. When Amazon entered the picture, those factors became secondary. Wayfair survived by analyzing its ecosystem architecture to determine what Amazon did not accomplish well. Working with its suppliers, the company engaged in differentiating itself in two critical areas of the value architecture: customer discovery and deliberation. Wayfair and its ecosystem partners helped customers identify their own style and make appropriate decisions by providing more information, including quality, 3D images of furniture and the opportunity to digitally place it in their own settings.

Investigate what works best for you, your partners, and your customers. Amazon may have captured the majority of the transactional market, but certain partners and customers want more than commodification. Create a “defensible niche” by devising a common strategy with partners and bringing them together in a cohesive front, as Wayfair did.

Exercise humility in deciding how central you are to the ecosystem.

Don’t expect to build your ecosystem around your company, with you at the front. Thinking your company is the center of everything offends and repels the very partners you require. By adopting an ecosystem mindset, you recognize that the coalition, not your company, comes first.

Consider if you should be a leader or a follower in an ecosystem. Every company hopes to lead, but success is dependent on a variety of factors. Partners in successful ecosystems decide which of them is most suited to lead. Followers have significant power in anointing the leader and should use that authority early on to change the governance and behavior of the ecosystem. Leaders in the ecosystem stand to earn more, but they also make larger investments and take on more risk. Followers receive less, but contribute less – and their ROI can be significant.

When you come across tempting new business opportunities that compete with those of your partners, temper your ambitions. During Spotify’s conflicts with Apple Music, it began negotiating directly with some musicians. This concerned the company’s music label partners. Spotify backed down before too much damage was done. Podcasting, on the other hand, was a complementary business that Spotify could and did join without alienating ecosystem partners.

Maintain one eye on your company and the other on the coalition of partners. 

Former Microsoft CEO Steve Ballmer was preoccupied with competition and Microsoft’s dominance. Over the course of 14 years, he tripled income but saw no increase in share value. In his first six years as CEO, Satya Nadella drove internal processes that increased revenue from about $87 billion to $143 billion. In addition, Nadella roughly quadrupled share value. The difference in shareholder trust arises in part from Nadella’s exterior, humble focus on developing an ecosystem of partners to significantly scale many of Ballmer’s positive ideas.

When it comes to industrial competitiveness, you frequently want to be the first to market. The same is not always true in an ecosystem. 

In an ecosystem, getting ahead of your partners may not provide any benefit if you end up waiting for them to catch up. The same can be said for getting too far ahead of the market. Philips pioneered analogue HDTV in the 1980s. However, by the time HDTV camera technology, programming possibilities, and broadcast capabilities caught up, HDTV had gone digital. Despite billions of dollars put into its research, Philips’ analogue HDTV technology was worthless.

“For both attackers and defenders, avoiding irrelevance requires understanding not just whether disruption will happen, but also when.”

Examine changes to the present ecosystem as you consider a new or emerging ecosystem opportunity. Don’t expect the ecosystem you want to replace to remain static. It will almost certainly alter. It could improve, or new laws and regulations could develop, thus extending your deadline. While you’re waiting, consider what kinds of assets you should invest in. Philips invested in a technology whose value dwindled year after year until it has become obsolete. Consider investing in parts of your future ecosystem by investigating “temporal compression diseconomies.” Consider how long it will take for the market to catch up to your idea and for the ecosystem to develop.

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